Second and Third Order Effects

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” – F. A. Hayek


The American military is often perceived of as an institution with a simple mindset: see bad guy, blow up bad guy. Truth be told, American service members do little to counteract this impression with their often macabre humor. But throughout my stint in the Army, I was repeatedly reminded to consider second and third order effects. In other words, for any action we took, how would the enemy and Iraqi civilians respond, and what would be the response to that response? With many of their policies, this is a question liberals do not seem to have learned to ask.

Liberals tend to see the world in relatively static terms. Pass this law, and the problem is solved! But the world is much more complex than that. Sure, raising the minimum wage is a positive development for people with minimum wage jobs. But the second order effect may be fewer of those jobs, meaning some people are laid off and others can never get those jobs to begin with. The third order effect may be that without that entry-level job experience, young people newly entered into the workforce do not have the requisite skills to get and keep a better job that pays above minimum wage.

You can look at many laws liberals championed, with admittedly noble intentions to help people, which ended up having severely negative outcomes. Obamacare required businesses to provide insurance to any employee working at least 30 hours a week. Whether you believe business owners and managers are being honest when they say they can’t afford the extra expense, or you think they’re just being greedy, the real world effect has been that some people already struggling to get by are worse off because their hours have been cut to get below that threshold. There are people who still did not get insurance because it is too expensive even with the subsidy, so the only effect of Obamacare on them has been a smaller paycheck.

Interestingly enough, one of the problems Obamacare sought to correct was the concern some people have of being tied to employer-provided insurance. For some people with health issues, this limited their economic mobility because they could not afford the change in insurance plans that would come with a change in employment. That system of employer-provided insurance is itself an unintended consequence of government action. As part of the response to the Great Depression and WWII, FDR instituted wage and price controls. With fringe benefits not included in the wage controls, employers began offering health insurance as a means of compensating for their inability to offer higher wages to attract employees. Fast forward a few decades, and the government passes a massive bill partly designed to correct the unintended consequences of the government’s previous actions.

This understanding that society is a complex organism that cannot be accurately predicted or effectively controlled is one of the reasons conservatives oppose big government programs. We too want people to have good paying jobs and access to healthcare. But we are not arrogant enough to believe we can conform 320+ million Americans to our wishes. Each attempt to control the actions of such a large and diverse population will have unforeseen consequences. Even the noblest of ideas can have devastating repercussions. Liberals could do with a bit more humility in what they imagine they can design.