Unintended Consequences of Regulation

What we have forgotten since in 1989, back when the Berlin Wall fell, the Soviet Union collapsed, and Europe became free is that we all agreed that communism, the belief in central planning, the five-year plans, collectivization of agriculture died. But the belief in regulations did not die. So, socialism in the sense of a strong belief in interventions into markets and civil society is still alive. Just like Hayek, I am going to talk to socialists in all parties because their beliefs are just as dangerous as communism.

It is important to understand that rules, laws are very important to the free society, to the open society, to the market economy, to civil society, to independent communities, and individual liberty. We need simple rules in complex societies such as property rights, the rule of law, freedom of contract, protection of individual liberties, civil, political, and economic liberties, but also rules that protect liberty in general. Given that we have these basic, simple rules markets and civil society will flourish. That is the big basic idea from, Adam Smith, Hayek, Popper, and onwards.

However, regulations are a different thing. Regulations are interventions into markets, civil society, and communities in order to reach specific outcomes. These kinds of interventions tend to produce self-enforcing processes that in the end contribute to unintended and often counter-productive consequences that are very dangerous to society.

The first one is the “logic of conceit,” the more important type, which concerns benevolent interventions. Politicians, voters, and interest groups want to promote the good society, social justice and handle all kinds of social problems. When it comes to inequality, unemployment, lack of housing and all other kinds of things that we don’t think are working, instead of relying on markets and civil society, in order to provide these goods many people want to interfere in those spontaneous orders. The second one is the “logic of opportunism” – special interests, self-interested politicians and various groups in society want to promote their own interests, stifle competition, get benefits, subsidies, in other words, privileges to their own group.

Both of these kinds of interventions usually start with good intentions. Rent control for example, is something that most western societies have. It was introduced because housing is such an important social good, especially for poor people. It is very costly to get a house, to get a rental apartment therefore politicians and voters wanted to control the prices of rents to keep the cost down. A price control was introduced in this housing market and as a consequence, it started a process that ended up with a lack of housing.

Many people wanted to have cheap apartments so you constructed new social problems. Lots of people wanted more housing so you started to subsidize the construction sector. But then the inputs into the construction sector became more costly so you start to regulate those sectors. Thus, you got a kind of self-enforcing process where one intervention caused new social problems which legitimized new interventions and so on – a very dangerous process ending up with larger states, more subsidies, and more regulations.

Another example is employment protection legislation. For example, youth unemployment is very high in Southern Europe in countries like Spain, Italy, and Greece which is caused by this benevolent intervention. From the very start, you want to promote security on the job. It is costly to lose your job so people who have a job want to feel safe and secure. So the legislation, interventions, and regulations were introduced to strengthen the position of people in their employment. In the long run, this created consequences such as companies not wanting to hire new people because it became too costly and risky to hire people with the wrong competencies. It became too costly to fire them if they didn’t produce what was expected at the job. This kind of new policy in turn caused social problems which created a demand for new interventions for new regulations. In the end (and this is not only a problem for Southern Europe but also in countries like Sweden) it resulted in creating insiders and outsiders in the labor market (which is a huge problem).

A more contemporary example, which I believe is perhaps one of the biggest threats to liberty in Europe at least is The European Pillar of Social Rights that the European Union wants to promote. For example, they are introducing a European minimum wage because they believe that wages are too low in some countries in Southern Europe and Eastern Europe. What happens is that the increased wage floor, meaning you cannot pay less than this minimum, means that unemployment will rise in those countries. At the same time, it becomes a protectionist measure for workers in the richer countries in the West. Again you started with a perhaps benevolent intervention that starts a process where you get these unintended consequences and social problems which after some time legitimizes new interventions and regulations. This way, you get this process of an ever-increasing state, a kind of tyranny in small steps.

The last example comes from the last year when the wolhe world has seen lockdowns, restrictions on public meetings, restrictions on mobility and traveling, and so on. These interventions already have these kinds of unintended consequences. You will see increases in mental health problems, rising unemployment, lack of economic growth, all kinds of things that would legitimate new regulations and interventions into markets and civil society. This is very counterproductive. It destroys the spontaneous mechanism, the way markets work, the way communities work, the way civil society works which will result in very dangerous long-term consequences.

If we go back to 1989 we will find one such example. For a long time, for about 20 years after 1989 economic freedom in the world and the number of democracies in the world increased. But in the last few years, economic freedom in the West has flattened or even fallen a little bit. You see the rise of populism, the strength of democracies being weaker, the number of democracies shows a very strong decline.

This process may cause “The State of State.” Many years ago I wrote a book called The State of State: Invisible Hands in Politics and Civil Society where I explain this mechanism more thoroughly and with many other examples. Such a situation is not communist, is not central planning, but It is a society where the state has a dominant role over markets and civil society, over communities, over families. That is a very dangerous situation that we should try to avoid. Therefore these lessons that we have learned in 1989 of the problems of communism and central planning are lessons that we should learn from the works of Mises, Hayek, Adam Smith, Buchanan, and many others for the future of not only Europe but for the world.