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Blame it on unintended consequences

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By The Staff

Why do economic downturns catch experts unawares? Even more intriguingly, why do they defy analysis after they’ve happened?

Neither economists nor financiers can agree on why the world’s economies are in free-fall today. More than 70 years later, there’s still no agreement on what caused the Great Depression. Not even in hindsight does consensus emerge.

The answer to this puzzle lies in the fact that economic activity sets in motion a battery of unintended economic consequences. They can be propitious for growth, or not. Usually they move in different directions, but sometimes they converge to produce disasters like the one we’re experiencing.

In 1776, Adam Smith used the law of unintended consequences to explain how individual ambition served the common good. It’s not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, he noted, but from their regards to their own interest.

The unintended consequence of their self-interest, mediated by competition, was better and cheaper meat, beer and bread. The invisible hand of the market converted their motives into a force for good.


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