The Non-Intentional Consequences of Regulation

"The curious task of economics is to show men how little they really know about what they imagine they can project." - F.A. Hayek.

Often politicians and their constituents believe in the power of good intentions. New laws and regulations are created to correct a certain "market failure," as if such a market were a means to a predetermined end.

Here is an erroneous view of the market, which is seen as something static, as if the world could be fully analyzed through equilibrium models. But the market is a process that involves human cooperation under the division of labor, where individual value judgments and their actions influence the structure of prices, that is, the relationship between demand and supply. Competition is dynamic, driven by the process of value creation and evolutionary. Therefore, these narrow visions of the market neglect the spontaneous coordination, not only of entrepreneurial decisions, but also of political decisions.

Good intentions, hell is full, says the popular saying. In economics we can also point out several unintended consequences of well-intentioned regulations. Some have become theories, such as the phenomenon of risk compensation, where policies aimed at protecting human life through the use of seat belts create a perverse behavior of drivers, because the feeling of greater safety leads them to drive at a faster speed than they would drive if they had not felt.

Ludwig von Mises identified two basic types of intervention: one in production and the other in the pricing system. In the case of productive constraints, the use of capital for purposes other than those originally planned leads to a reduction in the productivity of investment and wealth in general. While we talk about intervention in the price system, in practice, we often see the drop in production and the increase in prices, as Brazilians who have gone through the Cruzado Plan should remember. The negative consequences lead to further attempts to correct the market that generate the most distortions, in a vicious cycle that has no end.

Faced with this, the question arises: is it possible to achieve the objects of a certain policy through regulation? The answer is given by F.A. Hayek: according to him, knowledge is always local, tacit and dispersed among individuals, whose rationality does not necessarily generate a state of equilibrium. Due to the subjectivism associated with human action and the limitation of knowledge, it is impossible to make efficient allocations of resources by means of a centralized decree. In addition, politicians, administrators and often economists themselves suffer from overconfidence when assessing their knowledge of complex phenomena. According to Hayek, it is only possible to indicate general trends about a particular phenomenon, but one can not arrive at detailed forecasts. As Franklin would say, nothing is certain except death and taxes.

In view of Hayek's contributions to knowledge theory and Kirzner's theory of entrepreneurship, any intervention or state regulation leads to a decline in the adaptability of markets. The blocking of discovery processes practiced by entrepreneurs in competing markets leads to unintended consequences and accumulated errors.

The next interventions, made in the name of correcting errors generated by the previous intervention, will cause a situation where the state is very large, in which either the process is reversed through liberalization or a socialist system is reached, whose economic calculation is impossible : without private property there are no markets whose prices indicate to agents how to guide their economic actions.

When the state's expansion reaches a certain point and intervention errors grow, the government's room for maneuver decreases, causing a contraction in the government's cycle of expansion. As a result, one realizes that interventionism is not a constant system, in fact it expands or contracts in a cyclical way. Such a theory may explain the predominance of the interventionist (mercantilist) system throughout history.

Mises dismissed any "third way," that is, a mixed economy system halfway between capitalism and socialism. In his view, the interventionist country either dismantles this apparatus and becomes capitalist or deepens the interference and walks towards socialism.

There is no doubt that the greater the concentration of power through central planning, the greater will be the loss of the use of dispersed knowledge among agents, which will necessarily lead to greater inhibition of the production of new knowledge. Entrepreneurship in a regulation-free environment raises invention and discovery through multiple activities dispersed in a spontaneous order model.

References:

BARBIERI F. A economia do intervencionismo. Disponível em <http://rothbardbrasil.com/wp-content/uploads/arquivos/MisesBrasil_A%20Economia%20do%20Intervencionismo_BROCHURA.pdf>. Acesso em: 16 novembro 2017.

HAYEK F.A. A pretensão do conhecimento. Instituto Mises Brasil, 2011. Disponível em: < www.mises.org.br/Article.aspx. Acesso em: 15 novembro 2017.

MISES L. Uma crítica ao Intervencionismo. Tradução de Arlete Franco. São Paulo: Instituto Ludwig von Mises Brasil, 2010. 144p.

OLIVA A. Entre o dogmatismo arrogante e o desespero cético : a negatividade como fundamento da visão de mundo liberal.. Rio de Janeiro : Instituto Liberal, 1993. 90p.