Friday, May 5, 2017

The Law of Unintended Consequences

People do not always understand the first lesson of economics and that almost invariably means that they will run afoul of the law of unintended consequences. The economist James Gwartney has one of my favorite examples in his book Common Sense Economics

In the former Soviet Union, managers and employees of glass plants were at one time rewarded according to the tons of sheet glass they produced. Because their revenues depended on the weight of the glass, most factories produced sheet glass so thick that you could hardly see through it. The rules were changed so that managers were compensated according to the number of square meters of glass they could produce. Under these rules Soviet firms made glass so thin that it broke easily.

The Soviet Glass factory is a great example of central planning run amuck, but it raises a puzzle. Capitalist countries have glass factories too, and they have to pay their workers somehow. Why do glass factories work better in capitalist countries? How do capitalists pay their workers so as to avoid the law of unintended consequences? We’ll cover this later in a later post, but you may want to start thinking about it now.

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