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Roslyn Kunin: Governments and the law of unintended market consequencesI believe that the market is the best system for allocating goods and services in an economy. (I also believe that in a country as rich as Canada  no one should have to go cold or hungry, but that’s another subject.)

There are many who would disagree, giving governments – through laws, regulation or fiat – a bigger role in deciding what’s produced and who gets it. They rightly point out that in a totally unregulated market, the rich man’s cat gets milk before the poor woman’s children.

Fortunately, Canada has a sufficiently mixed economy that those kinds of rough edges are smoothed.

In places like Canada, markets have worked their magic and provided us with one of the highest material standards of living ever seen.

No laws, regulations or other government activity was needed to tell anyone to stop making rotary dial phones and start producing smart phones. Transitions like this are less smooth where governments make all the decisions.

An example from the old centrally-planned Soviet Union involves metal kitchenware – cups, pots, dishpans, etc. The government decided how much of such ware was needed, set up the factory, ensured they had sufficient raw materials and workers, and ordered the factory to produce the required amount. It also ordered that the production be at minimum cost. But there was no market economy that would have automatically led to least cost.

The factory produced the required tonnage at very low cost, but one still could not find a pot or a pan in any store or outlet. How could that be?

Since the factory was only judged on tonnage and cost, they decided to produce only washtubs – the cheapest and easiest way to meet their target, but not the needs of the people. And no government has the resources to make decisions down to the level of sauce pans versus double boilers.

Even with functioning markets, there’s a role for governing bodies. To use the good Canadian expression, they must provide peace, order and good government. They are in the best position to ensure the provision of certain public goods like the transportation infrastructure and clean air. Outside these areas, using laws to deal with problems has some serious limitations.

To work, a law must be obeyed. Many centuries ago, Talmudic scholars told rulers not to pass a law that people wouldn’t obey, but they didn’t listen.

Only one or two centuries ago, countries like Britain had laws against not paying your debts. It didn’t stop desperate or careless people from going into debt, but incarcerating them as criminals did make sure that they were never in a position to get back on their feet and pay off their debts.

Did the laws against alcohol during Prohibition or the more recent laws against cannabis work as intended?

One law that inhibits the effectiveness of legislators is the law of unintended consequences.

A surfeit of unwanted washtubs at the expense of any useful products was the unintended consequence in the Soviet Union. Those passing laws against alcohol or drug use weren’t expecting the rise in criminal gang activity that resulted. When U.S. President Donald Trump enacted protectionist laws against imports, he didn’t think about other nations’ reactions hurting exports.

The effectiveness of any law is based on the assumption that legislators act in the best interests of society. This is less an issue in Canada than in some other countries where politicians’ self-interest and corruption affect laws and their enforcement.

We do need laws for society to function, but we still need markets in order to prosper. In a way, it’s too bad that laws can’t do it all. If they could, I’d be the first to recommend we pass a law against the common cold.

Troy Media columnist Roslyn Kunin is a consulting economist and speaker. 

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Governments and the law of unintended market consequences

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