Saturday, May 30, 2009

Cascading Unintended Consequences

Have you noticed you keep hearing examples reported in the media of "unintended consequences" of the current economic policy put forth by the Obama Administration. When you intervene into free market demand and supply, you get outcomes you never expected.

Actually you should expect unintended consequences because markets naturally reach equilibrium and intervening then distorts equilibrium. The distortion of equilibrium then breeds unintended consequences.

However, if you simultaneously intervene in many Economic Sectors e.g. Homes, Autos, Financials, Health Care, etc. then unintended consequences from one Sector interact with other unintended consequences generated from another Sector, creating yet another unintended consequence or even a new set of unintended consequences.

Those new unintended consequences begin to interact with other unintended consequences. That is, unintended consequences have a multiplier effect and certainly cascade across Sectors and hence the Macro Economy. Look at it this way, intervention is an attempt to influence outcomes to a new artificial equilibrium. The artificial equilibrium may create the outcome you seek, but the artificial equilibrium comes with unintended consequences due to distortion of equilibrium. Distorting equilibrium across many sectors simultaneously, creates a multiplier effect within unintended consequences.

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