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ECONOMICS 101

We Need to Consider
Consequences
Dr. Anne Bradley
May 11, 2012

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Stewardship forces us to think like


economists. We must look past our
hopes and good feelings when
making decisions in the public and
private spheres. We need to
understand the results of our
actions and how they may affect
ourselves, others, and our
communities.

With every decision, we can create


long-terms consequences. We have
seen how these consequences can
be both positive or negative.
Negative consequences happen less
in our private decision-making
because we know that we usually
bear the costs of our actions. If I
decide to buy a house in a certain
neighborhood, I will likely spend
many hours deliberating the
potential long term effects of that
decision. Do I anticipate that they
will be building new infrastructure
in my area? What is the quality of
the schools? How far away is the
nearest grocery store? How do I
think the crime rate will change?
These and many more questions
would run through my mind. And
once the house is mine, I have to
bear the consequences—or move.

This is why property rights that are


well-defined and protected are so
important. If you don’t own all of
the land around your house, you
will not tend to it or care for it in
the same way that you would if
you owned it.

In the arena of public policy, things


are not as simple. Politicians and
policy makers are also motivated to
make decisions, but unlike my
example above, they often do not
bear the cost of their decisions.
When we aren’t required to be fully
accountable for our decisions—to
bear the full cost—we lose
incentives to make the best
decision possible with the
information at hand.

Policy makers and politicians don’t


own the property rights over which
they make many decisions and we
have seen historically how the
consequences unfold. The longest-
standing historical example comes
in the form of price controls.
Economist Henry Hazlitt , in his
article Can We Keep Free
Enterprise? , tells us:

The record of price controls


goes as far back as human
history. They were imposed by
the Pharaohs of ancient Egypt.
They were decreed by
Hammurabi, king of Babylon,
in the eighteenth century B.C.
They were tried in ancient
Athens.

A “price control” is a policy that


sets a limit on the ability of a price
to fluctuate to its natural level. It is
often used as a policy to prohibit a
price from becoming “too high.” I
think it is important here to
remember F.A. Hayek and his
insight into the knowledge
problem – which is why I use
quotation marks around the phrase
“too high.”

Price controls are often


implemented with good intentions.
Policy-makers and politicians look
at the world and say: “I think rent
in New York City is too high” so
they implement price controls with
the intention of making life easier for
people who need to rent
apartments in New York City. But
the results are anything but good.
They actually make life harder, less
productive and less efficient than it
would have been.

Let’s unpack this a bit. There are


some obvious reasons why rent in
New York City is higher than rent
in Columbus, Ohio. Mainly, New
York City is the most populous city
in the country. 18.9 million people
over 6,720 miles to be precise. The
metropolitan area of Columbus
has about 1.8 million. Based on
this difference, it’s hard to imagine
why the rental properties should
have similar prices. Scarcity of
land is the most pressing issue
when it comes to housing, office
space, etc.

This is a simple example of


demand being great relative to the
supply. When this happens, the
price rises. The price is the only
mechanism the market has to
allocate resources, and it’s quite
efficient . If we don’t let prices
move, we curtail the dynamic
market process and we will inhibit
the most efficient allocation of
scarce resources.

When policy-makers look at this


situation and move to impose a
maximum price on the rent, they
think they are making life better.
However, what they have actually
done is truncated the market. It
may seem like a better situation for
the people who rent apartments,
but is it?

The most significant consequence


of rent controls is that they distort
incentives. Think of the person
who owns an apartment building.
If the natural market price is
$2000 per month and rent control
takes that price down to $750,
what happens? What would you do
as the building owner? Most likely
you would not be able to afford to
maintain that building. Perhaps
you can’t fix the stairs, or keep up
with fire and building codes, you
have no one to fix leaking sinks. So,
this policy has negatively altered
the incentives and the ability of the
property owner to serve his
customers.

Thomas Sowell , author of Basic


Economics , writing on rent control
notes:

In short, a policy intended to


make housing affordable for the
poor has had the net effect of
shifting resources toward the
building of housing that is
affordable only by the affluent
or the rich, since luxury
housing is often exempt from
rent control, just as office
buildings and other commercial
properties are. Among other
things, this illustrates the
crucial importance of making a
distinction between intentions
and consequences. Economic
policies need to be analyzed in
terms of the incentives they
create, rather than the hopes
that inspired them.

God calls us through stewardship


to fully understand the incentives
that will result from policies we
support. What sounds good doesn’t
always turn out that way. Thinking
like an economist can help us
better see the unseen, and better
align our intentions with actual
results.

Question: In what ways has


considering the unintended
consequences modified your
decision making? Leave a
comment here .

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DR. ANNE BRADLEY

Anne Bradley, Ph.D. is the


George and Sally Mayer Fellow
for Economic Education and the
academic director at The Fund
for American Studies. She also
serves as the Vice President of
Economic Initiatives at the
Institute for Faith, Work &
Economics. She served as co-
editor and contributing author to
IFWE’s Counting the Cost: Christian
Perspectives on Capitalism (Abilene
Christian University Press) and
For the Least of These: A Biblical
Answer to Poverty (Zondervan).
Anne received her Ph.D. in
Economics from George Mason
University. She is a visiting
professor at Georgetown
University and has previously
taught at George Mason
University and at Charles
University in Prague.

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jurisnaturalist
− ⚑
8 years ago
We can go a step further and consider that
whenever an intervention is introduced
into the economy it arbitrarily creates
privileges and introduces power into
relations which otherwise would have a
level playing field. The landlord who can
no longer charge the market rate now
recaptures some of her surplus by
exercising more discrimination over whom
she lets to. Restrained biases become less
expensive to express and act upon.
As believers it is up to us to oppose the
creation of new vehicles for the exercise of
discrimination. Sometimes this will
require that we behave against our own
best interest in light of such institutions
that already exist, both to live in
righteousness, and to demonstrate the
injustice of the institution. In so doing we
truly live as stewards of creation and
remind the world around us of the way of
Jesus.

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