Second-Order Effects

Rent control makes apartments cheaper. That’s the first-order effect. Obvious, visible, intended.

But then: landlords convert to condos, reduce maintenance, exit the market. Developers stop building rentals. Supply shrinks. Affordable housing becomes harder to find.

The cure worsens the disease.

Bastiat called this the difference between the seen and the unseen. The seen is immediate: tenants paying less. The unseen is delayed: apartments not built, people who can’t find housing at all.

Politics rewards the seen. Wisdom requires tracking the unseen.

Second-order thinking asks “and then what?” for each consequence.

The factory closes. And then? Workers lose jobs. And then? They cut spending. And then? Local businesses suffer. And then? Those businesses lay off workers. And then? Fewer people to buy anything.

The chain keeps going. Most people stop after the first link.

I’ve been burned by this enough times that I now try to force myself through at least two or three levels. What will people do in response to this change? And what will happen because of their response?

The cobra effect is a classic case. British India put bounties on cobras. And then? People farmed cobras for bounty money. And then? The British cancelled the bounties. And then? Farmers released their now-worthless snakes. And then? More cobras than before.

Every intervention changes the system. And the system adjusts.

Second-order effects aren’t always bad. Sometimes they amplify good. A library increases literacy. And then? Skills increase. And then? Incomes increase. And then? Demand for libraries increases.

The feedback runs both directions. The question is whether you’ve thought far enough ahead to see which direction it’ll run in your case.