Goals vs Incentives

"Not everything is as seems."
--Miyagi (The Karate Kid)

One of several nice points made by Prof Williams in his review of Thomas Sowell's new textbook edition is that the path to understanding economic outcomes involves examining the consequences of decisions in terms of incentives they create rather than of the goals pursued. He observes that doing the opposite--paying attention to goals rather than incentives has resulted in disastrous public policy.

For example, the goal of minimum wage laws is to provide 'living wages.' However, minimum wage laws create incentives for employers to reduce labor and to seek labor substitutes. Unemployment goes up--particularly for the marginal workers that minimum wage laws purport to help. The ECON 101 axiom: put a floor on price (of labor) and demand (for labor) will leave the market.

Another example is rent control laws that are enacted to provide people with 'affordable housing.' They create incentives for landlords to reduce housing stock available to marginal tenants that rent controls purport to help. The ECON 101 axiom: put a ceiling on price (of rent) and supply (of housing) will leave the market.

As these two examples demonstrate, incentives often result in outcomes directly opposite of the goals of particular policies.