Without it, you wouldn't be reading this

Try to get something going.

The development of the semiconductor is a great example of how the modern mixed economy of the public and private working together is so great.

Jack Kilby, a graduate of a land grant college, was a private scientist(engineer) working for a
publically traded capitalist company on a project financed by the US government. Without both government financing and/or the private ingenuity it would probably have been much longer until the integrated circuit was developed.

No doubt that Cold War era defense contracts helped spur on the development of many modern conveniences. Today we have an explosion of growth in research and development of items related to homeland security. The readers can decide whether that's a positive development or not. Certainly there are some benefits, but also some dangers.

But let's not forget that a lot of projects are completely or mostly privately funded. Thomas Edison was a wizard at attracting venture capital. I don't recall Steve Wozniak and Steve Jobs getting a government contract to build the first Apple Computer. How many thousands of inventors are toiling in obscurity? One of them will produce something that ten years from now we will think we can't live without... and probably won't get much assistance from the government.

Whereas in ten years, I would also predict that the use of tracking devices will be much more ubiquitous. I would guess that government would have an active interest in such projects in this day and age. Should I be glad? I think there are reasons to be glad and to be cautious.

But you know all this. And you know full well that I do not advocate an extreme form of small government conservatism. So in a way, posing this argument to me seems a little over the top.

You point out that Kilby graduated from a land grant college. The other co-inventor of the IC graduated from Grinnell (a private college in Iowa) and got his Ph.D. from MIT. (That would be Robert Noyce of Fairchild, and later co-founder of Intel.)

I have a degree from a private college and from a public university. I have been a faculty member at one of each. There are strengths and weaknesses of each. The land grant universities and the systems of public universities in most states are the envy of the world and have done great things for the economic well-being of this country. Yet, I wouldn't want our university system to be entirely state run. Our public universities are great in part because they compete with the private universities. The public K-12 school I send my kids to is great because they know that if they don't meet my expectations, I'll put my kids in private school.

Government has a proper role to play in the economy. I have never denied that, and you know it. It's when government overreaches and causes unintended consequences that I have the most problem with it.

Of course you are right.

But private markets also generate unintended consequences.

MIT is also a land grant school.

Right. MIT is one of (according to Wikipedia) only two private land grant universities. Tuskegee being the other. Very much a special case. Though I think you'd have to admit that the size of its private endowment is much more important to its success than its land grant status these days.

But then every university, public and private alike, benefits from government research grants (and grants from private funds). That's an example of mixed economy that works quite well. Of course I would agree.

I'm not sure what you mean when you say that private markets generate unintended consequences. Markets don't have intent. Governments do. If there are market failures (imperfect competition, externalities, and so forth) there can be negative effects. It is proper for government to correct those failures. (Though I think you would recognize that if governments go too far in correcting those problems, the results can be just as bad.)

If there are missing markets and government intervenes to create them, there can be unintended consequences if the government does a bad job of creating the market. For example, a Pigouvian tax, though no better in theory than a market for pollution permits, might actually be better in practice if the government can't get the market for permits set up correctly.

Many of the unintended consequences that occur where markets are involved are the result of someone trying to get around a law or are taking advantage of a rent-seeking opportunity.

The subprime crisis is an excellent example. Here is a relatively new market that sprang up. Financial innovation made it possible to securitize these mortgages and offer new and enticing products to those with less than stellar credit. On the face of it, it sounds like a good thing. But there were imperfections in this market--often having to do with information. In some cases, people did not understand the terms of the deal they were making. In other cases, the brokers misrepresented the terms. In other cases, appraisers inflated the value of the houses because it was in their private interest to do so, and it was in no one's private interest to take a second look. The investors in these mortgage backed securities depended on the underwriters to do a good job of assessing the risk because it was too costly for the investors to do it themselves. And so on it goes. You know the rest.

What we have here is a mechanism design problem with a really poorly designed mechanism. The market probably got ahead of the government's ability to regulate it. Unfortunately that is a risk that we take when we allow participants in these markets to innovate. The lessons learned from this will create a more robust market for homes in the 21st century.

So if that's what you mean by markets generating unintended consequences, then ok. But that's old news to most of us. But hear me on this... saying it is an unintended consequence is misleading because markets don't have intent.

Governments do.

Market are created by humans that have goals and outcomes they desire. There is little or no difference whether the humans represent private actors or state actors--markets virtually always stem from some combination of both. Either one can generate unintended consequences.

The subprime market was created by people --it did not spring into full-blown existence all by itself.

No markets do.

I anticipated something like that. I get a little frustrated with people who say "markets do this" and "markets do that" as if the markets themselves are acting with intent or purpose. Of course the people acting in those markets act with intent or purpose. And a good bit of the time, the result for the people involved is close to what was intended.

But to say that there is "little or no difference whether the humans represent private actors or state actors" is perhaps the fundamental difference in our point of view (on a lot of things). I argue that there is a big difference. In government, it is possible, even likely, that a group of people numbering in the single digits can impose their will on thousands or even millions and influence their economic decision. I don't think I need to argue that point any further.

Now, you might argue that the same is true in a market. If so, it is generally the result of some kind of market imperfection. I thought I made this point with the subprime market. The subprime market was created by people, yes. And before long they realized that they could exploit informational problems to their profit--which caused long run damage to others. If that is what you mean by an unintended consequence of the market then ok, fine. I know what you're saying, I just don't think it is useful or productive to reduce it to those terms.

What was the cause of the unintended consequence? Was it the existence of the market itself--its creation? By that argument, global warming is an unintended consequence of the creation of a market for oil. True on some level, perhaps, but not the most useful statement we could make.

Isn't it more correct to say that the problems in the subprime market were a result of information problems in that market and people simply responded to the incentives created in that environment? Isn't it more correct to say that global warming is a result of an externality--that private costs do not fully reflect social costs?

Isn't that a distinct problem from one of a handful of people deciding to ban product X, tax product Y, or make it easier for the state to take private property because they have some goal in mind to protect us or help us somehow?

I think they are very different. Hence, I don't like to use the same term. I know what I mean (or what anyone else means) by an unintended consequence of a government policy. Government creates policy to effect result A and ends up generating the unanticipated result B (and maybe or maybe not A).

What you do mean by an unintended consequence of a market? Someone acts in a market in a way that harms someone? That's not always unintended. Is it that the creation of the market is responsible? That's too much of a broad brush statement. I don't know. It's just not as informative. I don't find your attempt to equate them very convincing.

People can act through government to produce unintended consequences just as people can act through markets to achieve unintended consequences.

I understand that when you say government you are just using a short hand term for the people who act through government. I am doing the same thing when I say markets cause unintended consequences.

People created the market for sub-prime mortgages.
They did not intended to create a financial crises that threatens the very existence of many financial institutions or a recession. But clearly, a major share of the current hard times is an unintended consequence of the sub-prime market.

To take your terms. The sub-prime market created the conditions A -- mortgages that depended on ever rising home prices -- that ended up generating the unanticipated results B -- a major financial crises.

Now you can argue that it was not the market but the bankers and wall street brokerage firms that created the situation. But that is just playing with words and creating definitions to suit your argument.

I just completely fail to understand how you can argue in good faith that markets do not have unintended consequences.

I think I have said two or three times that I know what you mean by the market causing unintended consequences and that it is certainly true that market failures, missing markets, or poor regulation of markets can lead to problems that would have been unanticipated by the creators of the market or its participants.

But I do not like equating that with the more customary meaning of what is colloquially known as "the law of unintended consequences" (though I admit that I'm not a big fan of the phrase even when it is used this way). As most people understand that phrase, they mean that some group of advocates in government wanted to do something positive--to protect us from danger, help the poor, whatever the case may be. But the policy ended up having a negative effect, often, the opposite of the good that the policymaker intended to do. (The Peltzman Effect, which I'm sure you're familiar with, is a prime example.)

If you see that as being equivalent to what you are calling the "unintended consequences" of the market, then we are not going to agree. And remember, spencer, you're not talking to some rabid defender of completely unregulated markets. I have routinely said that government intervention is necessary and that markets are not perfect. But I do want to be clear about the difference between what I see as a result of market failure or market incompleteness, and the consequences of government "good intentions".

The biggest difference is that the creator of a market or its participants is not doing it with the intent of promoting the public good. But that is usually the intent of someone in government advocating a policy.

Does this difference absolve people in the private market of blame for acting unethically or causing (unintended) harm? Absolutely not!

They are just different problems, with different incentive structures. With government, it usually comes down to getting votes for doing something good (this is the "intent") for the people.

The private market version is a lot more complicated, but again it boils down to the intent being to make money. That this would have "unintended consequences" is no surprise. But it's a fundamentally different situation, and fundamentally different intent, than in the government version.

What you are trying to argue is that the same colloquial phrase should be applied to both problems, which would communicate to the reader that they are the same problem, or at least very similar. The problems stemming from the creation of the subprime market and (for example) the effects of a smoking ban would, in that view, be two sides of the same coin. Both just examples of the unintended consequences of people's private or public decisions. No difference whether it is private or public. I disagree and say there is a difference.

Look, I'm not absolving one or the other. My harshest judgment is reserved for those who would fraudulently or illegally exploit imperfections in the private market. And yes, technically, just about everything has a negative (or positive) externality (however large or small) which is to say in effect that markets have unintended consequences. But I stop short of equating that situation with the case of government trying to do good and ending up causing another problem.

I may have jumped too hard on your use of the term in your second comment. But then again, maybe not. One of our fundamental disagreements is that we differ on the effectiveness or desirability of public vs private action. This is perhaps related to that. We seem to agree on more than we disagree on here. We agree that markets can have negative outcomes. I just don't want to equate that with the fact that government policies sometimes do different things (sometimes even the opposite) than what was intended by the policymaker who only wanted to do good for society.

I agree that we are much more in agreement then in disagreement. WE both recognize that both government and markets are institution created by people and that both government and market actions can have unintended consequences.

Probably to a great extent our differences are generational. I grew up in the 1950s and 1960s in the rural south and saw a lot of very good things come from the federal government actions -- education , health, integration, even electricity, etc.. The federal government made out life much, much better and the private sector clearly was not doing it.

I had little or nothing to do with academic economics for years and was amazed at the attitude of academic economist when I started blogging-- it is much more anti-government then the typical republican businessman as far as I am concerned.

It is like the Peltzman Effect. When I look at the Peltman study what I see is his finding one of two things -- either statistical noise or the baby boom generation starting to drive. If you look at the long term trend of auto deaths the jump he found in the early 1960s was just the data returning to trend after falling below trend
in the late 1950s. There was no shift in trend around the introduction of seat belts. Seat belts were just another in a long series of both private and public improvements in auto safety contributing to the decline in auto deaths. I am amazed that the economics profession excepts his conclusions. I can not understand why anyone who looks at the long term trend and accepts his conclusions. I'll be glad to send you the data, as it is hard to collect.

Moreover, the earliest good data on seat belt use finds that seat belt usage was still only about 10% of drivers in the early 1980s and in the early 1960s it must have only been one or two percent of drivers. I bought my new first car in 1965. this was when cars were first required to have seat belts and they were hooked up to the ignition so the car would not start unless the front seat occupants' seat belts were connected. The salesman showed us how to disconnect that feature by unplugging a connection under the seat. Within a week it was disconnected. Seat belt usage was negligible in the early 1960s and certainly not enough to generate the Pelzman effect.

Several good later studies have completely failed to find any support for the Pelzman effect.

This is not to say there is not such thing as compensating behavior, but his study massively over-estimates its size.

"This is not to say there is not such thing as compensating behavior, but his study massively over-estimates its size."

Indeed. I am aware of the standard criticisms of the Peltzman Effect and if push came to shove would probably put his estimate as an upper bound on the true effect. There are other cases where it has been cited (bike helmets is one, I think) where the effects are plausible, but perhaps less than advertised. I would have to go read those studies again as it has been a while.

(But I'm intrigued by your claim that you have some data. You should still have my e-mail--go ahead and send it.)

"The federal government made out life much, much better and the private sector clearly was not doing it."

Market failures do exist, and government can do good. No argument there.