Master the Art of Business
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Every action has a consequence, and each consequence has another consequence. These are called Second-Order Effects. Every change you make to a system will have Second-Order Effects, which may affect the system's functionality. Be careful when making changes, they may have the opposite effect of what you aimed for.
A few years ago, Kelsey and I had the opportunity to visit the kingdom of Bahrain, a small island country a few miles off the east coast of Saudi Arabia. Now known for its international banking prowess, pearl diving, and international F1 racing track, it wasn’t too long ago that Bahrain was known for its unique ecosystem.
A few short decades ago, the interior of Bahrain was lush with natural greenery — an island oasis said to be the original site of the Garden of Eden. Now, the interior of the island is a stark desert, and local plant life is maintained via irrigation. What changed?
Bahrain is surrounded by a network of underground freshwater springs, which were responsible for both watering the island’s plant life and spurring the local oysters to cultivate pearls of remarkable quality. As the country’s single large city, Manama, developed, land in the city center became scarce, so developers adopted a process called “land reclamation,” which involved excavating dirt from the interior of the island and depositing it on the coast, “reclaiming” land from the sea.
This approach was successful in creating new land, but at a much steeper cost than anticipated—the island’s network of springs dried up, turning the country into a desert.
Every action has a consequence, and those consequences have consequences, which are called Second-Order Effects. Think of a line of dominoes—a single push causes a chain of events to occur. Once the chain starts, it’s difficult (if not impossible) to stop or reverse the cascade of cause-and-effect.
Rent control in New York City after World War II is another sobering example of unintended consequences. Originally intended to provide returning veterans with affordable housing, the city’s housing commission capped rent prices (and ability of landlord to raise them) in certain areas of the city. Affordable housing for veterans is a noble policy, right?
Here’s what city planners didn’t expect: the cost to maintain properties in New York City continued to rise, but landlords couldn’t raise rent prices to compensate for their increased costs. By law, rent control couldn’t be removed unless the original leaseholder moved or the building was condemned, so landlords refused to upkeep the property—it was a waste of money. Financially, it was better to let the building deteriorate around the remaining tenants.
The effect of this policy over time was a steep decline in the quality of property, and eventually supply, as buildings were condemned, making housing even more expensive. A policy intended to make housing more affordable actually destroyed housing supply and made it more expensive — the opposite of the original intent.
Changing some aspect of a complex system always introduces Second-Order Effects, some of which may be antithetical to the original intent of the change. Elements in a complex system can be interrelated or dependent upon each other in millions of different ways, and Uncertainty guarantees you probably don’t know exactly how. Every action has a consequence, and those consequences always have consequences — even if you don’t know what they are or don’t want them to happen.
Approach making changes to a complex system with extreme caution: what you get may very well be the opposite of what you expect.
"While we are free to choose our actions, we are not free to choose the consequences of our actions."Stephen Covey, author of The Seven Habits of Highly Effective People
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Master the Art of Business