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John Locke’s message

Unintended market consequences

Wednesday, 15th August 2007

If only Alan Greenspan had read John Locke more attentively. The 17th-century philosopher, who doubled as a brilliant economist, was among the earliest exponents of the law of unintended consequences.

If only Alan Greenspan had read John Locke more attentively. The 17th-century philosopher, who doubled as a brilliant economist, was among the earliest exponents of the law of unintended consequences. It is one of the most powerful lessons economics has to teach, yet one the former US Federal Reserve chairman conspicuously failed to heed.

To understand why hedge-fund whizz-kids have spent the past few weeks tearing their hair out, and why Greenspan is largely to blame, let us take a trip back to 1692. That year, Locke wrote with passion against a parliamentary bill that proposed to cut interest rates. Its supporters wanted to help the poor; but Locke realised that government intervention would be worse than doing nothing. Paradoxically, he argued, it would hurt hardest those it sought to help — ‘widows, orphans and all those who have their estates in money’ — by curtailing the supply of credit.

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