Monday, November 21, 2011

The Blind Men and the Scope of Government

We all want adequate levels of the goods that we value...right? The problem is that there are some goods, known as "public goods", that people can benefit from without paying for. This problem is known as the free-rider problem.

In order to deal with the free-rider problem we force people to pay taxes and allow the government to produce these public goods. The challenge is that we do not value all public goods equally. What might be a public good for one person might not be a public good for another person. In order to try and decrease the tax rate many people are inclined to argue that the free-rider problem does not apply to public goods that they do not value.

The main political ideologies can be roughly organized based on their perceptions of how pervasive the free-rider problem actually is...


How can we figure out who is correct? How can we determine what goods, if any, the government should be responsible for providing? If the private sector can produce adequate levels of a public good then wouldn't it be redundant/wasteful for the public sector to also produce that same good? Redundancy, or the misdirection, of public funds can also be thought of as the inefficient allocation of public funds.

In order to discern the actual scope of government we should allow taxpayers to directly allocate their taxes to "essential" government organizations. An "essential" government organization is one that provides important public goods that the private sector either partially or completely fails, because of the free-rider problem, to provide. Allowing taxpayers to directly allocate their taxes is known as pragmatarianism.

The biggest challenge to pragmatarianism is that people do not understand how the invisible hand works. People instinctively get the feeling that "important" public goods would be underfunded and "less important" public goods would be overfunded. The thing is...in a pragmatarian system taxpayers would still have the option to give all their taxes to congress. If congress was efficiently allocating taxes...then why would any taxpayers choose to directly allocate their taxes themselves?

The fundamental concept to try and understand is that the only way we can accurately determine the "importance" or "value" of a public good is by seeing how much funding it would receive relative to other public goods. This is known as the "opportunity cost" concept. This concept is simply the idea that you can't have your cake and eat it too. Deciding whether you eat or have your cake reflects your true values. The problem with the current system is that voters can convey their opinions...but taxpayers are unable to convey their true values. In a pragmatarian system voters would determine the functions of government and taxpayers would determine which functions they funded. In essence...by allowing people to put their money where their mouths are...we can determine the best possible use of public funds.

What if you disagree with pragmatarianism? Then please explain what basis you have for believing that congress can efficiently allocate taxes. As far as I can tell...the current system is based on nothing but tradition. Nearly 1000 years ago some Barons were not happy with how the king was spending their money so they forced him to relinquish the "power of the purse". That's the cliff notes version but there is no logical or rational basis for believing that 535 people can efficiently allocate the taxes of millions and millions of taxpayers. Parliament did not have to interview for this position. They did not end up with this position because they were uniquely qualified. All they had to do to get this position was to take it by force from the king. That's it. Just because they stole control of taxes from a king does not make their control over taxes any more legitimate than the king's control of taxes was. Why did the king have control over taxes in the first place? Because people believed he had "divine authority". In the past 1000 years we've learned a bit more about how scarce resources are efficiently allocated.

Hayek's concept of partial knowledge ties into Bastiat's concept of opportunity cost which ties into Smith's concept of the invisible hand...which ties all the way back to Buddha's explanation of how we are all just blind men touching different parts of an elephant. The true scope of government can only be revealed by adding all our limited perspectives together.

It's great if you want to argue against pragmatarianism...but please help me understand why you believe that congress is better qualified to efficiently allocate taxes.

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