Saturday, November 26, 2011

Economic Fairytales?

The liberals over at the Crooked Timber blog published an entry on the efficient use of scarce resources... Dives and Lazarus: An Economic Fairytale

Here's my comment on their entry...that they decided not to publish.  Why didn't they publish it?  Well...perhaps they wanted to stick with the whole "fairytale" theme by critiquing the efficient use of scarce resources without even once mentioning opportunity costs.

Here's my last comment...The Psychology of Political Change...which they hesitated publishing and here's the first comment of mine...Crooked Timber Liberals...which they did not publish.

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Anybody ever read Dogshit Food by Liu Heng? It's a story that was set during China's Great Leap Forward when 20-30 million died as a result of state induced famine. In my blog entry on The Dialectic of Unintended Consequences I juxtapose Mao Zedong and Deng Xiaoping in order to highlight the stark disparity between the consequences of giving people less, and then more, choices.

We all intuitively understand that we have to choose between having our cake and eating our cake. Therefore, we all intuitively understand the "opportunity cost" concept...which is essential to ensure the efficient allocation of scarce resources.

The problem is that there are numerous goods that people can benefit from without having to contribute to...aka...the free-rider problem. Therefore...it's very well possible that the private sector would fail at producing adequate levels of these goods...aka public goods.

Libertarians believe that the free-rider problem only applies to very few goods...national defense, the courts and the police. Yet, here's an exceptional libertarian..."The same reasoning applies in the context of poverty. Almost everyone would be happier knowing that fewer people are starving to death. Some people might help the poor out of altruism, but many others will free-ride. Purely private provision might therefore be insufficient relative to most people’s optimum. That is, alleviation of poverty is also a public good." - Jeffrey Miron, Libertarianism and Anti-Poverty Programs.

Is it progressive for a libertarian to entertain the possibility that the free-rider problem might apply to welfare programs? Of course! Would it be progressive for liberals to recognize the value of efficiently allocating public funds? Of course! Nobody would willingly give a kidney to somebody that truly didn't need it.

In order to guarantee the efficient allocation of public funds we should allow taxpayers to directly allocate their taxes. This would force them to consider the opportunity costs of their tax allocation decisions.

So yes, Elizabeth Warren was correct that taxpayers have an obligation to "pay it forward". However, in order to maximize the benefit to society, taxpayers should be able to directly choose which government organizations they give their taxes to. For more information check out my blog entry on the opportunity costs of public transportation.

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