Tuesday, March 6, 2012

Partial Knowledge and Opportunity Cost


This is my response to the comments that Anonymous shared on my post on An Economy Based on Wife Swapping...

************************

If you read through all the responses to pragmatarianism that I shared on this page...Unglamorous but Important Things...it should be clear that Swit, and many others, made the same type of argument that you did.  Therefore, I addressed your concern by showing you that others share your concern.  Perhaps you think that because others share your concern it validates your concern?  It doesn't.  It just creates a picture of you and Swit pointing your fingers at each other and saying, "this guy is too myopic to fund FEMA during years when there are no disasters".  In other words...you guys think that you are atypical taxpayers when in reality you're just typical taxpayers.

"Citizen allocation of taxes won't result in efficient levels of disaster relief."

A better word to use is "adequate".  You're concerned that tax choice would not result in adequate levels of disaster relief.  Conservatives are concerned that tax choice would not result in adequate levels of national defense.  Liberals are concerned that tax choice would not result in adequate levels of social programs.  Yet, I'm not advocating that we reduce the tax rate.  Therefore, given that the tax revenue would be exactly the same, where would the money go if not towards programs that liberals care about and programs that conservatives care about?

Who is to say what constitutes "adequate" levels of funding for government programs?  If you couldn't care less about space exploration then should you be in charge of determining what constitutes "adequate" levels of funding for NASA?  Conversely, if I believe that we should already have colonies on Mars...then should I be in charge of determining what constitutes "adequate" levels of funding for NASA?  Perhaps Newt Gingrich should be in charge of determining what constitutes "adequate" levels of funding for NASA?

You believe that 538 congresspeople can somehow know what constitutes "adequate" levels of funding for government programs.  But here's what Hayek would say about your belief...
The problem is thus in no way solved if we can show that all the facts, if they were known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world. - Hayek, The Use of Knowledge in Society
What solution are we trying to determine?  We're trying to determine what constitutes adequate levels of funding for FEMA, for NASA, for the EPA and so on and so on.  You believe that 538 congresspeople have access to enough facts to determine the solution.  My argument is that the solution is "produced by the interactions of people each of whom possesses only partial knowledge".

What I struggle to understand is how we are on such different pages on this concept.  Do you think that Hayek was saying that the solution could be determined by the interactions of 538 congresspeople each of whom possesses only partial knowledge?  The point of Hayek's essay was to demonstrate why socialism fails.  What is socialism?  Socialism is a committee of government planners that think they have enough facts to determine adequate levels of funding for organizations.  But what is congress if not a committee of government planners?  So why would Hayek argue that 538 government planners can have access to enough facts to determine the solution?  Why would he argue that 538 people could overcome the knowledge problem?  Why would he argue in favor of socialism?  He wouldn't.  Hayek was arguing that the solution can only be determined by the interactions of millions and millions of people each of whom only possess partial knowledge.

Bastiat, in his essay on the Seen vs the Unseen was pretty much saying the same thing as Hayek...but from the angle of values/priorities.
It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them. - Bastiat, The Seen vs the Unseen
As I argued before...538 congresspeople have no idea which public goods you value most.  Without knowing what all our priorities are it's impossible for them to know how much funds NASA should receive relative to the EPA or FEMA.  As individuals we can say that space colonization is more important than disaster relief or environmental protection.  We can point our fingers at other taxpayers and say, "you are being myopic if you can't see that we only have a finite amount of time left in this solar system before our sun dies."   But when it comes to public goods....our priorities cannot be accurately determined by a king...and they cannot be accurately determined by 538 congresspeople...and they certainly cannot be accurately determined by voters.  In order to accurately determine what our priorities should be each and every taxpayer should be allowed to consider the opportunity costs of their tax allocation decisions.

Economics is the study of scarcity.  Hayek's partial knowledge concept and Bastiat's opportunity cost concept are powerful tools that can help us understand how scarce resources are efficiently allocated.  When we add fallibilism into the mix we get the idea that allowing 538 congresspeople to allocate 150 million people's taxes is the equivalent of putting all our eggs in one basket.  As I argued in my post on Fallibilism vs Fairness...the equation is as follows...

Scarcity + Fallibilism = Hedge Our Bets = Tax Choice = Pragmatarianism


3 comments:

  1. My choice is "none of the above"

    Now what?

    ReplyDelete
    Replies
    1. "None of the above" wouldn't be one of your options...just like a mansion in Malibu is not currently one of my options...just like living forever is not currently one of my options...just like being able to choose which government organizations receive my taxes is not currently one of my options.

      We both value having more options in life. Everybody values having more options. Right now I have the option to sell my body for sex. Well...I don't legally have that option but I could still choose to do so. Is this a "good" option? Well...given that prostitution is illegal clearly we can see that many people think it's a "bad" option. But what does it mean when people choose "bad" options? What does it mean when people choose to become prostitutes?

      In my post on the Dialectic of Unintended Consequences I discussed how people in developing countries chose to work in sweatshops rather than continue to engage in subsistence agriculture. What does it mean that so many people chose to work in sweatshops rather than continue to work in subsistence agriculture?

      Do you want to be a prostitute or work in a sweatshop? No. Should you have these options? Yes. Should you have the option to kill yourself? Yes. Should you have the option not to pay taxes? Should you have the option to live on Pluto?

      What I'm advocating is ridiculous. I'm advocating that people should have the option to live on Saturn. People overwhelming reject this option. But what if somehow they recognized the value of having this option? Let's say one day we do have the option to live on Saturn. Your response would be..."I could care less. I want to have the option to live on Pluto."

      You think I would care at all what you were saying? Not in the least bit. I would be absolutely stunned by the fact that we had the option to live on Saturn. I would be all but certain that I was dreaming.

      What can I tell you? Saturn is a lot closer to Pluto than our planet is. So is Mars. Can we make it to Mars even...can we implement even a little tax choice? Probably not within my lifetime.

      Delete
  2. "..What does it mean that so many people chose to work in sweatshops rather than continue to work in subsistence agriculture?..."

    Because it is their choice to improve themselves - but that is not at all the same for what you doing.

    You are still stealing money then setting up little buckets for people to put their loot stolen from them in... and then after that, in the back room, the thieves pour into a barrel and then divided up as they see fit...

    ...and this is a better system in your opinion.

    The idea to stop the theft simply doesn't cut it.

    ReplyDelete