Saturday, March 24, 2012

Perspectives Matter - Economics in One Lesson



Does your perspective matter?   Your perspective represents your ideas, interests, values, desires, wants, needs, priorities, concerns, fears, hopes, dreams, goals, experiences, preferences, and partial knowledge.  Does all that matter?  Here are your options...

1. No, your perspective does not matter
2. Yes, your perspective does matter

Let's consider both possibilities.

1. No, your perspective does not matter

If your perspective does not matter then one use of your limited resources is as good as any.  Therefore, it shouldn't matter if congress uses your taxes to clog toilets.

2. Yes, your perspective does matter

If your perspective does matter, then one use of your limited resources is not as good as any.  Therefore, it's entirely up to you to decide whether it matters if congress uses your taxes to clog toilets.

Here's the paradox.  You can't choose which government organizations you give your taxes to.  Therefore, your perspective does not matter.  In order to resolve this paradox you have to figure out why your perspective matters in the private sector but not in the public sector.  Why would the "best" use of your limited resources matter in the private sector but not in the public sector?  Why would economics, otherwise known as the study of scarcity, matter in the private sector but not in the public sector?  Either economics matters...or it does not.  Either your limited resources matter...or they do not.  Either your perspective matters...or it does not.

Too Many Eggs in One Basket

Let's consider a situation where people's perspectives did not matter at all...socialism.  A committee of government planners tried to determine the "best" uses of an entire nation's resources.  The result?  Epic fail.  Why though?  Simply because putting too many eggs in one basket minimizes rewards and maximizes risks.  We all have unique perspectives...yet we all make mistakes...aka fallibilism.  This is why it's not a good idea to put too many resources in the hands of government planners.

What about our system though?  Our system is a mixed economy.  We have two sectors...the private sector and the public sector.  In the private sector your perspective matters...you can determine the best use of your limited resources.  In the public sector, however, your perspective does not matter...you cannot determine the best use of your limited resources.  In essence, we follow the rules of economics in the private sector but not in the public sector.  What do you think the results are of disregarding the rules of economics in the public sector?  What do you think the consequences are of disregarding 150 million taxpayer's unique perspectives?

The consequences are substantial fails, depressions and recessions, which represent the misallocation of substantial resources.  Think about it on the individual level.  Let's say that you make a mistake and gamble your home on a failed business idea.  What are the results of putting all your eggs in one basket?  What are the consequences of misallocating your resources?  You lose your home.  But do any of your neighbors suffer from the consequences of your mistake?  Nope.
It follows, then, that a less centralized society has the advantage of a greater diversification of its performance across a larger number of preceptors.  This is because diversification here dilutes the impact of the ability, or the lack thereof, of each preceptor on the aggregate societal performance. - Raaj K. Sah, Fallibility in Human Organizations and Political Systems
Individuals and corporations simply do not control enough resources to cause substantial failures.  On the other hand, our committee of government planners, aka congress, does.  If the tax rate is 25% then we can imagine that 538 people control 1/4 of our nation's resources.  That is too many eggs in one basket.  Our mixed economy is part socialism...and we understand exactly why socialism fails...so why is it any surprise when our system substantially fails?  Yet, what happens when substantial failures occur?  Each party conveniently blames the other party.  And guess what?  You believe them and the pattern repeats itself.

As long as we disregard 150 million taxpayer's unique perspectives, we will have to deal with substantial failures.

Humility vs Conceit

The best analogy of economics, that I know of, is Buddha's parable of the blind men and the elephant.  Each blind person was touching a different part of the elephant.  We all have access to an essential part of the truth...which is our own unique perspective.  Economics, the study of scarcity, only has meaning in terms of our perspectives.

The trick is understanding that our perspectives, while unique, are extremely limited.  It requires humility for us to appreciate just how limited our perspectives truly are.  People that fail to appreciate just how limited their perspective truly are, can be said to suffer from conceit.  These conceited people erroneously believe that other people's perspectives do not matter.

In order to understand the dynamic between humility and conceit, let's consider Frederic Bastiat's perspective and then compare it to Elizabeth Warren's perspective.  Here's Bastiat's perspective...
This means that the terraces of the Champ-de-Mars are ordered first to be built up and then to be torn down. The great Napoleon, it is said, thought he was doing philanthropic work when he had ditches dug and then filled in. He also said: "What difference does the result make? All we need is to see wealth spread among the laboring classes." -  Frederic Bastiat, The Seen vs the Unseen
What difference do the results make?  That depends entirely on your perspective.
 In the first place, justice always suffers from it somewhat. Since James Goodfellow has sweated to earn his hundred-sou piece with some satisfaction in view, he is irritated, to say the least, that the tax intervenes to take this satisfaction away from him and give it to someone else. Now, certainly it is up to those who levy the tax to give some good reasons for it. We have seen that the state gives a detestable reason when it says: "With these hundred sous I am going to put some men to work," for James Goodfellow (as soon as he has seen the light) will not fail to respond: "Good Lord! With a hundred sous I could have put them to work myself." -
Frederic Bastiat, The Seen vs the Unseen
What are some good reasons for taxes?   That depends entirely on your perspective.
When James Goodfellow gives a hundred sous to a government official for a really useful service, this is exactly the same as when he gives a hundred sous to a shoemaker for a pair of shoes. It's a case of give-and-take, and the score is even. But when James Goodfellow hands over a hundred sous to a government official to receive no service for it or even to be subjected to inconveniences, it is as if he were to give his money to a thief. It serves no purpose to say that the official will spend these hundred sous for the great profit of our national industry; the more the thief can do with them, the more James Goodfellow could have done with them if he had not met on his way either the extralegal or the legal parasite. - Frederic Bastiat, The Seen vs the Unseen
Which brings us to Elizabeth Warren's perspective.  As I mentioned in my post on the opportunity costs of public transportation...she provides a perfect example of somebody who is conceited.  Here's the famous bit from her speech...
I hear all this, you know, “Well, this is class warfare, this is whatever.”—No!  There is nobody in this country who got rich on his own. Nobody.  You built a factory out there—good for you! But I want to be clear.  You moved your goods to market on the roads the rest of us paid for.  You hired workers the rest of us paid to educate.  You were safe in your factory because of police forces and fire forces that the rest of us paid for.  You didn’t have to worry that maurauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.  Now look, you built a factory and it turned into something terrific, or a great idea—God bless. Keep a big hunk of it.  But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along. - Elizabeth Warren
Do you think that Elizabeth Warren knows better than James Goodfellow what is and isn't essential for the successful operation of his business?  Why would anybody want their business to fail?  Why would anybody want their country to fail?  If Goodfellow has to pay taxes anyways...then why wouldn't he spend his taxes on the public goods which benefit his business the most?  If we have to pay taxes anyways....then why wouldn't we spend our taxes on the public goods which benefit our country the most?

If our perspectives do not matter then our country does not matter.  Value only has meaning in terms of our  perspectives.  We can maximize our country's value by allowing 150 million taxpayer's unique perspectives to determine the distribution of public funds.

Personal Shoppers

Congress functions as our personal shoppers for public goods.  Unlike in the private sector however, we do not have the option to shop for ourselves.  If you believe that congress is wasting your taxes then you should have the option to directly allocate your own taxes.  There's absolutely nothing wrong with having public personal shoppers...as long as taxpayers have the freedom to skip the middlemen and directly give their taxes to the government organizations that produce the "best" results.

What About Fairness?

Fairness is wonderful and admirable and desirable...but it does not trump certain failure.  Ignoring the rules of economics always results in failure.  If you want to support fairness...then it has to be with your own taxes.  No matter how you spin it...supporting fairness with other people's hard-earned taxes is nothing more than conceit.  You're assuming that your perspective is not as limited as somebody else's perspective.  We all have limited perspectives, which is exactly why we should strive to tolerate, if not respect, other people's perspectives.  Here's what Milton Friedman strongly emphasized...
If we can't persuade the public that it's desirable to do these things, then we have no right to impose them even if we had the power to do it.
If we can't persuade other taxpayers that fairness is desirable...then we shouldn't impose our perspective on them even if we had the power to do it.  This is because it's entirely possible that we might be wrong.  Therefore, we should hedge our bets by incorporating a multitude of unique perspectives into the public sector.

What About Information?

Persuasion isn't just valuable in terms of tolerance...it's also valuable in terms of the exchange of information.  In order to try and persuade other taxpayers that fairness matters...you would have to share your partial knowledge with them.  In order to try and persuade you that perspectives matter...I have to share my partial knowledge with you.  In order for government organizations to try and persuade us that their responsibilities matter...they would have to share their partial knowledge with us.  This is how we solve problems and make significant progress.
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. - Friedrich Hayek, The Use of Knowledge in Society
What is the total amount of information contained within the perspectives of 150 million taxpayers?  Does congress even know your name...let alone your ideas, interests, values, desires, wants, needs, priorities, concerns, fears, hopes, dreams, goals, experiences, preferences, and partial knowledge?  All that information is not conveyed by voting.  It can only be conveyed by allowing you to choose which government organizations you give your limited resources to.

It's important to be really clear on this...so here's a bit of redundancy.  Taxpayers should not serve the government...the government should serve taxpayers.  We should not exist to satisfy the demands of the government...the government should exist to satisfy our demands.  The government should not shape the perspectives of taxpayers....the perspectives of taxpayers should shape the government.  The government should not be the sculptor and taxpayers should not be the medium   The relationship between taxpayers and the government should not violate the rules of economics.  The longer that the government disregards our perspectives...the longer that we'll have to suffer the economic consequences.

Conclusion

Hedging our bets by allowing taxpayers to directly allocate their taxes minimizes the risk and maximizes the reward for our country as a whole.  It shouldn't matter whether an organization is public or private...what matters is whether it produces results.  Results only have meaning in terms of your perspective, which is exactly why you should have the freedom to choose which government organizations you give your limited resources to.  Sacrifice without reward is waste...and nobody wants their taxes wasted.

What is the value of 150 million taxpayers, each with their own unique perspective, striving to ensure that their sacrifices are not in vain?   From my perspective, the value of pragmatarianism is 150 million times greater than the value of 538 people spending money that they did not toil, strive, labor, sweat and sacrifice to earn.

The question then remains...does your perspective matter?

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