Tuesday, September 24, 2013

Market Success Versus Government Success

Public choice is a theory of ‘government failure’ here in the precisely analogous sense that theoretical welfare economics has been a theory of ‘market failure' - James M. Buchanan
Before I use a title for a blog entry, sometimes I'll conduct a Google search to determine just how (un)original it is...

  • "Market failure versus government failure" - 32,200 results
  • "Government failure versus market failure" - 28,500 results
  • "Government success versus market success" - 0 results
  • "Market success versus government success" - 0 results

Right now when you search for "government success"...the second result is the Wikipedia entry for "government failure".  Not sure how personalized the results are though.  But let's have some fun by Google bombing the heck out of "government success" by linking it to the Wikipedia article for government failure.  Like so...government success.

We often hear of market failure...but what exactly does it mean for markets to fail?  The standard answer typically contains concepts such as irrationality, wealth inequality, information asymmetries, negative externalities, monopolies and public goods.  These concepts are frequently used to justify government intervention.  But in order to truly understand market failure...I think it's essential to first understand market success.

Right now you're surrounded by examples of market success.  Every product/service that you purchase is an example of market success.  The toothpaste that you purchase is an example of market success.  Yet, for most of recorded history, the private sector did not supply toothpaste as we know it.  The market failed, but now it succeeds.

But isn't it reasonable to believe that there's still room for improvement when it comes to toothpaste?  It's hard to imagine that 200 years from now people are still going to be using exactly the same toothpaste that we use.  I'm pretty sure that in the future you're simply going to put a tablet in your mouth that will quickly dissolve away anything that shouldn't be in there.  Not having to brush your teeth will free up your time for more valuable uses.  That's progress.

Because there's always room for improvement...there's no such thing as perfect success.  Every product/service we purchase is successful because consumers decided that it reduced the shortcomings of previously available products/services.  Therefore, consumers incentivize entrepreneurs to not just find where there's room for improvement, but to actually make the improvements.  It's relatively easy to find where there's room for improvement, but actually making the necessary improvement takes considerable amounts of effort, skill, ingenuity, perseverance...and a good dose of luck.  This is why incentives matter.

The key concept is that the only way we can measure the extent of an entrepreneur's success is by observing how consumers react to the new product.  If Erin, the entrepreneur, develops a tooth tablet, then the success of her product will be determined by how many consumers stop buying toothpaste/toothbrushes and buy tooth tablets instead.  If toothpaste and toothbrushes become as outmoded as buggy whips, then we can definitively say that Erin successfully corrected a market deficiency/inadequacy/shortcoming/failure.

We know that the market succeeds because people are willing to pay for products.  We also know that the market fails because there's always room for improvement.  But can we say that the government succeeds?  Nope nope nope nope.  Why not?  Simply because consumers don't have the freedom to demonstrate how effectively/efficiently the government is taking up the slack.

Here's how I've illustrated this...





The point of these graphs is to illustrate that the success of government depends on how accurately the supply of public goods reflects the true breadth/depth of market failure.  

Graph 1 - what government success would look like
Graph 2 - what government failure looks like
Graph 3 - government success depends on knowing the breadth/depth of market failure

If we don't know the breadth/depth of market failure, then we can't truly know how well the government is complementing the private sector.  For all we know it could be making mountains out of mole hills...and whatever the opposite analogy is.  

The theory of pragmatarianism is that allowing taxpayers to choose where their taxes go will show us the breadth/depth of market failure.
It is, of course, not desirable that anything should be done by funds derived from compulsory taxation, which is already sufficiently well done by individual liberality. - J.S. Mill, Principles of Political Economy with some of their Applications to Social Philosophy
If education is sufficiently well done by individual liberty, then taxpayers won't spend any of their taxes on public education.  The more money that taxpayers do spend on public education, the greater the depth of market failure and the greater the height of government success in terms of education.

Saturday, September 21, 2013

The Essential Value of Incentives - For Kevin Vallier

Over at the Bleeding Heart Libertarian blog, the political philosopher Kevin Vallier recently called out the market economists Peter Boettke and Peter Leeson (CoordinationProblem.org)... The Essential Relationships Between Duty and Coordination – For Boettke and Leeson

The heart of his argument...
Here’s the problem. Many moral philosophers (including me) think a purely instrumental agreement is seriously deficient from a moral point of view. For one thing, instrumentally rational agreements might be subject to gross inequalities of wealth, and worse, inequalities of bargaining power. It might be instrumentally rational, for instance, for a drowning man to give up all of his money to the only person in a position to rescue him. But we think such an agreement would be unjust because the rescuer is exploiting the man who needs rescuing. The result is that instrumentalist contracts are not properly normative. They don’t give us the right reasons to comply with social and political rules.
Kevin Vallier, I'll be your huckleberry!  Let's see how much my response differs from those fine fellows over at CoordinationProblem.

Here's the bottom line up front...

Decreasing the amount of benefit that people can receive from being at the right place at the right time, decreases their incentive to make the effort to be at the right place at the right time.  Basically, incentives matter.

I'm going to attach two epiphytes to the same branch by sharing the rest of the lines sandwiched in the middle of this rather pretty decent discussion with Infactum...
Of course not. However, that sentence directly contradicts the claim that the following is proven: - Infactum
opportunity cost ensures the efficient allocation of resources - Xero
You're lumping two extremely different types of earmarking...
The standard normative "theory" of earmarking adopts the reference system of the budget-maker, the budgetary authority, who is, by presumption, divorced from the citizenry in the political community. An alternative working hypothesis of political order is the individualistic
one in which the reference system becomes that of the individual citizen. - James M. Buchanan, The Economics of Earmarked Taxes
The standard idea of earmarking is individual congresspeople allocating funds to specific programs. Buchanan discussed earmarking in terms of individual taxpayers allocating funds to specific programs. What do you think the difference is between the two types of earmarking in terms of opportunity cost?
Since economists do not agree, then we conclude that opportunity cost is not proven to ensure efficient allocation of resources (regardless of market). This logic only applies as of 1963, of course. It is possible that that statement was proven since then. - Infactum
So find a paper that substantiates your specific claim that opportunity costs do not ensure the efficient allocation of resources.
I'll admit, I had only read the first page since I dislike making more internet accounts. The paper was, however, disappointing in it's narrow applicability.

His argument, in The Economics of Earmarked Taxes (1963), was, essentially, that if you make enough assumptions, then earmarking is optimal. To do prove earmarking is optimal, he explicitly rejects strategic allocation by assuming that the good provided by a public service is directly proportional to the amount of funding that service receives (p.460). He himself admits (as I would expect most any self respecting economist to do) that these are just assumptions and the real world may behave far differently from his idealization. He especially focuses on the political nature of the actor as far from his ideal actor and the "decision making cost." See section V for his cautions on the applicability of the results. Note especially where he says that the violation of these assumptions might mean that a traditional allocation system could be better. I will note that all 3 of these things have been brought up in one way or another in this thread by me or others. - Infactum
You missed the point regarding bundles and preference revelation...
Institutionally, earmarking provides a means of compartmentalizing fiscal decisions. The individual citizen, as voter-taxpayer-beneficiary, is enabled to participate, separately, either directly or through his legislative representative, in the several public expenditure decisions that may arise. He may, through this device, "vote" independently on the funds to be devoted to schools, to sanitation, and so on, given the specified revenue sources. Only in this manner can he make "private" choices on the basis of some reasonably accurate comparison of the costs and the benefits of the specific public services, one at the time. By contrast, general-fund budgeting, or non-earmarking, allows the citizen to "vote" only on the aggregate outlay for the predetermined "bundles" of public services, as this choice is presented to him by the budgetary authorities. - James M. Buchanan, The Economics of Earmarked Taxes
Remember what I wrote in my original post? Our current system is based on the assumption that congresspeople are omniscient (True/False)...
The basic argument assumes a full range of possible baskets of public goods available at the start. But how is this spectrum of opportunities established? Two possibilities come to mind: some central authority or auctioneer could set up different local communities and clubs with different baskets of public goods and inform all potential citizens of the characteristics of each community club. There are two obvious difficulties to this resolution of the problem, however. First, assuming a central authority knows what baskets of public goods must be supplied disposes of a large portion of the preference revelation problem, which the model is supposed to solve. If the central authority knew which people had which preferences, it could simply assign individuals to the appropriate club or local polity. Second, even if it is to some extent feasible, this solution to the preference-revelation problem violates the decentralized spirit of the Buchanan and Tiebout models. - Dennis C. Mueller, Public Choice III
Scholars have examined a number of factors that are taken to be structural components of governmental systems and that are presumed to induce utility losses. Among them is the "bundling" of goods and services, that is, the provision in a single package of a number of goods and services. Yoram Barzel (1969) has shown that bundling can impose utility loses on citizens. - Albert Breton, Competitive Governments: An Economic Theory of Politics and Public Finance
Every year, 100 million homes pay for a bundle of cable channels. Like any bundle, it's hard to see exactly what they are paying for. That is somewhat the point of bundling -- to disguise the true cost of the constituent items. - Derek Thompson, The End of TV and the Death of the Cable Bundle
Bundling...

1. assumes omniscience on the part of congresspeople
2. decreases utility for citizens
3. prevents citizens from being aware of the (opportunity) costs

Your argument is largely centered around the idea that taxpayers will have an incentive to conceal their true preferences if they could choose where their taxes go. Buchanan argued against this in his paper...
Under most real-world taxing institutions, the tax price per unit at which collective goods are made available to the individual will depend, at least to some degree, on his own behavior. This element is not, however, important under the major tax institutions such as the personal income tax, the general sales tax, or the real property tax. With such structures, the individual may, by changing his private behavior, modify the tax base (and thus the tax price per unit of collective goods he utilizes), but he need not have any incentive to conceal his "true" preferences for public goods. - James M. Buchanan, The Economics of Earmarked Taxes
This substantiates my claim that taxpayers would allocate their taxes according to their preferences. If you claim otherwise, then the responsibility is on you to find any papers that substantiate your claim. Just like if you claim that opportunity costs do not ensure the efficient allocation of resources, then the responsibility is on you to find any papers that substantiate your claim.
Opportunity cost is the difference in value derived from one choice versus the best of the choices not picked. - Infactum
You derive x amount of value from replying to this thread (1st best option) and y amount of value from reading your book (2nd best option). The opportunity cost of replying to this thread is not x - y...it's simply y. It's the value that you would have derived from reading your book.
In theory, if everyone is rational (i.e. makes no "mistakes"), then they will pick the option with the least opportunity cost. - Infactum
People pick the most valuable option, which requires the sacrifice of the second most valuable option. The value that you would have derived from the second best option is the opportunity cost.
I honestly cannot find a discussion of this concept with relation to multiplayer games, but that is quite important, as the opportunity cost of defecting in the prisoner's dilemma is dependent on the other player's action. This prevents the analysis from extending to collectively funded public goods IMO. My claim, however isn't that strong.

[...]

1) "If you're not willing to cooperate with your coconspirator, then clearly you'd prefer to sit in jail for 3 years instead of 1." Is that a true statement in your opinion? Can you see this as a valid analogy?

[...]

Opportunity cost is not well defined in (some) multiplayer games. That was the point of the second sentence. You can't tell me my opportunity cost for defecting in the prisoner's dilemma/Chicken/etc without information on another actor. This means that, even if I were a homo economicus, I would have insufficient information to determine the magnitude of my opportunity cost. How do you expect poor little normal me to do so? If I cannot determine the magnitude of my opportunity cost, I cannot determine how much I am sacrificing. If I cannot determine how much I am sacrificing, then I cannot compare the value of different options. If I cannot compare the value of different options, I cannot choose the one I prefer. Do you disagree with anything in that logic chain? - Infactum 
Imagine a river right next to a soup kitchen. When you arrive at the soup kitchen to volunteer you notice that there's a group of people picking up trash along the river. How is the prisoner's dilemma relevant/applicable?
My original guess was that you were going to claim that the private sector was more complex, and therefore people ought to have an easier time deciding what was of value to them in the public sector. After tracing the thread of conversation back a bit, it seems more likely that you intend to show that (government provided?) public goods tend to compete with each other far less, so it is much more important to choose one over the other. Was I even close? - Infactum
Not really. My point was for you to explain why there's such a greater diversity/variety of goods in the private sector. What do you attribute this to?
I'll admit, I hadn't considered "voting" as asking people how much things are worth to them with the understanding that that will be how much they pay. When we vote we have the opportunity to make other people pay for things we value. I know this is a problem you have with the system, but it means that our method of voting is not exactly a contingent valuation system.

[...]

No, it's not. The reason people like Hitler become powerful is that they are able to change others' preferences. Hitler could easily have risen to head of government. If he could get any small fraction of the people to give their taxes to his military, he could seize power.
Clearly you believe that voting adequately allows people to communicate their true preferences/values. So please substantiate your claim.
No, but Congress does have access to experts and (in theory) studies the issue constantly. Now you are pretty much requiring that everyone do some fraction of this if they want to allocate to the best of their ability. I believe this is what Buchanan referred to as "Decision cost." Perhaps their will be a new industry of allocation advisers spawned, if so that would cut down, but not remove this decision cost. It also wouldn't get rid of the incentive to "defect". - Infactum
Keep climbing the mountain by reading up on rational ignorance...
This greater complexity of political choice is compounded by an inability to gain from any investment in knowledge. In a market setting, a person can gain by storing food during the boom periods; it is a simple task to profit directly from knowledge. In a political setting, however, even if a person has acquired knowledge about the more complex question of "why," there is no way that he can profit from his knowledge because a change in policy will take place only after a majority of people have come to the same conclusion. Consequently, it is rational to be considerably more ignorant about general policy matters than about matters of market choice. - James M. Buchanan, The Theory of Public Choice: II
We all gain as a society when we incentivize people to be at the right place at the right time. Being at the right place at the right time requires doing homework. But there's no point in doing homework if there's absolutely no benefit from being at the right place at the right time.

Consider this recent blog entry over at the Bleeding Heart Libertarian blog...
Here’s the problem. Many moral philosophers (including me) think a purely instrumental agreement is seriously deficient from a moral point of view. For one thing, instrumentally rational agreements might be subject to gross inequalities of wealth, and worse, inequalities of bargaining power. It might be instrumentally rational, for instance, for a drowning man to give up all of his money to the only person in a position to rescue him. But we think such an agreement would be unjust because the rescuer is exploiting the man who needs rescuing. The result is that instrumentalist contracts are not properly normative. They don’t give us the right reasons to comply with social and political rules. - Kevin Vallier, The Essential Relationships Between Duty and Coordination – For Boettke and Leeson
Clearly Vallier needs to read Bastiat...
In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil. - Frédéric Bastiat, What Is Seen and What Is Not Seen
It might seem morally wrong for Dave to exploit (take advantage of) Bob, who's drowning. But the fact of the matter is, nobody else was around. If we limit/restrict Dave's ability to benefit from his effort/research/luck/insight/foresight, then we decentivize people to be where we need them most. It's the equivalent of removing sirens and flashing lights from emergency vehicles. If we don't know how valuable all the different uses of society's limited resources are...then it's impossible for resources to flow to where they create the most value. Without this essential information, it's a given that resources will flow the wrong directions and we will all be worse off.

So you feel secure placing our future in the hands of 300 congresspeople and their entourage of experts. But I would feel infinitely more secure if everybody could receive the benefit of their accurate estimates of future value.
If the socialists mean that under extraordinary circumstances, for urgent cases, the state should set aside some resources to assist certain unfortunate people, to help them adjust to changing conditions, we will, of course, agree. This is done now; we desire that it be done better. There is, however, a point on this road that must not be passed; it is the point where governmental foresight would step in to replace individual foresight and thus destroy it. - Frédéric Bastiat
given enough eyeballs, all bugs are shallow - Linus's Law
Right now in this thread there are numerous people looking for the bugs in pragmatarianism. Clearly they are finding bugs. Maybe the bugs are imagined rather than real, but they should be allowed to allocate their resources accordingly. This is exactly how the public sector should work as well. Let many people look for the bugs in public programs and allocate their taxes accordingly.
Earlier you said that how much I sacrifice is the same as how much I valued something. If this is true, then no value is created in trades, as I am sacrificing something to receive something of equal value (and so is "Trusty"). Do you believe value is created in trades? - Infactum
People only sacrifice something if they suspect that what they receive in return will be more valuable than what they have to give up. Otherwise they'll simply suffer a loss. Given that nobody intentionally wants to suffer a loss, the more that somebody is willing to sacrifice, the more they value what they are trading for.
The exsistence of a costless exit is not even obvious. "Cost," can only be defined relative to other things (as you assert when talking about oppurtunity cost). Therefore, the existence and placement of a zero (i.e. "costless") is at best arbitrary. - Infactum
There's a difference between internal "barriers" and external barriers. Costless exit just means that I'm not preventing you in any way shape or form from leaving this discussion. With our current system, it's very costly for a pacifist not to fund the DoD. They can either avoid making enough money to pay taxes or risk going to jail or try to move to a country where they aren't forced to fund war.
I tend to think abundance has to do with how well society uses societies limited resources. There is so much aping and riffing on eachothers' ideas in industry that it is basically impossible to define who is responsible for a given business practice. And make no mistake, it is technological innovations and business practices that are responsible for the abundance, as they are what allow us to multiply our labor.

And you haven't answered my question. If, say, the poorest third of the people on SNAP (5% - 15 Million people) starved to death after implementing tax choice, would you say the market valued them more dead than alive? - Infactum
You agree that abundance depends on how well society's limited resources are being used. Yet, you want me to address an unrealistic scenario with millions starved to death because we implemented tax choice. It reminds me of these anarcho-capitalists who critiqued pragmatarianism using a pragmatarian system with a 100% tax rate as their example. If you want me to address your unrealistic scenario, then please provide a detailed and credible explanation of how we arrive at your scenario.

Step 1: Implement pragmatarianism
Step 2: ?
Step 3: Millions starve to death
I can't be certain that P doesn't lead to pragmatarianism. In principle, I could if I could show some kind of contradiction, but I would prefer things be better defined before attempting that again. It may not lead to anywhere interesting or useful on it's own. That's just the nature of logic. You still have to rigorously show it leads to pragmatarianism; logic isn't a Bayesian analysis. - Infactum
You're defending the current system, and you agree that values are subjective (P). Please give me an example rigorously showing that P leads to our current system. Or acknowledge that you hold my arguments to a far higher standard than you hold your own.

Tuesday, September 17, 2013

Perfect Information versus Partial Knowledge

People know external things (circumstances) and internal things (values). They know how many potholes they run over and how much cancer research they'd be willing to forego to fix them. They know how many times they've been mugged and how much education they'd be willing to forego for more police. They know how many nights they've lost sleep because of the threat of terror and how much space exploration they'd be willing to forego for more peace of mind.

All this information would be integrated in the public sector if people were free to shop for themselves.  If you don't want people to shop for themselves then it's because you believe one of the following...

A. the political process allows this information to be adequately conveyed to congresspeople
B. resources can be put to their most valuable uses without all this information
C. congresspeople are omniscient

Which one do you believe?

Buchanan insisted on the same conclusion in an article published a few months after the conference in October 1959 in the Journal of Law and Economics. “Positive Economics, Welfare Economics, and Political Economy” opposed the positive political economy approach of welfare economics -- in which the role of the economist consists in discovering “what people want” (1959, p. 137) and “what is the structure of individual values” (1959, p. 130) -- to the normative new welfare economics -- in which the economist, seeing himself as an external and omniscient observer, is capable of “reading” the individual preferences of the individuals and accordingly of determining the best possible outcome for the collectivity - Alain Marciano, Why markets do not fail
It must be confessed, however, that we seldom know enough to decide in what fields and to what extent the State, on account of the gaps between private and public costs could interfere with individual choice. - Arthur Pigou, Some Aspects of the Welfare State.
At this point, a question naturally arises: how can we justify the fact that the central government is less capable (because of less information) of satisfying citizens' preferences (Oates 2005)? - Brian Dollery, Lorenzo Robotti, The Theory and Practice of Local Government Reform
Jay Lund's chapter explores the informational problems implied in finding the best way to allocate water resources. In this respect, the main advantage of water trading is that its effectiveness does not require having in advance detailed information on the value of water on any place and for any alternative use. Engaging in trade is a voluntary decision, thus the market is itself a preference revelation mechanism. No particular prior information on people's preferences is then required in advance for trading to find mutually beneficial deals. By definition, when a transaction takes place, the maximum willingess to pay of those buying water is higher than the minimum compensation required by the sellers of water property rights and the deal improves the welfare of those engaged in it. Allowing for water trading thus reduces the information burden of water authorities as they do not need detailed information beyond that required to reach a decision on the overall constraints on the water use in the entire economy. - Carlos Mario Gomez, Incentives and prices in water trading
Third, keeping citizens off the street meant that 99% of the eyes and brains that might solve a crime were being wasted. Eric S Raymond famously said that "given enough eyeballs, all bugs are shallow". It was thousands of citizen photographs that helped break this case, and it was a citizen who found the second bomber. Yes, that's right – it wasn't until the stupid lock-down was ended that a citizen found the second murderer - Clark, security theater, martial law, and a tale that trumps every cop-and-donut joke you've ever heard
Our discontent with the original Samuelson rule stems from its failure to account for tax payers’ response to public expenditure and taxation. The rule was derived for an omnipotent, omniscient and benevolent government, a government which, by definition, need not consider people’s responses to its actions. Drop that assumption, restrict government to the choice of tax rates and public expenditures, and the response to its actions must be taken into account. - Dan Usher, Should the Samuelson Rule Be Modified to Account for the Marginal Cost of Public Funds?
The instruments of intervention became the tools with which to apply government knowledge. Resources were directed and allocated by the state, by political and bureaucratic decision making, rather than by the elemental forces of supply and demand - forces shaped by the knowledge of those in the marketplace. - Daniel Yergin, Joseph Stanislaw, The Commanding Heights
One of the strongest arguments in favor of letting people interact freely in a market under property rights institutions is that it is the best known way to utilize the decentralized knowledge of the society— including the knowledge that each individual has about his own values. - David Friedman, The Machinery of Freedom
Individuals express preferences about changes in the state of the world virtually every moment of the day. The medium through which they do this is the market place. A vote for something is revealed by the decision to purchase a good or service. A vote against, or an expression of indifference, is revealed by the absence of a decision to purchase. Thus the market place provides a very powerful indicator of preferences. - David Pearce, Dominic Moran, Dan Biller, Handbook of Biodiversity Valuation A Guide for Policy Makers
Individuals’ actions necessarily rest on imperfect knowledge, and people often appear to act without sufficient information. However, intractable problems of knowledge and incentives impede government officials’ attempts to improve on market-generated knowledge. Knowledge, consisting of information plus judgment, is highly subjective. Therefore, the optimal amount of information varies from person to person, depending on the expected costs and benefits. It should not be surprising that government attempts to improve consumer knowledge frequently are disappointing. Hayek labels as the fatal conceit the idea that human beings can determine what is best for society and use the political process to shape the world according to their wishes. - E.C. Pasour, Consumer Information and the Calculation Debate
Hayek stressed that the knowledge needed to achieve a rational economic order consists of dispersed bits of knowledge held by individuals. This knowledge is highly specialized: only individuals involved in deciding resource use know the relative importance of the various ends or purposes for which resources might be used. Thus, the crucial problem confronting society is how to use the specialized knowledge of different people in the production of goods and services to satisfy consumers. - E.C. Pasour, Consumer Information and the Calculation Debate
Economic planning in a socialist system must necessarily founder on the rocks of ignorance. First, the data necessary to find out the pattern of production that best fits consumer preferences are never given, as often assumed by planning proponents. Second, and even more important, the central planner cannot obtain the necessary data. Much of the data on available resources, production alternatives, and consumer demand constantly changes as economic conditions change. Thus, decentralization is the only means of coordinating economic activity through which the specialized knowledge of individuals can be taken into account and used promptly. - E.C. Pasour, Consumer Information and the Calculation Debate
Governments, like private firms, do not necessarily have ‘the necessary information’ about people’s demand functions to provide public goods at efficient levels. Without non-exclusion there does not seem to be a compelling role for government provision, that is, there is no 'public' in 'public goods'. The general consensus seems to be that it is better to restrict public goods, and hence the a priori case for government intervention, to goods that are both non-rival and non-excludable. - Frances Woolley, Why public goods are a pedagogical bad
It is a world of change in which we live, and a world of uncertainty. We live only by knowing something about the future; while the problems of life, or of conduct at least, arise from the fact that we know so little. This is as true of business as of other spheres of activity. The essence of the situation is action according to opinion, of greater or less foundation and value, neither entire ignorance nor complete and perfect information, but partial knowledge. - Frank H Knight, Risk, Uncertainty, and Profit
To the naïve mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions, and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account. This is the main reason for rejecting the requirements of constructivist rationalism. - Friedrich A. Hayek, The Fatal Conceit
It may be admitted that, so far as scientific knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available...[Yet] scientific knowledge is not the sum of all knowledge...[A] little reflection will show that there is . . . the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others in that he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation. - Friedrich A. Hayek
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 A. Hayek, The Use of Knowledge in Society
It is the extensive cooperation among highly specialized workers that enables advanced economies to utilize a vast amount of knowledge. This is why Hayek's emphasis on the role of prices and markets in combining efficiently the specialized knowledge of different workers is so important in appreciating the performance of rich and complex economies. - Gary S. Becker
A free society is one in which individuals are free to discover for themselves the available range of alternatives. In his masterly critiques of the theory of central planning, Hayek directed attention to the circumstance that the information available in an economy is always scattered among countless individuals, never concentrated in the mind of a single central planner. Hayek pointed to the need for a social institutional structure capable of organizing the scattered scraps of available information so they can be used for the efficient allocation of society’s resources. The competitive market, Hayek showed us, is a discovery process, one in which society discovers what options are feasible and how important they are. - Israel Kirzner, Perception, Opportunity, and Profit
An individual is fully sensible of the value of the article he is consuming; it has probably cost him a world of labour, perseverance, and economy; he can easily balance the satisfaction he derives from its consumption against the loss it will involve. But a government is not so immediately interested in regularity and economy, nor does it so soon feel the ill consequences of the opposite qualities. Besides, private persons have a further motive than even self-interest; their feelings are concerned; their economy may be a benefit to the objects of their affection; whereas, the economy of a ruler accrues to the benefit of those he knows very little of; and perhaps he is but husbanding for an extravagant and rival successor. - J.B. Say, A Treatise on Political Economy
It must be remembered, besides, that even if a government were superior in intelligence and knowledge to any single individual in the nation, it must be inferior to all the individuals of the nation taken together. It can neither possess in itself, nor enlist in its service, more than a portion of the acquirements and capacities which the country contains, applicable to any given purpose. - J.S. Mill, Principles of Political Economy with some of their Applications to Social Philosophy
The fact that such a tax institution always exists conceptually does not, of course, imply that it can be determined independently of the revealed choices of individuals themselves. If an omniscient observer should be present, and if he were asked to "read" all individual preference maps, he could then describe the "optimal" structure of tax prices. Failing this, there is no means of ascertaining with any degree of accuracy the "efficient" tax structure or institution. - James M. Buchanan, Public Finance in Democratic Process
Individuals are not, of course, omniscient, even those who think themselves to be. The securing of information about the predicted effects of alternatives is a costly process, even in a world with reasonable certainty. Recognizing this, individual utility-maximizing behavior remains “rational” when choices are made on the basis of less-than-perfect information. There is some “optimal” investment in fact-finding and analysis for the deciding individual at each stage of his deliberation. - James M. Buchanan
Markets, for instance, are usually prima facie diverse because they are made up of people with different attitudes toward risk, different time horizons, different investing styles, and different information. On teams or in organizations, by contrast, cognitive diversity needs to be actively selected, and it's important to do so because in small groups it's easy for a few biased individuals to exert undue influence and skew the group's collective decision. - James Surowiecki
Pareto-optimal provision clearly also requires full knowledge of individual preference functions by the central planning agency. The preference-revelation problems involved in practice are a familiar theme in the modern public goods literature. - John G. Head, Public Goods and Multi-Level Government
If the knowledge problem identified by Mises and Hayek make rational central planning impossible for something as simple as a quart of milk, what chance do central planners have to make rational, effective plans for something as complex and difficult as educating the children of a diverse nation of more than 300 million? - Kevin D. Williamson, The Politically Incorrect Guide to Socialism
As we've seen, socialism cannot serve citizens' interests because central planners have no way of knowing what those interests are. In the absence of the information conveyed through marketplace activity - particularly through prices - economic planners are left with highly defective sources of information: opinion polling, surveys, stated preferences (which normally differ dramatically from real or revealed preferences), and the like. - Kevin D. Williamson, The Politically Incorrect Guide to Socialism
This process of redistribution of wealth is not prompted by a concatenation of hazards. Those who participate in it are not playing a game of chance, but a game of skill. This process, like all real dynamic processes, reflects the transmission of knowledge from mind to mind. It is possible only because some people have knowledge that others have not yet acquired, because knowledge of change and its implications spread gradually and unevenly throughout society. - Ludwig M. Lachmann, The Market Economy and the Distribution of Wealth
If well-meaning policymakers possess all the relevant information about individuals' true preferences, their cognitive biases, and the choice contexts in which they manifest themselves, then policymakers could potentially implement paternalist policies that improve the welfare of individuals by their own standards. But lacking such information, we cannot conclude that actual paternalism will make their decisions better; under a wide range of circumstances, it will even make them worse. New paternalists have not taken the knowledge problems that are evident from the underlying behavioral and economic research seriously enough. - Mario J. Rizzo, Douglas Glen Whitman, The Knowledge Problem of New Paternalism
Deprived of this guidance, and without the incentive of personal interest, accounts and statistics, however complete, would be of very little use, and unless they were the mundane representatives of an omniscient providence, the directors of production would be quite unable to avoid occasional excess or deficiency of supply, which would cause terrible disorder and confusion, with effects infinitely more serious than mistakes made by private enterprise, which, as a whole, is never actuated by precisely similar motives; thus its errors correct each other, and being uninfluenced by prejudice, or amour proper, it shows a marvellous quickness of adoption; mistakes committed by the state would be not only far more serious, but far more difficult to remedy. - Paul Leroy Beaulieu, Collectivism
Each individual is unique, not fully duplicated anywhere else. Therefore, each individual possesses considerable knowledge that is not and cannot be fully known by anyone else - by government or by any group of people. Each individual has preferences - needs and wants - of which only he can be cognizant at any point in time; he also has a unique capacity to envision new wants when old ones have been partially or fully satisfied. The individual knows, within limits, what gives him gain and causes him pain; and he knows this before any of his actions are revealed to others. He can understand the subjective basis for his actions before he acts; others can only observe his actions after the fact and guess at his motivation by reflecting on their own, different preferences. - Richard B. McKenzie, Bound to Be Free
True, consumers do demand a given product, say, a certain model automobile. But how, outside the market process, can the government know what consumers want? Can the government simply ask consumers what they want? - Richard B. McKenzie, Bound to Be Free
The very division of knowledge increases the necessary ignorance of the individual of this knowledge. The division of knowledge increases the need for a decentralized decision-making system - the market. - Richard B. McKenzie, Bound to Be Free
Expositions of welfare economics typically assume that the analyst possesses knowledge that is in no one’s capacity to possess. A well-intentioned administrator of a corrective state would face a vexing problem because the knowledge he would need to act responsibly and effectively does not exist in any one place, but rather is divided and dispersed among market participants. Such an administrator would seek to achieve patterns of resource utilization that would reflect trades that people would have made had they been able to do so, but by assumption were prevented from making because transaction costs were too high in various ways. A corrective state that would be guided by the principles and formulations of welfare economics would be a state whose duties would exceed its cognitive capacities. - Richard E. Wagner
We can never possess tomorrow’s knowledge today. We can never know what innovations, creative ideas, and useful improvements will be generated in the minds of free men in the years to come. That is why we must leave men and their minds free. The man of system, the social engineer, who sees only the apparent problems from these global changes, wants to plan America’s place in the new, emerging global economy. But to do so, he must confine and straitjacket all of us to what his mind sees as the possible, profitable, and desirable from his own narrow perspective with the knowledge he possesses in the present. - Richard M. Ebeling, Free Markets, the Rule of Law, and Classical Liberalism
There is no need to prove that each individual is the only competent judge of this most advantageous use of his lands and of his labor. He alone has the particular knowledge without which the most enlightened man could only argue blindly. He alone has an experience which is all the more reliable since it is limited to a single object. He learns by repeated trials, by his successes, by his losses, and he acquires a feeling for it which is much more ingenious than the theoretical knowledge of the indifferent observer because it is stimulated by want. - Turgot
We know that the essence of markets is that individual cost and value information is private and dispersed, and that command and control economies inevitable must fail to deliver the goods because the appropriate information is not, and cannot be, given to any one mind. - Vernon L. Smith, Commonwealth North Forum
Nevertheless, even without perfect knowledge, the government must decide whether or not to provide the public good. It also must decide how much of the public good it should provide. Finally, the government must decide, all without guaranteed information, on a tax schema. Under such circumstances, it is not possible for the government to reach an optimal solution and a Pareto distribution of taxes for the public good. - Wilfried Eecke, Ethical Dimensions of the Economy
Development happens thanks to problem-solving systems. To vastly oversimplify for illustrative purposes, the market is a decentralized (private) problem solving system with rich feedback and accountability. Democracy, civil liberties, free speech, protection of rights of dissidents and activists is a decentralized (public) problem solving system with (imperfect) feedback and accountability. Individual liberty in general fosters systems that allow many different individuals to use their particular local knowledge and expertise to attempt many different independent trials at solutions. When you have a large number of independent trials, the probability of solutions goes way up. - William Easterly, The Answer Is 42!

Friday, September 13, 2013

Bushels Over Brilliance

Rainbows and Rivers wrote:  I think you may have misunderstood me. The money that would be distributed would be the money that is already collected in taxes. Since it is meant to be spent on behalf of the citizens of a country rather than on behalf of its taxpayers, you should have no problem including all the citizens' value preferences. After all, however successful a millionaire may be, there is no way he can know someone else's preferences, right? Or at least your own argument goes like that.

Xero wrote: Imagine that your preferences are a giant diamond with a billion different facets. A successful millionaire isn't successful because he knows all your facets...he's successful because he shines one of your facets better than anybody else does. That's why you choose him to give your money to.

So there he is shining one of your facets. But obviously he's not a alone. There are a billion other people all over your giant diamond and each one is focusing on shining the facet that you paid them to shine.

Shopping is the process by which you find the people who can shine one of your facets better than anybody else can. Right now you're shopping for economic discussion. And here I am trying to shine this particular facet of yours. But I'm completely oblivious to all your other facets. I have no idea whether you have an artichoke facet or a Paris Hilton facet.

But in the public sector...rather than having a billion representatives each focused on shining a different facet...you have one representative who is trying to shine all your facets. Given that the public sector is half our economy, it behooves us to understand which method is more productive/effective/efficient/valuable.

I think maybe the person closest to you might know quite a few of your facets...but nobody can know your facets better than you can. Nobody can know how you rank the importance of each of your facets. Therefore, everybody would be infinitely better off if taxpayers could choose where their taxes go. Even if you don't make enough money to pay taxes...you're still going to get infinitely better/accurate/customized/tailored representation from your billion representatives who do have to pay taxes.

If the artichoke farmer is one of your representatives then he's going to spend his taxes on the public goods inputs he needs to successfully output artichokes. If Hot Chip is one of your representatives then they are going to spend their taxes on the public goods inputs they need to successfully output awesome music.

The moral of the story is...shine on you crazy diamond. Don't let them put a bushel over your brilliance.

Friday, September 6, 2013

Xero's Rule

... an increase in the power of the State ... does the greatest harm to mankind by destroying individuality which lies at the heart of all progress… - Gandhi
The public collectively is abundantly ready to impose, not only its generally narrow views of its interests, but its abstract opinions, and even its tastes, as laws binding upon individuals. And the present civilization tends so strongly to make the power of persons acting in masses the only substantial power in society, that there never was more necessity for surrounding individual independence of thought, speech, and conduct, with the most powerful defences, in order to maintain that originality of mind and individuality of character, which are the only source of any real progress, and of most of the qualities which make the human race much superior to any herd of animals. - J.S. Mill, Principles of Political Economy with some of their Applications to Social Philosophy 
Xero's Rule: by the time a species has progressed to the point that they can travel to other inhabited planets...they would have discovered the positive correlation between trading and progress.

While it's entertaining/exciting/scary to watch movies with alien space invaders attacking our planet in order to take our resources...the concept has no basis in economic reality...

1. Scarcity is relevant no matter what solar system you're from
2. Progress depends on how scarce resources are used
3. Different perspectives can see different uses of the same resource
4. Therefore, the rate of progress depends on...

A. how much difference there is between people's perspectives (diversity)
B. how much freedom people have to apply their perspectives to their scarce resources

If a species has 100% freedom but no variation in perspectives...then they won't come up with different uses of their resources...which will result in a 0% rate of progress.  Same thing if a species has 0% freedom but incredible variation in perspectives.  Of course neither extreme is possible...but where a species falls on the spectrum will determine its rate of progress.

In all likelihood it would probably be relatively easy for an advanced alien civilization to enslave/kill/eat us and take our resources. They would then be able to use our resources in their own alien ways. But if they did take our resources then they would be greatly hindering their own progress.  This is because if they hadn't taken our resources...then us humans would have been able to apply our very different perspectives to our resources.  We would have come up with new and innovative uses that the aliens would have been able to benefit from...but wouldn't have thought of on their own.

The same concept is applicable to China. China could certainly try and invade our country and take our resources. And if they were successful...then they would temporarily benefit. They would have more resources...but they would still just be applying the same set of perspectives to them.  And having resources isn't nearly as important as what you do with them.  Therefore, China would be sacrificing the significantly greater benefit that they would have derived from all future American innovations.

Here's what John Stuart Mill wrote in 1869...
China—a nation of much talent, and, in some respects, even wisdom, owing to the rare good fortune of having been provided at an early period with a particularly good set of customs, the work, in some measure, of men to whom even the most enlightened European must accord, under certain limitations, the title of sages and philosophers. They are remarkable, too, in the excellence of their apparatus for impressing, as far as possible, the best wisdom they possess upon every mind in the community, and securing that those who have appropriated most of it shall occupy the posts of honour and power. Surely the people who did this have discovered the secret of human progressiveness, and must have kept themselves steadily at the head of the movement of the world. On the contrary, they have become stationary—have remained so for thousands of years; and if they are ever to be farther improved, it must be by foreigners. They have succeeded beyond all hope in what English philanthropists are so industriously working at—in making a people all alike, all governing their thoughts and conduct by the same maxims and rules; and these are the fruits. The modern régime of public opinion is, in an unorganized form, what the Chinese educational and political systems are in an organized; and unless individuality shall be able successfully to assert itself against this yoke, Europe, notwithstanding its noble antecedents and its professed Christianity, will tend to become another China. - J.S. Mill, On Liberty
And here's what Mao Zedong wrote nearly a 100 years later...
Apart from their other characteristics, the outstanding thing about China's 600 million people is that they are "poor and blank". This may seem a bad thing, but in reality it is a good thing. Poverty gives rise to the desire for changes the desire for action and the desire for revolution. On a blank sheet of paper free from any mark, the freshest and most beautiful characters can be written; the freshest and most beautiful pictures can be painted. - Mao Zedong
Subjugation/taking greatly slows the rate of progress. This fatal conceit squanders the most valuable resource... individuality/uniqueness/originality. Therefore, the rate of progress is far greater if we rely on persuasion/trading.

Unfortunately, as a species, clearly we still are not aware of the positive correlation between trading and progress. The pattern is there...but most have yet to see it.  As more and more people start to see the pattern, there will be more recognition of the immense value of giving taxpayers the freedom to shop for themselves in the public sector.  The unique perspectives of millions of diverse people would be applied to public goods and the result would be infinitely beneficial.

If people aren't free to shop for themselves...then the specificity and ranking of their preferences and the uniqueness of their circumstances will not be input into the function which determines how society's scarce resources are used. As a result, the output will be the wrong quantities of an extremely narrow selection of poor quality products/services. Pseudo-demand, pseudo-supply.  Garbage in, garbage out.

Pragmatarianism can't be implemented if the positive correlation between shopping and progress is not clear to most...just like we won't be capable of traveling to other inhabited planets if the pattern is not clear to all.  Given that economic reality is not constrained by time/space... convergence is certain: an alien civilization won't be able to visit other inhabited planets before they've seen the pattern.      

What I've shared is basically a consequentialist argument against taking. Or conversely...a consequentialist argument for trading/liberty.  It should be clear that consequentialist arguments for liberty have far more substance than moral arguments for liberty.

The amount of benefit the future holds depends on you!  So please carefully read the following passages on heterogeneous activity...
Solutions to complex social problems require as many creative minds as possible — and this is precisely what the market delivers. - Donald J. Boudreaux
I’m not here to say that men are to blame for the [financial] crisis and what happened in my country [Iceland]. But I can tell you that in my country, much like on Wall Street and the city of London and elsewhere, men were at the helm of the game of the financial sector. That kind of lack of diversity and sameness leads to disastrous problems. - Halla Tomasdottir, Co-founder of Audur Capital 
Austrians believe that we get more solutions – and better, more creative solutions – if the energy, imagination, alertness and specialist knowledge of many individuals are engaged on the task. In economics, this is achieved through the process of competition, which gives diverse entrepreneurs the incentive to seek out new and better ways of enhancing value to consumers. By the same reasoning, our social and political problems may also be best solved if we give individuals the widest possible freedom to come up with a variety of creative responses, rather than hoping that a single collective approach will suffice. - Eamonn Butler, Austrian Economics
The generation to which we belong is now learning from experience what happens when man retreats from freedom to a coercive organization of their affairs.  Though they promise themselves a more abundant life, they must in practice renounce it; as the organizational direction increases, the variety of ends must give way to uniformity.  That is the nemesis of the planned society and the authoritarian principle in human affairs. - Walter Lippmann
Development happens thanks to problem-solving systems. To vastly oversimplify for illustrative purposes, the market is a decentralized (private) problem solving system with rich feedback and accountability. Democracy, civil liberties, free speech, protection of rights of dissidents and activists is a decentralized (public) problem solving system with (imperfect) feedback and accountability. Individual liberty in general fosters systems that allow many different individuals to use their particular local knowledge and expertise to attempt many different independent trials at solutions. When you have a large number of independent trials, the probability of solutions goes way up. - William Easterly, The Answer Is 42!  
So far as this is the case, it is evident that government, by excluding or even by superseding individual agency, either substitutes a less qualified instrumentality for one better qualified, or at any rate substitutes its own mode of accomplishing the work, for all the variety of modes which would be tried by a number of equally qualified persons aiming at the same end; a competition by many degrees more propitious to the progress of improvement than any uniformity of system. - J.S. Mill, Principles of Political Economy with some of their Applications to Social Philosophy
It is not by wearing down into uniformity all that is individual in themselves, but by cultivating it and calling it forth, within the limits imposed by the rights and interests of others, that human beings become a noble and beautiful object of contemplation; and as the works partake the character of those who do them, by the same process human life also becomes rich, diversified, and animating, furnishing more abundant aliment to high thoughts and elevating feelings, and strengthening the tie which binds every individual to the race, by making the race infinitely better worth belonging to. In proportion to the development of his individuality, each person becomes more valuable to himself, and is therefore capable of being more valuable to others. There is a greater fulness of life about his own existence, and when there is more life in the units there is more in the mass which is composed of them. - J.S. Mill, On Liberty
Similarly, Niskanen attacked the monopoly power of public bureaucracies, school districts among them.  More recently, Coons and Sugarman have championed the case for parental freedom of choice, indicating that we should "substitute mutual respect as a ground of a social accord" and use freedom of choice to reduce the perils of uniformity. - Daniel J. Brown, The Case For Tax-Target Plans 
While declaring “Let the government handle it” comes across as a solution, it’s no such thing. Instead, it is merely a sign of a simple and baseless faith — a simple and baseless faith that people invested with power will not abuse that power; that political appointees possess or will find better answers than will millions of people pursuing solutions in their own ways, and staking their own resources and reputations on their efforts; that only those ‘solutions’ that are spelled out in statutes and regulations and that have officials paid to implement them are true solutions. - Donald J. Boudreaux
In 1956, economist Charles Tiebout (pronounced TEE-bow) asked: What is it about the private market that guarantees optimal provision of private goods that is missing in the case of public goods?  His insight was that the factors missing from the market for public goods were shopping and competition. - Jonathan Gruber, Public Finance and Public Policy