Thursday, July 30, 2015

Unlimited Wants vs Limited Resources


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You’re looking for people to learn from? I nominate Adam Smith…

The people feeling, during the continuance of the war, the complete burden of it, would soon grow weary of it, and government, in order to humour them, would not be under the necessity of carrying it on longer than it was necessary to do so. The foresight of the heavy and unavoidable burdens of war would hinder the people from wantonly calling for it when there was no real or solid interest to fight for. The seasons during which the ability of private people to accumulate was somewhat impaired would occur more rarely, and be of shorter continuance. Those, on the contrary, during which the ability was in the highest vigour would be of much longer duration than they can well be under the system of funding. — Adam Smith, Wealth of Nations

Here are a couple fundamental truths…

  1. Society’s wants are unlimited. 
  2. Society’s resources are limited.

Markets work because people are forced to prioritize how they spend their own hard-earned money. We can’t afford to purchase everything on our want list… so we have to make some painful decisions. We have to deliberate, discern and determine which wants will provide us with the most value. Our spending decisions communicate our valuations to producers… and producers utilize this information to put society’s limited resources to their most valuable uses. As a result, society derives the maximum value from its limited resources. 

Governments fail because they aren’t markets. In the absence of markets, society will not derive the maximum value from its limited resources. 

Does this mean that we have to eliminate governments? Nope. The fact of the matter is that we can’t solely rely on voluntarily contributions to public goods. Again, people’s wants are unlimited… so there’s a strong incentive to free-ride on other people’s contributions to public goods. You can’t benefit from the steak that I buy (unless I want you to)… but you can benefit from the national defense that I contribute to. So it’s not unreasonable to guess that the free-rider problem would be extensive. Therefore, public goods would be largely underfunded/undersupplied. 

The solution is to turn the government into a market. People would still have to pay taxes… but they would be able to choose where their taxes go. If war is truly a priority for most people… then their spending decisions would clearly communicate this. People’s true priorities can only be revealed by their willingness to sacrifice the alternative uses of their own money. Take personal sacrifice out of the equation and you’re bound to get the wrong answer.

You’re on the right track by endeavoring to try and facilitate communication between citizens and government. But it’s fundamentally important to understand and appreciate the significance of actions (spending) speaking louder than words (opinions). 

Perhaps it will help to apply this concept to our current context.

Four people have “Recommended” this story of yours…

  1. Madeline Roachell
  2. Tulio Malaspina
  3. Travis Truman
  4. James Horton

The “Recommend” button facilitated communication. It made it stupid easy for these four people to communicate that they like your story. They didn’t have to send you a smoke signal… or knock on your door… or send you a telegram… or send you a fax… or write you a letter… or send you an e-mail… or send you a text… or call you on the phone… all they had to do was click one button. With minimal sacrifice… these four people voted for your story. And now we know that they like it.

What we don’t know is how much these four people like your story. Does it matter how much they like their story? Does it matter how important your story is to them? Does it matter how much they would be willing to sacrifice for your story? Does it matter how they would rank your story among all the other stories that they’ve also recommended? Shall we pretend that they value each of their recommended stories equally? 

In order for society’s limited resources to be put to their most valuable uses… valuing stories has to be as stupid easy as recommending them. Communicating values has to be as stupid easy as communicating opinions. Next to the “Recommend” button could be some coin buttons… penny, nickle, dime and quarter. Clicking a coin button would instantly transfer the money from the reader’s digital wallet to your digital wallet. Which coin button(s) would James Horton click? Which coin button(s) would Madeline Roachell click? Which coin button(s) would you click? How much do you value your own story? Which of your stories do you value most? Which of your stories does the crowd value most? Which of the crowd’s stories do you value most?

Of course we’d still be up against the free-rider problem. But the existence of the non-profit sector clearly proves that many people are happy to voluntary make some contributions to support worthy causes and concepts. So I’m pretty sure that plenty of people on Medium would be happy to click some coin buttons in order to more accurately communicate the intensity of their preferences. 

It would be really awesome if some city government endeavored to clarify demand by making it stupid easy for citizens to communicate their values. But clarifying demand is equally relevant to Medium and a gazillion other websites. I’m guessing that Medium would be much more likely to add coin buttons than some city government. Just like I’m guessing that other websites would be much more likely to add coin buttons than Medium is. 

There are multiple paths to any destination. If the shortest path has significant obstacles… then it might not be the best path. 

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