Monday, August 3, 2015

Minimizing Economic Wackiness

Reply to: Thank you for the thorough and thoughtful response.


A year ago I created a group on reddit for participatory budgeting (PB). Not too long afterwards I ended up getting shadowbanned. Stupid reddit.

Apart from the banishment… I like the idea of reddit. It’s interesting and useful to know the relative popularity of ideas. 

The issue is when resources are allocated according to popularity. Take prohibition for example. The idea was popular enough for enough people to vote for it. And in order for the law to be enforced… massive amounts of resources were diverted away from numerous alternative uses. 

Allocating society’s limited resources to prohibition created X amount of value for society. If all these resources hadn’t been allocated to prohibition… then they would have created Y amount of value for society. 

If X > Y… then why bother with markets? Why should we want any consumer choice when voter choice and/or representative choice provides society with more value? 

With pragmatarianism… directly allocating taxes would be optional. Nobody would force you to choose where your taxes go. If you didn’t want to shop for yourself in the public sector…you could just give your tax dollars to congress. They would be more than happy to allocate your taxes for you. What percentage of the population do you predict would choose to have congress allocate their taxes for them? 

If you want to argue that representative choice creates more value for society than consumer choice does… then, in theory, you should predict that most people would choose to have congress spend their taxes for them. You would be the first to do so! For some reason, nobody ever predicts that most people will want congress to spend their taxes for them. Why doesn’t anybody predict that there’s a large demand for impersonal shoppers? Some possibilities…

  1. It’s perceived that taxpayers don’t want more value
  2. It’s perceived that few taxpayers recognize more value
  3. It’s perceived that representatives don’t truly create more value

I’m pretty sure that we can cross out the first one. Because… who doesn’t want more value? Every living organism wants the most bang for its buck. If the second one is true… then we can’t have any confidence that voters (re)elect representatives who truly create more value. Which leaves us with the third explanation.

Would Obama allocate his taxes himself… or would he have congress allocate his taxes for him? Would smart people allocate their taxes themselves… or would they have congress allocate their taxes for them? If the answer isn’t readily apparent… then I think the jury’s still out regarding the efficacy of impersonal shoppers. 

Pragmatarianism, as you describe it, is one way of using the benefits of markets to shape public policy. But relying on departments (such as the EPA in your example) to adequately inform the public, and then relying on the public to magnanimously make decisions about somewhat abstract, long-term issues, seems impossible. As you mention about the free-rider problem with public goods, people are always pulled toward self-interest, and *short-term* self interest at that. I don’t see any way such a full degree of direct public control could lead to anything planful, let alone thriving.

If the EPA is going to improve at a faster rate without consumer choice… then why would this only be true of government organizations? If the government… either through PB or representatives… is going to allocate the optimal amount of funding to the EPA… then why would this only be true of government organizations? 

When it comes to allocation methods… it’s not economically consistent to simultaneously support markets and not-markets. With markets… people’s say is earned. Not-markets reduce people’s earned say. PB eliminates everybody’s earned say and gives them all an equal say. According to PB… people’s value judgements are equally good. People should all have the same power/control/influence over society’s limited resources… regardless of how resourceful or wasteful they’ve been. However, according to representation… people’s value judgements are not equally good. Some people’s values judgements are better… and we can effectively identify these people and give them more say by using a system where everybody has an equal say (voting). The additional say that is given to representatives has to come from somewhere though… and that somewhere is people’s earned say. 

Utilizing all three allocation methods results in a very contradictory, confusing and counterproductive system…

There’s a long line of people waiting to get into Bob’s Bakery. Evidently they really love his baked goods! So they are willing to wait in line for the opportunity to put their money into his pocket. After they purchase Bob’s delicious baked goods… they head over to the townhall where they engage in some PB. This entails reaching back into Bob’s pocket… taking out some of the money that they just put in there… and voting on how it gets spent. Uh… what? They already decided how it should be spent! They decided that it should be spent on Bob’s baked goods. Do they, or do they not, want more of Bob’s baked goods? 

If we make the crazy assumption that Bob’s customers are actually going to vote for spending their/his money on the public goods that Bob needs in order to improve his business… then we also need to make the crazy assumption that his customers somehow know better than he does which public goods these are. Without these two crazy assumptions… the logical result is that people are going to be made worse off. Why? Because they are veering significant resources away from something that, according to their own spending decisions, makes them better off (more of Bob’s baked goods).

This same economically wacky process gets repeated, more or less, when Bob’s customers vote for Elizabeth Warren…

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 marauding 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. — Elizabeth Warren

With PB… one of the the crazy assumptions was that Bob’s customers know better than he does which public goods he needs more of. With representation… the crazy assumption is that Bob’s customers know that Elizabeth Warren knows better than Bob does which public goods he needs more of. Uh… what? So Warren knows best? 

The fact of the matter is that nobody has more incentive than Bob does to try and ensure that the line outside his bakery is as long as possible. So we can be confident that, if Warren truly does know better than Bob does which public goods that he needs more of in order to get richer… then he’ll be more than happy to put his taxes in her pocket. 

Personally though… I’m skeptical that 500 representatives can know better than millions and millions of business owners which public goods that they need more of in order to successfully operate their diverse businesses. In other words, I’m skeptical of command economies. In other words, I’m skeptical of socialism. Socialism doesn’t become any less sketchy just because it’s in our public sector. Overriding society’s dispersed knowledge and individual incentive is just as defective for public goods as it is for private goods.

In order to minimize economic wackiness… the basic rule should be that, once you voluntarily and intentionally and willingly put your money into somebody else’s pocket… then you shouldn’t be allowed to remove any portion of it. If you do happen to feel that Bob didn’t give you the most bread for your buck… then learn your lesson and buy your bread somewhere else next time. Consumer choice, driven by self-interest (the desire to maximize benefit) is how we truly maximize the rate of improvement. 

Regarding short-term self interest… what is it anyways? Partying when you should be studying? Playing when you should be working? Consuming when you should be producing? Taxpayers, by definition, are the people who give up momentary pleasure for future benefit.

Socialism wouldn’t be such a disaster if well-planned steps were usually in the right directions. But no amount of planning can guarantee that a step will be in the right direction. This doesn’t mean that we should eliminate planning… it means that we should never be so confident of our plans that we force people to go along with them. Solely relying on persuasion maximizes the flow of information. Like so! 

Decentralized planning helps society hedge its bets against a future that’s always uncertain. Which is why pragmatarianism is the world’s best plan. But as good as it is… I can never be 100% certain that it doesn’t have fundamentally fatal flaws. Therefore, I would never force anybody to invest any amount of their limited time/energy/money in it. 

Anyways, I appreciate your thoughts as well! 

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