Tuesday, September 29, 2015

Coffee Tastes Like Politics

Comment on: Libertarianism And The Politics Of Everything by Will Wilkinson


Coffee tastes like politics?  Yuck!  No wonder I don't drink the stuff!

You spend your money on coffee... I do not spend my money on coffee.  We spend our money differently because we have different preferences.  Human diversity is the basis of consumer choice.  Consumer choice is economics.  Economics is the opposite of politics.  Economics is the opportunity cost of politics.

If coffee was in the realm of politics... then one of us would have to get screwed.  Either my money would be spent on coffee... despite the fact that I can't stand the stuff... or your money wouldn't be spent on coffee... despite the fact that you love the stuff.  Would you really want coffee to be in the realm of politics?  No?  Then why in the world would you want anything to be in the realm of politics?  

Politics only exists because people don't understand economics.  If people understood economics then they would clearly see the absolute absurdity of allowing a small group of elected officials to spend everybody's taxes.

The next time that you drink coffee... don't think about politics.  Think about how you're pretty happy with your coffee despite the fact that I'm entirely free not to spend any of my money on coffee.  

To be clear... the free-rider problem is a real problem... so we need the public sector... but we really don't need it to be a political realm.   Libertarianism is the belief that we need to kick most public goods out of the public sector.  Pragmatarianism is the belief that we need to kick politics out of the public sector.

Monday, September 28, 2015

John Quiggin vs Weeds

John Quiggin is my second favorite liberal.  He's writing a book about opportunity cost!  How cool is that?  Over at Crooked Timber he's been sharing excerpts from his book so that people can share their feedback.  This is also really cool.

Here's his latest excerpt... Income redistribution: Where should we start?

Even though I love the general topic... his treatment is missing something.  The word "lackluster" comes to mind.  So does "drab".  But what, exactly, is it missing?  It's one thing to taste some soup and realize that there's something missing.  It's another thing entirely to be able to specify the missing ingredient.  Actually, nearly every dish could use more garlic!

As I was quickly scrolling through the comments... I noticed quite a few from a reader named Plume.  This is nothing new.  He is a very frequent commenter.  His comments boil down to "socialism good, capitalism bad".

What was new though was that Plume received some significant pushback from another commenter...

I know that I, at least, would be very glad if every thread even remotely related to economics didn’t devolve into an extended discussion of Plumism, or Pluminomics, or whatever it is we keep getting long dissertations on. There are lots of good topics here to be discussed, but I don’t see this as one of them. I’m almost certain that I’m not alone. I believe that it’s still free to start a blog, and perhaps starting a new one devoted just to Plumism would be a good choice for those interested in the subject. - Matt  

 Somewhat surprisingly... a few comments later... Quiggin wrote...

Plume, I agree with other commenters here. From now on, for my post, can you limit yourself to one comment per post per day.

This is the missing ingredient!  In fact, it's not just one ingredient... it's two ingredients...

Missing ingredient #1: People do different things with society's limited resources... and different people value different things differently.  This fundamentally basic but incredibly important concept is largely, or entirely, missing from Quiggin's analysis.  But there it is plain to see in the comments section!  How can any conclusion regarding the distribution/redistribution of society's limited resources possibly be correct when it doesn't take into account this essential economic truism?

Missing ingredient #2: Accessible scenarios that help convey the relevant economic concepts!  I'm pretty sure that I've read every excerpt that Quiggin has shared... and I don't think that he's ever offered an accessible scenario.  Then again... my memory isn't that great.  Then again... a really good scenario is really hard to forget!

For example...

Following a three-hour time-off-for-personal-exploration period, an excited Sylvia returns to the campsite and announces: "I've stumbled upon a huge apple tree, full of perfect apples." "Great," others exclaim, "now we can all have apple sauce, and apple pie, and apple strudel!" "Provided, of course," so Sylvia rejoins, "that you reduce my labour burden, and/or furnish me with more room in the tent, and/or with more bacon at breakfast." Her claim to (a kind of) ownership of the tree revolts the others. - G.A. Cohen, The Socialist’s Guide to Camping

It's a very simple and accessible story that wonderfully illustrates Cohen's point.  Of course I don't agree with his point... but I really admire how well he conveyed it.

Quiggin's book is the liberal sequel to Hazlitt's book... Economics In One Lesson... which was all about Bastiat's beautiful essay... What Is Seen and What Is Not Seen.  When it comes to accessible economic scenarios... nobody holds a candle to Bastiat.  He really set the standard that every economist should strive to meet.

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. - Frédéric Bastiat, What Is Seen and What Is Not Seen

A few other people have shared some noteworthy scenarios...

Now suppose that Wilt Chamberlain is greatly in demand by basketball teams, being a great gate attraction. (Also suppose contracts run only for a year, with players being free agents.) He signs the following sort of contract with a team: In each home game, twenty-five cents from the price of each ticket of admission goes to him. (We ignore the question of whether he is "gouging" the owners, letting them look out for themselves.) The season starts, and people cheerfully attend his team’s games; they buy their tickets, each time dropping a separate twenty-five cents of their admission price into a special box with Chamberlain’s name on it. They are excited about seeing him play; it is worth the total admission price to them. Let us suppose that in one season one million persons attend his home games, and Wilt Chamberlain winds up with $250,000, a much larger sum than the average income and larger even than anyone else has. Is he entitled to this income? Is this new distribution D2 unjust? If so, why? There is no question about whether each of the people was entitled to the control over the resources they held in D1; because that was the distribution (your favorite) that (for the purposes of argument) we assumed was acceptable. Each of these persons chose to give twenty-five cents of their money to Chamberlain. They could have spent it on going to the movies, or on candy bars, or on copies of Dissent magazine, or of Monthly Review. But they all, at least one million of them, converged on giving it to Wilt Chamberlain in exchange for watching him play basketball. If D1 was a just distribution, and people voluntarily moved from it to D2, transferring parts of their shares they were given under D1 (what was it for if not to do something with?), isn’t D2 also just? If the people were entitled to dispose of the resources to which they were entitled (under D1), didn’t this include their being entitled to give it to, or exchange it with, Wilt Chamberlain? Can anyone else complain on grounds of justice? - Robert Nozick, Anarchy, State, and Utopia

Quiggin will probably disagree with Nozick's point like I disagree with Cohen's point... but perhaps Quiggin will appreciate how well this scenario conveys Nozick's point.  And if Quiggin wants to argue in favor of redistribution... it would behoove him to explain, preferably by using an equally accessible scenario, how doing so does not subvert the true will of the people as revealed by the decisions that they make as consumers.

Here's another one...

Consider the following analog to Block's gardening problem. Let there be an island that contains all the known stock of Austrian Pure Snow trees. The island is inhabited by a religious sect, the first to mix their sweat and blood with the island's soil, thus satisfying Rothbard's principle of "original ownership." They worship these trees as if they were God. Never would they let them be tampered with in any way. Unknown to anyone, these trees contain an ingredient that is a sure cure for cancer, and when this is discovered a question of the ownership of this ingredient, unavailable elsewhere, arises. The religious sect will in no way, for any compensation, allow that ingredient to be extracted. Is it "evil and vicious" to believe that it would be preferable for someone else to own the right to this ingredient, requiring instead that the religious sect purchase the inviolability of this ingredient? Might not "our most cherished and precious property rights" be still more cherished and precious if the private ownership of this new resource was not confined to those who own the rest of the island? Would the answer be much different if this ingredient not only was known to the island dwellers, but was precisely that part of the trees that they worshiped? Would the answer be different if the islanders were very poor? - Harold Demsetz, Ethics and Efficiency in Property Rights Systems

As a nature lover... I appreciate all the trees in this scenario.  And, as an economics lover... I appreciate the ownership dilemma.  Although... the scenario falls apart a bit when we consider the fact that trees have seeds.  It's hard to imagine that some group wouldn't be willing to sell one seed for any price.

Here's the most recent noteworthy scenario that I've run across...

If Robinson Crusoe and Friday are on an island, and Crusoe grows seven pumpkins and Friday grows three pumpkins, Crusoe hasn’t grabbed a bigger piece of (pumpkin?) pie. He has simply created more wealth than Friday, leaving Friday no worse off. It is dishonest to say Crusoe has “taken” 70 percent of “the island’s” wealth. - Don Watkins, Turning the Tables on the Inequality Alarmists

Short and sweet.   It's unfortunate that Watkins can't keep his story straight... Limit Socialism To California.

My favorite recently-dead economist James Buchanan wasn't exactly known for his scenarios... and perhaps this is part of the reason that he is so incredibly under-appreciated.  Consider this scenario...

At some basic psychological level of choice, the demand of the citizen for more police protection by the municipality reflects the same drive as his demand for additional door locks from the local hardware store. 
Even with such a simple analogy, however, care must be taken lest the similarities be pushed too far. The person who wants to purchase a new lock goes to the local hardware store, or to several stores, surveys the array of alternatives offered for sale, along with the corresponding array of prices, makes his purchase, and is done with it. It should be evident that the person’s act of implementing his demand for additional police protection is quite different. The citizen must communicate his desires to his elected political representative, his city councilman, who may or may not listen. If he does listen, the councilman must then take the lead in trying to convince a majority of his colleagues in the representative assembly to support a budgetary adjustment. But what about quality and price? Almost anyone would desire more police protection of high quality if this should be available to him at a zero price. At one level of reaction, the citizen must understand that additional public services can be secured only at the price of either reductions in other services or increases in taxes. How can he indicate to his political representative just what quantity-quality-price mix is most preferred? And how can his political representative, in trying to please his constituents, determine this mix? - James Buchanan, Richard Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes

The scenario works... but it doesn't exactly stick.  Buchanan didn't even give the person a name!

Ok, so what is Quiggin's book missing?  Based on the drafts that Quiggin has shared... his book is missing two things.  First, it doesn't really address the fact that people value things differently.  Second, it doesn't have any accessible scenarios/stories.  My dollar vote is for a scenario involving Australia's wonderful epiphytic orchids.

While I'm at it... I should point out that the solution to the comment problem really isn't to limit Plume's comments.  The solution is to create a market in the comment section!  Quiggin could spend his pennies on whichever comments he values most.  Everybody else could do the same.  Then, if people wanted to, they could sort the comments by their value.  The most valuable comments would be at the top of the comment section and the least valuable comments would be at the bottom of the comment section.

If we think of Quiggin's blog entry as a home... then the comment section would be the garden.  Plume is a weed that grows everywhere in the garden.  He takes up way too much space in the garden.  The thing is... it's a really big garden... and not all the space is equally valuable.  The most valuable space is closest to the house.  So the problem really isn't that Plume is taking up too much space... the problem is that he's taking up too much valuable space.  All the valuable space that Plume takes up could be used for far more valuable plants.  Sure, Quiggin could manually limit the amount of valuable space that Plume occupies... but a far more effective approach would be for Quiggin to give more water, food and love to the plants that he values most.  They would grow more vigorously and, as a result, they would crowd out Plume and all the other weeds.  Pretty soon all the most valuable space in the garden would be occupied entirely by the most valuable plants.  The garden would still have weeds... but they would be located in the most remote part of the very big garden.

This is how and why markets work.  Consumers can't pull weeds... but they can help nourish the most beneficial plants.  The logical result of consumer choice is that resources are unevenly distributed among the unequally beneficial plants.  Redistribution might seem fair... but it simply provides more valuable space to less valuable plants.

Nobody truly benefits when society's limited resources are placed in less beneficial hands.  In other words, the opportunity cost of fairness is way too high.

Artificial Barriers To Entry: Humanity's Berlin Wall


You argue that nobody is better off when they trade with Martin Shkreli… but you also argue that plenty of people choose to trade with him (which is why he’s raking in the profits). 

The first time that you traded with Shkreli he ripped you off. Shame on him. But if you traded with him a second time… then shame on you. If you continued to trade with him… then here are a couple of very different conclusions…

1. you’re irrational
2. you’re benefiting

Are you irrational? If so, then you really shouldn’t be blaming Shkreli. Are you benefiting? If so, then you really should be thanking Shkreli. 

Markets wouldn’t work so well if most people continued to make trades that weren’t beneficial. The fact of the matter is that consumers want to maximize their profit just as much as producers do. The only difference is that we can’t see or measure the amount of profit that consumers derive from a trade. But, because market trades are entirely voluntary, when consumers continue to make the same trades…. we can reasonably guess that they are profiting from doing so. It’s an entirely different story when consumers don’t have the freedom to exit. In the absence of consumer choice, the only thing that we can reasonably guess is that producers have little, if any, incentive to benefit consumers. Destroying the direct connection between payment and performance has logically detrimental consequences. 

Even though your economic analysis is logically flawed… you’re right that there’s a problem. Rent-seeking is certainly a part of it. The thing is… your definition of rent-seeking is incredibly wrong. Rent-seeking really is not when people charge what the market will bear. Where did you get the idea that it was? Being able to price gouge is the reward that people receive for correctly foreseeing future conditions. We really want people to have the maximum incentive to be in the most valuable place at the most valuable time. If there are a lot of people drowning and only one lifeguard… then it’s a really bad idea to reduce the incentive for other people to become lifeguards. Evidently you didn’t learn in econ 101 that incentives matter. You should try and get a refund. 

Rent-seeking is actually when people use the government to cheat. The minimum wage is the result of rent-seeking. It’s rent seeking when unions use the government to block competition. Just like it’s rent-seeking when corporations use the government to block competition. 

Forcing drug companies to comply with extensive government regulations is a huge part of the reason that drugs are so expensive. Costly compliance creates a very high barrier to entry… and a very high barrier to entry means a lot less competition… and a lot less competition means higher prices, smaller quantities and lower qualities. Drug companies want compliance to be costly… and voters want to be protected from defective drugs. So, unfortunately, it’s a win-win situation for congress to create the maximum amount of red-tape possible. 

Therefore, the real problem is democracy. Voters think that they are getting a free lunch when they vote for politicians who promise to ensure drug safety. Instead of getting a free lunch, voters simply make drugs a lot more expensive. Saving one life really isn’t such a great deal when it costs 1000s of lives. 

People vote to make it a lot harder to become a lifeguard and then they turn around and complain that so many people are drowning. 

The solution is to allow taxpayers to choose where their taxes go (pragmatarianism). When taxpayers consider the opportunity costs of drug safety compliance… they will decide that they have much more beneficial trades to make with the government. Big pharma will cry big tears when the barrier to entry is knocked down just like the Berlin Wall was. Once the barrier is down… competition will skyrocket and this will ensure an abundance of affordable and effective drugs. 

Drug companies will still want to cut corners… but a fully functioning market with maximum competition will quickly and severely punish any companies that cost, rather than save, lives. 

Regulations are just rules… and rules are necessary. This doesn’t mean though that all rules are equally necessary. The only way to ensure that rules truly create the most benefit for society is to create a market in the public sector. Are you going to voluntarily spend your hard-earned money on rules that harm you? Not if you’re rational. Generally speaking… rational people have more money to spend than irrational people. This is because being in the right place at the right time is more profitable than being in the wrong place at the wrong time. Thank goodness! So if you’re rational… then chances are good that you’re going to have more influence…. which you’ll use to support the most beneficial rules. If circumstances change and a rule becomes less beneficial… then you’ll have the freedom to quickly use your taxes to communicate to the rest of society that the rule has become less necessary. 

It’s important to understand that benefit is entirely in the eye of the beholder. Just like it’s important to understand that incentives matter. Just like it’s important to understand that every allocation requires the sacrifice of alternative allocations.

So is it beneficial for you to reply to my reply? I have absolutely no idea. But if you do reply…. assuming that nobody forced you to do so… and assuming that you’re reasonably rational… then I’ll logically conclude that any benefit that you foresaw must have been large enough to incentivize you to spend your time sharing your thoughts on my thoughts on your thoughts.

Sunday, September 27, 2015

Consumption Tax vs Income Tax

Scott Sumner's recent blog entry begins with... "It's difficult to think of a more bizarre and foolish policy than the practice of taxing capital"...  and ends with...

A simpler and fairer solution would be to abolish all taxes on capital, and start over. Think about what the tax system is trying to achieve, and implement a tax system that achieves those goals in the fairest and most efficient way possible. In my view that would be a progressive consumption tax.

Taxing capital is more bizarre and foolish than allowing congresspeople to spend everybody's taxes?

Let's say that Sumner believes that congresspeople are omniscient.  This belief of his would explain why he has no problem with congresspeople spending his taxes.  Congress would know Sumner's preferences/circumstances and spend his taxes accordingly.  He would benefit from their spending decisions.  Of course he would have to assume that congress is actually interested in his benefit.

Let's say that Sumner does not believe that congresspeople are omniscient.  Then he either believes 1. that congress can adequately discern his preferences/circumstances or 2. that his preferences/circumstances are irrelevant.

I'm pretty sure that Sumner doesn't believe that his preferences/circumstances are irrelevant.  Therefore, he must believe that congress can adequately discern his preferences/circumstances.  Why does his believe this?  Because he can vote?

Sumner votes for Elizabeth Warren and she somehow knows his preferences/circumstances.  Not because she's omniscient... but because she has a drone follow Sumner around everywhere.  If Sumner is mugged then Warren decides how much of his taxes to give to the police.  Not exactly sure why the drone didn't just electrocute the mugger.

I can't figure out Sumner's beliefs.  Can you?  Why should we have to guess?  Is it really that difficult for him to share his beliefs on the topic of preference revelation?  Maybe he's embarrassed of his beliefs?

In the X-Files... Mulder isn't embarrassed to share his beliefs.  This often embarrasses his partner.  For some reason I derive quite a bit of utility from her embarrassment.  Probably because it reminds me of Linus sharing his belief in the Great Pumpkin.  I'd probably be embarrassed if I had a friend that believed in the Great Pumpkin.

Maybe Sumner's friends encourage him not to publicly share his beliefs in the efficacy of congress spending everybody's taxes?

Yesterday I spent $18 dollars for an orchid.  The orchid is a drought tolerant epiphyte.  My decision to purchase the orchid communicates something about my preferences/circumstances.  Sumner believes that this exchange should be taxed.  And I suppose we could pretend real hard that congress looks at everybody's purchases and aligns expenditures accordingly.  The supply of orchids depends on certain public goods.  So the supply of orchids can be improved by improving the supply of the relevant public goods.  But if congress can adequately improve the supply of the relevant public goods... then why can't they adequately improve the supply of the relevant private goods?

From my perspective... we should eliminate every tax but the income tax.  With a pragmatarian system, the income tax would simply indicate that people are legally obligated to spend a certain percentage of their income in the public sector.  I'm pretty sure that everybody's preferences/circumstances are just as relevant for public goods as they are for private goods.  And spending is better than voting at communicating preferences/circumstances.

How much better is spending at communicating preferences/circumstances?

Friday, September 25, 2015

Selling Labor For $0 Dollars An Hour


The real problem is that people can give their labor away for free. For example… how much of your labor went into this story of yours? Maybe five hours? Yet, here you are giving five hours of your life away for free. You’re not selling your labor for $15 dollars/hour… or $10 dollars/hour… or even $5 dollars an hour. You’re selling your labor for $0 dollars an hour. 

It’s illogical to argue that you should have the freedom to sell your labor for $0 dollars/hour… but that you shouldn’t have the freedom to sell your labor for any amount between $0.01 cents/hour and whatever the minimum wage is.

If we made it illegal for you to sell your labor for $0 dollars an hour… then people would better understand the true value of labor. And nobody would be able to exploit you. Like, if your friend wanted you to help her move… then she would have to pay you at least the minimum wage. 

Of course this would do away with unpaid internships. And volunteering. If a non-profit wanted you to help the homeless… then they would have to pay you at least the minimum wage. 

Is Medium a for-profit or non-profit? In any case, once it’s illegal for you to sell your labor for $0 dollars an hour… then Medium would have to pay you the minimum wage for your labor. 

Well… what if you wanted to pull the weeds in your garden? If you shouldn’t have the freedom to sell your labor to others for $0 dollars/hour… then why should you have the freedom to sell your labor to yourself for $0 dollars/hour? You really shouldn’t be an exception to the rule. Exploiting yourself is just as bad as exploiting others. Therefore, if there was any work around the house that needed doing… then you’d have to pay somebody else at least the minimum wage to do it. 

How much time have I spent writing this reply? Eh… close enough to an hour. We should keep track of all the hours that Medium has exploited us. Then, when it becomes illegal to sell/buy labor for $0 dollars/hour, we can sue Medium for back pay. 

Wicksellian Interest vs Wicksellian Benefit

Scott Sumner posted yet another blog entry on Wicksellian Interest.  Why is Sumner far more interested in Wicksellian Interest than he is in Wicksellian Benefit?  In his entry Sumner asks what he's missing.  Here's my guess...

It would seem to be a blatant injustice if someone should be forced to contribute towards the cost of some activity which does not further his interests or may even be diametrically opposed to them. - Knut Wicksell, A New Principle of Just Taxation

Justice would thereby have been done at least to the extent that each man received his money’s worth.  - Knut Wicksell, A New Principle of Just Taxation

It is impossible for anyone, even if he be a statesman of genius, to weigh the whole community's utility and sacrifice against each other.  - Knut Wicksell, A New Principle of Just Taxation

For Buchanan, Wicksell is “the intellectual father of modern public finance” (Buchanan, 1968: 192), and he states: “In any overall evaluation of the history of fiscal thought, Wicksell alone commands the heights of genius” (Buchanan, 1967: 285).  Buchanan’s Nobel-prize speech honored Wicksell with the accolade that Wicksell deserves designation as the most important precursor in public finance theory. (Buchanan, 1987: 243). - Bernd Hansjürgens, The Influence of Knut Wicksell on Richard Musgrave and James Buchanan

The effect (of the Finanztheoretische Untersuchungen, B.H.) on me was dramatic. Wicksell laid out before me a set of ideas that seemed to correspond precisely with those that I had already in my head, ideas that I could not have expressed and would not have dared to express in the public-finance mindset of the time.  - James Buchanan, Economics from the Outside in: "Better Than Plowing" and Beyond

A second analytical principle emerged more than a century after Smith’s Wealth of Nations, and it was not explicitly incorporated into the norms for policy. But it may have been implicitly recognized. It is important because it reinforces the classical principles from a different and essentially political or public-choice perspective. In 1896, Knut Wicksell noted that an individual could make an informed, rational assessment of various proposals for public expenditure only if he were confronted with a tax bill at the same time. Moreover, to facilitate such comparison, Wicksell suggested that the total costs of any proposed expenditure program should be apportioned among the individual members of the political community. These were among the institutional features that he thought necessary to make reasonably efficient fiscal decisions in a democracy. Effective democratic government requires institutional arrangements that force citizens to take account of the costs of government as well as the benefits, and to do so simultaneously. The Wicksellian emphasis was on making political decisions more efficient, on ensuring that costs be properly weighed against benefits. A norm of balancing the fiscal decision or choice process, if not a formal balancing of the budget, emerges directly from the Wicksellian analysis. - James Buchanan, Richard Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes

Essential though the efficiency model of public goods is as a theoretical construct, standing by itself it has little practical use.  The omniscient referee does not exist and the problem of preference revelation must be addressed.  The Wicksellian perspective is thus needed. -  Richard Musgrave, The Nature of the Fiscal State

The only reason for recalling the Wicksellian Connection in this chapter is the long and solidly held conviction of many Public Finance economists that vertical fiscal imbalance and the intergovernmental flows of funds that it necessarily implies breaks the connection between revenue and expenditures and leads to fiscal illusion, bureaucratic manipulation, and waste. - Albert Breton, Competitive Governments: An Economic Theory of Politics and Public Finance

Monday, September 21, 2015

Limit Socialism To California

Reply to: You assume that political equality means one person, one vote.


How, exactly, does a “Constitutional Republic with a limited government” negate the problems with giving unequally rational people equal influence over choosing our representatives? Our representatives are in charge of the constitution. So you’re essentially giving unequally rational people equal influence over the constitution.

I’ve read Ayn Rand… but I’ll admit that I haven’t thoroughly read her work. So it’s entirely possible that I’m missing something. That being said, I sincerely doubt that what I haven’t read will cancel out what I have read….

The proper functions of a government fall into three broad categories, all of them involving the issues of physical force and the protection of men’s rights: the police, to protect men from criminals — the armed services, to protect men from foreign invaders — the law courts, to settle disputes among men according to objective laws. — Ayn Rand, The Nature of Government

However you spin it… this is socialism. True… it’s limited socialism… but that doesn’t make it any less socialism. Elected representatives say, “We’re going to allocate more resources to defense and less resources to police and courts because doing so will better protect life, liberty and the pursuit of happiness”.

You argue that the visible hand should control X, Y and Z… but you also argue that the visible hand shouldn’t control A through W.

It’s like arguing that we should limit socialism to California. As if socialism somehow works in California but it doesn’t work in all the other states. As if the rules of economics are somehow different in California. Just like the rules of physics are somehow different in New York.

You and I both want the market to allocate A through W. But that’s not going to happen as long as you continue to argue that the market shouldn’t allocate X, Y and Z.

And if you believe that the market shouldn’t allocate X, Y and Z… then this means that you really don’t have a solid grasp on why the market should allocate A through W.

The benefit of consumer choice is that everybody wants the most bang for their buck. Consumers don’t choose to put their money into Friday’s hands. Why not? Because he can’t give them any pumpkins in return. Why not? Because he roasted and ate all his pumpkin seeds rather than save any to sow. Friday completely failed to consider other people’s interests… so of course consumers are not going to want him to have more influence over how society’s limited resources are used.

As a result of consumers striving to ensure that their hard-earned money isn’t wasted… society’s limited resources are placed in the most rational hands. And because people are unequally rational… the logical result of markets is that people are unequally influential. Some people have more influence than other people because some people earn more income than other people.

Earned influence is just as important in the public sector as it is in the private sector. Placing guns in the most rational hands is just as important as placing seeds in the most rational hands. Which is exactly why a market in the public sector is just as important as a market in the private sector.

You can benefit from this story of mine without paying for it. This is what makes it a public good. The question is… are you truly benefiting from this story? I don’t know. Why don’t I know? Because I’m not omniscient.

The fundamental and extremely unappreciated fact that people are not omniscient is just as relevant for public goods as it is for private goods. Believing otherwise is what makes libertarianism/objectivism logically absurd.


This is what Medium might look like if people truly appreciated the fact that nobody is omniscient.

If you benefited from a story… then you could communicate the size of your benefit to everybody simply by clicking on one of the *heart* buttons. Clicking on the 5 cent *heart* would instantly transfer 5 cents from your digital wallet to the creator’s digital wallet. Then, when people searched for stories and sorted the results by value, the creator’s story would show up 5 cents closer to the top of the results.

My girlfriend just told me that she’s upset that her organization’s directors want to fire the new Chief Operating Officer. Evidently my gf is a fan of the new COO. How many other employees are in the same boat? What would her organization look like if people truly appreciated the fact that nobody is omniscient?

The other day my gf was upset because a show that she enjoys on Netflix was canceled. What would Netflix look like if people truly appreciated the fact that nobody is omniscient?

Socialism is the idea that adequately good allocation decisions can be made without knowing the true demand.

Saturday, September 19, 2015

Human Inequality vs Political Equality


Don Watkins! You’re more coherent than most… but you’re not coherent enough.

A good chunk of your story nicely illustrates human diversity. Unfortunately, your solution is political equality (one person one vote).

Your story is basically a non sequitur. Your conclusion (political equality) really doesn’t follow from your premise (human inequality).

You wrote…

If Robinson Crusoe and Friday are on an island, and Crusoe grows seven pumpkins and Friday grows three pumpkins, Crusoe hasn’t grabbed a bigger piece of (pumpkin?) pie.

Imagine if, rather than planting his pumpkin seeds, Friday had roasted and eaten them. Perhaps nobody would consider his behavior to be irrational… but I think most would agree that Friday had made a pretty big mistake. He failed to give up momentary pleasure for future benefit. As a result of his failure, he wouldn’t grow any pumpkins while Crusoe would grow seven pumpkins.

The disparity in income (pumpkins) between Crusoe and Friday would reflect the disparity in their foresight, prudence, resourcefulness, productivity, judgement and so on. For convenience sake we can lump all these character disparities under the label of “rationality”. The disparity in their income would reflect the disparity in their rationality.

In the private sector… because Crusoe would have a lot more income… he would have a lot more influence. But in the public sector… if we’re assuming one person one vote… then Crusoe and Friday would have the same exact amount of influence. Which is very problematic because Crusoe and Friday are not equally rational.

Friday would vote to roast and eat all the pumpkin seeds while Crusoe would vote to save and sow some of the pumpkin seeds. Of course they would need a tie breaker.

The correct solution is for their influence in the public sector to equal their influence in the private sector. Rationality is just as important for public goods as it is for private goods. We really don’t want Don Quixote to have just as much political influence as somebody who correctly perceives that the windmills are really not evil giants.

All the problems you listed… ie minimum wages… are not the result of political inequality… they are actually the result of political equality. It’s only natural for people to vote for whichever politicians promise the best free lunches. The problem is… there’s no such thing as a free lunch.

In order for rational people to have more influence in the public sector than irrational people…. taxpayers should have the freedom to choose where their taxes go (pragmatarianism). People with higher incomes make fewer mistakes and, as a result, have to pay more taxes. The influence that they earn should carry over to the public sector.

As wonderful as Ayn Rand was… she wasn’t economically coherent. All the problems of the world boil down to a shortage of economic coherence.

Friday, September 18, 2015

What Is Alex Tabarrok’s Biggest Mistake?

Alex Tabarrok is my favorite living economist.  Here's his most recent blog entry... What Was Gary Becker’s Biggest Mistake?

Becker's biggest mistake was incoherent economics.  It's also Tabarrok's biggest mistake.

In his entry, Tabarrok wrote that he favors "more police on the street to make punishment more quick, clear, and consistent."

Let's consult my favorite recently-dead economist...

A nation cannot survive with political institutions that do not face up squarely to the essential fact of scarcity: It is simply impossible to promise more to one person without reducing that which is promised to others. And it is not possible to increase consumption today, at least without an increase in saving, without having less consumption tomorrow. Scarcity is indeed a fact of life, and political institutions that do not confront this fact threaten the existence of a prosperous and free society. - James Buchanan, Richard Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes 

More guns, less butter.  More cops, less coaches.  A coach is the opportunity cost of a cop... and vice versa.  What is the optimal ratio of cops and coaches?

Let's consult my favorite long-dead economist...

It is thus that the private interests and passions of individuals naturally dispose them to turn their stocks towards the employments which in ordinary cases are most advantageous to the society. But if from this natural preference they should turn too much of it towards those employments, the fall of profit in them and the rise of it in all others immediately dispose them to alter this faulty distribution. Without any intervention of law, therefore, the private interests and passions of men naturally lead them to divide and distribute the stock of every society among all the different employments carried on in it as nearly as possible in the proportion which is most agreeable to the interest of the whole society. - Adam Smith, Wealth of Nations

The optimal proportion depends on people's priorities.  How do we know people's priorities?  By how they spend their money.

Three facts...

1. Nobody's omniscient
2. The optimal proportion depends on people's priorities
3. People's priorities are revealed/communicated by their spending decisions

Getting back to Buchanan...

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 Buchanan, The Economics of Earmarked Taxes

Buchanan appreciated that clarifying demand is just as important for public goods as it is for private goods.  Buchanan stood on Adam Smith's shoulders.  Is Tabarrok standing on Buchanan's shoulders?

We know that Tabarrok believes that it would be beneficial if there were more police.  We also know that he believes that it would be beneficial if there was more asteroid defense...

I am also a contributor to an Indiegogo campaign to develop a planetary defense system–yes, seriously! I don’t expect the campaign to succeed because, as our principles of economics textbook explains, too many people will try to free ride. But perhaps the campaign will generate some needed attention. In the meantime, check out this video on public goods and asteroid defense from our MRU course (as always the videos are free for anyone to use in the classroom.) - Alex Tabarrok, Planetary Defense is a Public Good

What we don't know is whether more police or more asteroid defense is a bigger priority for Tabarrok.  Why don't we know this?  It's because 1. we aren't omniscient and 2. Tabarrok does not have the freedom to use his tax dollars to tell us what his true priorities are.  Information is asymmetrical.  I kinda get the impression that Tabarrok would prefer more information symmetry...

Still, the passing of many information asymmetries will lead easier trade, higher productivity, and better matches of people to jobs and to each other. - Alex Tabarrok, Tyler Cowen, The End of Asymmetric Information

But does Tabarrok want the freedom to shop in the public sector?  I don't know!  He certainly didn't mention it in that article... or any other.

Tabarrok kinda recognizes that demand opacity is a problem...

Voting and other democratic procedures can help to produce information about the demand for public goods, but these processes are unlikely to work as well at providing the optimal amounts of public goods as do markets at providing the optimal amounts of private goods.  Thus, we have more confidence that the optimal amount of toothpaste is purchased every year ($2.3 billion worth in recent years) than the optimal amount of defense spending ($549 billion) or the optimal amount of asteroid deflection (close to $0).  In some cases, we could get too much of the public good with many people being forced riders and in other cases we could get too little of the public good. - Tyler Cowen, Alex Tabarrok, Modern Principles of Economics

Why do markets provide the optimal amounts of private goods?

Many more people need a kidney than there are kidneys available for transplant. Economists such as Gary Becker (and I) have argued that the quantity supplied would increase if we lifted the ban on paying for organs. - Alex Tabarrok,  Matchmaker, Make Me a Market

If people had the freedom to pay for kidneys then we would know the demand for kidneys.  Knowing the demand for kidneys would facilitate more informed decisions.  Correctly deciding whether to keep or sell an item depends entirely on knowing its true market value.  Supply optimality depends entirely on demand clarity.

Tabarrok, more than most, appreciates the importance of clarifying the demand for public goods...

The free rider problem is a challenge to the market provision of public goods. In my paper on dominant assurance contracts I use game theory to show how some public goods can be produced by markets using a special contract.  In an assurance contract, people pledge to fund a public good if and only if enough others pledge to fund the public good. Assurance contracts were not well-known when I began to write on this topic but have now become common due to organizations like Groupon and Kickstarter, which work on this principle (indeed, I have been credited with the ideas behind Groupon, although sadly for my bank account, I don’t think that claim would stand in a court of law). Since no money is paid unless the total pledges are high enough to fund the public good, assurance contracts remove the fear that your contribution will be wasted if other people fail to contribute. - Alex Tabarrok, A Test of Dominant Assurance Contracts


Tiebout identified a force, voting with one's feet, that would discipline local governments and provide information about which public goods and services are most valued by residents. - Alex Tabarrok, Market Challenges and Government Failure

There's a shortage of consistency though...

In other words, the Federal government spends more on preventing trade than on preventing murder, rape and theft. I call it the anti-nanny state. It’s hard to believe that this truly reflects the American public’s priorities. - Alex Tabarrok, The Anti-Nanny State

We really shouldn't have to guess what the public's priorities actually are.  We should already know the public's priorities.  Several decades ago Buchanan informed us that, when it comes to public goods, it's entirely possible to know the public's priorities.  Yet, here we are... still in the dark age of public goods.

The biggest mistake of every economist is that they don't adequately appreciate, or emphasize, or explain the importance of clarifying demand.  No two biggest mistakes are equally big though.  The bigger the mistake, the more incoherent the economics.

Let's expand the "more police" snippet from Tabarrok...

I favor more police on the street to make punishment more quick, clear, and consistent. I would be much happier with more police on the street, however, if that policy was combined with an end to the “war on drugs”...

Tabarrok doesn't want a police bundle that includes the war on drugs?  Yet, Tabarrok is not a fan of unbundling cable.  Tabarrok wants his cable dollars spent on terrible shows... but he doesn't want his tax dollars spent on the drug war.  Except, as far as I know, he's never once argued that people should be free to choose how they spend their tax dollars in the public sector.  Sometimes his preferences matter... othertimes they do not.  Sometimes he wants to use his dollars to communicate his priorities... othertimes he doesn't.  Where and why does he draw the line?  What is his rule?

Is it greedy of me to want more economic coherence from my favorite living economist?

Tabarrok clearly believes that no two activities that cops engage in are equally valuable.  Unfortunately, he doesn't pounce on the opportunity to channel Smith or Buchanan.  So he leaves readers with the incredibly wrong impression that the public's priorities can be adequately known and the public's funds can be adequately allocated despite the fact that people don't have the freedom to communicate their priorities by spending their tax dollars.

As Buchanan pointed out... scarcity is a fact of life.  No single resource can be in two places at the same exact time.  Are there any exceptions to this rule?  Maybe?  Well... for sure a cop isn't one of them.  A cop definitely can't be in two different places at the same exact time.  If a cop is here... then he can't be there.  And if he's there... then he can't be here.

If we're going to pay some guy to be a cop... then it stands to reason that we really want him to be in the most valuable location.  This is Quiggin's Implied Rule of Economics (QIRE): society's limited resources should be put to more, rather than less, valuable uses.

QIRE is exactly where Tabarrok drops the ball.  Or, it's where he doesn't pick up the ball and run with it.  Or, it's where he doesn't run fast/far enough with it.

How do we determine where in the world the cop will create the most value for society?  How can we know where in the world the cop will provide taxpayers with the most bang for their buck?  How can we determine the most efficient allocation of the cop?

According to Buchanan, the most efficient allocation of the cop depends entirely on the preferences of taxpayers.  This is because values are entirely subjective.  Benefit is in the eye of the beholder.  One person's trash is another person's treasure.  One person's weed is another person's epiphyte.

Understanding and appreciating the fact that values are entirely subjective is essential in order to understand and appreciate how to determine the correct answer to the single most important question:  How should society's limited resources be used?  Because values are entirely subjective, every single person knows a different part of the correct answer.  People communicate their unique part of the correct answer when they are free to spend their own money on whichever allocations provide them with the most value.  The more people participating in the valuating/choosing/spending process, the more valuable/correct the answer.  The less people participating in the valuating/choosing/spending process, the less valuable/correct the answer.  Inclusive valuation is more valuable than exclusive valuation.

Imagine that I assign a value to every possible location that one cop could be in.  Tabarrok also assigns a value to every possible location that the same cop could be in.  Would our valuations be perfectly equal?  Of course not.  I live in California... Tabarrok lives in Virginia.  I'd benefit more if the cop was located closer to where I live... and presumably Tabarrok would benefit more if the cop was located closer to where he lives.

What if the other 300 million people in America assigned a value to every possible location that the cop could be in?  Where in America would the cop create the most value?

Location isn't the only variable.  Activity is another variable.

How many different locations are there in America?  How many different activities can a cop engage in?

When we combine all the different locations with all the different activities with all the different cops with all the different preferences and circumstances of 300 million Americans... we end up with quite a few different possible combinations/allocations.  Some of these possible allocations are a lot more valuable than other possible allocations.

Socialism is the idea that cops can be adequately allocated without the invisible hand.  I think that Tabarrok is under the impression that cops can be adequately allocated without the invisible hand.  Well... as far as I know, he's never said, "we need the invisible hand to efficiently allocate cops".  But he certainly has said that cable doesn't need to be unbundled.  If clarifying the demand for content isn't necessary... then there's no reason that it should be necessary for cops.  If every single individual's unique part of the answer isn't needed to determine whether enough cop shows are being supplied... then every single individual's unique part of the answer isn't needed to determine whether enough cops are being supplied.  

Tabarrok has never endorsed people voting with their taxes... but he's certainly a huge fan of people voting with their feet.  How could he be a huge fan of one but not the other?  The benefit of foot voting is that it helps clarify the demand for public goods...

Tiebout identified a force, voting with one's feet, that would discipline local governments and provide information about which public goods and services are most valued by residents. - Alex Tabarrok, Market Challenges and Government Failure

Tabarrok loves the idea of private cities...

So, people who live in cities are much more productive than in the agriculture. We know in agriculture in Africa, in Asia, that it's essentially subsistence living. So, they are really just making enough to stay alive, to support themselves. While in the city, you can have people making much higher, much above subsistence level. So there's definitely room there for a large profit opportunity. And in fact that is what has created modern China--it's getting hundreds of millions of people out of subsistence agriculture and into the cities where they can make much more. The question is: Are we just going to pile them into the cities and hope for the best, or can we have a planning system? The public planning is usually not going to work, because the incentives aren't there, the bureaucracy is inefficient, it's corrupt, and so forth. Can we have a private planning system? That's at least what the hope is. It worked with Walt Disney World. It worked with Jamshedpur, in India. I think it can work in other cities as well. - Alex Tabarrok, On Private Cities

Maybe Disney World is the heart of Tabarrok's biggest mistake?  Disney World seems to work perfectly fine despite the fact that residents can't use their taxes to communicate their priorities.  Perhaps this leads Tabarrok to perceive that, as long as people are free to vote with their feet, then there's no point for people to be free to vote with their taxes.  But if there's no point in people being free to vote with their tax dollars... then what's the point of people being free to vote with their non-tax dollars?  Dollar voting is entirely pointless?

Can you imagine a world with all foot voting and no dollar voting?  If a vegetarian didn't want her dollars spent on meat... then she could simply quit her enjoyable job, sell her nice house, say goodbye to her friends and family, say goodbye to her favorite bookstore, say goodbye to her favorite boutique, say goodbye to her favorite masseuse and hairstylist and mechanic... and move to a town that didn't spend any money on meat.  Would eliminating dollar voting be a marginal revolution?  Not so much.  It would be the epitome of throwing the baby out with the bath water.  Vegetarians would certainly be free to clarify their demand for no meat... but it would cost them an arm and a leg to do so.

Imagine if foot voting was the only way to break up with someone.  It's a given that a lot more people would be stuck in less than beneficial relationships.

If it's really important to know people's true priorities... then wouldn't it be beneficial to make it easier for people to share their true priorities?

Allowing people to vote with their tax dollars would be the most important marginal revolution of all time.  But you certainly wouldn't know it from reading Tabarrok's blog!

Unlike Gary Becker, Tabarrok is still alive.  This means that he has the wonderful opportunity to try and correct his biggest mistake.  Or, he has the opportunity to do an excellent job of explaining away his economic incoherence.

Would I personally spend my taxes on more cops?  Well... the thing is... cops endeavor to take away some people's best options.  Let's say that a guy wants to rob a convenience store.  Evidently, from his perspective, robbing the store is his best option.  This best option would probably be eliminated if there was a cop located outside the store.

Most of us would agree that robbing a convenience store is a terrible best option.  But it's extremely important to understand that taking away a terrible best option from somebody really isn't the same thing as giving them a better option.

A sweatshop is a terrible first option.  But eliminating this option really isn't the same thing as giving people the option to work in an air-conditioned factory.  Tearing down really isn't the same as building up. Destroying isn't the same as creating.

In a world without scarcity... then sure, let's have one more cop on the block.  However, our world really isn't an exception to the rule of scarcity.  So one more cop means one less coach.  I'm using the word "coach" to refer to anybody who helps, in some way, to create better options.  Do we want a larger market for coaches... or a larger market for cops?

Perhaps what pushes Le Guin onto the wrong track is that there are more (inter)-national blockbusters than ever before which gives some people the impression that variety is declining. It’s not a contradiction, however, that niche products can become more easily available even as there are more blockbusters–as Paul Krugman explained the two phenomena are part and parcel of the same logic of larger markets. It’s important, however, to keep one’s eye on the variety available to individuals. Variety has gone up for every person even as some measures of geographic variety have gone down. - Alex Tabarrok, Why Does Ursula K. Le Guin Hate Amazon?

The more cops there are... the less coaches there are.  The less coaches there are... the less variety of opportunities that will be available to individuals.  The less variety of opportunities available.... the less likely it is that individuals will find their niche.  The less likely it is that individuals will find their niche... the more likely it is that individuals will commit crimes.

We really don't want anybody to have terrible first options.  Which is why it's so important to understand that taking away terrible first options does absolutely nothing to increase the supply of better options.  In fact, because of scarcity, allocating more resources to destroying options means that less resources will be allocated to creating options.  The result is a vicious cycle.

Creating a market in the public sector would help ensure that cops were efficiently allocated.  With cops engaging in the most valuable activities in the most valuable locations... we would be a lot better protected with far fewer cops.  This would free-up more people to be coaches... which would decrease the demand for cops... which would free-up even more people to be coaches...   It would be a virtuous cycle.

Basically, the more resources that we allocate to cultivating, the less resources we will need to allocate to weeding.  With this in mind... let's jump back to private cities.

Unlike the government, private cities would have the maximum incentive to try and discern people's true priorities.  The profit motive would ensure that we'd see some increase in the diversity of the supply of public goods.  But how, exactly, would the owners of the private cities do a better job of discerning people's true priorities?  More cheap talk surveys?  More cheap talk town hall meetings?  Whichever methods were used... none of them would come even close to the preference revelation effectiveness and accuracy of giving taxpayers the freedom to vote with their tax dollars.  Foot voting is the epitome of a blunt instrument.  Opinion voting is the epitome of an inaccurate instrument.  Dollar voting is the epitome of a precise and accurate instrument.

Humans are diverse... which means that demand is naturally diverse.  Creating a market in the public sector would ensure that the supply of public goods is just as diverse as the demand for public goods.  Maximizing supply diversity would maximize niche diversity.

Here are some passages that have something to do, more or less, with niches...

It is, after all, not necessary to fly right into the middle of the sun, but it is necessary to crawl to a clean little spot on earth where the sun sometimes shines and one can warm oneself a little. - Franz Kafka,  Kafka’s Remarkable Letter to His Abusive and Narcissistic Father
Ecological Homogenization - Part of the problem for our native bees is our human desire for neatness and uniformity. Pretty lawns with no bare spots. Non-flowering grass, or pollen-less flowers. Paved spots where a sand bank or brush pile may have been before. All places where a native bee might have made her home or found a snack. - Gwen Pearson, You're Worrying About The Wrong Bees
That on the multiplicity of those wants depended all those mutual services which the individual members of a society pay to each other: and that consequently, the greater variety there was of wants, the larger number of individuals might find their private interest in labouring for the good of others, and united together, compose one body. - Bernard Mandeville, The Fable of the Bees and Other Writings 
The solution, as I believe, is that the modified offspring of all dominant and increasing forms tend to become adapted to many and highly diversified places in the economy of nature. - Charles Darwin, On the Origin of Species by Means of Natural Selection 
If it were only that people have diversities of taste, that is reason enough for not attempting to shape them all after one model. But different persons also require different conditions for their spiritual development; and can no more exist healthily in the same moral, than all the variety of plants can in the same physical, atmosphere and climate. The same things which are helps to one person towards the cultivation of his higher nature, are hindrances to another. The same mode of life is a healthy excitement to one, keeping all his faculties of action and enjoyment in their best order, while to another it is a distracting burthen, which suspends or crushes all internal life. Such are the differences among human beings in their sources of pleasure, their susceptibilities of pain, and the operation on them of different physical and moral agencies, that unless there is a corresponding diversity in their modes of life, they neither obtain their fair share of happiness, nor grow up to the mental, moral, and aesthetic stature of which their nature is capable. - J.S. Mill, On Liberty
Tree crowns consist of a heterogeneous mosaic of microhabitats resulting from a complex combination of biotic and abiotic variables (Benzing 1978, 2000; Callaway et al. 2002; Hietz & Briones 1998; Madison 1977; Scheffknecht et al. 2012; Winkler et al. 2005). Within the canopy, radiation, temperature, wind velocity, and water and nutrient availability vary spatiotemporally, creating microclimatic gradients that may differentially affect the germination of different epiphytic species (Benzing 1978; Hietz & Briones 1998; Zotz & Andrade 2002). These variables change from one phorophyte to another, depending on their height, crown size and shape, leaf habit, bark characteristics (texture, stability and water retention capacity), branch thickness, position in the canopy, the presence of allelopathic compounds or other minerals washed from the phorophyte, i.e., lixiviates (Bennett 1986; Benzing 1978, 1990; Callaway et al. 2002; Castro et al. 1999; Frei et al. 1972; Mehltreter et al. 2005). - Mondragon et al, Population Ecology of Epiphytic Angiosperms: A Review

Biodiversity is a function of niche diversity.  The greater the variety of niches... the greater the richness of life.  Niche diversity is just as important for the economy as it is for the environment.  As J.S. Mill so wonderfully explained... people, like plants, are all different.  Human diversity means that demand is inherently diverse.  When demand is perfectly clarified... supply will be just as diverse as demand.  Supply diversity will create a "heterogeneous mosaic of microhabitats".  Every individual will have a niche to thrive in and coaches will be extremely good at helping people find their optimal niches.

The efficient allocation of individuals depends entirely on demand clarity.  Right now demand is far from clear.  This is because economists struggle to get their stories straight.  Every economist's biggest mistake is that their economic story is not coherent.  My favorite living economist certainly isn't an exception.  Tabarrok largely acknowledges that people's preferences matter... even when it comes to public goods... but then he doesn't recognize the value of unbundling cable or the government.  This begs the question... where and why are markets necessary?

From my perspective... markets are necessary wherever there's scarcity.  Scarcity is everywhere so markets should be everywhere as well.  Wherever markets are missing... people's true priorities will not be known... and Quiggin's Implied Rule of Economics will be violated.    

My economic story is the least incoherent... but I'm sure that Tabarrok could do a much better job of standing on Buchanan's shoulders.  

And again, I do get the feeling that it's greedy of me to expect more from Tabarrok when he's already done so much.  But life is too short not to be greedy!  If markets are only needed in certain circumstances... then Tabarrok should show us the rule.  And if he can't show us the rule... then he should admit it.  If nothing else, publicly acknowledging a lack of knowledge will help point future economists in the right direction.  

Wednesday, September 16, 2015

Minimum Wages vs Minimum Employees


If it would be beneficial to increase the minimum wage… then why not also decrease the price of movie tickets, popcorn and sodas? 

If it would be beneficial to increase the minimum wage… then why not also force employers to hire more workers? 

If preventing the exportation of jobs is beneficial… then why not also prevent the exportation of food? 

If preventing the exportation of jobs is beneficial… then why not also prevent the importation of workers? 

If preventing the importation of workers is beneficial… then why not also prevent people from having more than one child? 

If preventing the importation of workers is beneficial… then why not also export the least productive American workers? 

If preventing workers from accepting less than minimum wage is beneficial… then why not also prevent workers from giving their labor away for free? Isn’t “free” less than the minimum wage? Right now we’re giving our labor to Medium for $0.00 dollars an hour. Why not force Medium to pay Americans the minimum wage for their labor? 


Anybody watched Madam Secretary on Netflix?  In the episode "Whisper Of The Ax"... Stevie, the 20 year old daughter of the Secretary of State, decides that she'd like to volunteer full time for a good cause... microloans.  The program is desperately understaffed and the only paid employee, Arthur, is very happy to have Stevie help out.  At the end of her first day volunteering, Stevie and Arthur exchange some information...

Arthur: You're still here.
Stevie: Yes.  Why wouldn't I be? 
Arthur: Oh, my God! You think this is a paid internship.
Stevie: No, I don't.
Arthur: Because it so isn't.
Stevie: Yeah, I figured 
Arthur: Okay, good.  On the upside, that means your mother's budget cuts won't affect the position.
Stevie: You know who my mother is? 
Arthur: I do.  And I don't care.  Unlike literally everybody else I've hired, you want to be here.  That works in your favor.
Stevie: Great.
Arthur: Here's some paperwork you'll need to take to your school's career services office.
Stevie: Oh, um, I'm actually not in school, so 
Arthur: Oh, the, uh, internship's only available for college credit.
Stevie: Like you said.  I'm really happy to be here.  I mean, I really like feeling useful 
Arthur: No, we have to do it in conjunction with a university course.  Otherwise asking people to work for no compensation is what the government likes to call slavery.
Stevie: Well can I, can I sign a waiver or something? 
Arthur: No, it's nonnegotiable.  It's part of the program's charter.  I'm sorry.

Benefit is in the eye of the beholder.  If it wasn't, then there wouldn't be any problem with the government determining whether personal relationships are adequately beneficial.  

Tuesday, September 15, 2015

Demand Disparities Reflect Information Disparities


I got the same exact “fatal conceit” vibe from Brennan’s comparison of markets and guitar amps. 

However, you concluded by saying “don’t touch that dial” but a few sentences earlier you pointed out that, “Turning those knobs up to 11 won’t change the fact that a D chord is still a D chord.”

You kind of undermine your conclusion. If touching the dial doesn’t change the information that’s transmitted… then what’s the harm in touching the dial? 

The problem with the fatal conceit is that it does change the information that’s transmitted. This is a problem because the new information is less accurate. Less accurate information results in less valuable behavior.

For example… a minimum wage changes the information that’s transmitted. It communicates that the given geographical region needs more unskilled labor than it truly does. People adjust their behavior according to this false information and society is worse off as a result. We end up with too many unskilled workers in that area. Society is harmed by the inefficient allocation of labor. 

It’s a fatal conceit for planners to override the information that’s supplied by millions and millions of people.

You get a lot closer to this concept than Brennan does. He argues that markets should be expanded… which I agree with… but it’s extremely unfortunate that he doesn’t come close to illuminating the value of accurate information. 

Here’s a comment on Brennan’s most recent entry… Markets in Adoption Rights

In other words, it seems to me that everything that those that object to markets in adoption are screaming about is this: that market transactions means no interference from the government and that price, supply and demand is allowed to play out. This should mean that the pedophile with lots of money and the parent really in need of money have to be allowed to come to a deal for the latter to sell the kid to the former. — King Goat

If supply and demand are allowed to play out… and the pedophile purchased the child… then the assumption is that there was inadequate demand for preventing the purchase. Let’s take a look at this assumption from a different angle…

Imagine that there’s an auction for an extremely endangered animal. There are only two bidders. One is an extremely rich guy who wants to buy the animal so that he can eat it. The other is the moderately wealthy owner of a zoo who wants to buy the animal so that he can try and save the species. Given the disparity in wealth between the two bidders, chances are good that the animal is going to be eaten. The conclusion is that there shouldn’t be a market for endangered animals.

However, the only reason that we don’t have legal markets for extremely endangered animals is because enough people don’t want extremely endangered animals to go extinct. 

With this in mind, let’s revise the auction scenario. There are still only the two same bidders… but everybody in the world could use their own money to bolster whichever bid they preferred. If you don’t want the animal to be eaten… then you could reach into your own wallet… pull out $5 dollars… and increase the zoo owner’s bid by $5 dollars. 

How much money would the crowd allocate to each bid? What is the demand for the animal being saved? What is the demand for the animal being eaten? 

Personally, I benefit a lot more from the continued existence of California condors than I would from some extremely rich guy eating a California condor for Thanksgiving. So I would be a lot more inclined to bolster the zoo owner’s bid. How many other people are in the same boat? 

The extremely important, but conceptually difficult, part here is that the rich guy eating the condor is a private good while the zoo owner saving the condor is a public good. With the private good… even if I did enjoy eating condors, I couldn’t benefit from the rich guy’s Thanksgiving meal… so there wouldn’t be any incentive to bolster his bid. But with the public good… even though I do enjoy the continued existence of the condor… I can enjoy this benefit even if I don’t chip in to increase the zoo owner’s bid. And if I can benefit from condor conservation without paying for condor conservation… then it wouldn’t make sense to pay for condor conservation. The problem is… if too many people come to the same conclusion… then the zoo owner’s bid wouldn’t be adequately bolstered by the crowd… and the condor would be consumed rather than conserved. This is the free-rider problem.

Getting back to the pedophile scenario… here are two possibilities…

  1. The crowd doesn’t care whether the child is purchased by a very wealthy pedophile or purchased by a moderately wealthy non-pedophile. 
  2. The crowd does care whether the child is purchased by a very wealthy pedophile or purchased by a moderately wealthy non-pedophile… but, because of the free-rider problem, the very wealthy pedophile would still outbid the moderately wealthy non-pedophile.

Clearly the crowd does care… so it’s most definitely not the first possibility. 

King Goat thinks that the problem is with supply and demand playing out… but the real problem is that the free-rider problem prevents supply and demand from playing out.

With the current system… the government forces us to contribute to public goods (taxation) and then gives us the opportunity to vote for representatives who decide how to divide the very large pool of money between children, conservation and numerous other public goods.

Our current system also prevents supply and demand from playing out. 

If we truly want supply and demand to play out… then taxpayers should be free to choose where their taxes go (pragmatarianism). Taxpayers would have the freedom to decide whether placing children in the best homes is more important than placing endangered animals in the best homes. 

If you decide that conservation is more important… then you’ll also have the freedom to decide which zoo is doing the best job of conserving endangered animals. You’ll allocate your taxes accordingly. Taxpayer choice will provide zoos with the maximum possible incentive to do the best job possible conserving endangering animals. 

If you decide that children are more important… then you’ll also be able to reward the best public services for children and boycott the worst public services for children. Taxpayer choice will provide children’s services with the maximum possible incentive to do the best job possible of protecting children. 

Creating a market in the public sector wouldn’t just provide proper incentives… it would also provide accurate information. We would know the true demand for public goods. Will we always agree with the true demand for public goods? Of course not. But this disagreement will reflect information disparities. 

If the crowd demands a lot more defense than you do…. then what, exactly, does the crowd know that you do not? And what, exactly, do you know that the crowd does not? Maybe you don’t know that the crowd knows that Godzilla is heading for America. Maybe the crowd doesn’t know that you know that it’s only a prank that would make Orson Welles proud. 

Correctly prioritizing the elimination of information disparities depends on knowing the real demand disparities.