Tuesday, September 15, 2015

Demand Disparities Reflect Information Disparities


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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.  

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