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

Also...

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.  

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