Friday, December 25, 2015

Clarifying The Demand For Defense

Merry Christmas.  Here's my reply to: effectively directing the bulk of government spending

... and some relevant passages.

********************************************************

After 9/11, if taxpayers had been free to directly allocate their taxes, then defense would have received even more funding than it actually received?  Even though the DoD failed to do its job... not only would taxpayers have rewarded the DoD... but they would have rewarded it more than congress did?

The bottom line up front: Taxpayers are the people least likely to spend the wrong amount of money on defense.  In other words, taxpayers are the people most likely to correctly discern whether any given expenditure will provide a real or imaginary advantage.

Perhaps the best place to start would be to compare federal income tax receipts (source) with the amount of money that defense actually received (source)...



The numbers are in billions.  Here's the chart data along with defense as a percentage of income tax...




Is this right?  I'm not 100% confident that I did this correctly.  If it is correct....then, in order for taxpayers to have spent more money on defense than defense actually received... it would have been necessary for them to spend, on average, more than 55% of their taxes on defense.  Does that sound plausible?

Right now people can't choose where their taxes go.  This means that we don't know the demand for public goods.  I refer to this as demand opacity.  Even though we don't know the demand for defense... I'm pretty sure that taxpayers wouldn't have spent as much money on defense as congress did.

Let's consider some of the relevant economic concepts...


Bang For The Buck


Everybody wants the most bang for their buck.  This is the most fundamental force that drives human behavior.  It's so fundamental that, not only does it drive humans... it drives every living organism.  Plants, fungi, microbes, insects, fish and coywolves all strive to maximize benefits.

When it comes to economic questions, in order to determine the correct answers, life's most fundamental force has to be part of every economic equation.

As far as I know... this "engine of life" doesn't have a technical term.  Perhaps this is part of the reason that so many people come up with the wrong answers to economic questions.  Hopefully somebody will coin a cool term for this essential element sooner rather than later.  In the meantime we can just use the word "biogine" (bio + engine).

The Free Rider Problem


[T]he heart of the whole problem of social economy: by departing from his indoctrinated rules, any one person can hope to snatch some selfish benefit in a way not possible under the self-policing competitive pricing of private goods. - Paul Samuelson, The Pure Theory of Public Expenditure

When it comes to private goods, people striving to "snatch some selfish benefit" (biogine) ensures maximum progress and abundance.  Consumers are incentivized to shop around for the best deals and producers are incentivized to offer better deals.  In order to offer better deals, producers must discover better uses of society's limited resources.

It's a different story when it comes to public goods.  Unlike with private goods, it's possible to benefit from public goods without having to pay for them.  So the innate and powerful desire to "snatch some selfish benefit" becomes a bane rather than a blessing.

The standard solution to the free-rider problem has three parts...

1. People are forced to contribute to public goods (taxation)
2. The government supplies public goods (public provision)
3. Voters elect people to allocate taxes (representation)

One problem with this solution is that voting is subject to the free-rider problem.  Voters, because of biogine, have the maximum incentive to vote for politicians who promise to provide free lunches.  Politicians, because of biogine, have the maximum incentive to offer free lunches.  Which is a problem because there's no such thing as a free lunch...

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

Free lunches mean that everything else will be more costly.  The more free lunches that are supplied... the more expensive that everything else becomes.

In the private sector, consumers sacrifice less valuable goods for more valuable goods.  In the public sector, voters unwittingly sacrifice more valuable goods for less valuable goods.

In order for public sacrifices to create the maximum value... taxpayers must be free to choose where their taxes go.  Once we create a market in the public sector then we'll have a greater abundance of more valuable public goods.  We'll also make just as much progress with public goods as we make with private goods.

The Forced Rider Problem


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

WWI and WWII only occurred because Germany solved the free-rider problem.  Perhaps it could be argued that, in the absence of adequate defense, Germany would have been invaded by Russia... which would have started a world war.  But again, this world war would only have occurred because Russia solved the free-rider problem.

Technically speaking, a public good is any good that is both non-excludable and non-rivalrous.  This mean that it's a public good when one country attacks another country (national offense).  It's also a public good when one country attacks its own citizens (the Holocaust).

What if the Holocaust had been funded entirely by donations?  Jews certainly wouldn't have voluntarily donated money to their extermination.  Would this have made them free-riders?  No.  The free-rider problem only occurs when allocations are less than valuations.  The Jews clearly didn't derive a positive utility from being exterminated.  They derived the most negative utility possible.  Combine this with the fact that they were forced, via taxation, to pay for their extermination... and we have an extreme example of the forced rider problem (allocation greater than valuation).

After 9/11... how many forced riders were there?  How many people had to spend more money on the war on terror than they would have if they had been given a choice in the matter?  If they had been free to directly allocate their taxes... how much less money would have been spent on the war on terror?  How much more money would have been spent on education, healthcare, infrastructure and the environment?

Actions (Spending) VS Words (Opinions)


In my very first response to one of your stories I shared this passage with you...

The people feeling, during the continuance of the war, the complete burden of it, would soon grow weary of it, and government, in order to humour them, would not be under the necessity of carrying it on longer than it was necessary to do so. The foresight of the heavy and unavoidable burdens of war would hinder the people from wantonly calling for it when there was no real or solid interest to fight for. - Adam Smith, Wealth of Nations

The reason that I shared this immensely wonderful, fundamentally important and incredibly insightful passage with you was because you were giving far too much weight to people's words (votes/opinions).  Talk is cheap.  Again, the free-rider problem is equally applicable to democracy.

Evidently Adam Smith didn't do the trick though because here you are arguing that people's shouts for war after 9/11 accurately reflected their willingness to pay.  Well... you did also make the argument that people don't understand probabilities.  But I'm not sure that you would have made that argument if you fully appreciated the problem with divining people's real priorities simply on the basis of their words/shouts/opinions/votes/cries/calls.

Fiscal Illusion vs Fiscal Equivalence


Ordinary households — and that’s who makes consumption decisions — have no idea what the government is spending, whether it is temporary or permanent, whatever. - Paul Krugman, Multipliers and Reality

Progressive taxation ensures that citizens unequally shoulder the tax burden.  Around half the country does not even pay any income taxes.  Not to mention the fact that governments usually borrow money... and sometimes even print it.... in order to pay for wars.

The monumentally detrimental consequence of our system of public finance is that everybody suffers from fiscal illusion.  The real cost of war is entirely, or largely, absent from people's personal economic equations.  As a result of fiscal illusion, the shouts/votes for war will greatly exceed the true demand for war.

As was noted in Chapter 3, expressions of malice and/or envy no less than expressions of altruism are cheaper in the voting booth than in the market.  A German voter who in 1933 cast a ballot for Hitler was able to indulge his antisemitic sentiments at much less cost than she would have borne by organizing a pogrom. - Loren Lomasky, Geoffrey Brennan Democracy and Decision

Again, the free-rider problem is equally applicable to democracy.

Biogine has some very straightforward implications.   When things are expensive... people will demand less.  When things are cheap... people will demand more.  And when things are free... people will demand the most.

Wars are extremely expensive... so people should demand a lot less.  But with our current system, for most people war seems to be either free or really cheap.  So until we change this insanely absurd system.... shouts for war will always be greater than the true demand for war.

Fernando Teson has proposed the Democratic Peace Theory (DPT) as A Solution for the Middle East.  The DPT is the fairly self-explanatory theory that democracies rarely fight with each other.  According to Kant, here are the conflict disincentives of democracies...

...having to fight, having to pay the costs of war from their own resources, having painfully to repair the devastation war leaves behind, and, to fill up the measure of evils, load themselves with a heavy national debt that would embitter peace itself and that can never be liquidated on account of constant wars in the future.  - Immanuel Kant, Perpetual Peace

If voters acutely felt the true cost of conflict then the DPT would be a solid theory.  But, as I've endeavored to explain, the free-rider problem and fiscal illusion both guarantee that voters do not feel the true cost of conflict.

The free-rider problem and fiscal illusion could easily be eliminated simply by allowing taxpayers to choose where their taxes go.

The Public VS Taxpayers


Perhaps I should more fully address your argument that the public fails to correctly calculate risk.  You substantiated your argument by citing a book by Richard Muller.  Rather than buying his book, I tracked down an article he wrote with Mark G. Stewart... Hardly Existential - Thinking Rationally About Terrorism.

This isn't the first time that I've heard this critique of the public.  Back in 2011, I shared this passage...

#4. Our Brains Don't Understand Probability
Now take it into the realm of politics. The U.S. has spent $1.3 trillion on the war on terror so far. That was in reaction to about 14,000 total deaths from international terrorism from 1975 to 2003. That's more than $90 million spent for each person killed.  
If you point out that this money would have been better spent preventing industrial accidents (which kill twice as many people per year than died in the World Trade Center) or, even better, curing cancer (the equivalent of about 200 WTC attacks each year), you'll be told, "Say that to the 9/11 victims, hippie!" - Kathy Benjamin, 5 Logical Fallacies That Make You Wrong More Than You Think

Benjamin linked to this article... Did the U.S. Overreact to the 9/11 Attacks? Undoubtedly by John Horgan... and Horgan referenced Richard Muller.

Even though I fully grasp this critique... I still fully support pragmatarianism.  Perhaps it will help if we rephrase the critique like so...the public makes bad investments.

Saying that the public makes bad investments is exactly the same thing as saying that the public fails to understand risk/probability.  The fact of the matter is that every allocation is inherently risky.  Every time you allocate your resources to X rather than Y... there's no guarantee that X > Y.  Every time you get out of bed (X) rather than stay in bed (Y)... there's no guarantee that X > Y.  Right now I'm allocating my resources to writing this story (X) rather than to writing some other story (Y).  Is there any sort of guarantee that X > Y?  Nope.  When you read this story (X) rather than some other story (Y)... will there be any sort of guarantee that X > Y?  Nope.  The fact of the matter is that nobody has a crystal ball!  No allocation is ever guaranteed to be the most valuable allocation.  Therefore, every allocation is a gamble.

Saying that "the public makes bad investments" is a better way to phrase your critique because hopefully it will bump the intuition that the public doesn't make equally bad investments.  Some people are a lot better than other people at making investments.  In other words, some people are a lot better than other people at allocating society's limited resources.  The alternative... everybody being equally good at allocating resources... is entirely and thoroughly absurd.

In the TED talk on "Why we make bad decisions", Dan Gilbert argued that it's not easy for people to grasp odds/probabilities which is why Americans spend/lose more money on gambling than on all other forms of entertainment combined.  Personally, I've never lost any money gambling in Vegas.  Not even a penny.  Does this mean that I always win?  Nope.  It means that I've never gambled... in any casino.  Like I mentioned... here I am gambling right now that the time and energy that I put into this story will be worth the risk.  Is this a good bet?  From my perspective...and based on all the information at my disposal... this bet is a lot better than any bet that I could make in any casino.  So here I am!  Gilbert went on to say that playing the lottery is a stupidity tax.  We can guess that Gilbert doesn't play the lottery.  And neither do I.  So Gilbert's title is very misleading.  It should actually be something like, "Why some people make bad decisions".

Playing the lottery and gambling in Vegas aren't the only two stupidity taxes... there are plenty of other stupidity taxes.  It should be a given that some people pay a lot more stupidity taxes than other people.  So again, some people are a lot worse at allocating resources than other people.

Irrational Choices Have Rational Consequences


Capitals are increased by parsimony, and diminished by prodigality and misconduct. - Adam Smith, Wealth of Nations

Don Quixote allocated his resources to attacking imaginary adversaries.  Would you have paid Quixote to do so?  I personally wouldn't have... and it's doubtful that I'm the exception rather than the rule.  So I think that it's unlikely that Quixote would have earned very much money.  And by extension... he wouldn't have had to pay very many taxes.

To put it bluntly, it's a good thing for crazy people to have less, rather than more, control/influence/power over how society's limited resources are used.  Society doesn't benefit when massive amounts of its limited resources are wasted tilting at windmills, barking up the wrong trees, going on wild goose chases, pursuing pipe dreams and so on.  Fools rush in where wise men fear to tread... so it's a really good idea to minimize the amount of resources that fools control.

Sometimes there's wide consensus regarding what constitutes foolish behavior... othertimes there's disagreement.  Markets, via consumer choice, give everybody the freedom to valuate the rationality/sanity/relevance/competence/value/benefit of everybody else's allocations.  The broader the consensus regarding the rationality of an individual's allocations... the greater that individual's income... which gives them greater influence over how society's limited resources are used.

The market process is by far the most robust and accurate feedback/reputation/rating system.  We don't just give people stars or thumbs up for their rational/beneficial behavior... we give them our own personal sacrifice (money, time and other limited resources).  We reward people who can correctly discern whether an advantage is real or imaginary.  Most people wouldn't have rewarded Quixote.

The example of Quixote is a bit extreme.  Perhaps it might help to also consider an example that's a bit more subtle.

Let's say that you're talking with your friend Sally who's going to Harvard law school.  You ask how she's doing and she tells you that her grades are good.  She also tells you that she's planning to drop out of law school so that she can write children's stories.  Perhaps the first thing that pops into your head is, "That's crazy!".  Because... why would any sane person throw away the opportunity to have a very lucrative career just so that they can pursue a goal that is very likely to be a pipe dream?

It's popular to criticize markets on the basis of other people's irrational behavior.  But this critique misses the fundamentally basic and extremely important fact that irrational choices have rational consequences. Markets work because mistakes that result from rash/hasty/irrational/emotional/biased/uninformed/random/delusional decisions decrease an individual's income.  Less income means less influence (over how society's limited resources are used).

Chances are extremely good that Sally will make a lot less money writing children's stories than she would have made working at a prestigious law firm.  But if she's a lot happier writing than she would have been lawyering... then from her perspective she wouldn't have made a mistake.  From society's perspective, however, she made a big mistake.  She chose a career that society has a lot less demand for.  As a result, Sally would have a lot less income/influence.

It's a different story of course if Sally turns out to be the next J. K. Rowling.  Then it would have been a big mistake for her to stay in law school.

Out of curiosity I googled "pursue a pipe dream" and found this...

Financial irresponsibility. Society doesn’t offer large rewards for self-indulgence. I suspect that the more high-paying jobs are ones for doing work that benefits others, not jobs that cater to narcissistic interests. A healthy society depends on citizens who cooperate, sacrifice and try to help each other out. It depends on professions such as biomedical engineers, clinical nurse specialists, software architects, reservoir engineers, database administrators, information assurance analysts, accountants, occupational therapists, optometrists, and biochemists. We may enjoy the arts but we really don’t need an endless supply of artists, actors and dancers — we appear well-stocked in these specialty areas. - Gary Klein, Are You Pursuing A Pipedream?

Markets reward individuals who allocate their resources in ways that create the most benefit for society.  These individuals earn higher incomes.  Higher incomes provide them with greater influence (over how society's limited resources are used).

Taxpayers have earned their influence by accurately allocating their resources.  The accuracy of their allocations was determined by the weighted decisions of other people.  Basically... the weight of everybody's decisions is determined by everybody's weighted decisions.  Is there a technical term for this?  If so, then maybe it has the word "recursive" in it... like "recursive ranking".  In any case, the more beneficially Sally has served society, the more weight her choices will have when it comes to valuating the correctness/benefit/rationality of other people's choices.

When this recursive, robust, inclusive, dynamic and accurate process of assigning influence is fully appreciated... it should be crystal clear that taxpayers are the people least likely to spend the wrong amount of money on defense.  Taxpayers are the people most likely to correctly discern whether a war will provide a real or imaginary advantage.  Which is why it's a such huge problem that we prevent taxpayers from choosing where their taxes go.  Blocking their influence from the public sector guarantees that the wrong amount of money will be spent on defense.

History is littered with examples of nations spending the wrong amounts of money on defense.  Every war that's ever been fought was caused by one or more nations spending the wrong amount of money on defense.  Humanity will continue to suffer from new examples until enough people fully grasp the monumental problem with blocking earned influence from the public sector.

It's important to note that not all earned influence is blocked from the public sector.

Crony Capitalism / Corporate Welfare / Rent Seeking


There are multitudes with an interest in peace, but they have no lobby to match those of the 'special interests' that may on occasion have an interest in war. - Mancur Olson, The Logic of Collective Action

Defense contractors spend millions of dollars in order to influence congress (Source)...


Clearly there's a strong correlation between defense lobbying and defense spending.  Correlation, however, doesn't imply causation.  But in this case, why would defense contractors spend millions lobbying congress if it wasn't profitable to do so?

In a pragmatarian system, power wouldn't be so conveniently centralized.  This is because taxpayers aren't all located in Washington DC... they are widely dispersed around the country.  Wining and dining millions of widely dispersed taxpayers would be a lot more costly and a lot less effective than wining and dining a few consolidated congresspeople.  And it's not like taxpayers are interested in campaign contributions.  I'm sure that they wouldn't mind regular contributions... but how would that even work?  A defense contractor gives a wealthy taxpayer $100,000 so that the taxpayer gives more than half of his taxes (say $1,000,000) to the DoD.  Then the DoD would award some portion of that million to this contractor rather than to some other contractor?

Given that taxpayers could shop in the public sector at any time throughout the year... an "extra" million dollars that one taxpayer puts into the DoD's bucket means a million less money that numerous other taxpayers would put into the bucket.  This would greatly decrease the breadth of demand for defense... which would be especially problematic for defense contractors given that demand breadth would determine whether or not a public good was on the "menu".

Perhaps defense contractors would have to resort to relying on information dissemination (advertising) in order to influence the decisions of taxpayers.  The thing is... even if they wanted to, taxpayers wouldn't be able to give their taxes directly to defense contractors.  So it would seem super shady if any defense contractor did encourage taxpayers to give more money to the DoD.  The underlying message would be that the DoD was in bed with that defense contractor.

Defense contractors could of course wine and dine the Dept of Defense.  Would this be a problem?  Not when taxpayers are entirely free to boycott the DoD.  Nobody has more incentive than taxpayers do to ensure that the DoD doesn't waste their hard-earned money.

Incentives Matter


Public services are never better performed than when their reward comes only in consequence of their being performed, and is proportioned to the diligence employed in performing them. - Adam Smith, Wealth of Nations

With the current system, the DoD has the minimum incentive to avoid wasting taxpayers' money.  That's because taxpayers can't choose where their taxes go.  In the absence of easy "exit", we can be confident that the DoD's defectiveness has absolutely nothing to do with inadequate funds and everything to do with poorly spent funds.  Severing the direct connection between performance and reward will always, because of biogine, guarantee piss poor performance.  Why work harder/smarter if your reward doesn't depend on it?

After 9/11... if taxpayers had been free to directly allocate their taxes... then maybe a few of them would have shouted, "The problem is that the DoD doesn't have enough money!".  And perhaps a few of these shouters would have even put some of their own tax dollars where their shouts were.  But most taxpayers would have said, "The problem isn't a lack of funding, the problem is that the DoD has done a terrible job spending the billions and billions of dollars that it's already been given."  In order to clearly communicate their dissatisfaction, these taxpayers would have boycotted the DoD.  The DoD would have very quickly transitioned from maximum complacency to maximum diligence.

By failing to avert 9/11... the DoD fundamentally dropped the ball.  But this sports metaphor isn't nearly strong enough.  It's more like the DoD dropped a baby.  Not a little drop... but a big drop.  How would parents have responded?  More and more parents would have handed their babies over to the DoD?  "Here, try again with my baby...because... nature is a whore... we can have some more...  "

Milton Friedman probably put it best...

The government should not help to save Chrysler, of course not.  This is a private enterprise system.  It's often described as a profit system but that's a misleading label.  It's a profit and loss system.  And the loss part is even more important than the profit because it's what gets rid of badly managed, poorly operated companies.  When Chrysler loses money…it's got to do something.  When Amtrak loses money it goes to congress and gets a bigger appropriation. - Milton Friedman, What is Greed?

After the DoD failed to do its job... it went to congress and got a bigger appropriation.  But I sincerely doubt that taxpayers would have been so understanding/forgiving.  Again, because of biogine, taxpayers don't just want more bang for their buck... they want a better bang for their buck.  Better defense will be ensured when, and only when, taxpayers who are dissatisfied with the cost/quality of defense are free to clearly communicate their dissatisfaction by boycotting the DoD.   It's really important for all government organizations, and especially the DoD, to thoroughly, fully and completely understand that failure will be punished rather than rewarded.

Markets work because they positively reinforce beneficial, rather than detrimental, behavior.

The Necessity Of Defense


The bottom line is, again, that taxpayers are the people least likely to spend the wrong amount of money on defense.  This means that defense will always be necessary as long as there are some countries that prevent their taxpayers from determining how much money gets spent on defense.  Once every country allows its citizens to choose where their taxes go... the amount of money allocated to defense will quickly dwindle.  Taxpayers will have far more beneficial public goods to spend their taxes on.  

The Opportunity Cost Of War


Every allocation requires the sacrifice of alternative allocations.  In other words, every allocation has an opportunity cost.

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some fifty miles of concrete pavement. We pay for a single fighter plane with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people. This is, I repeat, the best way of life to be found on the road the world has been taking. This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron...Is there no other way the world may live? - Dwight D. Eisenhower, The Chance for Peace

For taxpayers, the opportunity cost of unnecessary wars will always be too high.  Taxpayers have the most to lose from unnecessary wars.  It's their hard-earned money being flushed down the toilet.  Which is why it's such an epic problem that taxpayers are prevented from choosing where their taxes go.  If taxpayers were free to shop for themselves in the public sector... then they would have the most to gain by putting the most valuable/beneficial/rational/necessary public goods in their shopping carts.  In other words, taxpayers have the maximum incentive to minimize opportunity costs.

A few months ago my second favorite liberal, John Quiggin, posted a "slightly updated" entry on the opportunity cost of war.  He also posted this follow up entry... War and Technological Progress.  It's quite wonderful that he endeavors to try and help people understand that wars have very high opportunity costs... but it's exceedingly unfortunate that he does not recognize that the problem is entirely structural in nature.  I sincerely wish that the problem could truly be solved simply by informing the public that wars have very high opportunity costs!  Quiggin could just launch a crowdfunding campaign to pay for a world wide public service announcement... and then voila!  World peace!  As I've endeavored to explain though, with our massively incoherent system of public finance... wars, for the large majority of voters, seem to be either entirely free or extremely cheap.  This means that the opportunity costs of war will not be tangible.  People knowing the opportunity costs of war is not a substitute for people feeling the opportunity costs of war.  The only way to ensure that people truly feel the opportunity costs of war is to eliminate fiscal illusion entirely.

When voters shout for unnecessary wars... and defense contractors spend for unnecessary wars... it becomes a win-win situation for congress to supply unnecessary wars.  This problem can quickly and easily be solved simply by giving each and every taxpayer the freedom to decide for themselves whether a war is truly worth the very high, and very tangible, opportunity costs.

Exclusive Valuation VS Inclusive Valuation


When the most severe economic depression of modern times was at its peak, the American presidency came to be occupied by one of those extraordinary figures whom Walter Bagehot had in mind when he wrote: "some man of genius, of attractive voice and limited mind, who declaims and insists, not only that the special improvement is a good thing in itself, but the best of all things, and the root of all other good things."  Fully convinced that he knew best what was needed, Franklin D. Roosevelt conceived it as the function of democracy in times of crisis to give unlimited powers to the man it trusted, even if this meant that it thereby "forged new instruments of power which in some hands would be dangerous." - Friedrich Hayek, The Constitution of Liberty 

However well balanced the general pattern of a nation's life ought to be, there must at particular times be certain disturbances of the balance at the expense of other less vital tasks. If we do not succeed in bringing the German army as rapidly as possible to the rank of premier army in the world...then Germany will be lost! - Adolf Hitler (1936)

The Third Reich will always retain the right to control property owners. - Adolph Hitler (1931)

Hitler prevented German taxpayers from deciding for themselves, with their own taxes, which tasks (public goods) were less vital.  This is an example of exclusive valuation.

Taxpayers are still prevented from deciding for themselves, with their own taxes, which tasks are less vital.  It is to humanity's greatest detriment that people still haven't grasped just how immensely harmful exclusive valuation truly is.  Excluding people from the valuation process guarantees that the allocation will be wrong.  Including people in the valuation process greatly decreases the chances that the allocation will be wrong.

Here I am right now endeavoring to articulate the incredible necessity of inclusive valuation.  This is my most vital task (X).  I'm willing to sacrifice all other tasks (Y)... eating, sleeping, cleaning, bathing, working, playing, epiphyting and so on.  Every task in the world is less vital to me than the task at hand.

X > Y

Will X always be greater than Y?  Probably... not.  My stomach is fond of reminding that I haven't eaten for a while... so pretty soon my priorities will change...

X < Y

My priorities adjust according to my changing circumstances.

Right now you're also free to decide for yourself which tasks are more or less vital.  Your freedom to allocate your resources according to your unique valuations and circumstances reflects the fact that you're in a market.

Markets are all about inclusive valuation.   There are millions of unique individuals right now in different circumstances.  They are processing all their available information and valuating the various possible allocations of their limited resources.  All these people are prioritizing, choosing and sacrificing... striving to squeeze the most enjoyment and meaning out of life.

Inclusive valuation is essential because nobody is omniscient.  Consider the following experiment...

...a daycare began charging late-coming parents a small fine of 10 New Israeli shekels (about $3 at the time).  This resulted in an increase in the number of late pick-ups even in the short run, that is, while the incentives were present.  One interpretation of this result is information: the parents did not initially know how important it was to arrive on time.  The contract specified that they should pick their children up on time but failed to specify the penalty if they did not.  The distribution of the parents' beliefs regarding how bad it was to be late may have included bad scenarios (for example, "the teacher will make my child suffer").  Once a small fine was imposed, the contract was complete in that being late was priced.  The relatively small fine signaled to parents that arriving late was not that important.  This new piece of information - that it was not so bad to be late - did not disappear once the fine was removed.  Indeed, Gneezy and Rustichini (2000b) found that even in the long run, after the fine was removed, parents who had faced the fine were more likely to pick up their children late than were those in the control group.  Once the message has been sent that being on time is not that important, it is hard to revert back to the original level of arriving late. - Uri Gneezy, Stephan Meier, Pedro Rey-Biel When and Why Incentives (Don’t) Work to Modify Behavior

Without knowing the school's valuation of punctuality... how could the parents possibly have known just how important it was for them to arrive on time?  Parents aren't omniscient... and neither are schools.  Each side has different information.  Information asymmetry is why facilitating accurate communication is so important.  By charging the parents a fine for arriving late, the school helped to share more of its information with the parents.  Parents' willingness to pay the fine helped to share more of their information with the school.  Each side became better informed of the other side's preferences, circumstances, costs and benefits.  Being better informed helps to facilitate better decisions.

Way too many people struggle with the concept that all organizations, even public organizations, exist to serve people and not the other way around.  Nobody's omniscient... so effectively/efficiently serving people depends entirely on accurate communication... which is what inclusive valuation is all about.              

Inclusive valuation facilitates the accurate and mass communication of everybody's dynamic preferences/priorities/circumstances.  This communication constantly guides society's limited resources to their most valuable uses.

When more and more valuations are removed from the economic equation... communication becomes less and less accurate... allocations become less and less optimal... and everybody derives less and less value from society's limited resources.  Countless lives and their contributions are cut short by wars and diseases that only continue to plague society because people still haven't grasped just how immensely detrimental exclusive valuation truly is.

The Diversity Of Demand For Defense


The psychologist Barry Schwartz has this Ted talk… The Paradox of Choice (transcript)... where he argues that people are suffering from too many choices.  Grocery stores, clothing stores, electronics stores and other stores all have too many different items to choose from.  Schwartz completely fails to grasp that the diversity of the supply is simply a reflection of the diversity of the demand.  Demand is diverse because humans are diverse.  So attacking supply diversity is the same thing as attacking human diversity.

In the public sector... the supply of public goods really isn't diverse.  Does this mean that there isn't a diverse demand for public goods?  Does it mean that humans are all the same when it comes to things like defense, the environment and healthcare?  No.  The supply of public goods isn't diverse because congress isn't diverse.

Even if congress was the best possible representation of American diversity... the diversity of public goods would still be nowhere near the diversity of private goods.  In the current system, Elizabeth Warren, a liberal congresswoman, doesn't have full control over how $5.6 billion ($3 trillion / 535) dollars are spent.  It would be an improvement if she did have full control over her portion of the budget. Her differences would be fully reflected in the supply of public goods.  Plus, voters would be incredibly more informed regarding what Warren's true priorities really were.  They would clearly be able to see the quantity and variety of public goods that she put into her own shopping cart.  This additional clarity would help reduce fiscal illusion.  But even if congress was the best possible representation of diversity... and even if each congressperson had full control over their portion of the budget... there would still only be a vanishingly small improvement in the diversity of the supply of public goods.  This is because 535 of the most diverse people are infinitely less diverse than 300 million Americans.

If everybody had the freedom to shop for themselves in the public sector... then the supply of public goods would quickly diversify to accurately reflect the diversity of the demand for public goods.

Unfortunately, human diversity isn't truly appreciated.  If it was, then I wouldn't have to write this... people would already be free to choose where their taxes go.

Let's say that Sally believes that oatmeal is by far the very best thing to eat for breakfast.  The more fully she perceives that her breakfast preference is objectively, rather than subjectively, superior... the less reason she'll see in giving people the freedom to choose anything other than oatmeal for breakfast.  What's the point of breakfast options when oatmeal is objectively the best choice?  The fundamental flaw with this mentality is that oatmeal only exists because people in the past were free to choose what they ate for breakfast.  So if people in the present were prevented from choosing what they ate for breakfast... it's guaranteed that the people in the future would be robbed of some better breakfast food.

The importance of human diversity isn't just relevant to breakfast... it's relevant to every type of good/service... including defense.  People in the past were prevented from choosing their preferred type of defense... so it's guaranteed that we've been robbed of a better defense.  And because people are still prevented from choosing their preferred type of defense... it's guaranteed that the people in the future are being robbed of a better defense.

Progress is a function of difference...  





No matter how objectively beneficial and clearly correct certain paths might seem... all progress depends on people being free to choose different paths.  Human diversity is the source of all progress... so blocking demand diversity from the public sector will invariably block the progress that could and should be made with public goods.... including defense...

A second point of broad consensus among critics stresses that publicness in consumption must not necessarily mean that all persons value a good’s utility equally, Mendez (1999), for example, illustrates this point by examining peace as a PG. Some policy-makers might opt for increased defense spending in order to safeguard peace. However, this decision could siphon off scarce resources from programmes in the areas of health and education. Other policy-makers might object to such a consequence and prefer to foster peace through just the opposite measure -- improved health and education for all. Especially under conditions of extreme disparity and inequity, the first strategy could indeed provoke even more conflict and unrest, securing national borders by unsettling people’s lives. - Inge Kaul, Public Goods: Taking the Concept to the 21st Century

Your theory is that, after 9/11, if taxpayers had been free to directly allocate their taxes, that defense would have received even more funding than it actually received.  But this theory fundamentally ignores the essential economic element of human/demand diversity.  It's impossible that taxpayers, who are infinitely more diverse than congress, would have had even less variation in their defense allocations than congress had.

Demand diversity -> supply diversity -> progress.

Summary


Human diversity means that people aren't all equally alert, productive, effective, responsible, perceptive, careful, intelligent, informed, talented, creative, competent, prudent, diligent, resourceful or rational.  Some people are more rational than other people.  In the private sector, rational people have more influence than irrational people.  But when it comes to electing which representatives will determine the supply of defense/offense... people are equally influential (one person one vote).  Which is a problem because again, people are not equally rational.

Because people aren't equally rational... it's a given that many people will shout for unnecessary wars.  However, willingness to shout does not accurately reflect willingness to pay.  When shouters are personally confronted with the full burden of an unnecessary war... most of them will shout a different tune.  The few shouters who would truly be willing to spend their own money on an unnecessary war... wouldn't have very much money to spend.  Chances are really good that this wasn't the first time that they've incorrectly gauged the necessity of things.  Markets work because people who incorrectly gauge the necessity of things have a lot less income/influence than people who correctly gauge the necessity of things.

Taxpayers are the people most likely to spend the right amount of money on defense.  What makes the amount optimal, to a large extent, is the fact that people will approach the same problem differently.  Taxpayers are infinitely more diverse than congresspeople... which means that the defense allocations of taxpayers will be infinitely more diverse than the defense allocations of congresspeople.  Approaching national defense from the widest possible variety of the most rational angles will maximize our coverage/protection/safety/progress.  Our defense will improve much faster than any other country's offense.

Markets are fueled by the most powerful force in the universe... biogine.  Biogine is the source of our success as a species.  Humans are the best at choosing the most valuable option.  If we truly want to make as much progress with public goods as we make with private goods... if we truly want to prevent unnecessary wars and free-up countless resources for far more valuable uses... then it's imperative that we create a market in the public sector.

No comments:

Post a Comment