Sunday, October 30, 2016

Coherent Economics VS Will Wilkinson

Over a year ago, Will Wilkinson wrote this blog entry... Libertarianism and the Politics of Everything.  Here's the comment that I wrote on his entry...

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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.

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This morning in my twitter feed I found this...



And this...


Let's start here...

You start to accept that spending cuts are ultimately more about optimizing the composition and effectiveness of spending than about the overall level of spending or its rate of growth. - Will Wilkinson, What If We Can't Make Government Smaller?

Definitely!  Yes!  True!  But what, exactly, does government effectiveness depend on? Does Wilkinson know the answer to this question?

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When those most likely to benefit from social spending have a political voice, they demand more of it. - Will Wilkinson, What If We Can't Make Government Smaller?

When people get richer, they seem to want more government. In particular, they want more welfare spending. It’s mainly the positive relationship between rising demand for welfare services/transfers and rising GDP per capita that drives Wagner’s Law. - Will Wilkinson, What If We Can't Make Government Smaller?

Bill Niskanen said that “the longer-term challenge for those of us who favor limited constitutional government is to try to convince voters to reduce their demand for the services financed by federal spending.” However, the fact of the matter is that our well-funded and well-organized attempts “to convince voters to reduce their demand for the services financed by federal spending” so far have all failed. - Will Wilkinson, What If We Can't Make Government Smaller?

If we look at the world, what we see is that when people get richer, they want more welfare state. Maybe there’s nothing much we can do about that. - Will Wilkinson, What If We Can't Make Government Smaller?

Folks on the right need to consider the possibility that we’ve been wrong to see demand for government as the sort of dependent variable that can be manipulated through education or propaganda or political organizing or too-clever-by-half fiscal policy gymnastics or far-fetched constitutional amendments. The only variable the level of government spending clearly and reliably responds to over the long run is GDP per capita, and the relationship goes the wrong way. When people get richer, they want more welfare state. - Will Wilkinson, What If We Can't Make Government Smaller?


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Imagine that Wilkinson is at the grocery store.  He finds an employee and says, "I want coffee".  The employee replies, "Aisle 8".   Wilkinson goes to aisle 8 and finds a wide variety of coffee to choose from.  Why is there a wide variety to choose from?  Maybe it has something to do with the fact that he's free to choose which variety he believes will provide him with the most bang for his buck.   When he chooses a variety he then has to decide the quantity.  Will he fill up his entire shopping cart with coffee?  Maybe he'd consider the opportunity cost.

When he's finished putting items in his shopping cart... he goes to find a cashier.  He tells her, "I demand coffee".  And she says, "Yeah, great, I can see that!"  She just takes his word for it and he walks out the store?  Of course not.  If he truly wants/demands coffee, then he's going to have to take out his wallet and prove it.

This is so fundamentally basic.  Wants are unlimited, resources are not.   Willingness to pay (WTP) is how we ensure that limited resources are put to their most valuable uses.  Therefore, effective/efficient government depends on WTP.  Does Wilkinson understand this?

There’s an abiding faith on the right that there must be policy levers that can be pulled to reduce political demand for government spending. - Will Wilkinson, What If We Can't Make Government Smaller?

See that?  He said "political demand".  Which implies that he grasps that there are other types of demand.  But he doesn't really feel any need to point out or mention or highlight or discuss the important difference between political "demand" and economic demand.  Yet...

But if you’ve been following the proposals of this year’s presidential contenders, or glanced at the unrelenting spending trendlines, it’s hard say attempts at economic and political education have had any effect at all. - Will Wilkinson, What If We Can't Make Government Smaller?

Wilkinson knows that if he truly wants coffee, then he's going to have to pay for it.  He's going to have to actually demonstrate that he's truly willing to sacrifice the alternative uses of his money.  But why doesn't he apply this fundamentally basic economic concept to government?

Political "demand" really isn't the same as economic demand, and economic demand is the only way that we can know what people truly want.  Knowing what people truly want is the only way that the government is going to be truly effective/efficient.  

Libertarians half believe this*.  So, as a result, their attempts at economic education have always been half-assed.  Libertarians, by definition, are economically incoherent.  They say that determining true demand is necessary for coffee... but it's not necessary for defense. Because, evidently, congresspeople are partially omnisicent.  Or, resources are unlimited in the public sector.

Well... to be clear... anarcho-capitalists are not libertarians.  Murray Rothbard, to his incredible credit, grasped that knowing the demand for defense is just as important as knowing the demand for coffee...

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One of the most absurd procedures based on a constancy assumption has been the attempt to arrive at a consumer’s preference scale . . . Through quizzing him by questionnaires.  In vacuo, a few consumers are questioned at length on which abstract bundle of hypothetical commodities they would prefer to another abstract bundle, etc. Not only does this suffer from the constancy error, no assurance can be attached to the mere questioning of people. Not only will a person’s valuations differ when talking about them than when he is actually choosing, but there is also no guarantee that he is telling the truth. - Murray Rothbard

Individual valuation is the keystone of economic theory. - Murray Rothbard

The concept of demonstrated preference is simply this: that actual choice reveals, or demonstrates, a man’s preferences; that is, that his preferences are deducible from what he has chosen in action. Thus, if a man chooses to spend an hour at a concert rather than a movie, we deduce that the former was preferred, or ranked higher on his value scale. Similarly, if a man spends five dollars on a shirt we deduce that he preferred purchasing the shirt to any other uses he could have found for the money. This concept of preference, rooted in real choices, forms the keystone of the logical structure of economic analysis, and particularly of utility and welfare analysis. - Murray Rothbard

The crucial point is that when consumers spend, they benefit, because the expenditures are voluntary. The consumers buy product X because they decide that, for whatever reason, it would benefit them to buy that product rather than use the money on some other product or save or add to their cash balances. They give up money for product X because they expect to prefer that product to whatever they could have done with the money elsewhere; their preference reflects a judgment of relative benefit from that, as compared to another, purchase. In my own terms, spending choices by consumers demonstrate their preference for one, as compared to another, way of using their money. - Murray Rothbard

Since "benefits" are subjective, we cannot measure anyone's benefit on the market either, but we can conclude, from a person's voluntary purchase, that his (expected) benefit was greater than the value to him of the money given up in exchange. If I buy a newspaper for 25 cents, we can conclude that my expected benefit is greater than a quarter. But since taxes are compulsory and not voluntary, we can conclude nothing about the alleged benefits that are paid for with them. Suppose, in analogy, that I am forced at gunpoint to contribute 25 cents for a newspaper and that that newspaper is then forcibly hurled at my door. We would be able to conclude nothing about my alleged benefit from the newspaper. Not only might I be willing to pay no more than 5 cents for the paper, or even nothing on some days, I might positively detest the newspaper and would demand payment to accept it. From the fact of coercion there is no way of telling. Except that we can conclude that many people are not getting 25 cents' worth from the paper or indeed are positively suffering from this coerced "exchange."   Otherwise, why the need to exercise coercion? Which is all that we can conclude about the "benefits" of taxation. - Murray Rothbard

We have no idea how much the taxpayers would value these services, if indeed they valued them at all. For example, suppose that the government levies a tax of X dollars on A, B, C, and so on, for police protection—for protection, that is, against irregular, competing looters and not against itself. The fact that A is forced to pay $1,000 is no indication that $1,000 in any sense gauges the value to A of police protection. It is possible that he values it very little, and would value it less if he could turn to competing defense agencies. Moreover, A may be a pacifist; so he may consider the State's police protection a net harm rather than a benefit. But one thing we do know: If these payments to government were voluntary, we can be sure that they would be substantially less than present total tax revenue. - Murray Rothbard

In the first place, how much of the deficient good should be supplied? What criterion can the State have for deciding the optimal amount and for gauging by how much the market provision of the service falls short? Even if free riders benefit from collective service X, in short, taxing them to pay for producing more will deprive them of unspecified amounts of private goods Y, Z, and so on. We know from their actions that these private consumers wish to continue to purchase private goods Y, Z, and so on, in various amounts. But where is their analogous demonstrated preference for the various collective goods? We know that a tax will deprive the free riders of various amounts of their cherished private goods, but we have no idea how much benefit they will acquire from the increased provision of the collective good; and so we have no warrant whatever for believing that the benefits will be greater than the imposed costs. The presumption should be quite the reverse. And what of those individuals who dislike the collective goods, pacifists who are morally outraged at defensive violence, environmentalists who worry over a dam destroying snail darters, and so on? In short, what of those persons who find other people’s good their “bad?” Far from being free riders receiving external benefits, they are yoked to absorbing psychic harm from the supply of these goods. Taxing them to subsidize more defense, for example, will impose a further twofold injury on these hapless persons: once by taxing them, and second by supplying more of a hated service. — Murray Rothbard


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Unfortunately, Rothbard's excellent attempt at economic education was almost entirely eclipsed by his solution (abolishing/annihilating/destroying the government).   Rothbard never realized that the demand for defense could easily be determined by allowing each and every taxpayer to decide for themselves whether additional defense was worth more than the alternative uses of their own tax dollars.

Noah Smith wants Wilkinson to write a book.  Well...




How intellectually deficient would Wilkinson's book be if it didn't address Rothbard's economic criticism of government?  Would it be more or less intellectually deficient than his article?

With all of this in mind, Wilkinson's perspective on basic income shouldn't be a surprise...






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