Friday, October 28, 2016

Standing On The Right Shoulders

Am I trying to stand on the right shoulders?  Are you trying to stand on the right shoulders?  These are good questions to ask because... life is too short to spend standing on the wrong shoulders.  Life is too short to spend barking up the wrong trees.

I saw this on twitter last week...




James Buchanan is my favorite recently dead economist so of course I listened to it.  And of course I enjoyed it but... it felt too broad/general... or something.  It's a bit hard for me to complain though because I suspect it was supposed to be a broad overview.  Hey Munger... fancy sharing the text of your lecture?  It was nice to listen to but it's not so easy to reference/quote.  Also, why not put it on Youtube and your blog?

Munger mentioned an interview with Geoffrey Brennan.  I did a quick google search to try and find it but failed to do so.  A day or two later I was on Youtube randomly searching for videos of Buchanan when I spotted this one...





It's funny because I listened to the entire thing without realizing that it was the interview that I was actually looking for.  I didn't know that Geoffrey Brennan is Australian!

Here's the second part...





You can download the audio files from Liberty Fund... part 1 and part 2.  While listening to the interview I roughly noted some topics of particular interest...

Part 1

10: benefit principle
18: game theory
27: econometric nonsense
28: experimental economics
29: Knut Wicksell
59: minimum vs productive state

Part 2

30: Friedrich Nietzsche, inside house looking outside through different windows
39: value of prizes
54: Mormons
56?:  no children, motivation for promoting liberty

Does anybody have a transcript of the interview?

The interview took place in 2001.  It really seemed like Buchanan was bashing econometrics more than decade before it was fashionable to do so.

Where was I in 2001?   I had been out of the Army Infantry for a couple of years and I was going to Pasadena City College.  Was I even a libertarian then?  When I transferred to UCLA to study international development I was probably a libertarian.  Between my junior and senior year... thanks to being in the active Army Reserves... I spent a year in Afghanistan.  When I returned I was definitely a libertarian.  Of course now I'm no longer a libertarian.  Now I'm a pragmatarian.

My point is that it would have been pointless for me to interview Buchanan in 2001.  Now it's 2016 and I have a gazillion questions that I'd love to ask him... but he died in 2013.  I was 35 years old?  Our lives overlapped but we never connected.

Just like I'm a huge fan of Buchanan.... he was a huge fan of Wicksell.  Buchanan was 7 years old when Wicksell died.  Even less of an overlap.

I really enjoyed the part in the interview where Buchanan talked about Wicksell.  It would be nice to have the exact quote but... in the meantime...

It is impossible for anyone, even if he be a statesman of genius, to weigh the whole community's utility and sacrifice against each other. - Knut Wicksell, A New Principle of Just Taxation
Justice would thereby have been done at least to the extent that each man received his money’s worth. - Knut Wicksell, A New Principle of Just Taxation
For Buchanan, Wicksell is “the intellectual father of modern public finance” (Buchanan, 1968: 192), and he states: “In any overall evaluation of the history of fiscal thought, Wicksell alone commands the heights of genius” (Buchanan, 1967: 285).  Buchanan’s Nobel-prize speech honored Wicksell with the accolade that Wicksell deserves designation as the most important precursor in public finance theory. (Buchanan, 1987: 243). - Bernd Hansjürgens, The Influence of Knut Wicksell on Richard Musgrave and James Buchanan
The effect (of the Finanztheoretische Untersuchungen, B.H.) on me was dramatic. Wicksell laid out before me a set of ideas that seemed to correspond precisely with those that I had already in my head, ideas that I could not have expressed and would not have dared to express in the public-finance mindset of the time.  - James Buchanan, Economics from the Outside in: "Better Than Plowing" and Beyond

I think it's safe to say that Buchanan stood on Wicksell's shoulders.

Not too long after I listened to Munger's lecture on Buchanan I saw, thanks to Glen Weyl, this tweet....


I read the version on Jingjing Zhang's webpage where I found this...

In this paper we have demonstrated the inefficiency of elections, i.e. their inability to achieve socially optimal outcomes in situations without a clear ex ante winner (Proposition 1). We have also shown that a simple bidding mechanism yields higher overall welfare and better outcomes for all voters. These bidding mechanisms therefore represent practical implementations of Wicksell's idea of “unanimity and voluntary consent in taxation," i.e. the insight that if a proposal yields a common outcome with a positive net value to society then there exists a compensation scheme by which those that gain from the proposal can compensate those that lose and the proposal can be approved unanimously. - Jacob K. Goeree and Jingjing Zhang, One Man, One Bid

Also...

This endogenous choice of institution is inspired by Wicksell's (1896) principle of unanimity and voluntary consent in taxation: “if a proposal yields a common outcome that applies to all members of a collective, and the outcome provides higher overall welfare, then there exists a compensation scheme whereby those that gain from the outcome compensate those that are harmed in a manner such that everyone is better off. As a result, the proposal will be accepted unanimously." In our experiments there is no status quo so it is unclear which of the two institutions would require unanimous consent. To not favor either bidding or voting, we let the choice of institution be determined by majority voting. - Jacob K. Goeree and Jingjing Zhang, One Man, One Bid

Wicksell!  Well yeah.  The winners should compensate the losers.  For all intents and purposes, Goeree and Zhang are standing on Wicksell's shoulders.   Then again, so did Buchanan but, as far as I know, he didn't have the same idea.  Well... I'm pretty sure that Goeree and Zhang didn't cite Buchanan in their paper.

What's really interesting is that I had independently thought of the same general idea as Goeree and Zhang...

- Clarifying The Demand For Green Lights (Feb 2016)
- Popular vs Valuable (Mar 2016)
- Nude Beach Economics (Sept 2016)
- 4th Grade Nation State (Oct 2016)


However, they thought of the same general idea several years before I did...

Given we’ve been doing “one person, one vote” for so long, I think it is highly unlikely that we will ever see Glen’s idea put into practice in major political elections.  Two other economists, Jacob Goeree and Jingjing Zhang have been exploring a similar idea to Glen’s and testing it in a laboratory environment. Not only does it work well, but when given a choice between standard voting and this bid system, the participants usually choose the bid system.  

This voting scheme can work in any situation where there are multiple people trying to choose between two alternatives — e.g., a group of people trying to decide which movie or restaurant to go to, housemates trying to decide which of two TV’s to buy, etc.  In settings like those, the pool of money that is collected from people voting would be divided equally and then redistributed to the participants. - Steven D. Levitt, An Alternative to Democracy?

Even though we both thought of the same general idea... we really didn't think of the same exact idea!  Which is really fascinating!

In their version they use quadratic voting and they evenly distribute the compensation.  In my version, the outcome is simply based on the willingness to pay (WTP) of the participants.  Plus, the compensation is proportionally distributed based on WTP.  The greater a participant's WTP (cost/harm)... the greater their compensation.

In my previous blog entry, I shared three trades that have already been made in my friend's 4th grade class...

1. Deciding which book to read (29 Sept 2016)...





2. Deciding who should be in charge of their IRS (7 Oct 2016)...






3. Deciding what the class insect should be (11 Oct 2016)...






Today a fourth trade was made...

4. Deciding who should be in charge of their Gardening Department (28 Oct 2016)...




My friend Michelle didn't just replace voting with spending... she also's taxing the compensation but allowing the students to choose which class/school goods they spend their taxes on.  Hence the need for an IRS.

Today the second department (IRS was the first) was created... the Gardening Department.  Or Department of Gardening?

Michelle and I are both avid plant enthusiasts... which is how we met.  She quickly transferred her enthusiasm for plants to her students and they've transformed several of the school's empty patches of dirt into thriving green spaces.  So it's only natural that the students should have the opportunity to give their taxes to a department dedicated to gardening.

After the first trade the students brought up the issue of Michelle participating in the trades.  The class was strongly supportive of her doing so.  I texted Michelle when she was at school and told her to ask the students whether they wanted their parents to have the opportunity to participate.  They overwhelming said "no".  I then had Michelle ask the class whether I should be allowed to participate.  I sent a follow up text that if they said "no" that I would want all my pennies back.  I had given Michelle 700 pennies and she gave each of her 30 students 20 pennies for the first trade.  It's hard to know exactly when it started, but now the students are bringing pennies, nickles, dimes, quarters and even dollars from home.  However, only pennies can be used for participation.

Well, actually, most of the kids started bringing money from home when Michelle started auctioning off quotes from my collection.  Each day she sold one or more quotes and the average winning bid for the first 10 or so quotes was around 50 cents.  The winners will be able to decide which class/school goods their money gets spent on.  Michelle and I were curious whether it would be possible to create a market for ideas in her classroom.  Ideally her students would trade ideas as enthusiastically as kids (used to?) trade baseball cards.  Maybe nowadays it's Pokemon?  Gotta catch them all?

Getting back on track, the students all enthusiastically said that I could also participate in the trades.  I haven't met her students and don't plan on doing so... I don't even like kids.  Michelle refers to me as "the inventor" when they discuss trading/taxing.

Today Michelle texted me that they were about to use spending to choose who should be in charge of the Gardening Department.  The responsibilities include... giving taxpayers receipts when they make tax payments, keeping track of tax payments, deciding how to spend the revenue and keeping track of expenditures.  I'm sure that there will be other responsibilities as well.  Today her students received gmail addresses so they'll be able to use google docs, sheets and slides.  It will help them keep track of all the information.

When Michelle asked for nominees... there were way too many and there was some difficulty narrowing the candidates.  So in this case, there ended up being 6 options to choose from.  Michelle texted me the options and I told her to let me know when she had already turned in her own valuation.  When she did so, I texted her that my valuation was $1.50 for Brianna.

My valuation wasn't random... it was based on information that Michelle had previously shared about Brianna's diligence, competence and initiative.  It was also based on one of her homework assignments.

After the first trade the students were given an optional extra credit homework assignment of answering some questions about the process. The students didn't know what "extra credit" meant and asked Michelle. She told them to guess and one student guessed that it meant pennies and another student followed with the guess that more writing meant more pennies. Michelle didn't confirm or deny it. The next day Michelle said that she had never seen so many students turn in their homework. Over the weekend Michelle and I individually "graded" their homework. We didn't use the typical grading system.... we used pennies.  So we technically valuated their homework.  We both decided that completing the assignment was worth a penny. Aiden's homework was relatively decent so my valuation was 5 pennies. That's why I was willing to spend 80 pennies for him to be in charge of the IRS.   My highest valuation was 7 pennies for Brianna's homework which is partly why my valuation for her being in charge of the Gardening Department was 150 pennies.

Today, my valuation was the very last one that Michelle wrote on the board.  She called me during her lunch break and said that, when the kids saw my valuation, they all gasped/screamed... "Oh no!!!"  At first they were disappointed that their preferred candidate didn't win but then Adrian jumped up and spun around and exclaimed, "We get compensation!  We're going to get money!!"  The rest of the class cheered up at the prospect of being compensated.

In this case though their compensation was somewhat less than their valuation.  This is an issue with having so many options... the total size of the losing pie is more likely to be larger than the winning pie.  Not exactly sure what the most efficient way is to narrow down the options.

When I asked Michelle what her valuation was, I was somewhat surprised when she said that she had been willing to spend 10 cents on Jacob.  I had guessed that she would have preferred Brianna to be in charge of the Gardening Department.  My guess was obviously wrong.

I think that Michelle's compensation was 7 cents.  With a 10% tax rate... we can round up and say that she owes around a penny to the class/country government.  But she'll be able to choose which department she gives it to.  Chances are good though that she'll make a payment when she owes a few more pennies and there are a few more departments to choose from.

Would this system work better with quadratic voting and equal compensation?  I e-mailed the authors and asked about the two key differences.  Goeree quickly replied but wasn't willing, or able, to answer the question.  Instead, he wanted to point out who he believes deserves credit for the idea... Arrow, d'Aspremont and Gerard-Varet (1979... AGV).

I haven't had a chance to really dig into the relevant literature but from a quick browse the impression that I got was that they were using a replacement for democracy to try and do the job of a market.   Ack.  *Awkward*

From my perspective, coasianism (my name for replacing voting with spending) is for deciding whether prostitution, for example, should be illegal. If coasianism determines that it should be illegal... then you need a market (pragmatarianism) to allow each and every taxpayer to decide for themselves whether funding the enforcement of this law is more valuable than the alternative uses of their tax dollars.

Which brings us 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 M. Buchanan, The Economics of Earmarked Taxes

Geoffrey Brennan didn't ask Buchanan about this paper... and Buchanan didn't mention it.  I think part of the oversight might be explained by the section where they discussed a productive government versus a minimum government.  It seems like Buchanan had initially been more interested in, and focused on, a productive government.  But by 2001 he had become disillusioned with the system and had switched his focus to a minimum government?

It seems rather logical that this disillusionment has infected Munger, Peter Boettke and others who are the closest to standing on Buchanan's shoulders.  As far as I can tell, they've never written anything about people choosing where their taxes go.  Have they ever written anything about replacing voting with spending?   Bryan Caplan doesn't seem very interested in alternatives to voting.

Today I noticed that Boettke retweeted this...



I didn't expect to agree with David Suzuki, but a lot of what he said in the video is painfully true.  However, it's extremely important to distinguish between economics and conventional economics.  Conventional economists have almost entirely ignore the externalities associated with voting and biodiversity conservation and space colonization.  It's like biologists ignoring the existence of whales or trees or photosynthesis or evolution.  Or some better comparison.

The fact of the matter is that we can only see/reveal/show externalities when our systems eliminate people's incentives to hide their true preferences.  Therefore... scientific/economic experiments!  They are clearly possible and desirable.  By far the most important thing to test is the Invisible Hand...

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 

I'm pretty sure that David Suzuki would argue that global warming is a faulty distribution.  But how many of his own tax dollars would he be willing to spend in order to try and correct this faulty distribution?  We don't know.  "We" don't care!  Yeah... too many economists aren't standing on the right shoulders.

It's so strange that economists don't appreciate/understand that the Invisible Hand depends on accurate information.  The Invisible Hand can't correct faulty distributions when Suzuki, for example, isn't given the freedom to use his taxes to show/communicate/reveal what he believes to be a faulty distribution.

The concept of communicating with cash is so clear and obvious to me that it feels really reasonable to conclude that conventional economics does cause brain damage.  It prevents conventional economists from seeing/understanding/appreciating the basic mechanics of how faulty distributions are corrected with incentives.

Math is a convenient culprit.  At UCLA I remember being fascinated by the Invisible Hand.  I asked at least a few professors what would happen if we applied it to the public sector.  None of them had any idea and they obviously weren't very interested in the question.  For a while there I wanted to study economics until I took an upper level economics class that consisted entirely of math.   Yeah... no.  I didn't want to study math.  I wanted to study economics.  But, according to UCLA, they were one and the same.

So maybe conventional economics doesn't make you brain damaged.  It simply selects for brain damaged individuals.  Heh.  That can't be right.  It selects for individuals who should be studying math instead of economics.  So you end up with a bunch of economists who can't appreciate the Invisible Hand because math doesn't allow them to see its true beauty.

Obviously I did end up studying economics.  But I certainly didn't study it formally/traditionally/conventionally.  Perhaps applying the Invisible Hand to one public school classroom will allow real economics to creatively destroy conventional economics.  And then it will be abundantly clear whose shoulders are the right ones to stand on... Buchanan, Hayek, Mises, Wicksell, Bastiat, Smith and a precious few others.

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