Monday, October 31, 2016

Clarifying The Demand For Having Class Outside

In this Nation States forum thread... 4th Grade Nation State... one of the participants, Galloism, has facilitated an experiment to test the relative long-term effectiveness of using spending (coasianism) to make group decisions.   At a local college, a psychology professor is allowing two of his classes to use coasianism to decide whether to have class inside or outside.  A third class is using voting to decide.

With coasianism, the students write down their...

1. Name
2. Preferred option (ie outside)
3. Willingness to pay (WTP)

Once all the students have turned in their valuation forms, the professor does some basic math to determine the most valuable option (MVO).  The students who prefer the MVO have to give their money to the professor.  The students who do not prefer the MVO do not have to spend any money.  Instead, they are proportionally compensated.  The winners have to pay the losers.

Today was the first day of the experiment.  All three classes decided to have class outside.  With the voting class... 16 voted in favor and 1 voted against.  It was a classic example of tyranny of the majority.

With the coasianism classes, it wasn't tyranny of the majority because the majority fairly compensated the minority.  The majority traded with the minority.

In a different but similar study (One Man, One Bid), which I discussed here, there were two key differences...

1. quadratic voting
2. equal compensation

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...






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 Hansj├╝rgens, 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.

Tuesday, October 11, 2016

Paul Samuelson: Worst Economic Theorist

Comment on: Nobel Prize 2016 Part I: Bengt Holmstrom by Kevin Bryan

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Samuelson was not the greatest economic theorist of all time.  My friend Michelle teaches a 4th grade public school class of 30 students.  She recently applied two of my economic theories to her class...

1. voting is replaced with spending
2. kids can choose where their taxes go

The first theory is largely based on Coase while the second is largely based on Smith and Buchanan.

Today the kids are using their own real money (pennies) to choose the class insect.  The kids who are compensated for their preferred insect not being chosen will have to eventually pay a tax on their compensation/income.  But they will be able to choose which class/school goods they spend their taxes on.

Can you make a solid prediction about the outcome?  Chances are extremely good that you'll be unable to.  Why?  Largely because you don't realize just how terrible an economist Samuelson was.  He was wonderful at math but terrible at economics.  Economics is all about trade.  Being terrible at economics means failing to truly understand the benefit and point of trade.  When you fail to truly understand the benefit and point of trade... then you fail to see all the places where trade isn't... but should be.

"the Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive."  - Samuelson

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Here are some trades that have occurred in Michelle's 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)...






The most valuable option was chosen.  The students who did not get their preferred option did not have to spend their money.  Instead, they received all the money spent on the most valuable option.  The amount of money a student received was in proportion to their WTP.  

Did all these trades occur because of Samuelson?  Nope.  They occurred despite him.  He was an obstacle to trade.  He was a barrier to trade.  Samuelson was an anti-economist.  The true purpose of economics is to facilitate trade.

We must always remember that Samuelson was the great anti-Misesian of 20th century economics, and in my book that translates into a force for anti-economics despite all the scientific accolades, awards, honorary degrees, and reverence by his peers he was granted in his lifetime. - Peter Boettke, Paul Samuelson

Blocking trade is the same as blocking the flow of information...

We know what this huge volume of trading is about. It’s about information, not preference shocks. Information seems to need trades to percolate into prices. We just don’t understand why. - John H. Cochrane, Volume and Information

We don't understand why?  Really?  Maybe he should find a class of 4th graders.

The main point about which there can be little doubt is that Smith’s chief concern was not so much with what man might occasionally achieve when he was at his best but that he should have as little opportunity as possible to do harm when he was at his worst. It would scarcely be too much to claim that the main merit of the individualism which he and his contemporaries advocated is that it is a system under which bad men can do least harm. It is a social system which does not depend for its functioning on our finding good men for running it, or on all men becoming better than they now are, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent and more often stupid. - Friedrich Hayek, Individualism and Economic Order

Tuesday, October 4, 2016

Samuel Hammond VS QIRE

Comment on: Voting as a collective action problem by Samuel Hammond

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Prohibition, the Holocaust and every war ever started were "solutions" to collective action "problems".  Same thing with the pyramids and putting a man on the moon.

Voting is only good to the extent that it doesn't violate Quiggin's Implied Rule of Economics (QIRE).  So... when does voting not violate QIRE?  The only way that we could know that voting was not violating QIRE would be if we actually knew people's willingness to pay (WTP) for their preferred option.  But that would require replacing voting with spending.

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Economics teaches two basic truths: people make wise choices when they are forced to weigh benefits against costs; and competition produces good results. - Edward Glaeser, If You Build It…

The correct fix for crowded roads is to charge people for the social costs of their choices. - Edward Glaeser, If You Build It… 

People should pay for the social cost of their flying. The TSA should be paid for by fliers. - Edward Glaeser, The one thing Trump and Clinton agree on is infrastructure.

Until people are made to bear the full costs of their decisions, those decisions are unlikely to be socially sound, in this as in other areas of public policy. - Richard Bird, Charging for Public Services: A New Look at an Old Idea

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

Public officials and professionals may have higher preferences for some public goods than the citizens they serve. Thus they may allocate more tax monies to these services than the citizens being served would allocate if they had an effective voice in the process. Under-financing can occur where many of the beneficiaries of a public good are not included in the collective consumption units financing the good. Thus they do not help to finance the provision of that good even though they would be willing to help pay their fair share. - Vincent Ostrom and Elinor Ostrom, Public Goods and Public Choices

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WTP is an incredibly coherent thread in economics (and in the best libertarianism).  Why are you ignoring it?  Do you think it's irrelevant?  Are you not aware of it?

Elsewhere you wrote...

Economists call this Tiebout sorting, a model that inspired a generation of libertarians to a kind of municipal fetishism which vastly overestimated the average person’s willingness to move, and vastly underestimated the potential for localized forms of tyranny.

It seems like you care about a person's willingness to move.  But willingness to move is the same thing as WTP.   So.... clearly, to some extent, you're not entirely unaware of WTP.  The question is... why are you ignoring it when it comes to voting?  Why does it matter when it comes to foot voting but it doesn't matter when it comes to ballot voting?

Giving people the freedom to decide for themselves whether it's truly worth it to throw the alternative uses of their own resources under the bus is the only way to prevent QIRE from being violated.