Saturday, May 13, 2017

The Pragmatarian Model For The Roosevelt Institute

Last month I pitched the pragmatarian model to the Roosevelt Institute...

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Xero: Your economic analysis is quite sophisticated. But I wonder about your basics. What are your thoughts on Adam Smith’s Invisible Hand? Overrated, underrated or adequately rated?

Eric Harris Bernstein: As an analogy of the general push and pull of market forces, I think it’s brilliant. As an a priori explanation of our reality, I find it highly unsatisfactory. Seems to work as a religion, though ;)
Overrated.

Xero: Why, exactly, do you find the Invisible Hand to be highly unsatisfactory as an a priori explanation of our reality?

Bernstein: Requires a longer answer than I can really give here, but in short:

As commonly conceived, the invisible hand theorem suggests that the market directs supply (and therefore price) to the societally desired level, where tastes are properly accounted for. It is suggested this occurs naturally, and that any policy interference only disrupts that exchange.

The problem with that idea is, in reality, no market can exist without rules and without behavior that violates or complicates those rules. At the very least, you need to have rules that prevent theft, extortion, etc. Furthermore, there are a lot of factors that influence how and where the hands moves, which economic theory neither accounts for nor considers. Information asymmetries, power dynamics, the influence of money of policy, are all factors that push the hand away from the actually optimal level.

So, although it’s an important thought experiment, the notion of a free market is a fallacy. Understanding that is the first step towards making policy that moves things in an optimal level.

For more on this, I think our report Rewriting the Rules is a great start.

Xero: As the Invisible Hand is commonly conceived? It’s commonly conceived to be primarily about selfishness. But this common perception really isn’t correct. The Invisible Hand is primarily about signals
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
People use their own money to signal the value of things. Therefore, the Invisible Hand helps us to avoid overlooking anything valuable.

However, there are certainly circumstances when people don’t use their money to signal the value of things. For example… Medium stories. But is this a failure of the Invisible Hand? No, it’s something that prevents the Invisible Hand from doing its job.

Let’s say that I somehow prevent you from doing your job at the Roosevelt Institute (RI). Clearly the RI isn’t going to reflect the work that you didn’t do. Imagine how absurd it would be for me to criticize the RI’s shortcomings that were the indirect result of me preventing you from doing your job. Imagine how absurd it would be for me to argue that you should be fired for failing to do your job. The true solution would simply be for me to allow you to do your job.

For Medium the solution is simply to give subscribers the option to spend their fees on their favorite stories. Since they are subscribing anyways, they might as well use their fees to signal the value of stories. As a result, the Invisible Hand would help us to avoid missing any valuable stories.

You linked me to Rewriting the Rules. I clicked the page and read it. You certainly brought that page to my attention. But, where is that link located on your homepage?

The space on your homepage is theoretically unlimited. But the space on your homepage isn’t equally valuable. Space at the top is more valuable than space at the bottom. It makes sense that links on your homepage should be allocated accordingly. The more valuable links should be at the top of the page. And they really shouldn’t require any horizontal scrolling… or waiting… to see them. Don’t make people scroll or wait to see the most valuable links.

The question then becomes… how do you determine the value of a link? There aren’t a lot of options…
  1. Invisible Hand (IH)
  2. Visible Hand (VH)
  3. Democratic Hand (DH)
Right now I’m pretty sure that you don’t use the DH to determine the value of links. Even if people could vote for the links… it would only reveal how popular they were. In no way, shape or form would it reveal their value. Value in all cases is a function of willingness to pay/spend/sacrifice.

You definitely don’t use the IH to determine the value of the links… which leaves the VH. The VH is better than the IH at determining the value of links?

Imagine if donors to the RI could use their donations to signal the value of the links. In this case the IH would determine the order (relative importance) of the links. You think that this order would be inferior to the order that is currently produced by the VH?

Check out the Cato homepage. The links on their homepage aren’t ordered by the IH either.
It’s no surprise that the RI prevents the IH from doing its job. But it’s certainly an incredibly ironic issue that Cato also prevents the IH from doing its job.

Recently I brought this to Cato’s attention… Jason Kuznicki VS Adam Smith. You, me and Kuznicki are pretty much having a mental ménage à trois. I sure do love intellectual intercourse.

I’ve equally informed you and Kuznicki about the point and purpose of the IH. But I’d be super surprised if the RI allowed the IH to do its job before Cato did. Pretty much the point and purpose of the RI is to prevent the IH from doing its job. It would be a monumental pivot for the RI to allow the IH to determine the order of links on your homepage.

I also just shared the point and purpose of the IH with the LearnLiberty organization. The link is actually on their homepage. Unfortunately, it’s not because of the IH.

As you might have noticed I’m not a big fan of putting all my eggs in one basket. My idea is now in the RI’s basket, and Cato’s basket and LearnLiberty’s basket, and the New Yorker’s basket and lots of other baskets. The point and purpose of the IH is super righteous so it’s only a matter of time before some organization realizes this.

It could be your organization… but it probably won’t be. Instead it will be some other organization and then another and then another… until there are enough organizations allowing the IH to do its job that your organization can no longer avoid the truth of the matter. But by then it will be too late for your organization. Nobody will care about the RI. Once everybody can clearly see the point and purpose of the IH… then there will no longer be any scope for the RI. There will no longer be any demand for any organizations that support any scope for the VH.

If I was in your shoes, then I’d try and come up with a really good spin for allowing the IH to do is job at the RI.

“Dear supporter, it is our firm belief at the RI that the IH is horrible hogwash. We’re willing to sacrifice the RI in order to save the world from the IH. The next time that you make a donation you’ll have the option to use your donation to signal the value of our content. The IH will determine the order of the links on our homepage. Everybody will be able to clearly see that the order of the links is complete chaos. This will definitively disprove the IH once and for all!”

This is just like me going back into time and trying to persuade Mao Zedong to allow the IH to do its job… but under the guise of disproving it. I have to laugh because it’s a pretty absurd picture… but then I have to cry because I can imagine the countless lives that would have been saved if Mao had allowed the IH to do its job.

Admittedly, it’s entirely possible that I’m wrong about the point and purpose of the IH. So if you think that I’m overlooking some valuable argument against the IH doing its job… then I’m all ears.

Lots of people like to object that people don’t value money equally. But if this objection has any merit… then why allow the IH to determine the order (relative importance) of the RI and Cato? Donations to both organizations could be combined and donors could elect representatives to decide how to divide the money between the two organizations. The VH, rather than the IH, would determine the order (relative importance) of the RI and Cato.

Of course nobody in their right mind would argue for allowing the VH to determine the order (relative importance) of the RI and Cato. Therefore… I take this to mean that it’s not a genuine objection that people don’t equally value money.

I’m going to share this story with your buddy Tim Worstall. He writes for Forbes and CapX. Plus he’s a senior fellow at the Adam Smith Institute (ASI). None of those organizations allow the IH to do its job. I guess it doesn’t get any more ironic, or tragic, than the ASI not allowing the IH to do its job. Maybe Worstall can help solve this problem. He sure writes better than I do.

Bernstein: I do think you are overlooking an argument and I think I already supplied it, but happy to restate: In reality, there never has been nor never could be an unencumbered invisible hand. This is not the fault of the invisible hand — the invisible hand is just a concept — it is simply a global reality that society (and markets) require rules and regulations to function. Otherwise people could steal instead of purchase, extort instead of work or innovate, etc.

So, for better or worse, we need to pick and write the rules that we are all going to live by, and in reality those rules affect the relative well-being of various groups. This is where organizations where Cato and the Roosevelt Institute come in, in hopes of influencing policy makers to make rules that we each respectively believe to be in someone’s best interest. (Ostensibly both groups believe they are lobbying for society’s best interest but I would argue Cato has a long history of putting forth proposals that only serve the interests of the very rich, however that is just my opinion).

I agree that market signals push prices in various directions and that this is mostly good, but you are ignoring the context in which that occurs. Not only did the signals occur within a lawful society that has certain implications, there are also many goods for which individuals are not expected to pay based on their own tastes; things like national security, police enforcement, and regulation of industry are funded out of tax revenues specifically because no one would pay for national security unless forced.

Furthermore, you have a lot of faith that if we opened every decision up to markets, we would all be a lot better off, but that assumes all market participants act in good faith and with complete information, and that there is no such thing as anti-competitive behavior, discrimination, or any other behaviors that might, as you say, prevent the invisible hand from functioning. This is not the reality we live in.

On that note, I would like to refer back to a word I used in my original post to Worstall. That word is tautology, and here is why I return to it: you define the invisible hand as the movement of signals in a completely unencumbered market where everything functions exactly as it should. Any time any individual, group, or circumstance gets in the way, you assert that this is not the invisible hand, and that if only it were, the outcome would be perfect. I agree that if you remove all barriers of anti-competitive practices, etc., market outcomes would be pretty good. I simply disagree that in the real world this reality could ever come to exist. This position is justified by basic political theorems which hold that at the very least we need rules that bar various forms of extortion and theft, and which provide for basic collective goods like defense. It is also supported by numerous instances throughout history and even recent American history of broad discrimination, which prevents people from participating in markets on equal terms. From this and much else it follows that we will never have a completely neutral unencumbered invisible hand, and that we should go about writing rules that allow markets to function in a setting that supports positive societal outcomes.

Markets are the essential floor on which society can stand but that floor must be supported by a foundation of equitable rules.

Xero: Please address the super specific example that I offered. Right now the links on the Roosevelt Institute (RI) homepage are not ordered by the Invisible Hand (IH). Should they be?

You can respond… “The links on the RI homepage should not be ordered by the IH because… X, Y and Z”.

Just in case you didn’t read the links that I shared with you, let me clarify my example.

Donors to the Libertarian Party were recently given the freedom to use their donations to signal which potential convention theme is the most valuable. Here are the top results…

$6,222 — I’m That Libertarian!
$5,200 — Building Bridges, Not Walls
$1,620 — Pro-Choice on Everything
$1,377 — Empowering the Individual
$395 — The Power of Principle

This order (relative importance) of the themes was determined by the IH. The list of themes was ordered by the IH.

The RI also has donors. Should they be able to use their donations to signal the value of the RI’s content (ie articles)? Should the IH determine the order (relative importance) of the links on the RI homepage?

Bernstein: Again, you are ignoring my analysis of the the invisible hand as it functions in the real world. I understand your point and have acknowledged it and responded substantively to the policy implications you are driving at. You have not done so with regard to my answers (for example, how do you fund government’s necessary functions without distorting market outcomes?). You are also imposing an oversimplified and condescending structure to the conversation. By doing this I think you are greatly detracting for the conversation’s value, but in the name of being a good sport, I will accept the rules you are imposting on this exchange and answer as you requested:

“The links on the RI homepage should not be ordered by the IH for several reasons. Here are a few:

1. Donors are not the only stakeholders in the Roosevelt Institute, and donations do not directly determine our priorities; allowing donations to order the links (I am taking links as a metaphor for institutional priorities overall) would imply that the staff and managers have no prerogative in interpreting our organizationals mission and making strategic decisions by prioritizing certain content. If we did that, we might very quickly become an entirely different organization. We are a nonprofit organization and our mission is not to earn the approval of people with money (if we were we would be an entirely different kind of organization, trust me) but to educate people on issues we think have important public policy implications. Donors’ interest might be driven by something else, so we have a considerable need to make decisions based on factors that are not donations. As an addendum, perhaps our nonprofit nature complicates your very clever metaphor. However, even if we were a for-profit news organization, we might see that we got the most dollars for stories about Jennifer Anniston’s love life, but we also might believe, for reasons not related to money, that it is important to cover and promote topics not related to celebrity gossip, so again — invisible hand not always the best arbiter of outcomes.

2. Our wealthiest donors could easily drown out the interests of large numbers of small donors (or important followers that do not donate). Since our mission is not simply money, but educational outreach in important issues, we would not want one or two large donors determining what every is most likely to see. A voting system might make more sense (and we do prioritize based on web hits, I believe), but even then, see #1. And on that note…

3. Donations could encourage bad or illegal work. Acknowledging for a second that the content of the website is endogenous to the donations we receive (meaning the more we receive donations in support of X, the more we look to publish more pieces like it), and assuming the staff has no prerogative to alter the priority of links and dedicatedly pursues more donations — which is pretty much the hypothetical you pose — then we can pretty quickly end up in some ethical dilemmas. For example, what if our donors are framing socialists (as many at Cato probably imagine) and push us continually towards work that is borderline defensible or outright dishonest but which, if true, supports their point? Eventually we might find ourselves publishing something like “New study shows poverty level at 99%” even if in reality it is at 10 or 20%. Without any sort of agency (and assuming we have created your libel-less libertarian utopia with no laws or rules to structure markets) then we would quickly be spewing indefensible garbage that damages society.

So no, I don’t think your system of prioritization is a good idea. Of course, on such a small scale would I object? No. But as soon as the question gets bigger it gets much more complicated (even within the context of a relatively small organization like the Roosevelt Institute).

Now that I humored you, I would love to hear how you respond to the broader societal challenge of monetizing every exchange and offering no rules or regulations to structure markets.

Xero: You don’t want your donors to use their donations to signal their demand for your specific content… because their priorities are wrong? When people go shopping for groceries… are their priorities wrong as well? If so, then why allow people to shop at all? Why allow people to decide whether they donate to the Roosevelt Institute (RI) or to Cato?

Do you see how quickly we got to the heart of the matter?

People donate to the RI because they are hungry for your content. But being all different, your donors don’t value all your content equally. They are hungrier for certain kinds of content. And you’re certain that they are hungrier for the wrong kinds of content.

And perhaps you see the RI as having a monopoly on relevant information. Kinda like the RI is the parent and the donors are very young children who are uninformed. Except this analogy doesn’t work because you’re not arguing that your donors are uninformed, you’re arguing that they are misinformed. They would demand the wrong kinds of content.

To be clear, it would be entirely optional for your donors to use their donations to signal their demand for your specific content. They would only choose this option if they have information which leads them to believe that some of your content is more valuable than other of your content.

By preventing donors from using their donations to signal the value of your content… you’re disregarding all the information that they have. How many people donate to the RI each year? 1000? 10,000? 100,000? Can you possibly comprehend how much information even 100 people have?

Admittedly, your donors aren’t experts like you. But they are all experts in some area. This is the consequence of the division of labor. I’m sure that your donors are doctors and professors and lawyers and teachers and plumbers and electricians and pilots and scientists and engineers and it’s probably a very long list. And it’s gotta be the case that your organization isn’t their only source of information.

What’s the total amount of articles that your donors read each day? How many podcasts do they listen to each day? How many hours of news do they listen to each day? How many books do they read each month? How many books do they write each year?

Your eager willingness to disregard all the information that your donors have in their heads is why you’re at RI instead of at Cato. Except, then again, even Cato doesn’t allow its donors to use their donations to signal the value of their specific content. Sadly, Cato is also willing to disregard all the information that its donors have.

Your mission at the RI is to inform people. But your donors are certainly already informed. Or else, why would they donate to the RI? And if you’re certain that your donors are misinformed then, well, clearly you’re failing at your mission. But how can you possibly succeed at your mission when you really don’t know which information your donors are missing?

Your real mission should be to inform people… and to be informed by people. It should be a two way street. Information should always be a matter of intercourse.

If your donors aren’t buying the “right” products (fruits and veggies)… then clearly you need to help them understand what it is, exactly, about these products that make them “right”. Conversely, if they are buying the “wrong” products (cigarettes and alcohol)… then clearly you need to help them understand what it is, exactly, about these products that make them “wrong”.

“Now that I humored you, I would love to hear how you respond to the broader societal challenge of monetizing every exchange and offering no rules or regulations to structure markets.”

Well… thanks to you humoring me, we’ve already got to the heart of the matter. So really there’s no need to address anything else if we can’t peacefully resolve the issue of your willingness to disregard all the information that your donors have in their heads.

But since you have been such a good sport then, at the risk of distracting you from the main issue, I will address some of your additional concerns.

I’m pretty sure that I never said that we don’t need rules. I’m pretty sure that I’m not an anarchist. I’m actually a pragmatarian. I believe that taxpayers should be free to choose where their taxes go.
If you have information that leads you to believe that drugs being illegal is a good and necessary and beneficial rule, then you’d have the freedom to spend your own tax dollars on the enforcement of this rule. The more money that taxpayers spend on the enforcement of this rule, the more it will be enforced.

So I have absolutely nothing against rules in general. What I want to know is just how valuable each and every rule truly is. I also want society’s limited resources to be allocated accordingly.

If society doesn’t think that the rule against jaywalking is very important, then there really shouldn’t be a cop on every corner enforcing this rule. The opportunity cost would be too high.

Therefore, the amount of resources allocated to any endeavor should reflect how strongly society cares about it. In other words, supply should reflect demand. In other words, society’s limited resources should be efficiently allocated.

To be clear, there’s a difference between an “efficient” allocation of resources and a “correct” allocation of resources. An allocation can be efficient without being correct.

Right now you don’t allocate any of your time and brains to promoting pragmatarianism. Because… pragmatarianism doesn’t match your preferences. This allocation is efficient… but obviously I don’t think it’s correct. Voila! Here I am endeavoring to correctly inform you. I’m supplying you with important information that you’re obviously missing.

If we created a market in the public sector then, unlike in the for-profit sector, it really wouldn’t be one-price-fits-all (OPFA). As a result, the signals would be more accurate. The supply in the public sector would more closely match the demand than the supply in the private sector. People would get more bang for their buck in the public sector. Therefore, people would want to spend more and more money in the public sector. The tax rate would go up, the public sector would expand and the private sector would shrink. Eventually the tax rate would be 100% and there wouldn’t be any private sector.
You would never have to buy oranges. Oranges would be free for everyone. If you ever felt that there weren’t enough oranges, then you’d use your tax dollars to signal this.

Admittedly, it isn’t the easiest thing to imagine a 100% tax rate with a market in the public sector. But I do know that more accurate signals result in a more relevant supply. I also know that people always want the supply to be more relevant. Everybody wants to be as happy as a kid in a candy store. Therefore, it’s pretty reasonable to conclude that creating a market in the public sector will increase the tax rate.

But it’s not like we need to immediately create a market in the public sector. Taxpayers are essentially subscribers. Netflix also has subscribers. So does Medium. The government really isn’t the only organization with subscribers. Lots of other organizations also have subscribers. They can give their subscribers the option to use their fees to signal the value of specific content. Then we’ll see if the organizations and their subscribers benefit from commerce as communication. I’m pretty sure that more communication is better than less communication… but I could be wrong.

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