Tuesday, June 20, 2017

Market-Avoiding Activity

Living in the dark ages really sucks.  So it's really wonderful that this paper by Peter Salib (Vox overview-interview) shines a brilliant light on the prison system.  He makes the painfully obvious, but exceedingly overlooked, argument that preventing prisoners from helping society is the same thing as harming society.  Prisoners should be put to their most socially valuable uses.  But since prisons can only provide a very small fraction of all the possible employment opportunities, prisoners can only be put to their most socially valuable uses outside of prison.

1. Prisoners should be put to their most valuable uses
2. Prisons have extremely limited employment opportunities
3. Prisons should be abolished

The trick is appreciating that his prescription doesn't really maximize his premise.  In order for prisoners to truly be put to their most socially valuable uses, they must have the most suitable, appropriate, personalized and customized training, skills and knowledge.  But what are the chances that any given prisoner already has the optimal education?

Schools, like prisons, are not markets.  The point of markets is to optimally (efficiently) allocate resources… including people.   Markets accomplish this task through the use of value signals… prices/wages/revenue/profits.  Participants in markets spend their money in order to help guide people and other resources to their most socially valuable uses.

From Salib's paper...

Both criminal and tort law are designed to regulate bad acts. Specifically, according to economic thinking, they are designed to regulate behavior that would otherwise cause net social losses. We can tell that bad acts cause such losses because such behaviors almost always circumvent perfectly functional markets.   Bad actors—burglars, fraudsters, murderers, and the like—take via pure coercion what they could have otherwise bargained for.  Markets with low transaction costs are, “virtually by definition, the most efficient method of allocating resources,” because they allow parties to freely decline wealth-reducing transactions.  Thus, the economic argument goes, both criminal and tort law seek to efficiently minimize such market-avoiding acts. - Peter N. Salib, Why Prison?: An Economic Critique 

In order to maximize socially beneficial behavior.... we first have to actually know how beneficial any given behavior is to society!  Having to explain this is proof that we're living in the dark ages.

Nearly all the activity that occurs in schools qualifies as market-avoiding.  Students do an incredible amount of work, but virtually none of it is graded/judged by the market.  As a result, students are almost entirely ignorant of the true social benefit of their behavior.

Today I read this article...

But, while households cannot spend their way out of a recession, their government can do that spending for them. It can increase its spending, providing the amount needed for a revival of the economy. And, insofar as the government represents the populace, and is entrusted with its interests - as is supposed to be the case in a democracy - it must increase its expenditure. The welfare of the public requires it. - Nina Shapiro, The Hidden Cost of Privatization 

Let's consult Bastiat...

This means that the terraces of the Champ-de-Mars are ordered first to be built up and then to be torn down. The great Napoleon, it is said, thought he was doing philanthropic work when he had ditches dug and then filled in. He also said: "What difference does the result make? All we need is to see wealth spread among the laboring classes. - Frédéric Bastiat, What Is Seen and What Is Not Seen 

Let's jump back to Shapiro...

Discussions of the advantages of education usually focus on its economic benefits, to both the educated and the nation. These economic benefits, however, were not so significant in Smith’s times, as the jobs available to the “common people” were menial, requiring little skill or understanding, and indeed, it was because they were that their education was paramount. It counteracted the “dulling” of the mind that occurred in the performance of their simple, uninterrupted and repetitive tasks, and was needed not for the advancement of their fortunes, but for the development of their minds. They had to have some minimal understanding of the world, and ability to learn about it, to act intelligently within it, and respect the others in it. A “civil” society required an educated public. -  Nina Shapiro, The Hidden Cost of Privatization

In order for students to act intelligently within the world, the world needs the opportunity to directly and monetarily judge the intelligence of students' activities.  Students should put all their work online and everybody should have the opportunity to use their own money to grade the intelligence/relevance/value of the work.

Here's a glimpse of a far more enlightened world... Classtopia.  On this page you can see their entries sorted by their social relevance.

Our current education system fails everybody.  Well duh.  Schools aren't markets.  Everybody's education is suboptimal so we can guarantee that nobody is being put to their most valuable uses.  We are all victims of the education system.  This is more obvious for some people... such as criminals.  Abolishing prisons would certainly put prisoners to more valuable uses, but it wouldn't come even remotely close to putting them to their most valuable uses.

Rather than abolishing prisons, they should be transformed into school-markets.  "School-markets"?   That really can't be the best term.  Coming up with the best term is a problem.  It's a problem that can be solved by school-markets.  Students would offer solutions and donors would use their money to grade the solutions.

Digging/filling random holes is certainly a solution to some problem.  But who in their right mind would reach into their own pocket to pay for this solution?  Would Nina Shapiro?  Would John Quiggin?

We live in the dark ages because so many people erroneously believe that society's limited resources can be adequately allocated even in the absence of everybody's opportunity to use their own money to grade the relevance/value of an allocation.

I highly value Salib's paper because it helps to illuminate these dark ages.  But it's not like I've spent any money on it.  Maybe it's because I'm a free-rider, or maybe it's because SSRN isn't a market.

Here are the statistics that SSRN provides on Salib's paper...

Abstract views: 9,555
Downloads: 2,821
Rank: 3,114

What if the rank of his paper was determined entirely by the amount of money that was donated to it?  The more money that was donated to it, the higher its rank.  The higher its rank, the more reason people would have to read it.

I wouldn't be spending my money on his paper so that I could read it.  I would be spending my money on his paper to encourage more people to read it.

Should papers be ranked by downloads or donations?  Having to ask this question is more proof that we're living in the dark ages.

If prisons were transformed into school-markets, then prisoners would put all their work online and everybody would have the opportunity to use their donations to rank the work.  Every prison would be a talent contest.  Everyone would be a talent scout.  Given enough eyeballs, all talent is conspicuous.  Talent that had been overlooked/unappreciated by parents and teachers would be spotted and cultivated by donors.

Youtube proves that people's tastes and appetites are endlessly diverse.  Unfortunately, since videos are ranked by views and thumbs up, rather than by donations, Youtube also proves that we're living in the dark ages.

Every prisoner has a multitude of natural/innate talents.  Prison should facilitate the discovery of talents.  Then it's a matter of markets informing prisoners of the social value of their different talents.  Donors would highlight and positively reinforce the most socially beneficial behavior.

Of course, once schools become school-markets, the number of criminals will plummet.  When the Invisible Hand guides students to their personally and socially optimal occupations, crime will almost entirely be a thing of these dark ages.  When every place/space is a market, it will be virtually impossible for any activity to avoid it.

Friday, June 9, 2017

Demystifying Greg Stevens

Comment on: Killing the myth that taxes are anti-democratic by Greg Stevens

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Round 2?  Andrew Sabl wrote a really thoughtful article... Liberalism Beyond Markets.   Unfortunately, he really didn't provide a coherent view of things.   Here's what I wrote in response...

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Laws are products that are outside the market.  Prohibition, for example, was a product that was created because enough people voted for it.  They voted for it because they valued it.  But of course they didn't equally value it.  The amount of money spent on this product was not determined by voters, or consumers, it was determined by government planners.

A = society's valuation of prohibition
B = the amount of money spent on prohibition
C = the difference between A and B

If Sabl wants to argue that C is insignificant, then he must believe that shopping is a massive waste of everybody's time and energy.  He should want the Invisible Hand (IH) to be entirely replaced by a combination of the Democratic Hand (DH) and the Visible Hand (VH).

If Sabl wants to argue that C is significant, but B is more socially beneficial than A, then he must believe that not only is shopping a massive waste of everybody's time and energy, but that the IH's division of resources is less socially beneficial than the DH+VH's division.

*****

His only response was that he probably wouldn't be able to find any intellectual common ground with me because I had referred to laws as "products".   Heh.  How convenient for him that semantics saved him from having to address my actual argument!

It might help to reframe the issue.  Netflix has around 100 million subscribers.  They give their money to Netflix and Netflix decides how to divide it between all the different types of content.   Deciding how to divide limited dollars among unlimited content is the prioritization process.  Do subscribers have the opportunity to participate in this process?  Yes...

1. They can unsubscribe if they don't like the content
2. They can vote for/against specific content
3. They can e-mail (and call?) Netflix

Netflix's current prioritization process results in the current division of dollars.

What if, rather than Netflix deciding how to divide subscribers' dollars among all the content, subscribers could decide how to divide their dollars themselves?  This very different prioritization process would result in a different division of dollars.

A = The division of dollars as determined by Netflix
B = The division of dollars as determined by subscribers
C = The difference between A and B

How significant is C?  If it's insignificant then what's the point of consumers ever deciding how to divide their limited dollars among unlimited products?  If it's significant, then which is more socially optimal... A or B?  If A is more socially optimal, then all markets should be replaced by DH+VH.

You believe that DH+VH is an effective way to divide society's limited resources among its unlimited wants.  But why do you believe that this system is more effective than the alternative?   Is your belief correct?  Are you interested in testing your belief?  Or do you wish to keep your political belief outside of science?

Right now Netflix and Hulu both use the same prioritization process... DH+VH.   What would happen if Hulu gave its subscribers the opportunity to divide their limited subscription dollars among its unlimited content?   What's your prediction?  How confident are you in your prediction?   How much would you be willing to bet on your prediction?   If you firmly believe that the IH is truly inferior to the DH+VH, then you should be willing to bet a lot of money that Hulu would lose a lot of money.

Alex Tabarrok, my favorite living economist, observed that a bet is a tax on bullshit.  So if somebody is unwilling to bet on their beliefs, then clearly they recognize that their beliefs are bullshit.  Same thing if they have no interest in coming up with a way to test their beliefs.   My belief is that no idea should be outside the market.  I believe that the IH, rather than the DH+VH, should determine the importance/relevance/value of each and every idea.  I'm very interested in testing this belief because I'm very uninterested in carrying around bullshit beliefs.

Wednesday, June 7, 2017

Demystifying Andrew Sabl

Andrew Sabl wrote this incredibly thoughtful article... Liberalism Beyond Markets.  It's unfortunate that it's so incredibly untrue.

That a system of laws need not contradict market values is of course orthodox Hayekianism, and that it furthers diverse individual purposes is also central to Lon Fuller’s similar account of law. But few Hayekians acknowledge what this means: that the Rule of Law, and not just the market, is an institution central to furthering our diverse ends.

Laws are products that are outside the market.  Prohibition, for example, was a product that was created because enough people voted for it.  They voted for it because they valued it.  But of course they didn't equally value it.  The amount of money spent on this product was not determined by voters, or consumers, it was determined by government planners.

A = society's valuation of prohibition
B = the amount of money spent on prohibition
C = the difference between A and B

If Sabl wants to argue that C is insignificant, then he must believe that shopping is a massive waste of everybody's time and energy.  He should want the Invisible Hand (IH) to be entirely replaced by a combination of the Democratic Hand (DH) and the Visible Hand (VH).

If Sabl wants to argue that C is significant, but B is more socially beneficial than A, then he must believe that not only is shopping a massive waste of everybody's time and energy, but that the IH's division of resources is less socially beneficial than the DH+VH's division.

There you go.  I just easily proved that what Sabl wrote is incredibly untrue.  I demystified Andrew Sabl.  Well... I handed him the cure.  Whether or not he takes it is another story.

Now what?  If he's still reading, maybe I should mention that I'm not a libertarian.  I'm a pragmatarian.  From my perspective, we should create a market in the public sector.  Taxpayers should have the opportunity to divide their limited tax dollars among the unlimited goods supplied by the government.  Rules would be inside, rather than outside, the market.

Rules would be subject to the same consumer selection pressure as clothes and computers.  The DoD and the EPA would be subject to the same consumer selection pressure as the NRA and the Red Cross.

Right now Netflix is in a market, but it is not a market.  Netflix as a whole is subject to consumer selection pressure, but its parts are not.  People can decide how they divide their limited dollars between Netflix and clothes, but if they do decide to allocate money to Netflix, they can't decide how they divide their subscription dollars between nature documentaries and sci-fi shows.

A = consumer selection pressure
B = no consumer selection pressure

It really can't be the case that A and B are equally effective at serving society's interests.  This fact should be blindingly obvious.

Humanity is a process of demystification.  This means that, just because we have an institution doesn't necessarily prove that it's beneficial.  The institution might be propped up by mysticism.  This was the case for making sacrifices to Gods.  Can you imagine the incredible amount of valuable resources that humanity wasted as a result of this pervasive mysticism?  Democracy is also propped up by mysticism.  Same thing for the government deciding how to divide tax dollars between environmental protection and space colonization.  Same thing for Netflix deciding how to divide subscription dollars between nature documentaries and sci-fi shows.  In all cases mysticism wastes humanity's limited resources.

Any single product (rule, belief, idea, institution, system) can be propped up by mysticism.  This is why markets accelerate demystification.

Tuesday, June 6, 2017

So Many Humanists, So Little Time

A humanist, Gary Saul Morson, and an economist, Morton Schapiro, recently collaborated to produce this book... Cents and Sensibility: What Economics Can Learn from the Humanities.  I read the first chapter and parts of the 7th chapter.

Economists can certainly learn a lot from humanists.  But economists can also learn a lot from psychologists, sociologists, biologists and many other "ists".   The issue is that economists, like all people, are constrained by time.  All the time spent learning from humanists is time that can't be spent learning from psychologists.

Let's take the economist David Henderson for example.  Like all of us, his time is limited but his desires are not.  Therefore, he has to prioritize.  He has to decide how to divide his limited time among his unlimited desires.

Henderson recently decided to allocate some his limited time to writing an entry about Cents and Sensibility (C&S).  Thanks to his decision, I learned of the book's existence.  The concept of cross-pollination matches my preferences so I decided to allocate some of my limited time to reading parts of C&S.  Doing so inspired me to allocate some of my limited time to writing an entry about it.

The authors of C&S appreciate the fact that time, and other resources, are limited...

To reject the idea of scarce resources is to reject reasonable thought altogether.

Right.  But is not rejecting this idea really the standard?  In order to answer this question it might help to allocate a minute of your limited time to watching this commercial...





We can imagine that all the people in this video are humanists.  The dog is Henderson the economist.  His mission is to select a humanist.  There are so many humanists to choose from... but he can't pick them all.  So how does he pick a humanist?

How does an economist pick a humanist?  How did Morton Schapiro pick Gary Saul Morson?  Did he randomly pick him from a pool that only consisted of white, older, male humanists from Northwestern University?  This university doesn't have a monopoly on humanists, does it have a monopoly on the best humanists?  Or did Schapiro pick Morson out of convenience?  Did Schapiro settle for Morson?

For sure an economist can learn something from every humanist.  Just like a humanist can learn something from every economist.  But...

1. Everybody's time is limited
2. Lessons aren't equally valuable

Therefore, if Henderson is going to pick a humanist, then he should pick the one with the most valuable lesson.  The question is... how can he spot this humanist?





If the loudest humanist also had the most valuable lesson then there wouldn't be an issue.  However, there's absolutely no correlation between loudness and value.

Morson and Schapiro are correct that economists should learn from humanists.  I doubt many economists would disagree with this.  But the real issue is how to connect economists with the best humanists.  This real issue is a purely economic problem.

The authors correctly recognize that Adam Smith is the "most important source of economic thought".  Unfortunately, they failed to use Smith's most important thought to solve the purely economic problem of connecting economists with the best humanists.

Smith's most important thought is the Invisible Hand (IH)...

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

In a market, people divide their limited dollars among their unlimited desires.  This prioritization process results in society's limited resources being optimally divided among its unlimited wants.

Most people don't understand what markets are good for.  For example, Netflix is in a market, but it is not a market.  There are around 100 million subscribers who don't have the opportunity to divide their limited fees among Netflix's unlimited content.  People think the system works fine, but how could it possibly work better than a market?  If it does truly work better than a market... then why should Netflix be in a market?

Imagine a Netflix that was a market but with academic papers.  Subscribers could freely read all the papers, but they'd have the opportunity to divide their limited fees among the unlimited papers.  This prioritization process would highlight the most valuable papers in each field, which would facilitate the most profitable cross-pollination.

Let's apply the IH to the pedigree scenario.  Henderson walks in and wants to pick a humanist to learn from.  Because his time is limited, he should choose the most valuable humanist.  Doing so depends on actually knowing the value of the humanists, which depends on readers dividing their limited dollars among the unlimited humanists.  The IH would guide Henderson to the most valuable humanist.

To some extent we already use this process.  Even though Schapiro is an economist I'm sure that he's heard of J.K. Rowling.  Even though Morson is a humanist I'm sure that he's heard of Tomas Piketty.  Piketty and Rowling both wrote bestsellers.  Lots of people used their limited dollars to say, "Pick her" and "Pick him".

Personally, I'm not going to buy C&S.  I'm not going to use my money to say, "Pick them".  It would be a completely different story if the authors had actually advocated using Smith's best idea to solve the problem of connecting economists to the best humanists.  Heck, even if they had attacked/criticized Smith's best idea I still would have purchased their book.  But they didn't even mention, notice, admit, or acknowledge its relevance to their objective.

The authors said, "To reject the idea of scarce resources is to reject reasonable thought altogether."  But they completely failed to see, or mention, the relevance of the IH.  Once you accept the idea of scarce resources, then you must also accept the necessity of choosing the best system for dividing society's limited resources among unlimited wants.  In order to efficiently divide society's limited resources, it's necessary to know the social value of the different wants.  Resources can't be efficiently allocated if we don't know the social value of things.

It might help the authors to see a small, but real life, example of the IH applied to scholarly products.  The students in my friend's 4th grade class have a blog... Classtopia.  On the homepage their products are sorted by the hand of time.  But on this page their products are sorted by the Invisible Hand.

Right now the IH is pretty small.  It consists of the students, their teacher and myself.  But in theory the IH could be as large as everybody in the world.

Schapiro is the president of Northwestern University (NU).  He could implement the same system for the entire university.  Students could put their papers online and donors could grade them with their dollars.  This system could supplement, rather than replace, traditional grading.  So each paper could potentially have two grades.  One would be given by the professor... the other would be given by the market.  Which grade would be more useful, credible, reliable, trustworthy and informative?

If NU was a market, then it would be easy for everyone in the world to find and learn from the most valuable papers that it produces.  It would be hard to avoid, or ignore, or neglect the most valuable papers in the different fields.  If a paper promoting the IH was the most valuable economics paper, it would be hard for humanists to ignore it.  If a paper criticizing the IH was the most valuable humanities paper, it would be hard for economists to ignore it.

Should NU be a market?  Of course.  If we embrace the idea of scarce resources, then knowing the value of papers is the only way for people to efficiently divide their limited time among unlimited papers.

I sneezed while writing this entry.  The gray cat woke up and looked at me.  I said, "It was just a sneeze.  I'm not a mouse.  Go back to sleep."

Nobody benefits from the inefficient allocation of attention.  Was this blog entry an efficient allocation of my limited attention and time?  It matched my preferences but, then again, no man is an island.  Socially efficient allocations can only be facilitated by the market process.

Monday, June 5, 2017

Human Bodies Are Optimized For What?

Comment on My Review of Kevin Laland by Arnold Kling

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Human bodies aren't optimized for speed (ie cheetahs), or propulsion (ie dolphins), or flying (ie birds), or climbing (ie squirrels), or strength (ie guerrilla).   Our bodies are optimized for allocation.  We're the best at simultaneously moving multiple different resources from point A to point B.   We can carry different combinations of water, food, tools, weapons and offspring over long distances.  Is it a coincidence that we're also the smartest species?

Being able to physically carry a lot of different things selected for individuals who were the best at being able to mentally carry a lot of different things.  Being able to store and process a wider variety of information facilitated better physical carrying decisions.

Kevin Laland carries a lot of different information in his head.  But his combination of information hasn't led him to the conclusion that our intelligence is a function of our body type.  I don't think that he carries enough economics.  Then again, I don't know of any economists who've argued that our big brains are the result of deciding what to physically carry.  Simply carrying around a lot of economics isn't adequate to solve the puzzle of human intelligence.

The fact that Laland and economists haven't figured out the root cause of our intelligence proves that he's correct about the importance of pooling insights and knowledge.  Groups can physically and mentally carry more than individuals can.  But this is only useful to the extent that trade is facilitated.

Right now Netflix isn't a market.  There are around 100 million subscribers who don't have the opportunity to divide their limited fees among Netflix's unlimited content.  They can't use their money to help Netflix decide what to carry.  Do you know of any economists who've argued that Netflix should be a market?

Imagine a Netflix that was a market but with academic papers.  Subscribers could freely read all the papers, but they'd have the opportunity to divide their limited fees among the unlimited papers.  This specific, and substantial, prioritization process would highlight the most valuable papers in each field, which would facilitate the most profitable cross-pollination.

There's a limit to how much we can physically and mentally carry.  We have to prioritize.  We should only carry the most valuable stuff.  But this is only possible when we know the value of stuff.  Hence the importance of markets.

Sunday, June 4, 2017

The Pragmatarian Model For The Adam Smith Institute

Ben Southwood is the Head of Research at the Adam Smith Institute.  He recently shared a critique of public choice theory.  So he basically criticized my second favorite economist... James Buchanan.  The attention that Southwood has allocated to Buchanan is certainly better no attention.  However, I have to admit that the quality of the attention is rather disappointing... especially since it came from the Head of Research at an organization named after my favorite economist... Adam Smith.

In order to fully grasp the deficiency of Southwood's critique, it's necessary to fully grasp the most basic, fundamental and elementary economic problem...

Society's wants: unlimited
Society's resources: limited

From Buchanan...

The concept of opportunity cost (or alternative cost) expresses the basic relationship between scarcity and choice. If no object or activity that is valued by anyone is scarce, all demands for all persons and in all periods can be satisfied. There is no need to choose among separately valued options; there is no need for social coordination processes that will effectively determine which demands have priority. In this fantasized setting without scarcity, there are no opportunities or alternatives that are missed, forgone, or sacrificed. - James M. Buchanan
A nation cannot survive with political institutions that do not face up squarely to the essential fact of scarcity: It is simply impossible to promise more to one person without reducing that which is promised to others. And it is not possible to increase consumption today, at least without an increase in saving, without having less consumption tomorrow. Scarcity is indeed a fact of life, and political institutions that do not confront this fact threaten the existence of a prosperous and free society. - James Buchanan, Richard Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes

Understanding scarcity means understanding that society must prioritize.  Society's unlimited wants aren't equally relevant.  Some wants are more socially relevant than others.  The relevance of society's wants must be known in order for its limited resources to be efficiently allocated.  From Smith....

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

In a market, consumers decide how to divide their limited dollars among their unlimited desires.  This inclusive, substantial, and specific prioritization process optimally (efficiently) divides society's limited resources among its unlimited wants.

With this prioritization process in mind, let's consider the issue of public goods.  From Paul Samuelson's 1954 paper ...

But, and this is the point sensed by Wicksell but perhaps not fully appreciated by Lindahl, now it is in the selfish interest of each person to give false signals, to pretend to have less interest in a given collective consumption activity than he really has, etc. — Paul Samuelson, The Pure Theory of Public Expenditure

The concern here isn't that people wrongly or incorrectly or inaccurately value public goods.  The concern is that, if people are asked how much they value national defense, for example, and they know that their answer will determine their payment, then they will have an incentive to pretend to value national defense less than they truly do.  Conversely, if people know that their answer will not determine their payment, then they will have an incentive to pretend to value national defense more than they truly do.  Both cases are problematic because they will result in society's limited resources being incorrectly divided.  In the first case too few resources will be allocated to defense.  In the second case too many resources will be allocated to defense.  Society really doesn't benefit from a shortage or a surplus of defense.

It's crucial to appreciate that false signals are a problem because they incorrectly divide society's limited resources.  It should be crystal clear that the correct division of resources depends on true signals.  The inherent challenge is that the truth of signals can only be known by the people themselves.

Therefore... what?  Samuelson immediately jumped to voting as the solution?  Nope.  In order to create a pretty model, he simply assumed omniscience on the part of government planners.

Buchanan was not a fan of assuming omniscience on anyone's part.  In 1963 he responded...

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

Let’s take Netflix for example…

Samuelson: The optimal quantity, quality and variety of movies depends on knowing the intensity of people’s preferences for movies. But if movies were freely available, and we asked people to report their valuation of specific movies, and they knew that their answer would determine their payment, then they would have an incentive to under-report their valuation. Therefore, we need Netflix. Subscribers will pay a fee, Netflix will “divine” their preferences and spend their fees accordingly.

Buchanan: Since Netflix subscribers are already paying fees, if they are given the option to earmark their fees to their favorite movies, they’d have absolutely no incentive to conceal their “true” preferences for movies.

Later on Buchanan put his criticism of the omniscience assumption like so...

What, then, does Barry mean (and others who make similar statements), when the order generated by market interaction is made comparable to that order which might emerge from an omniscient, designing single mind? If pushed on this question, economists would say that if the designer could somehow know the utility functions of all participants, along with the constraints, such a mind could, by fiat, duplicate precisely the results that would emerge from the process of market adjustment. By implication, individuals are presumed to carry around with them fully determined utility functions, and, in the market, they act always to maximize utilities subject to the constraints they confront. As I have noted elsewhere, however, in this presumed setting, there is no genuine choice behavior on the part of anyone. In this model of market process, the relative efficiency of institutional arrangements allowing for spontaneous adjustment stems solely from the informational aspects.

This emphasis is misleading. Individuals do not act so as to maximize utilities described in independently existing functions. They confront genuine choices, and the sequence of decisions taken may be conceptualized, ex post (after the choices), in terms of "as if" functions that are maximized. But these "as if" functions are, themselves, generated in the choosing process, not separately from such process. If viewed in this perspective, there is no means by which even the most idealized omniscient designer could duplicate the results of voluntary interchange. The potential participants do not know until they enter the process what their own choices will be. From this it follows that it is logically impossible for an omniscient designer to know, unless, of course, we are to preclude individual freedom of will.

Public choice attacks the omniscience assumption.  Southwood probably doesn't believe that anybody is omniscient.  So then, what does he believe?  Does he believe, like Buchanan and Samuelson did, that the optimal division of resources depends on true signals?  If so, does Southwood also believe that true signals can be revealed/communicated/transmitted by voting?  Does he seriously believe that direct democracy can optimally divide society's limited resources among its unlimited wants?  Does he truly believe that shopping is a massive waste of everybody's limited time, energy and brainpower?

The fact of the matter is that the Adam Smith Institute (ASI) is not a market.  Donors aren't given the opportunity to divide their donations among the ASI's numerous products.  The order (relative importance) of the ASI's products/topics is not determined by the Invisible Hand (IH), and it's not determined by the Democratic Hand (DH)... so it must be determined by the Visible Hand (VH).

In the ASI's case, the debate isn't about compulsory versus voluntary contributions to public goods.  It's purely and simply a matter of which hand is better at dividing the ASI's limited resources.  My theory is that the IH would do the best job, by far, of dividing the ASI's resources.  So should I provide a strong and wonderful argument in favor of replacing the VH with the IH?  What's the alternative?  Southwood should provide a strong and wonderful argument against replacing the VH with the IH?

After I publish this entry, I'll try and bring it to Southwood's attention by using Twitter.  After all, Twitter is how his entry was brought to my attention.  Twitter divides our limited attention among unlimited articles.  But does it efficiently allocate our attention?


From Adam Smith's perspective, the efficient division of limited resources depends on people dividing their limited dollars among their unlimited desires.  Attention is certainly a limited resource.  Yet, members of Twitter don't use their dollars to allocate each other's limited attention.  Twitter is not based on Smith's perspective.  Neither is the ASI.  Donors don't use their dollars to allocate each other's limited attention.

We shouldn't be surprised that Twitter is not based on Smith's perspective... but the ASI?  What hope can we have for Twitter, and the rest of the world, when even the Adam Smith Institute isn't based on Adam Smith's perspective?

Smith's perspective is either wrong or right.  Or, perhaps, somehow it's right for clothes, computers and cars... but it's wrong for articles, papers, posts and tweets.  I'll certainly admit that articles and clothes are different types of goods.  But even though articles are digital goods, and frequently public goods, their creation still requires the use of society's limited resources.  All the time that I spend writing about this topic is time that I can't also spend writing about other topics.  How should I divide my limited time among unlimited topics?  Should you answer this question with your dollars (Smith's perspective)?  Or should you answer this question with experts/leaders/committees/dictators (ASI's perspective)?  Or should you answer this question with cheap-talk (Twitter's perspective)?

Consider this blog written by 4th graders... Classtopia.  The entries on the homepage are sorted by the hand of time.  But the entries on this page are sorted by the Invisible Hand.

The IH is currently pretty small. It consists of the students, their teacher and myself. But in theory the IH could be as large as everybody in the world.  Everybody could use their money to grade the relevance of Classtopia's (home)work.  If every school was a market, then the IH would guide each and every student to their personally and socially optimal occupation.  If it makes sense for the IH to guide students... shouldn't it also guide prisoners?


My challenge to Southwood, and anybody else who reads this, is to come up with a coherent economic story.  Start with a solid foundation of scarcity and then construct a sound economic argument for inconsistently, or consistently, applying Smith's perspective.

I suppose that I should acknowledge that Smith himself didn't apply the IH to public goods, articles, tweets, Netflix shows or homework.  He didn't stand on his own shoulders.  Well... actually... he certainly recognized the importance of replacing Twitter's perspective with his own...

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 

Compare Adam Smith's solution to Noah Smith's solutions...

But as I see it, some kind of concentration is needed. Informational anarchy is always ruled by the Shouting Class, so the only way to curb the Shouters' power is to end the anarchy. Maybe social media platforms themselves will become the new quality filters. Maybe algorithmic blocking will use robots to shut down the Shouters. Maybe people will just stop using Twitter, and stop joining political argument groups on Facebook. Maybe everyone will make their profiles more private, and learn to unfollow people who engage in callout culture. - Noah Smith, The Shouting Class

Noah Smith didn't even mention Adam Smith's solution.  Why is that?

There's nothing inherently wrong with shouting.  The problem is when the crowd doesn't have the easy opportunity to put its money where its mouth is.

It should definitely be easy for people to point and shout "Watch out for that ________ !!!"   But the number of exclamation points that they are willing to use should be given far less credence than the number of their own dollars that they are willing to spend.  Admittedly, if you're walking down the street and somebody points and shouts "Watch out for that piano!!!" then perhaps you shouldn't wait for the shouter to put their money where their mouth is.  But this is a purely technical issue.  In all cases, tying shouts and spending together is the only way to maximize rational choice.

Noah Smith, Ben Southwood and I are planning to go backpacking.  Noah is going to carry everything but all three of us will vote on what to take.  Southwood and I might as well vote/shout for some luxuries.  It's not like we will have to directly pay the price of our decisions.  Our costs will be completely covered by Noah.  He's going to be our beast of burden.

Buchanan thoroughly understood the incredible importance of creating a solid bridge between choice and cost...

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Historically, legislative bodies, through which the preferences of individual citizens are most directly represented, have exercised more control over revenue or tax decisions than they have over expenditure decisions. In part this asymmetry has its origin in the development of democratic political institutions out of monarchial institutions. Representative bodies, parliaments, first achieved the power to restrict the tax-gathering privileges of the kings. Before taxes could be levied on the people, representative bodies were given the right to grant their approval. No consideration was given to the spending side of the account because public expenses were assumed to benefit primarily the royal court, at least in the early days of constitutional monarchy. Taxes were viewed as necessary charges on the people, but they were not really conceived as any part of an "exchange" process from which the people secured public benefits. It was out of this conception of the fiscal process that both the modern institutions and the modern theory of public finance developed. - James Buchanan The Bridge Between Tax and Expenditure in the Fiscal Decision Process

The emerging of modern democratic states dramatically modified the setting for the fiscal process, but only recently has attention been paid to the necessity of revising age-old norms. As royal courts came to be replaced by executives, and monarchies by republics, taxes continued to be viewed as necessary to sustain the expenses of “government,” with the burden of these taxes to be minimized to the maximum extent possible. Surprisingly little recognition has been given, even yet, to the idea that taxes must, in the final analysis, be considered as the “costs” of those public goods and services which provide benefits to the same people who pay taxes. - James Buchanan, The Bridge Between Tax and Expenditure in the Fiscal Decision Process

A second analytical principle emerged more than a century after Smith’s Wealth of Nations, and it was not explicitly incorporated into the norms for policy. But it may have been implicitly recognized. It is important because it reinforces the classical principles from a different and essentially political or public-choice perspective. In 1896, Knut Wicksell noted that an individual could make an informed, rational assessment of various proposals for public expenditure only if he were confronted with a tax bill at the same time. Moreover, to facilitate such comparison, Wicksell suggested that the total costs of any proposed expenditure program should be apportioned among the individual members of the political community. These were among the institutional features that he thought necessary to make reasonably efficient fiscal decisions in a democracy. Effective democratic government requires institutional arrangements that force citizens to take account of the costs of government as well as the benefits, and to do so simultaneously. The Wicksellian emphasis was on making political decisions more efficient, on ensuring that costs be properly weighed against benefits. A norm of balancing the fiscal decision or choice process, if not a formal balancing of the budget, emerges directly from the Wicksellian analysis. - James Buchanan, Richard Wagner Democracy in Deficit: The Political Legacy of Lord Keynes

The necessity of relating decisions on public expenditures explicitly to decisions on taxes through the political process, and of assigning a definite revenue category to each single expenditure was stressed by Wicksell in his classic statement of the individualistic theory of public finance (see Knut Wicksell, "A New Principle of Just Taxation," in Classics in the Theory of P'ublic Finance, ed. 1R. A. Musgrave and A. T. Peacock [London: International Economic Association, 1958], pp. 72-118, but esp. p. 94. The original Wicksell work is Finanztileorietisclie Uizlersuchlungen [Jena: Gustav Fischer, 1896]). - James Buchanan, The Economics of Earmarked Taxes

The most sophisticated contribution was made by Knut Wicksell in 1896.  He explicitly identified the fundamental methodological error in the then-orthodox approach, and he combined positive criticism with normative suggestions for reforms.  Wicksell recognized the necessity of bridging the two sides of the fiscal account, and he noted the indeterminacy of any proposed principles that were limited to tax-side considerations. - James Buchanan, Public Finance and Public Choice

In addition to the uncertainty factor, which can be readily understood to limit the range of rational calculus, the single individual loses the sense of decision-making responsibility that is inherent in private choice. Secure in the knowledge that, regardless of his own action, social or collective decisions affecting him will be made, the individual is offered a greater opportunity either to abstain altogether from making a positive choice or to choose without having considered the alternatives carefully. In a real sense, private action forces the individual to exercise his freedom by making choices compulsory. These choices will not be made for him. The consumer who refrains from entering the market place will starve unless he hires a professional shopper. Moreover, once having been forced to make choices, he is likely to be somewhat more rational in evaluating the alternatives before him. - Gordon Tullock, James Buchanan, Individuality Rationality in Social Choice

The introduction of the debt alternative to taxation makes the bridge between cost and benefit more difficult for the individual to construct. - James Buchanan, "Fiscal Policy" and Fiscal Choice

Institutionally, earmarking provides a means of compartmentalizing fiscal decisions.  The individual citizen, as voter-taxpayer-beneficiary, is enabled to participate, separately, either directly or through his legislative representative, in the several public expenditure decisions that may arise. He may, through this device, "vote" independently on the funds to be devoted to schools, to sanitation, and so on, given the specified revenue sources. Only in this manner can he make "private" choices on the basis of some reasonably accurate comparison of the costs and the benefits of the specific public services, one at the time.  By contrast, general-fund budgeting, or non-earmarking, allows the citizen to "vote" only on the aggregate outlay for the predetermined "bundles" of public services, as this choice is presented to him by the budgetary authorities. - James Buchanan, The Economics of Earmarked Taxes

Conceptually, an "ideal" institutional arrangement might be that of allowing individuals to "pay for" governmental goods and services in a manner analogous to that which they have found most convenient for financing consumer durables. The quarterly payments of tax on declarations of income above or outside withholding probably tend, on balance, to promote "logical" response to the income tax structure. It is the absence of any conscious sense of transfer, the absence of any monthly or quarterly bill, that represents the questionable feature of withholding, and one that may tend to create a Puviani-type illusion.  - James Buchanan, Public Finance in Democratic Process: Fiscal Institutions and Individual Choice

Only one of these questions seems relatively easy to answer. If the individual can make separate fiscal choices for each public-goods program, which a structure of earmarked taxes conceptually allows him to do, directly or indirectly, he is informed as to the alternatives that he confronts, at least to the extent that the payment institutions allow, and subject, of course, to all of the qualifications noted in previous analysis. The uncertainty that he faces is clearly less than that which is present in the comparable decision on a “bundle” of public goods or services, with the mix among the separate components in the bundle to be determined in a separate decision process or through the auspices of a delegated budget-making authority. If this mix is not announced in advance to the voter-taxpayer, he must try to predict the outcome of another decision process, in which he may or may not participate, a process that need not exist at all in the more straightforward earmarking model where all revenue sources are specifically dedicated. - James Buchanan, Public Finance in Democratic Process: Fiscal Institutions and Individual Choice

In a balanced-budget context, a decision to spend publicly implies a decision to tax, and a decision to tax implies a decision to spend. Only if the actual institutions of fiscal choice are organized in such a way that this basic truism is reflected in the alternatives confronting the individual participant can these uncertainties be minimized. Much of the modern criticism of the United States Congress is directed at its failure to allow simultaneous consideration of expenditure and tax decisions. - James Buchanan, The Bridge Between Tax and Expenditure in the Fiscal Decision Process

Nevertheless, the fact remains that such choice embodies a direct correspondence between private cost and private benefit, the characteristic that is stressed here, and the one that is absent, in varying degree, from individual choice in collective decision processes.  This central feature of market choice, rather than any implied assumption of rationality, makes individual behavior in organized markets useful as a benchmark from which we begin to assess collective choice institutions. - James Buchanan, Public Finance in Democratic Process

Similar behavior can be predicted on the spending side of the account. If the individual citizen were asked, in mid-1963, his opinions on proposed expansions in the federal space program, he could, roughly and in some fashion, measure benefits in terms of sport, national prestige, adventure, technological fallout, etc. But what were the costs? He would not have translated the costs of the space program into increased taxes. And for a very simple reason: the individual knew that he would not have to pay such taxes. The predictable result of a democratic choice process is the generation of budget deficits when borrowing is available as an alternative to taxation unless deficit creation is not somehow restrained by constitutional limitations. - James Buchanan, Public Finance in Democratic Process: Fiscal Institutions and Individual Choice

The Clay committee has at last discovered the fiscal version of Aladdin's wonderful lamp, and that henceforth all governmental “good things” such as super-super highways may come to us without our having to bear either the burden of taxation of the sufferings of conscience over increasing national debt. - James Buchanan, Painless Pavements: Highways by High Finance

Good things come at a cost, whether they be provided by the government or the grocery store. - James Buchanan, Painless Pavements: Highways by High Finance

The apparent splitting of the fiscal process into two parts was shown to produce potential gaps between preferred spending on public goods and services and preferred levels of taxation. Until and unless these gaps are eliminated, budget deficits tend to emerge from democratic decision processes. - James Buchanan, "Fiscal Policy" and Fiscal Choice

Under the assumption that public output enters positively into the utility functions of citizens, the expenditure by itself will secure support for the politician. The taxes, however, will reduce the disposable income of citizens, thereby affecting them negatively and reducing support for the politician. In a plurality electoral system, for given preferences and fixed tax institutions, the budget will be expanded so long as a majority would prefer the public service to the private goods they would have to sacrifice via taxation. - James Buchanan, Richard Wagner Democracy in Deficit: The Political Legacy of Lord Keynes

The restoration of the balanced-budget rule will serve only to allow for a somewhat more conscious and careful weighting of benefits and costs. The rule will have the effect of bringing the real costs of public outlays to the awareness of decision makers; it will tend to dispel the illusory “something for nothing” aspects of fiscal choice. - James Buchanan, Richard Wagner Democracy in Deficit: The Political Legacy of Lord Keynes

Randall Bartlett makes the same point, only he uses a visual rather than an auditory metaphor. In his framework, some tax forms have higher visibility than others. Starting with perfect visibility, taxes can be arrayed in descending order of visibility. In both his analysis and ours, changes in the institutional format for extracting revenues will influence citizen perceptions of the cost of government. See Randall Bartlett, Economic Foundations of Political Power (New York: Free Press, 1973), pp. 92-95. - James Buchanan, Richard Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes

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Fully appreciating the necessity of bridging the gap between choice and cost depends entirely on fully appreciating the significance of scarcity.  Society's limited resources have to be divided between its unlimited wants.  In order to maximize the rationality, relevance, efficiency, benefit, value of the division, fiscal illusion must be minimized.  The only way to minimize fiscal illusion is for people to personally pay, and directly feel, the full and true cost of their choices.  Then, and only then, will society's limited resources be efficiently allocated. 

If people want a war, whether on drugs, terror or poverty, then they should definitely have the option to shout for these things... but they should not have the opportunity to pay for these things by reaching into other people's pockets.  They should only have the opportunity to reach into their own pockets.  Then, and only then, when they directly confront, consider, compare and calculate the (opportunity) costs of their own money, can they possibly make rational decisions regarding the true relevance/importance/necessity/urgency of the war.  When people only have the opportunity to reach into their own pockets then, and only then, will society's limited resources be optimally divided.  

A few years ago Robert Kuttner wonderfully wrote this article... Karl Polanyi Explains It All...

Yet Marx, for all of his stubbornly apt insights about capitalism, is an unreliable guide to its remediation. Polanyi, with the benefit of nearly a century’s worth more evidence, has a surer sense of how markets interact with society. 

Polanyi stood on Marx's shoulders.  Buchanan stood on Smith's shoulders.  Whose shoulders does Southwood want to stand on?  Whose shoulders does the ASI want to stand on?

My belief is that I'm correctly interpreting and understanding Smith and Buchanan.  But it's entirely possible that my belief is mistaken.  For example, Peter Boettke has studied Smith and Buchanan far more than I have.  And we certainly agree on some fundamentals...

I wonder how much progress could be made in political economy if the best and the brightest among economists, such as Raj Chetty, would take seriously the admonition of Hayek, Buchanan, and Elinor Ostrom that the assumptions of omniscience and benevolence must be rejected if we are going to make progress and develop a robust theory of political economy. - Peter Boettke, AEA Richard T. Ely Lecture --- Raj Chetty, "Behavioral Economics and Public Policy"

Yet, he's never argued that Netflix should be a market.  He's never endeavored to explain why the IH, rather than the VH, should determine the order (relative importance) of Netflix's content.  Boettke and I both agree that it's beneficial that Netflix is in a market, but he doesn't seem to perceive the benefit of Netflix being a market.  However, it's not like he has argued against Netflix being a market.  He has not argued that it would be detrimental for around 100 million subscribers to divide their limited fees among the unlimited shows and movies on Netflix.

How much would the content change if 100 million people could decide for themselves how their money is spent?  The amount of money spent would be exactly the same.  But it would be divided differently among the content.  How different would the division be?

A. The VH's division
B. The IH's division
C. The difference between A and B

Would Boettke seriously argue that C would be insignificant?  If he did, then wouldn't this entirely undermine his argument against socialism?  If planners can adequately figure out the movie preferences of 100 million people... then what, exactly, prevents planners from adequately figuring out the food preferences of 1 billion people?

Buchanan stood on Smith's shoulders by arguing that the IH should extend to the public sector.  I endeavor to stand on Buchanan's shoulders by arguing that the IH should also extend to Netflix, the ASI, the Roosevelt Institute, the Cato Institute, the Los Angeles Times, The New York Times and countless other organizations that should be, but are not, markets.  If Boettke is sure that I'm barking up the wrong tree, then of course I'd want him to share his perspective.  Same thing if he's sure that I'm barking up the right tree.  Same thing if he's unsure.

Boettke and I both agree that...

1. society's limited resources have to be divided among its unlimited wants
2. the omniscience assumption has to be destroyed
3. people's valuations of things must be known

When I assemble these three puzzle pieces they reveal a megareal world with markets everywhere.  Boettke has the same three pieces... so how could they reveal a different world?  Is he assembling the pieces differently?  Does he have additional puzzle pieces?

In this post I've endeavored to share, and elaborate on, the puzzle pieces that are entirely absent from Southwood's critique of public choice.  His critique doesn't reflect the relevance of the fact that Buchanan's public choice is solidly founded on the reality of scarcity.  As a result of Southwood's oversight, he is under the impression that "public choice doesn’t explain much at all."  Actually, public choice explains a lot.  But in order to fully appreciate the immensity of what public choice explains, it's entirely necessary to fully grasp the most elementary economic problem.  You first have to know and understand what the problem is before you can effectively evaluate a potential solution.

But it's entirely possible that my interpretation and understanding is incorrect.  My understanding of Smith has certainly influenced my understanding of Buchanan.  So I encourage Southwood to contact Boettke and ask for his perspective on the topic.  Ideally we should all put our heads together and figure out what markets are good for.

From my perspective, there's more than enough evidence that proves what markets are good for.  But since there's so much disagreement about the topic, it seems clear that we need more evidence.  The ASI becoming a market would provide additional evidence to help us figure out what markets are good for.