Monday, November 27, 2017

The Demand For David Friedman

My comment on Keynes on Newton--and some ideas for fantasy by David Friedman

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Have you read Adam Smith's book of essays? I was surprised that he wrote a 100 page essay on the history of astronomy. Especially since he is largely responsible for the idea of the division of labor. I think it's possible for labor to be overly divided. Take the handicap principle for example. Nowhere in the Wikipedia entry does it mention the fact that spending money is a costly signal. Smith also shared some enjoyable thoughts on music. Basically the main theme is on how things are ordered.

In the book's intro is this interesting bit...

The change in his habits which his removal to Edinburgh produced, was not equally favourable to his literary pursuits. The duties of his office, though they required but little exertion of thought, were yet sufficient to waste his spirits and to dissipate his attention; and now that his career is closed, it is impossible to reflect on the time they consumed, without lamenting, that it had not been employed in labours more profitable to the world, and more equal to his mind. - Dugald Stewart, An Account of the Life and Writings of Adam Smith

Imagine seeing Smith or Newton waiting in a line. You'd think, "Yikes! The opportunity cost is too high!" Or, "Something is really preventing the Invisible Hand from doing its job!"

While I'm here, I hope you don't mind if I share some ideas that I'd appreciate your thoughts on.

1. What if everybody had to do 100 push-ups before they purchased anything? The cost of trade would increase, so the quantity of trade would decrease, and so would the rate of progress. The reverse is true if the earliest native Americans had used horses. Horses would have reduced the cost of allocating resources, trading would have been less costly, the quantity of trade would have increased, and more progress would have been made.

2. Becoming bipedal reduced our ancestors' allocation costs. This increased the frequency of allocation, but it also meant having to more frequently solve allocation problems, which meant greater selection pressure on intelligence. The invention of bags and using other animals to carry things made the allocation problems even harder. Nowadays the allocation problems are even harder still, but good or bad allocation decisions rarely impact our reproduction. Therefore, we've reached peak intelligence.

3. Markets with prices work much better than socialism because prices transmit at least some information about people’s perception of importance. This would mean that the efficiency of allocation depends on the quantity of information about importance. Prices can never be optimal because they almost always fail to transmit all the information about importance. The economic term for the hidden information is of course “consumer surplus”. In theory, pragma-socialism would be the optimal economic system because it would entirely eliminate consumer surplus.

Pragma-socialism

What if the tax rate was 100%... but you could choose where your taxes go?  I refer to this as "pragma-socialism".  The Suburbanist asked me what would happen at airports when there were more people than seats on planes.  Here's my answer...

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In theory, with pragma-socialism, construction would be much faster than it currently is. The supply would far more quickly adapt to demand because it would far more correctly adapt to demand. There’s no unnecessary red tape. There are no unnecessary hoops to jump through. There’s no politics. There are no workers getting paid regardless of how much or how little work they do. Countless inefficiencies have been eliminated as the result of the total permeation of markets. When markets are everywhere there is no place for inefficiency to hide.

Even though construction would be much faster it still wouldn’t happen overnight. So when the demand for plane seats is greater than the supply, then perhaps the seats will be allocated based on priority.

If you think cancer research is important then you’d give more of your taxes to cancer researchers. You would empower them to compete more of society’s limited resources away from other uses.

So imagine a cancer researcher standing in line to board a plane. There are more people in line than seats on the plane. By giving more of your taxes to the cancer researcher… you would be essentially helping him move closer to the front of the line.

Same thing if a cancer researcher is waiting in line to receive a quantum computer. His place in line would be determined by the amount of tax dollars that you and other people have given him. Would he be in front of, or behind, an analyst from the DOD?

When people are driving and they hear a siren and/or see flashing lights… they pull over to the side of the road. This is because they know and recognize that emergency vehicles have the right-of-way (ROW). They accept that the emergency vehicles should reach their destination as quickly as possible.

You give more or your taxes to cancer researchers because you want them to have the ROW. You want them to reach their destination as quickly as possible. You want cancer to be cured sooner rather than later. If drivers concede the ROW to an ambulance trying to save one person, then they should definitely concede the ROW to a vehicle transporting somebody trying to save countless lives.

I imagine driverless vehicles automatically conceding the ROW to higher priority vehicles. But I’m sure that the highest priority people would probably all have their own helicopters and planes.

Markets with prices work much better than socialism because prices transmit at least some information about people’s perception of importance. This would mean that the efficiency of allocation depends on the accuracy of information about importance. Prices can never be optimal because they almost always fail to transmit all the information about importance. The economic term for the hidden information is of course “consumer surplus”.

The idea of consumer surplus should be obviously problematic when it’s applied to cancer research. You got a really great “deal” on cancer research because the amount that you spent on it was a lot less than your perception of its importance. Well no, you essentially shot yourself in the foot. You’re going to live in a world that has less cancer research than you truly want.

If we created a market in the public sector then it would be impossible for taxpayers to get “deals”. There’s no point in spending less than your true valuation on cancer research because it’s not like you can take the money that you “saved” and spend it on goods that only you can benefit from (ie a television). There won’t be any consumer surplus in the public sector so resources will be far more efficiently allocated than in the private sector. Taxpayers will appreciate the difference so they’ll want to spend more and more of their money in the public sector. The private sector will shrink and shrink until it’s completely gone. We’ll have arrived at pragma-socialism because millions and millions of taxpayers decided that the public sector market is far more efficient than the private sector market.

But again, this is simply my best guess. The important thing is that, in a pragmatarian system, each and every taxpayer will be able to decide for themselves which market (private sector or public sector) is more efficient. So I don’t have to necessarily worry about how pragma-socialism would work. It is an interesting challenge though.