Dear Jag Bhalla

If you search ScientificAmerican.com for "invisible hand" you could learn that there's some guy named Jag Bhalla who is critical of the Invisible Hand.  I found his website and sent him an e-mail, which was when gmail immediately notified me that his e-mail address was broken.  So here we are.

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Karl Popper was so cool...

If I am standing quietly, without making any movement, then (according to the physiologists) my muscles are constantly at work, contracting and relaxing in an almost random fashion, but controlled, without my being aware of it, by error-elimination so that every little deviation from my posture is almost at once corrected. So I am kept standing, quietly, by more or less the same method by which an automatic pilot keeps an aircraft steadily on its course. — Karl Popper, Of Clouds and Clocks

But he wasn't nearly as cool as Adam 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

Contrary to popular belief, the Invisible Hand is not about self-interest, it's about people using their money to communicate what their interests are.  The supply is regulated by the spending signals of countless consumers.

In Friedrich Hayek's 1945 Nobel essay he reinforced the idea that markets are all about communication...

We must look at the price system as such a mechanism for communicating information if we want to understand its real function — a function which, of course, it fulfils less perfectly as prices grow more rigid. (Even when quoted prices have become quite rigid, however, the forces which would operate through changes in price still operate to a considerable extent through changes in the other terms of the contract.) The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement. — Friedrich Hayek, The Use of Knowledge in Society

Command economies fail because, in the absence of prices, they are unable to utilize all the relevant and necessary knowledge that is dispersed among all the consumers and producers.

In 1954 the Nobel economist Paul Samuelson critiqued Hayek's essay by pointing out that, because of the free-rider problem, prices don't work so well for public goods...

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

Samuelson's basic assumption was that the optimal supply of all goods is entirely dependent on honest signals.  Again, it's about using money to communicate your interests.  The problem with a good like Linux is that you can benefit from it without having to pay for it.  Let's say that your true valuation of Linux is $40 bucks.  If you only donate $20 dollars to it, you still can fully benefit from it, but you can take the $20 bucks that you saved and use it to buy a nice steak.  The amount that you spent on Linux would be a false signal because it would be less than your true valuation of it.  On its own, your false signal isn't so much of a problem... after all... you only cheated Linux out of $20 bucks.  The issue is when everybody else does the same thing.  When everybody's contribution to Linux is a lot less than their true valuation of it, then naturally it's going to be a lot lower quality than everybody truly wants it to be.  Also, there's going to be far fewer freely available alternatives to Linux than everybody truly wants.

To be clear, the only reason that consumers have the incentive to be dishonest about their true valuation of Linux (a public good) is because they have the option to spend their money on steak (a private good) instead.  If this option was eliminated, then so too would be the incentive to be dishonest.  This was the point that the Nobel economist James Buchanan made in 1963...

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

I'll hedge my bets by sharing how other people have explained the idea of individual earmarking...

One strand of this approach-initiated in Buchanan’s (1963) seminal paper-argues that the voter who might have approved a tax increase if it were earmarked for, say, environmental protection would oppose it under general fund financing because he or she may expect the increment to be allocated to an unfavored expenditure such as defense. Earmarked taxation then permits a more satisfactory expression of individual preferences. — Ranjit S. Teja, The Case for Earmarked Taxes

Individuals who have particularly negative feelings concerning a publicly provided good (e.g. Quakers on military expenditures, Prolifers on publicly funded abortions) have also at times suggested that they should be allowed to dissent by earmarking their taxes toward other public uses. — Marc Bilodeau, Tax-earmarking and separate school financing

Imagine if Netflix gave subscribers the opportunity to use their monthly fees to help rank the content.  Would subscribers have any incentive to be dishonest? Nope. This is simply because they would not have the option to spend their fees on things like food or clothes. Subscribers would not have the option to spend their fees outside of Netflix. Therefore, how subscribers earmarked their fees would honestly communicate their true valuations of the content.  The result would be the optimal supply of content.

The most relevant economic discussion looks basically like this...

Smith: Consumers should have the freedom to spend their money to help rank goods.
Hayek: It's true, the market is the only way to utilize all the dispersed knowledge.
Samuelson: While the market does work for private goods, it fails for public goods.
Buchanan: Actually, earmarking would allow the market to also work for public goods.

So what do you think?  Have I successfully changed your mind about the Invisible Hand?  Have I efficiently eliminated one of the biggest errors that you live by?  Have I fulfilled my moral obligation to economically educate and enlighten you?

To be clear, my own beliefs in the Invisible Hand can potentially be falsified.  If Netflix gives the Invisible Hand the opportunity to regulate the content, and it didn't noticeably improve, then this would falsify my belief in the Invisible Hand.

Science is, or should be, the most fertile common ground.

Unfortunately I doubt Netflix will conduct this experiment any time soon.  Here's a potential experiment that's much more accessible.  Imagine if a bunch of people rank the following books...

The Origin Of Species
Harry Potter and the Sorcerer’s Stone
The Handmaid’s Tale
A Tale of Two Cities
50 Shades of Grey
Principia
The Bible
War and Peace
12 Rules For Life
A Theory of Justice
The Cat in the Hat
The Wealth of Nations
The Hunger Games

First the participants would vote for all the books that match their preferences.  Then they would spend their own money to quantify just how closely these books match their preferences.

To be clear, the participants would not be buying the books.  They would simply have the opportunity to spend any amount of their own money in order to reveal the size of their love for each book.  All the money they spent would help crowdfund this experiment.

How differently would voting and spending rank the books?  My hypothesis is that voting would elevate the trash while spending would elevate the treasure.  If, however, voting ranked the Wealth of Nations higher than spending did, then this would falsify my hypothesis.

The relative effectiveness of the Invisible Hand can easily, relatively speaking, be compared to the alternative ranking systems.  The fact that these tests have not been conducted is the biggest error ever.  Let's combine our forces and eliminate this error.  Together we can demolish the massively detrimental disparity between where the world is, and where it should be.

Which Economic Nutshell Is Better?

It seems like I'm forever endeavoring to stuff economics into a better nutshell.  Here are two recent nutshells... the first is bigger and more technical while the second is smaller and more accessible.  Which one is better?

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Nutshell #1 (shared here)

Here's Adam Smith's Invisible Hand...

It is thus that the private interests and passions of individuals naturally dispose them to turn their stocks towards the employments which in ordinary cases are most advantageous to the society. But if from this natural preference they should turn too much of it towards those employments, the fall of profit in them and the rise of it in all others immediately dispose them to alter this faulty distribution. Without any intervention of law, therefore, the private interests and passions of men naturally lead them to divide and distribute the stock of every society among all the different employments carried on in it as nearly as possible in the proportion which is most agreeable to the interest of the whole society.  — Adam Smith, Wealth of Nations

Contrary to popular belief, it's not about self-interest, it's about people using their money to communicate what their interests are.  The supply is regulated by the spending signals of countless consumers. 

In Friedrich Hayek's 1945 Nobel essay he reinforced the idea that markets are all about communication...

We must look at the price system as such a mechanism for communicating information if we want to understand its real function — a function which, of course, it fulfils less perfectly as prices grow more rigid. (Even when quoted prices have become quite rigid, however, the forces which would operate through changes in price still operate to a considerable extent through changes in the other terms of the contract.) The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement. — Friedrich Hayek, The Use of Knowledge in Society

Hayek argued that command economies fail because, in the absence of prices, they are unable to utilize all the relevant and necessary knowledge that is dispersed among all the consumers and producers.

In 1954 the Nobel economist Paul Samuelson, who was a liberal, critiqued Hayek's essay by pointing out that, because of the free-rider problem, prices don't work so well for public goods...

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

Samuelson's basic assumption was that the optimal supply of all goods is entirely dependent on honest signals.  The problem with a good like Linux is that you can benefit from it without having to pay for it.  Let's say that your true valuation of Linux is $40 bucks.  If you only donate $20 dollars to it, you still can fully benefit from it, but you can take the $20 bucks that you saved and use it to buy a nice steak.  The amount you spent on Linux would be a false signal because it would be less than your true valuation of it.  Your false signal on its own isn't so much of a problem... after all... you only cheated Linux out of $20 bucks.  The issue is when everybody else does the same thing.  When everybody's contribution to Linux is a lot less than their true valuation of it, then naturally it's going to be a lot lower quality than everybody truly wants it to be.  Also, there's going to be far fewer freely available alternatives to Linux than everybody truly wants. 

To be clear, the only reason that consumers have the incentive to be dishonest about their true valuation of Linux (a public good) is because they have the option to spend their money on steak (a private good) instead.  If this option was eliminated, then so too would be the incentive to be dishonest.  This was the point that the Nobel economist James Buchanan made in 1963...

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 me hedge my bets by sharing how other people have explained the idea of individual earmarking...

One strand of this approach-initiated in Buchanan’s (1963) seminal paper-argues that the voter who might have approved a tax increase if it were earmarked for, say, environmental protection would oppose it under general fund financing because he or she may expect the increment to be allocated to an unfavored expenditure such as defense. Earmarked taxation then permits a more satisfactory expression of individual preferences. — Ranjit S. Teja, The Case for Earmarked Taxes

Individuals who have particularly negative feelings concerning a publicly provided good (e.g. Quakers on military expenditures, Prolifers on publicly funded abortions) have also at times suggested that they should be allowed to dissent by earmarking their taxes toward other public uses. — Marc Bilodeau, Tax-earmarking and separate school financing

Imagine if Netflix gave subscribers the opportunity to use their monthly fees to help rank the content.  Would subscribers have any incentive to be dishonest? Nope. This is simply because they would not have the option to spend their fees on things like food or clothes. Subscribers would not have the option to spend their fees outside of Netflix. Therefore, how subscribers earmarked their fees would honestly communicate their true valuations of the content.  The result would be the optimal supply of content. 

The expert economic discussion looks basically like this...

Adam Smith (1776): Consumers should have the freedom to spend their money to help rank goods.
Friedrich Hayek (1945): It's true, the market is the only way to utilize all the dispersed knowledge.
Paul Samuelson (1954): While the market does work for private goods, it fails for public goods.
James Buchanan (1963): Actually, earmarking would allow the market to also work for public goods.

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Nutshell #2 (shared here)


Right now, because of democracy, you assume that congress makes decisions that take my well-being into consideration. My well-being? In the private sector I have to spend so much time and energy going around using my money to inform producers what works for my well-being. I shop and shop and shop. For example, I go to the supermarket and buy some artichokes. In doing so I essentially tell Frank the farmer, "Hey buddy! Good job guy! You correctly guessed that my well-being depends on artichokes! Thanks! Good lookin' out! Here's some money! Keep up the good work!" His behavior benefits my well-being, so I have to use my cash to positively reinforce his beneficial behavior.

Now here you are with the assumption that congress somehow knows what works for my well-being despite the fact that I've never once in my life shopped in the public sector. I've never once decided to give any of my tax dollars to the EPA, NASA, the DMV or any other organization in the public sector. I've never once used my tax dollars to positively reinforce behavior that benefits my well-being. Yet, despite the fact that I've never once shopped in the public sector, congress knows what works for my well-being? Woah. This boggles my mind. It blows my mind. It puts my mind into a blender. Your assumption bears repeating with emphasis... congress knows what works for my well-being despite the fact that I've never once in my life shopped in the public sector. Your assumption is really that shopping is entirely unnecessary. If you truly believe that shopping is entirely unnecessary... then please... don't hide your insight under a bushel. Start a thread here, there and everywhere and say "Hey folks! Shopping is entirely unnecessary! It's a massive waste of everybody's limited time and energy to use our money to communicate what works for our well-being! All we need to do is infrequently vote! And occasionally write our representatives!"

Every democracy has been bundled together with a market. The market, not the democracy, is why these societies have been relatively successful. Societies always work better when we better understand each other's needs... and markets are far better at revealing our needs than democracies are. Our needs aren't simple things... they are incredible complex and dynamic. The idea that infrequently voting and occasionally writing our representatives can adequately reveal our needs is the most harmful idea that has ever existed. But it's not like I can show you all the additional prosperity we would currently be enjoying if it weren't for democracy.

However I can show you the difference between voting and spending. All we need to do is use voting and donating to rank prominent skeptics. Then you'll see the difference between voting and spending and decide for yourself which ranking better reflects your own need for skeptics.

Public Finance In A Nutshell

Here's a reply I just posted on Medium...

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“This sounds like you’ve read a lot of mises.org…”

Evidently you haven’t read mises.org or James Buchanan. Which means that you haven’t studied austrian economics or public finance.

The Nobel economist Paul Samuelson was not an austrian economist. He was a very orthodox economist who studied public finance and other subjects. Here’s what he wrote in a paper that was published in 1954…

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 A. Samuelson, The Pure Theory of Public Expenditure

The premise here is that the optimal supply of public goods depends on people’s true signals. The supply of defense won’t be optimal if you pretend that it is less important to you than it truly is. However, the only reason that you’d have an incentive to be dishonest is if you had the option to spend your money on private goods rather than on public goods. If this option was eliminated, then your incentive to be dishonest would also be eliminated…

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

Imagine if Netflix gave you the opportunity to divide your subscription dollars however you wanted among all your favorite content. Would you have any incentive to be dishonest? Nope. This is simply because you wouldn’t have the option to spend your subscription dollars on things like food or clothes. Therefore, how you divided your limited dollars would accurately reflect your true preferences.

Paul Samuelson and James Buchanan were both Nobel economists. Samuelson was a liberal economist while Buchanan was a libertarian economist. Despite their ideological differences, they both agreed that the optimal supply of public goods depends on people’s true preferences for them.

Just like it would suboptimal for the private sector to supply meat if everybody was a vegetarian… it would be suboptimal for the public sector to supply war if everybody was a pacifist.

There you go, public finance in a nutshell. Any questions?

Public Finance For Andy Seal

Comment on: The Controversy over Democracy in Chains by Andy Seal

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In 1954 Paul Samuelson wrote "The Pure Theory of Public Expenditure".  He recognized the inherent problem with public goods.  You can benefit from national defense without paying for it, so you might as well pretend to have less interest in it than you truly do (false signal).  Therefore, taxation should be compulsory.  But then Samuelson simply assumed that planners would do an adequate job of correctly guessing your true valuation of defense.  He assumed omniscience.

The reason that I haven't purchased MacLean's book is because everything that I've read about it leads me to believe that she thinks that the other 1954 thing... "Brown v. Board of Education" was somehow more relevant to Buchanan and the formation of public choice than Samuelson's paper.

You've read MacLean's book... did she even mention Samuelson's paper?  Did she mention anything about the fact that the biggest economic defense of our current system of government is based on the assumption that planners are omniscient?

Buchanan had absolutely no issue with Samuelson's view on the inherent problem with public goods and the need for compulsory taxation.  But when it came to his assumption of omniscience, Buchanan had a very big issue.

In 1963 Buchanan wrote "The Economics of Earmarked Taxes".  He argued that taxpayer earmarking would eliminate the incentive to give false signals.  Since you are paying taxes anyways, if you were given the opportunity to earmark your taxes, then the amount of your tax dollars that you earmarked to defense would accurately reflect your valuation of defense.  Say that your valuation of national defense is $1000 of your tax dollars but you only earmark $100 tax dollars to national defense.  It doesn't mean that you'll be able to spend the difference on private goods (ie clothes, food). It means that you'll have $900 tax dollars to earmark to other public goods (ie education, healthcare)... which you value less than national defense. Therefore, there's absolutely no incentive to give a false signal.

MacLean is correct that Buchanan's work is anti-democratic.  Unfortunately, as a result of her economic ignorance, she thinks that his work is inspired by racism and/or the ultra-wealthy.  No.  Seriously?  No.  His work is inspired by his very serious concern about the assumption of omniscience.  If this absurd assumption is abolished, then the conclusion really can't be direct democracy.  No economist in their right mind is going to argue for voting on the amount of money to spend on defense.  Because if that was sane, then we might as well vote on the amount of money to spend on milk.  Except, if voting is used to allocate all resources, then money itself would be pointless.

Buchanan is our Goliath.  MacLean is not your David.  But at least she tried.  If she hadn’t, it’s doubtful that you would have written anything about Buchanan.

Evonomics

Why are echo chambers problematic? Because they prevent us from facing views dissimilar to ours. As a result, we could be led to take falsehoods for truths, become more extreme in our views, and regard others as enemies or adversaries. Part of the value of the right of free speech is that it creates an environment in which our own views are constantly challenged. - Nicolás Maloberti, Echo Chambers and the Prevalence of Motivated Reasoning

Evonomics is designed to discourage engagement in non-lefty ideas and thinkers. https://t.co/3Rwz3w70Ri

— Joe Norman (@normonics) May 18, 2017

Avoiding facts inconvenient to our worldview isn’t just some passive, unconscious habit we engage in. We do it because we find these facts to be genuinely unpleasant. - Brian Resnick, “Motivated ignorance” is ruining our political discourse 

The whole strength and value, then, of human judgment, depending on the one property, that it can be set right when it is wrong, reliance can be placed on it only when the means of setting it right are kept constantly at hand. In the case of any person whose judgment is really deserving of confidence, how has it become so? Because he has kept his mind open to criticism of his opinions and conduct. Because it has been his practice to listen to all that could be said against him; to profit by as much of it as was just, and expound to himself, and upon occasion to others, the fallacy of what was fallacious. Because he has felt, that the only way in which a human being can make some approach to knowing the whole of a subject, is by hearing what can be said about it by persons of every variety of opinion, and studying all modes in which it can be looked at by every character of mind. No wise man ever acquired his wisdom in any mode but this; nor is it in the nature of human intellect to become wise in any other manner. The steady habit of correcting and completing his own opinion by collating it with those of others, so far from causing doubt and hesitation in carrying it into practice, is the only stable foundation for a just reliance on it: for, being cognisant of all that can, at least obviously, be said against him, and having taken up his position against all gainsayers—knowing that he has sought for objections and difficulties, instead of avoiding them, and has shut out no light which can be thrown upon the subject from any quarter—he has a right to think his judgment better than that of any person, or any multitude, who have not gone through a similar process. - John Stuart Mill, On Liberty

Why isn't Evonomics a market?  Why aren't donors encouraged to use their dollars to grade the relevance of the articles?

Compare Evonomics to this blog written by 4th graders... Classtopia.  In both cases...

1. all the products are freely available
2. the homepage has a list of products sorted by their publication date

However, unlike Evonomics... Classtopia also has a list of products sorted by their relevance.

The relevance of Classtopia's products is determined by a market.  The market is currently pretty small. It consists of the students, their teacher and myself. But in theory the market could be as large as everybody in the world.  Everybody could use their money to grade the relevance of Classtopia's (home)work.

So why isn't Evonomics a market?  My theory is that whoever runs the website doesn't quite grasp what markets are good for.  If my theory is correct, then we should be skeptical of Evonomics' plan to become "The Next Evolution of Economics".

The point and purpose of markets is a topic that generates considerable disagreement.   In order for an examination of the topic to be productive, it must be built on common ground.  Here's something that we should all agree on...

Show Me The Economic Case For Democracy

Nancy MacLean is a liberal professor whose new book, Democracy In Chains, makes the case that James Buchanan's work is anti-democratic.  He's my second favorite economist so I really appreciate the fact that she has given him so much attention.  As far as I know, no other liberal has written a book that is primarily, or even significantly, about Buchanan.

MacLean is 100% correct that Buchanan's work is anti-democratic.  Unfortunately, from what I've read about her book, she doesn't attack, or even acknowledge, his economic arguments against democracy.  This is why I haven't purchased her book.  But then again, I do love the fact that she has helped to direct so much attention to him.  So I probably should purchase her book if for no other reason than to positively reinforce her decision to put a spotlight on Buchanan.  I want the spotlight to be as big and bright as possible!

Even though I'm confident that Buchanan's work is anti-democratic, it's entirely possible that I'm wrong.  Recently Michael Munger published a response to MacLean's book... On the Origins and Goals of Public Choice.  He did not agree with MacLean that Buchanan's work is anti-democratic.  Here's the recent twitter exchange between Munger and myself...

With much appreciation for remarkably fast work of my friends at @IndependentInst , my essay on DEMOCRACY IN CHAINS https://t.co/RnKzdRBuus

— Michael Munger (@mungowitz) June 30, 2017

How central to Buchanan's work is fiscal equivalence (FE)? How compatible are FE and democracy?

— Pragmatarian (@Pragmatarian) June 30, 2017

Buchanan was primarily a contractarian constitutionalist. Now, he preferred democracy. But ANYTHING people agreed was thereby justified.

— Michael Munger (@mungowitz) June 30, 2017

Buchanan preferred democracy?  Let's get historical...


1776...

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

1835...

Again, it may be objected that the poor are never invested with the sole power of making the laws; but I reply, that wherever universal suffrage has been established the majority of the community unquestionably exercises the legislative authority; and if it be proved that the poor always constitute the majority, it may be added, with perfect truth, that in the countries in which they possess the elective franchise they possess the sole power of making laws. But it is certain that in all the nations of the world the greater number has always consisted of those persons who hold no property, or of those whose property is insufficient to exempt them from the necessity of working in order to procure an easy subsistence. Universal suffrage does therefore, in point of fact, invest the poor with the government of society. - Alexis de Tocqueville, Democracy in America

1846...

The last point for consideration is the supposed disposition of the people to interfere with the rights of property.  So essential does it appear to me, to the cause of good government, that the rights of property should be held sacred, that I would agree to deprive those of the elective franchise against whom it could justly be alleged that they consider it their interest to invade them. - David Ricardo, Observations on Parliamentary Reform

1861...

It is also important, that the assembly which votes the taxes, either general or local, should be elected exclusively by those who pay something towards the taxes imposed. Those who pay no taxes, disposing by their votes of other people's money, have every motive to be lavish, and none to economize. As far as money matters are concerned, any power of voting possessed by them is a violation of the fundamental principle of free government; a severance of the power of control, from the interest in its beneficial exercise. It amounts to allowing them to put their hands into other people's pockets, for any purpose which they think fit to call a public one; which in some of the great towns of the United States is known to have produced a scale of local taxation onerous beyond example, and wholly borne by the wealthier classes. That representation should be coextensive with taxation, not stopping short of it, but also not going beyond it, is in accordance with the theory of British institutions. But to reconcile this, as a condition annexed to the representation, with universality, it is essential, as it is on many other accounts desirable, that taxation, in a visible shape, should descend to the poorest class. In this country, and in most others, there is probably no labouring family which does not contribute to the indirect taxes, by the purchase of tea, coffee, sugar, not to mention narcotics or stimulants. But this mode of defraying a share of the public expenses is hardly felt: the payer, unless a person of education and reflection, does not identify his interest with a low scale of public expenditure, as closely as when money for its support is demanded directly from himself; and even supposing him to do so, he would doubtless take care that, however lavish an expenditure he might, by his vote, assist in imposing upon the government, it should not be defrayed by any additional taxes on the articles which he himself consumes. It would be better that a direct tax, in the simple form of a capitation, should be levied on every grown person in the community; or that every such person should be admitted an elector, on allowing himself to be rated extra ordinem to the assessed taxes; or that a small annual payment, rising and falling with the gross expenditure of the country, should be required from every registered elector; that so every one might feel that the money which he assisted in voting was partly his own, and that he was interested in keeping down its amount.  

However this may be, I regard it as required by first principles, that the receipt of parish relief should be a peremptory disqualification for the franchise. He who cannot by his labour suffice for his own support, has no claim to the privilege of helping himself to the money of others. By becoming dependent on the remaining members of the community for actual subsistence, he abdicates his claim to equal rights with them in other respects. Those to whom he is indebted for the continuance of his very existence, may justly claim the exclusive management of those common concerns, to which he now brings nothing, or less than he takes away. As a condition of the franchise, a term should be fixed, say five years previous to the registry, during which the applicant's name has not been on the parish books as a recipient of relief. To be an uncertificated bankrupt, or to have taken the benefit of the Insolvent Act, should disqualify for the franchise until the person has paid his debts, or at least proved that he is not now, and has not for some long period been, dependent on eleemosynary support. Non-payment of taxes, when so long persisted in that it cannot have arisen from inadvertence, should disqualify while it lasts. - J.S. Mill, Considerations on Representative Government

1896...

If once the lower classes are definitely in possession of the power to legislate and tax, there will certainly be a danger that they may behave no more unselfishly than those classes which have so far been in power. In other words, there will be danger that the lower classes in power may impose the bulk of all taxes on the rich and may at the same time be so reckless and extravagant in approving public expenditures to which they themselves contribute but little that the nation’s mobile capital may soon be squandered fruitlessly. This may well break the lever of progress. — Knut Wicksell, A New Principle of Just Taxation

1933 (regarding)...

As was noted in Chapter 3, expressions of malice and/or envy no less than expressions of altruism are cheaper in the voting booth than in the market. A German voter who in 1933 cast a ballot for Hitler was able to indulge his antisemitic sentiments at much less cost than she would have borne by organizing a pogrom. — Loren Lomasky, Geoffrey Brennan Democracy and Decision

These thoughts, by such well-respected thinkers, are anti-democratic.  But perhaps it doesn't necessarily mean that their work was anti-democratic?

In 1954 the Nobel economist Paul Samuelson wrote a paper that correctly recognized that private goods and public goods are different. People can benefit from national defense, for example, even if they don't help pay for it. If the amount of money that people spend on national defense does not accurately reflect their true valuation of it, then the wrong amount will be supplied. So the problem is not that people wrongly value national defense. The problem is false signals. Samuelson correctly argued that taxation is necessary and that the government should supply public goods. However, he simply assumed that government planners would be able to correctly guess the true signals.

Samuelson's assumption did not sit well with Buchanan. In 1963 he wrote a paper that argued that, since people are paying taxes anyways, if they are given the opportunity to earmark their tax dollars to specific public goods, they'd have no incentive to give false signals. If your valuation of national defense is $1000 of your tax dollars, but you only earmark $100 tax dollars to national defense, it doesn't mean that you'll be able to spend the difference on private goods (ie clothes, food). It means that you'll have $900 tax dollars to earmark to other public goods (ie education, healthcare)... which you value less than national defense. Therefore, there's absolutely no incentive to give false signals.

From my perspective, Buchanan's paper is blatantly and obviously anti-democratic.  Why is it anti-democratic?  Because it's pro-market.  When markets expand, the alternatives contract.

Right now Netflix is in a market, but it is not a market.  Subscribers can vote for specific content, but they aren't given the opportunity to decide how to divide their limited subscription dollars among the unlimited content.  If Netflix did become a market, then people's spending decisions would logically subvert their voting decisions.  It wouldn't matter how many "thumbs up" a show received, all that would matter is how many subscription dollars it had received.  So it's logically absurd to prefer markets and democracy.

However, I acknowledge that Buchanan's one paper might not be truly representative of his work.  Let's zoom out...

*********************

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 Public 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

**********************

Am I cherry picking?  Maybe.  But it's a fact that democracy and markets can't be equally effective at creating a bridge between choice and cost.  Take prohibition for example.  The majority voted for it.  Evidently lots of people wanted it... so they got it.  However, the amount of money spent on prohibition was not determined by voters, 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 Munger wants to argue that C is insignificant, then he should see markets as a massive waste of time and energy.  It's pointless for everybody to decide how much money to spend on milk when government planners already know the answer.

If Munger wants to argue that C is significant, but B is more socially beneficial than A, then not only should he see markets as a massive waste of time and energy, he should see that they provide the wrong answer.  It's incredibly undesirable for everybody to decide how much money to spend on milk when their answer is less correct than the answer already known by planners.

MacLean perceives that Buchanan's work is anti-democratic.  Munger has an infinitely better grasp of Buchanan's work than MacLean does.  Yet, for some reason, Munger doesn't perceive that Buchanan's work is anti-democratic.

From my perspective, Buchanan's work is anti-democratic because it's pro-truth.  Buchanan and Samuelson both agreed that false signals are a problem.  However, Samuelson was perfectly fine simply assuming that planners would have no problem correctly guessing the true signals.  Buchanan rejected Samuelson's assumption.  Buchanan correctly understood and endeavored to explain that true signals are a function of individual choices being directly informed/influenced by personal (opportunity) costs.

In his response/review, Munger wrote...

For Buchanan, “politics” is a means for groups to overcome the transactions costs of negotiating and enforcing agreements in groups too large to foster Coasian (Coase, 1960) bargaining arrangements.

It helps to break prohibition down into two questions...

1. Should alcohol be illegal?
2. How much money should be spent on prohibition?

The second question is only asked if the first question is answered affirmatively.  Coasianism is relevant to the first question, but it's really not relevant to the second one.  The second question can only be correctly answered by a market in the public sector.  Just like this question, "how much money should be spent on sci-fi shows?" can only be correctly answered by a market in Netflix.

So what does Munger mean that coasianism doesn't work for large groups?  Imagine that Munger and I are the only two people answering the first question.  He answers "yes" but I answer "no".  Voting wouldn't work... but arm-wrestling would.  So would coasianism.  We'd both get our phones out and open the coasian app.  He'd enter how much he'd be willing to pay for his preferred outcome and I'd enter how much that I'd be willing to pay for my preferred outcome.  After we had both entered our amounts, the app would show us each other's amounts.  If his amount was $100 dollars while my amount was only $25... then he would win.  Alcohol would be illegal for a year.  Since I didn't get my way, I wouldn't have to pay $25 dollars.  Instead, I would receive the $100 dollars that he was willing to pay.  Clearly the decision was made by facilitating a mutually beneficial trade.  The decision was made by a market.  It was made by a different type of market.  It was made by a coasian market.  It was made by coasianism.

Coasianism doesn't have an upper limit on the number of participants.  It works just as well for 2 billion people.  There might be technical issues to overcome but they don't diminish the desirability of coasianism.

With coasianism, people's choices are obviously informed/influenced by their consideration/comparison of the (opportunity) costs.  So Buchanan's work is relevant to coasianism.  But Buchanan didn't really focus on coasian markets.  His focus was on buchanian markets.

Coasianism should be used to decide whether alcohol should be illegal.  If coasianism determines that alcohol should be illegal, then there's the question of how much money to spend on prohibition.  This question should be answered by buchanianism.  Each and every taxpayer would consider/compare the (opportunity) costs of prohibition, and earmark their own tax dollars accordingly.

Each of the two questions is answered by each and every person having the chance to consider/compare/calculate the (opportunity) costs.

Making decisions without knowing/comparing/feeling the (opportunity) costs is really stupid.  Therefore, democracy is really stupid.  Buchanan was not stupid.  Munger isn't stupid either.  Neither is MacLean.  Munger and MacLean can both understand why democracy is so stupid.  But it should be easier and faster for him to do so given that he has a lot more economics under his belt.

Of course it's entirely possible that I'm wrong about everything.  Munger can certainly make the case that I'm wrong about Buchanan.  I'd be interested to see his case.  But I'd be far more interested to see his case for democracy.  When, exactly, is it beneficial for people to be clueless about costs?  When, exactly, is it desirable for people to have no idea what they will have to sacrifice for the things they want?


[update]

Please quote exactly where Buchanan said...

A. The optimal supply of public goods does *not* depend on people's true preferences.

...or...

B. Voting is more effective than spending at revealing people's true preferences.

— Pragmatarian (@Pragmatarian) January 22, 2018

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?

If economics is really the study of the allocation of scarce resources it should be way more focused on time and attention

— Tim Wu (@superwuster) June 2, 2017

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?

Prison labor is dangerously close to a new form of American slavery. Fight it by paying inmates minimum wage: https://t.co/Wn3ZIYY3HE

— Noah Smith (@Noahpinion) June 2, 2017

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.