Clarifying The Invisible Hand

My response to: The Myth of the Invisible Hand by Jonathan Kolber

I love stories about the Invisible Hand (IH). It’s plain to see that you’ve definitely done quite a bit of homework on the topic. In fact, I even learned something!

However, despite all the homework that you’ve done, you haven’t quite grasped the essence of the IH. Here’s the most relevant passage…

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 

Clearly this passage doesn’t include the term “Invisible Hand”. But that’s exactly what this passage is all about.

Accountants, for example, are certainly “advantageous to society”. So it’s profitable to become an accountant. But if too many people become accountants… then the supply of accountants will be greater than the demand for accountants… which means that it will become less profitable to become an accountant… and less people will become accountants. Instead, they will go into more profitable professions.

High profits are a green light. Low profits are a red light. The greater the disparity between profits… the greater the incentive for faulty distributions to be automatically altered.

We all subjectively perceive shortages and surpluses and we spend our money accordingly. We influence each other and are simultaneously influenced by each other. We direct each other and are simultaneously directed by each other. We encourage beneficial behavior and are simultaneously encouraged to behave beneficially.

Therefore… no need for government intervention/interference? Well… not quite. Even though Samuelson was an idiot who clearly didn’t grasp the IH… he did grasp that the free-rider problem was a problem.

Like I said, I love stories about the IH. In other words, I subjectively perceive that there’s a shortage of stories about the IH. However, I have never even once spent even a penny on any stories about the IH.

valuation = my perception of the relative scarcity of IH stories
sacrifice = the amount of money that I’ve spent on IH stories

valuation > sacrifice

I truly want there to be more stories about the IH… but, by not spending any money on stories about the IH… I fail to provide any real incentive for people to write stories about the IH. In other words, I basically shoot myself in the foot by essentially lying to producers. Producers really aren’t mind-readers.

The solution is the pragmatarian model. Each month we’d each pay $1 dollar… but we’d be free to choose which stories we spend our pennies on. For sure I’d spend my pennies on stories about the IH. The more people who did so… the greater the incentive for people to write stories about the IH. The greener the light… the brighter the value signal… the sooner there would be an abundance of stories about the IH. The feedback loop would be accurate.

And if too many people started writing stories about the IH? Well… this is definitely hard for me to imagine! But I suppose it’s theoretically possible. If it did happen though then the light for stories about the IH would turn from green to yellow to red and the faulty distribution of topics would be automatically corrected without any intervention of law.

Incentives matter just as much for public goods as they do for private goods…

Public services are never better performed than when their reward comes only in consequence of their being performed, and is proportioned to the diligence employed in performing them. — Adam Smith, Wealth of Nations

So no, the IH really isn’t a myth. Values are subjective. Nobody is a mind-reader. Incentives matter.

Please let me know if you have any questions! It’s entirely possible that my interpretation/understanding/grasp of the IH is faulty. As the saying goes… two heads are better than one…

More heads are occupied in inventing the most proper machinery for executing the work of each, and it is, therefore, more likely to be invented. — Adam Smith, Wealth of Nations

Redistribution: Seen Vs Unseen

Reply to: Why Taxes are Bad by Miles Kimball

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I’m struggling with this! Let’s see if I’m getting the first part right…

1. According to Noah, there isn’t a correlation between taxes and work.
2. According to Noah, you argue that higher taxes make people feel poorer… which encourages them to work more. Therefore there is a correlation between taxes and work. 
3. According to Karl, you argue that when higher taxes provide more benefits… people are encouraged to work less. Therefore there is a correlation between taxes and work. 

So whether or not there is a correlation between taxes and work depends on 1. their size and 2. on how they are spent. When taxes are wasted (no benefit)… people feel poorer and work more. When taxes aren’t wasted (benefit)… people feel richer and work less. 

What about the statistics though? What does it mean that people work the same amount whether taxes are low (2000s) or high (1960s)? When taxes were high… people should have felt poorer… especially if the taxes were wasted. Therefore, people should have worked more (= 9 hours/day). If the high taxes weren’t wasted… then people wouldn’t have felt as poor… and they wouldn’t have worked as much…. (= 8 1/2 hours/day). However, people worked the same amount as when taxes were low. Therefore… uhhhhh… ouch, my brain. LOL… this reminds me of why I didn’t pursue econ at UCLA. 

Let me try and get back to more solid ground. You point out that GDP would drop if parents did something beneficial like spending more time raising their kids rather than working more. Doesn’t it matter though when the GDP is measured? Shouldn’t we see an increase in the next generation’s GDP as a result of all the extra tender loving care (TLC) that they received while growing up? If so, then the issue isn’t with the GDP… but when it’s measured. And if we don’t expect to see a future bump in GDP… then how could it really be argued that the extra TLC is truly beneficial? To be clear, my objective here really isn’t to defend GDP as a tool…. but to highlight Bastiat’s point…

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

Here’s what you wrote in What is a Supply-Side Liberal?

In calling myself a liberal, I am saying that in addition to an attachment to the liberty, limited government, constitutionalism, and rule of law emphasized by Classical Liberalism, I hold to a view based on both classic Utilitarianism and contested elements of modern economic theory that, generally speaking, a dollar is much more valuable to a poor person than to a rich person, and that therefore, there is a serious benefit to redistribution that must be weighed against the serious distortions caused by the usual methods of redistribution.

I wholeheartedly agree that a dollar is much more valuable to a poor person than to a rich person. So it’s a given that redistribution would increase total utility. Yet, I’m entirely against redistribution.

With GDP I argued that the issue is when it’s measured… and it’s entirely the same thing with utility. I’m extremely confident that we’d see a sharp increase in total utility if we measured it immediately after redistribution. This is the first effect… which is seen and favorable. But what about the unseen? What about the subsequent effects? The subsequent effects would be disastrous because productivity would plummet. 

Imagine if, rather than redistributing money from rich to poor… we redistributed money from smart to stupid. Would you oppose or support such a redistribution? Would it make a difference if you knew, for a fact, that it would immediately result in a massive spike in total utility? Personally, I would strongly oppose such a redistribution even if the first effect was favorable. This is because the second effect would be a huge decrease in productivity… which would lead to an even greater decrease in utility.

Putting society’s scarce resources into the wrong hands could certainly result in an immediate increase in total utility (first effect = seen)… but it would most certainly decrease productivity (second effect = unseen)… which would soon result in a greater decrease in total utility. We’d suffer a net loss of utility. 

Let’s say that you and I are stranded on an island. Food is scarce. You have one packet of eggplant seeds. Is redistribution of those seeds a good thing? Should we focus entirely on who would be happier to have the seeds? Should we focus entirely on fairness and divide the seeds equally? Or should we focus entirely on productivity and determine who has a greener thumb? If your thumb was greener, then redistribution would decrease productivity. If my thumb was greener, then redistribution would increase productivity. Given that our goal is for food to be far more abundant… then clearly we should focus entirely on productivity.

Markets work because the focus isn’t on utility/fairness/equality… the focus is entirely on productivity (results/abundance). And because the focus is entirely on productivity… the outcome is a greater total amount of utility. 

Markets place scarce resources in the most capable hands. Taxes are bad when, and only when, they result in the redistribution of money/resources/influence from more capable hands to less capable hands. Unfortunately, this is guaranteed to occur with our current system. 

Right now we don’t have a market in the public sector. We have socialism in the public sector. Socialism fails because government planners fail to place scarce resources in the most capable hands. This is why I’m entirely against redistribution. If we created a market in the public sector by allowing people to choose where their taxes go (pragmatarianism FAQ)… then taxes would cease to be bad. Society’s scarce resources would no longer be placed in less capable hands. 

I should probably rewind a bit and emphasize that I’m definitely not saying that poor people are stupid. I’m saying that if you know people who are smart but poor… then you probably have a theory as to why they are poor… and your tax allocation decisions would communicate your theory to the rest of society. If your theory is that they were failed by the education system… or by a lack of employment opportunities… or by closed borders… then you’d allocate your taxes accordingly. Creating a market in the public sector would allow for a multitude of theories to be simultaneously tested… which would greatly decrease the time it takes to uncover the truth. 

The truth regarding markets is that people don’t choose to place their hard-earned money into random hands. If we’re going to make the effort and take the time to earn money… then we really don’t want to see our limited time/effort/money/life flushed down the toilet. This fundamentally basic concern gives consumers the maximum incentive to place their hard-earned cash in the most capable/productive hands. So it’s the biggest problem when the results of this powerfully productive process are overridden by government planners who have infinitely less incentive and information than society as a whole does. Massive amounts of money/resources/influence will be placed in less capable hands, productivity will plummet, and everybody will suffer as a result. Redistribution subverts the true will of the people and greatly diminishes their welfare. 

It’s true that I don’t have a very strong grasp on the distortionary aspects of how taxes are collected… but I’d be very surprised if this possible problem is anywhere as harmful as the problem of having socialism in the public sector. I’m pretty sure that socialism is just as defective for public goods as it is for private goods. Therefore the spending, rather than the taxing, should be our greatest concern. 

Missing Markets: The Bane Of Our Existence

Reply to: Traditional Economics Don’t Make Sense For Open Business Models

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Imagine that you’re trying to decide whether to play golf (X) or write a story on Medium (Y). The question is… how should you allocate your time? Your time is a limited resource. Your time is scarce. Given that your time is scarce, it makes sense to allocate your time to whichever activity will provide you with the most benefit. 

Whenever people talk about post-scarcity economics… it’s a pretty good sign that they are clueless. Even if you were immortal you still wouldn’t be able to play golf and write stories at the same time. And [“Her” spoiler alert]… even if you were an incredibly advanced artificial intelligence capable of writing stories, playing virtual golf and engaging in a gazillion other activities at the same time… all the resources that you allocated to these gazillion activities couldn’t also be allocated to all the other gazillions and gazillions of possible activities. 

Scarcity will always be relevant… so prioritization will always be relevant. 

The way that market economies work is that everybody can help influence everybody’s priorities. If I had to allocate one of my dollars to X (you playing golf) or Y (you writing stories)… then I’d allocate it to Y. This is because I don’t derive any benefit from X. 

This is going to sound incredibly obvious but… you can never be me. And you are not omniscient. These incredibly obvious facts of life have incredibly powerful implications. You can never truly know how much benefit I derive from either X or Y. But, when I allocate my dollar to Y rather than X, then you can know that, from my perspective…

Y > X

It stands to reason that… the more people that give you their dollars for you to do Y… the more likely you are to do Y… and the more benefit you’d create for society. 

Let’s review the economic truisms…

1. Scarcity is, and always will be, relevant
2. Nobody’s omniscient
3. Incentives matter

Is this traditional economics? Well… it’s certainly economics. And it most definitely makes sense when we’re talking about open business models.  

This is what Medium might look like if they had a half-way competent economist on their payroll…

I would be able to use paypal to put money into my digital wallet. Then, if I benefited from your story, I could click the appropriate *heart* button. Let’s say that I clicked the 25 cent button. In less than a second, 25 cents would be transferred from my digital wallet to your digital wallet. I essentially gave you 25 cents of incentive to write stories rather than play golf. I increased your opportunity cost of playing golf by 25 cents.

Our society has a lot of people in it. And each person can engage in an infinite variety of activities. Market economies work because we can help encourage people to engage in the most beneficial activities.

All the biggest problems that we face as a society are not caused by markets… they are caused by the absence of markets. 

Right now we don’t have a market in Medium just like we don’t have a market in the public sector. These markets are missing because people don’t understand basic economics. People are under the impression that “recommending” or “liking” or voting can ensure that society’s limited resources are put to their most valuable uses. 

Solving the biggest problems in the world boils down to helping people understand basic economics. Then people would understand the point of markets… markets would be created wherever they are missing… and our collective intelligence and ingenuity would eliminate the world’s biggest problems. 

To help further illustrate the problem with missing markets… let’s consider this passage that you wrote…

I find this weird in so many ways. Let me highlight just one — consumption provides utility. Under this logic a tree has no utility unless it is cut down and “consumed”. I expect all of you question the logic of this. A tree can provide great utility without being consumed. It provides shade on a hot day, its leaves cleanse the air we breath, its branches provide homes for birds, its roots prevent erosion, and to many it is a thing of beauty. To assert that a tree has no utility if it is not consumed is, to me, a bizarre premise.

Benefit is in the eye of the beholder. Benefit is entirely in the eye of the beholder. 

In theory you benefit from trees being conserved rather than developed. It’s only a theory because you do not currently have the freedom to put your own taxes where your words are. Right now we don’t have a market in the public sector. A major and fundamentally important market is missing. It’s missing because people don’t understand basic economics. 

Creating a market in the public sector would be incredibly easy. People would be given the freedom to choose where their taxes go. I refer to this as “pragmatarianism”. Here’s the FAQ. 

Once we created a market in the public sector… then you could decide whether more trees (X) was more important to you than more defense (Y). 

If you decided that X > Y… then you’d allocate more taxes to X and less taxes to Y. Evidently, from your perspective, the world needs more trees more than it needs more tanks. 

I’d probably be in the same boat as you. How many other people would be in the same boat? We don’t know. We don’t know the demand for conservation just like we don’t know the demand for defense.

Right now you’re saying, more or less, that the supply of conservation is wrong… but why in the world would you expect it to be right? How could it possibly be right when the demand for conservation is unknown? If the supply could possibly be right without the demand being known… then markets would be entirely pointless. 

If we created a market in the public sector then the supply of conservation would be entirely determined by the demand for conservation. And then you’d be more than welcome to argue that the demand for conservation was inadequate. Would taxpayers find your arguments/information convincing? If so, then they’d give more of their taxes to the EPA. 

Sharing information isn’t the easiest thing. It takes time and effort. So if you take the time and make the effort to share your information about the environment with other people… then it becomes a lot more worthwhile to do so when the recipients of your info have the freedom to immediately act on it. 

If you’re a door and door salesman then you’re not going to waste your time making your sales pitch to a kid that answers the door. You’re going to ask to speak to whoever can make the decision to purchase your product. 

With our current system… congress controls the purse. So all the sales pitches are made to congress rather than to the public. The public is treated like some kid. This is a problem because, with our current system… the kid is responsible for determining who controls the purse. 

The only way that the public is going to make sound decisions about the environment is if they are given the relevant information. And the only way that it’s going to be worthwhile for the public to be given relevant information about the environment is if they have the freedom to control the money that they earned.

Missing markets are the cause of rational ignorance. The effects of ignorance, rational or otherwise, are extremely detrimental. Therefore, it would be extremely beneficial to create markets wherever they are missing. 

Artificial Barriers To Entry: Humanity's Berlin Wall

Reply to: How (Not) To Be a Capitalist

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You argue that nobody is better off when they trade with Martin Shkreli… but you also argue that plenty of people choose to trade with him (which is why he’s raking in the profits). 

The first time that you traded with Shkreli he ripped you off. Shame on him. But if you traded with him a second time… then shame on you. If you continued to trade with him… then here are a couple of very different conclusions…

1. you’re irrational
2. you’re benefiting

Are you irrational? If so, then you really shouldn’t be blaming Shkreli. Are you benefiting? If so, then you really should be thanking Shkreli. 

Markets wouldn’t work so well if most people continued to make trades that weren’t beneficial. The fact of the matter is that consumers want to maximize their profit just as much as producers do. The only difference is that we can’t see or measure the amount of profit that consumers derive from a trade. But, because market trades are entirely voluntary, when consumers continue to make the same trades…. we can reasonably guess that they are profiting from doing so. It’s an entirely different story when consumers don’t have the freedom to exit. In the absence of consumer choice, the only thing that we can reasonably guess is that producers have little, if any, incentive to benefit consumers. Destroying the direct connection between payment and performance has logically detrimental consequences. 

Even though your economic analysis is logically flawed… you’re right that there’s a problem. Rent-seeking is certainly a part of it. The thing is… your definition of rent-seeking is incredibly wrong. Rent-seeking really is not when people charge what the market will bear. Where did you get the idea that it was? Being able to price gouge is the reward that people receive for correctly foreseeing future conditions. We really want people to have the maximum incentive to be in the most valuable place at the most valuable time. If there are a lot of people drowning and only one lifeguard… then it’s a really bad idea to reduce the incentive for other people to become lifeguards. Evidently you didn’t learn in econ 101 that incentives matter. You should try and get a refund. 

Rent-seeking is actually when people use the government to cheat. The minimum wage is the result of rent-seeking. It’s rent seeking when unions use the government to block competition. Just like it’s rent-seeking when corporations use the government to block competition. 

Forcing drug companies to comply with extensive government regulations is a huge part of the reason that drugs are so expensive. Costly compliance creates a very high barrier to entry… and a very high barrier to entry means a lot less competition… and a lot less competition means higher prices, smaller quantities and lower qualities. Drug companies want compliance to be costly… and voters want to be protected from defective drugs. So, unfortunately, it’s a win-win situation for congress to create the maximum amount of red-tape possible. 

Therefore, the real problem is democracy. Voters think that they are getting a free lunch when they vote for politicians who promise to ensure drug safety. Instead of getting a free lunch, voters simply make drugs a lot more expensive. Saving one life really isn’t such a great deal when it costs 1000s of lives. 

People vote to make it a lot harder to become a lifeguard and then they turn around and complain that so many people are drowning. 

The solution is to allow taxpayers to choose where their taxes go (pragmatarianism). When taxpayers consider the opportunity costs of drug safety compliance… they will decide that they have much more beneficial trades to make with the government. Big pharma will cry big tears when the barrier to entry is knocked down just like the Berlin Wall was. Once the barrier is down… competition will skyrocket and this will ensure an abundance of affordable and effective drugs. 

Drug companies will still want to cut corners… but a fully functioning market with maximum competition will quickly and severely punish any companies that cost, rather than save, lives. 

Regulations are just rules… and rules are necessary. This doesn’t mean though that all rules are equally necessary. The only way to ensure that rules truly create the most benefit for society is to create a market in the public sector. Are you going to voluntarily spend your hard-earned money on rules that harm you? Not if you’re rational. Generally speaking… rational people have more money to spend than irrational people. This is because being in the right place at the right time is more profitable than being in the wrong place at the wrong time. Thank goodness! So if you’re rational… then chances are good that you’re going to have more influence…. which you’ll use to support the most beneficial rules. If circumstances change and a rule becomes less beneficial… then you’ll have the freedom to quickly use your taxes to communicate to the rest of society that the rule has become less necessary. 

It’s important to understand that benefit is entirely in the eye of the beholder. Just like it’s important to understand that incentives matter. Just like it’s important to understand that every allocation requires the sacrifice of alternative allocations.

So is it beneficial for you to reply to my reply? I have absolutely no idea. But if you do reply…. assuming that nobody forced you to do so… and assuming that you’re reasonably rational… then I’ll logically conclude that any benefit that you foresaw must have been large enough to incentivize you to spend your time sharing your thoughts on my thoughts on your thoughts.

Demand Disparities Reflect Information Disparities

Reply to: Toning it Down: Guitar Amps are not like Markets

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I got the same exact “fatal conceit” vibe from Brennan’s comparison of markets and guitar amps. 

However, you concluded by saying “don’t touch that dial” but a few sentences earlier you pointed out that, “Turning those knobs up to 11 won’t change the fact that a D chord is still a D chord.”

You kind of undermine your conclusion. If touching the dial doesn’t change the information that’s transmitted… then what’s the harm in touching the dial? 

The problem with the fatal conceit is that it does change the information that’s transmitted. This is a problem because the new information is less accurate. Less accurate information results in less valuable behavior.

For example… a minimum wage changes the information that’s transmitted. It communicates that the given geographical region needs more unskilled labor than it truly does. People adjust their behavior according to this false information and society is worse off as a result. We end up with too many unskilled workers in that area. Society is harmed by the inefficient allocation of labor. 

It’s a fatal conceit for planners to override the information that’s supplied by millions and millions of people.

You get a lot closer to this concept than Brennan does. He argues that markets should be expanded… which I agree with… but it’s extremely unfortunate that he doesn’t come close to illuminating the value of accurate information. 

Here’s a comment on Brennan’s most recent entry… Markets in Adoption Rights

In other words, it seems to me that everything that those that object to markets in adoption are screaming about is this: that market transactions means no interference from the government and that price, supply and demand is allowed to play out. This should mean that the pedophile with lots of money and the parent really in need of money have to be allowed to come to a deal for the latter to sell the kid to the former. — King Goat

If supply and demand are allowed to play out… and the pedophile purchased the child… then the assumption is that there was inadequate demand for preventing the purchase. Let’s take a look at this assumption from a different angle…

Imagine that there’s an auction for an extremely endangered animal. There are only two bidders. One is an extremely rich guy who wants to buy the animal so that he can eat it. The other is the moderately wealthy owner of a zoo who wants to buy the animal so that he can try and save the species. Given the disparity in wealth between the two bidders, chances are good that the animal is going to be eaten. The conclusion is that there shouldn’t be a market for endangered animals.

However, the only reason that we don’t have legal markets for extremely endangered animals is because enough people don’t want extremely endangered animals to go extinct. 

With this in mind, let’s revise the auction scenario. There are still only the two same bidders… but everybody in the world could use their own money to bolster whichever bid they preferred. If you don’t want the animal to be eaten… then you could reach into your own wallet… pull out $5 dollars… and increase the zoo owner’s bid by $5 dollars. 

How much money would the crowd allocate to each bid? What is the demand for the animal being saved? What is the demand for the animal being eaten? 

Personally, I benefit a lot more from the continued existence of California condors than I would from some extremely rich guy eating a California condor for Thanksgiving. So I would be a lot more inclined to bolster the zoo owner’s bid. How many other people are in the same boat? 

The extremely important, but conceptually difficult, part here is that the rich guy eating the condor is a private good while the zoo owner saving the condor is a public good. With the private good… even if I did enjoy eating condors, I couldn’t benefit from the rich guy’s Thanksgiving meal… so there wouldn’t be any incentive to bolster his bid. But with the public good… even though I do enjoy the continued existence of the condor… I can enjoy this benefit even if I don’t chip in to increase the zoo owner’s bid. And if I can benefit from condor conservation without paying for condor conservation… then it wouldn’t make sense to pay for condor conservation. The problem is… if too many people come to the same conclusion… then the zoo owner’s bid wouldn’t be adequately bolstered by the crowd… and the condor would be consumed rather than conserved. This is the free-rider problem.

Getting back to the pedophile scenario… here are two possibilities…

1. The crowd doesn’t care whether the child is purchased by a very wealthy pedophile or purchased by a moderately wealthy non-pedophile. 
2. The crowd does care whether the child is purchased by a very wealthy pedophile or purchased by a moderately wealthy non-pedophile… but, because of the free-rider problem, the very wealthy pedophile would still outbid the moderately wealthy non-pedophile.

Clearly the crowd does care… so it’s most definitely not the first possibility. 

King Goat thinks that the problem is with supply and demand playing out… but the real problem is that the free-rider problem prevents supply and demand from playing out.

With the current system… the government forces us to contribute to public goods (taxation) and then gives us the opportunity to vote for representatives who decide how to divide the very large pool of money between children, conservation and numerous other public goods.

Our current system also prevents supply and demand from playing out. 

If we truly want supply and demand to play out… then taxpayers should be free to choose where their taxes go (pragmatarianism). Taxpayers would have the freedom to decide whether placing children in the best homes is more important than placing endangered animals in the best homes. 

If you decide that conservation is more important… then you’ll also have the freedom to decide which zoo is doing the best job of conserving endangered animals. You’ll allocate your taxes accordingly. Taxpayer choice will provide zoos with the maximum possible incentive to do the best job possible conserving endangering animals. 

If you decide that children are more important… then you’ll also be able to reward the best public services for children and boycott the worst public services for children. Taxpayer choice will provide children’s services with the maximum possible incentive to do the best job possible of protecting children. 

Creating a market in the public sector wouldn’t just provide proper incentives… it would also provide accurate information. We would know the true demand for public goods. Will we always agree with the true demand for public goods? Of course not. But this disagreement will reflect information disparities. 

If the crowd demands a lot more defense than you do…. then what, exactly, does the crowd know that you do not? And what, exactly, do you know that the crowd does not? Maybe you don’t know that the crowd knows that Godzilla is heading for America. Maybe the crowd doesn’t know that you know that it’s only a prank that would make Orson Welles proud. 

Correctly prioritizing the elimination of information disparities depends on knowing the real demand disparities.  

Knowing The REAL Disparities In Profitability

Reply to: How to fix capitalism: part two

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Dollar voting is super solid! The rest of your story seems… shaky. In your previous story you wrote this… 

The sooner more of us buy organic (increased demand), then the sooner more companies will enter the market and create more (increased supply to meet demand), and the sooner the price will drop (due to increased competition and economies of scale).

This is super solid! 

But here’s what you wrote in this story…

Say we remove minimum wage and we remove all government social services. This would obviously lead to a short term disaster with many people living in poverty, homeless and hungry. But eventually these people would die, its a competitive world right?

This is super shaky!

Honestly, it seems like these two scenarios were written by two entirely different people. I’m sure that this isn’t the case… it just seems that way. 

If we eliminated the minimum wage and removed all government social services… then all companies would become more profitable as a result of lower taxes. The companies that were no longer required to pay minimum wages would become even more profitable. Because of these higher profits, more companies would enter the market… which would increase competition. Increased competition would have two counterbalancing effects…

1. The prices of all products would decrease. The prices of products made by unskilled labor would decrease even more. 
2. The cost of unskilled labor would increase… which would increase the prices of products made by unskilled labor. 

None of this is theoretical. A multitude of companies entered China’s market because they wanted higher profits. Higher profits were possible because labor was a lot less costly in China. Labor was cheaper in China because China used to have a massive labor surplus. Now labor in China isn’t so cheap. The large increase in wages had absolutely nothing to do with mandating minimum wages and everything to do with maximizing the demand for labor.

The demand for productive labour, by the increase of the funds which are destined for maintaining it, grows every day greater and greater. Labourers easily find employment, but the owners of capitals find it difficult to get labourers to employ. Their competition raises the wages of labour and sinks the profits of stock. — Adam Smith, Wealth of Nations 

Of course there’s no guarantee that this is exactly how it would play out if the US eliminated the minimum wage and cut taxes. For all I know… maybe the day after the minimum wage was eliminated… some company would launch a line of robots that could do everything that unskilled workers could do but at a fraction of the cost. Life is dynamic. Conditions and circumstances are constantly changing. 

The key concept is that the real disparities in profitability are absolutely necessary in order to optimally incentivize companies and workers to exit from less profitable areas and enter into the most profitable areas. 

A minimum wage arbitrarily decreases the disparity in profitability. It decreases the incentive for workers to go into more profitable fields and it decreases the incentive for companies to enter into fields which utilize unskilled workers. Just like subsidizing regular farmers would decrease their incentive to become organic farmers. 

Eliminating the minimum wage would increase the disparity in pay between unskilled workers and skilled workers (ie plumbers, electricians, carpenters). How much would the pay disparity increase? It’s impossible to say. But the greater the disparity in pay between unskilled workers and skilled workers … the greater the incentive for unskilled workers to make the effort to become skilled workers. Just like the greater the disparity in profitability between regular farming and organic farming… the greater the incentive for regular farmers to become organic farmers. 

Incentives matter…

If by law every human being wanting support could be sure to obtain it, and obtain it in such a degree as to make life tolerably comfortable, theory would lead us to expect that all other taxes together would be light compared with the single one of poor rates. The principle of gravitation is not more certain than the tendency of such laws to change wealth and power into miser and weakness; to call away the exertions of labour from every object, except that of providing mere subsistence; to confound all intellectual distinction; to busy the mind continually in supplying the body’s wants; until at last all classes should be infected with the plague of universal poverty. — David Ricardo, On the Principles of Political Economy and Taxation

When kids are in school… we really want them to have the optimal incentive to make the effort to learn and develop the skills that they need in order to maximize their contribution to society. We really want students to fully appreciate the real disparity in benefit between studying and slacking. We really don’t want to make unskilled labor appear more attractive or acceptable or adequate than it truly is. If being unskilled means barely scraping by and living uncomfortably… then we really want students to clearly see and appreciate this. This essential information will help them make far more informed career decisions. 

Knowing the real disparities in profitability isn’t just fundamentally important when it comes to different fields… it’s also important when it comes to different locations. 

If the US is suffering from a massive surplus of unskilled labor… then eliminating the minimum wage would result in a massive decrease in wages. Earning a lot less money would push some unskilled workers into much more profitable fields and it would push other unskilled workers into much more profitable countries. The two closest countries are of course Canada and Mexico. The question is… which country would it be most profitable for unskilled workers to move to? Does it matter? Of course it matters! Which is why it would be a big problem if Canada and Mexico lied, via minimum wages, about their respective labor situations. 

It would be extremely beneficial if every country in the world eliminated minimum wages. Unskilled workers would be pushed from the least profitable countries and pulled towards the most profitable countries. Companies would be pushed from the countries with too few workers (labor shortage = expensive labor) and pulled towards countries with too many workers (labor surplus = cheap labor). Eliminating the minimum wage would optimally incentivize workers and jobs to go where humanity needed them most. 

Markets maximize benefit because they create an accurate and interactive treasure map that everybody has access to. If consumers demand more organic food… then the treasure map will be updated accordingly and automatically. Everybody will clearly be able to see the actual size of the organic food treasure. This essential information will help people make an informed decision whether it’s worth it to go after the treasure. Whoever does decide to take the risk and make the effort of going after the treasure…if they manage to reach it before it’s all gone… then they will reap the reward of successfully benefiting society. 

The government, by mandating minimum wages, decreases the accuracy of the treasure map. Nobody benefits when the treasure map shows that the US needs more unskilled workers when it actually has too many unskilled workers. Everybody benefits when the treasure map accurately shows where in the world unskilled workers are needed most. Just like everybody benefits when it’s easier, rather than harder, for unskilled workers to go where they are needed most. 

The reality is, capitalism is doing just fine. The problem is not the system, the problem is what we tell the system to do. The purpose of capitalism should never have been the pursuit of profit. That is not what it was designed for and that is the reason for all the failings listed above.

I disagree with the first sentence because government intervention (minimum wages, numerous barriers to entry, subsidies, tariffs, quotas, unnecessary restrictions on immigration, etc.) decreases, to an incredible extent, the accuracy of the treasure map. An extremely inaccurate treasure map prevents capitalism from doing as well as it should. There would be infinitely more abundance, prosperity and progress if people truly understood the problem with decreasing the accuracy of the treasure map.

The second sentence is true inasmuch as it relates to dollar voting. Consumers are the compass…

The management of a socialist community would be in a position like that of a ship captain who had to cross the ocean with the stars shrouded by a fog and without the aid of a compass or other equipment of nautical orientation. — Ludwig von Mises, Omnipotent Government

The last two sentences really seem to miss the point of profits…

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 

If the US ends up with too many unskilled workers… then their wages should naturally decrease in order to automatically alter this “faulty distribution” (misallocation, inefficient allocation). By mandating a minimum wage… the government prevents faulty distributions from being automatically altered. The distribution of workers becomes even more faulty when the minimum wage is increased. It pulls even more workers to the US when it should be pushing them to countries that have a greater demand for unskilled labor. It pulls even more students out of school when it should be pushing them into learning and developing skills that there’s a greater demand for. 

As a collective society we need to reframe our willingness to pay based on the value that something brings to our society. We need policies that prioritize the collective utility over our individual needs.

There are a lot of movies that deal with the idea of the greater good. My favorite is Hot Fuzz. Another movie that comes to mind is The Cabin in the Woods. 

The idea of placing a higher priority on collective rather than individual utility is, to put it bluntly, entirely nonsensical. The only way that you can truly know whether something has actually increased the collective’s utility is to get accurate feedback from the collective. But the collective is simply a collection of individuals. 

With our current system… we elect representatives who determine whether something truly is in the greater good. And, if we disagree with their assessment of what the greater good truly is, then we replace them with better representatives. 

The premise of representative democracy is that it somehow produces a more accurate treasure map. Yet, for some reason, nobody ever wants to use the same system in the private sector. 

What few people understand is that the accuracy of the treasure map can only be increased by clarifying demand. Clarifying the demand for public goods can easily be accomplished simply by allowing taxpayers to choose where their taxes go (pragmatarianism). This would create a market in the public sector… which would help ensure that the treasure map is just as accurate for public goods as it is for private goods.  

Clearly a market in the public sector wouldn’t have “profits”. But government organizations would gain or lose revenue according to how effectively they served the public. 

Again, incentives matter…

Public services are never better performed than when their reward comes only in consequence of their being performed, and is proportioned to the diligence employed in performing them. — Adam Smith, Wealth of Nations

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See also: Workers: Beggars or Choosers?

Payment Costs

Reply to: Hey there!

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Glad you appreciated the info!

Regarding volunteers… aren’t we volunteers? Here we are on Medium pouring our time, effort, energy, experiences, uniqueness, information, sweat, tears, blood, bones and brains into our stories! Well… more or less… heh. And nobody pays us for our significant sacrifices! Sheesh!

Maybe our sacrifices are worthless? Or maybe it’s the free-rider problem? Or maybe it’s the compensation barrier problem?

Here’s your story that I recommended…. Money Is A Broken System Of Value. Clearly I liked it… hence the recommendation. And recommendations are certainly useful! It’s nice to know whether people like a story. But the problem with votes/likes/recommendations is that they don’t communicate how much somebody likes something.

Does it matter how much your sacrifice is worth to other people? For sure!

Let’s say that your story was worth 10 cents to me. Is it possible for me to send you 10 cents? Of course! If paypal doesn’t allow payments as small as 10 cents then I could snail mail you a letter with 10 cents in it. The problem is that the postage would cost a lot more than 10 cents. Not to mention the time and effort involved in getting your address, finding a letter and writing your address on it, finding a dime and putting it into the envelope, sealing it and risk getting a paper cut on my tongue, looking up the correct postage, finding stamps and sticking them on the letter and putting it in my mail box.

The harder it is to give you 10 cents… the less likely it is that I will do so. This is the compensation barrier problem. Actually I just made that term up. Maybe barrier to payment would be a better term? Barriers to entry is a real term… but for a different, albeit equally important, concept. Perhaps the closest correct term would be transaction costs.  However… that entry doesn’t mention anything about the difficulties associated with making a payment (unless I missed it). So maybe “payment costs” would be a better term?

Right now the payment costs on Medium are too high. One way to reduce the payment costs would be to give us all digital wallets. I could use paypal to put $10 dollars into my Medium wallet. Then I could click the dime button that was next to the recommend button on your story. Voila! With one click 10 cents would be transferred from my wallet to your wallet! It would be sooooooo stupid easy and quick to give you 10 cents! You could either spend that 10 cents on other stories or you could save up your money and have Medium paypal it to you.

Here’s another way of looking at it…

Recommend button (free)
Really recommend button (1 cent)
Really really really really really recommend button (5 cents)
Really really really really really really really really really really recommend button (10 cents)

You get the idea. Rather than having a recommend button with 25 “reallys” in front of it… it makes more sense simply to have a 25 cent button.

With the current system… we can sort stories by popularity (number of recommendations received). But if Medium did a better job of facilitating compensation/communication… then we would be able to sort stories by value (amount of money received). I’m pretty sure that most people would prefer to sort stories by value rather than by popularity!

If valuating stories was as easy as recommending them, then Medium would have a lot less volunteers and a lot more paid writers. It stands to reason though that few, if any, of the compensated writers would be able to quit their day jobs. But… it might encourage them to quit their less profitable pastimes. The more lucrative it is to write stories… the less lucrative it becomes to play video games or watch TV or have sex.

So by giving you 10 cents for your story… I’d essentially be trying to motivate/incentivize/bribe/encourage/inspire you to continue doing something that benefits me… instead of doing something that doesn’t benefit me.

In economic terms… giving you 10 cents for your story marginally increases the opportunity cost of you doing something other than writing stories.

With this in mind… if I truly value your story at 75 cents…. but, because of the free-rider problem, I only give you 5 cents… then I’m inadequately incentivizing you to do something that I benefit from. On the other hand… 5 cents is certainly better than 0 cents!

Let’s say that only members of Medium could read stories and it cost $5,000 a year to be a member. Members would be completely free to choose which stories they spent their $5,000 dollars on. Would this eliminate the free-rider problem? Yup. But would it result in the maximum payment for stories? It seems… doubtful. Having to pay $5,000 dollars to become a member of Medium would create a pretty high barrier to entry.

x = a lot of people paying a little
y = a little people paying a lot

Eh? Midgets would have to pay the most?

x = a lot of people paying a lit
y = a lit of people paying a lot

Maybe it would be nice if “a lit” was the opposite of “a lot”? Or something like…

x = a large amount of people paying a small amount
y = a small amount of people paying a large amount

That works… but it requires too many letters! Or…

x = more people paying less
y = less people paying more

I suppose that’s the best way?

Anyways…

It’s entirely possible that x > y.

By minimizing payment costs… Medium would become a market. Or, it would become a better market. Who doesn’t want to participate in a better market? But it’s not like the model would be impossible to copy. So competitors would quickly emerge. And we’d see a continuum of membership fees. All else being equal… whichever website/market has the highest paid writers would have discovered the optimal membership fee.

Minimizing payment costs helps to clarify demand. Clarifying demand increases benefit. The optimal membership fee will be the fee that provides the most demand clarity… which will maximize benefit.

You know what India has? A lot of nice orchids. You know what I like? Pictures of nice orchids growing on trees. That link takes you to my favorite photos on flickr. I’ve favorited 100s and 100s of photos of orchids growing on trees. When I search my favorites for “India” there are only 47 results! That’s way too few results! There should be a lot more results!

Here’s one photo that I particularly like… Foxtail Orchid. It’s a nice photo of a really nice orchid. Here’s a photo that I might like even more… Acampe praemorsa. Even though the orchid isn’t even blooming… the photo really shows how dry the habitat is. Which is right up my alley! I live in very dry Southern California… so I’m especially interested in drought tolerant epiphytic orchids.

Dinesh Valke took the photo of the epiphytic orchid in a dry habitat… and I’m the only one who fav’d it.

So there Valke is in India. And there you are as well. He took a photo that I like and you wrote a story that I like. Both of you voluntarily did something that I benefit from. And in neither case did I accurately communicate the amount of benefit that I derived from your respective actions. And in neither case is it entirely my fault. This is because neither Flickr nor Medium have grasped the value of minimizing payment costs. In other words… neither website understands the value of clarifying demand.

My point is… yes, I’m sure that that the government in India is a problem. But it’s only a problem because people don’t understand the value of clarifying demand. And changing the government is probably the hardest thing that you could possibly do to help people understand the value of clarifying demand. It would be a lot easier to change Medium or Flickr. And, honestly, this really isn’t the first time that I’ve told Medium that it should minimize payment costs by facilitating micropayments! So if changing Medium is an epic mission… then trying to change the government would be a monumentally epic mission.

It’s probably a lot easier to grab a couple of your best programming friends and create a website that minimizes payment costs. Your website would help people understand the value of clarifying demand and our respective governments would quickly change accordingly.

Am I stereotyping you Indians by assuming that you have at least a few friends that can program? Heh.

I actually modified some code to create a forum that facilitates micropayments. This blog entry… RudeBagel… has some links to some of the code that I modified. Let me just say that I’ve spent infinitely more time studying economics than I’ve spent studying programming!! The code works… as long as there aren’t any 12 year old hacker kids around!

The website is online… but every page should, in theory, redirect to the login page and I’ve disabled the registration. I’m trying to make some modifications and am looking for any excuse to procrastinate.

You and your programming buddies are welcome to build on the micropayments forum idea or create some other type of website that minimizes payment costs. In any case, should you get stupid rich from doing so, then I’ll be sure to sue you for a huge chunk of the money! Because I’m American! And we Americans love suing people. :D

Actually… the general trend is in the direction of clarifying demand. Take Patreon for example. However, Patreon was created with the intention of helping creators get paid. It wasn’t created with the intention of clarifying demand. This is a subtle but important distinction. If the founders of Patreon had actually understood the value of clarifying demand… then they would have set it up so that sponsors would be free to pay what they wanted for specific creations.

Dinesh Valke has 275 pages of photos on flickr. Do I value all his photos equally? Noooooo.

Here’s my valuation ranking of his photos…

1. Epiphytic orchids growing in dry habitats
2. Epiphytic orchids
3. Epiphytes
4. Plants
5. Animals
6. Other

I don’t want to encourage Valke to take more photos in general… I want to encourage him to take more photos of epiphytic orchids growing in dry habitats. I want to encourage him to do something that creates more, rather than less, value for me.

Clarifying demand is all about increasing the accuracy of communication… which is what increases benefit.

Basically, we want treasure maps to be more, rather than less, accurate.

Let’s say that Flickr minimizes payment costs and Bob, an American, is about to spend a few months backpacking around India. Before he take his trip… he searches Flickr for “India” and sorts the photos by value. What types of photos are the most valuable? Which subjects are in the greatest demand? Perhaps after scrolling down a bit Bob will see that I’ve allocated $100 dollars (hah… I wish!) to Valke’s photo of the epiphytic orchid in the dry habitat.

Medium, like Flickr, also clarifies demand so Bob decides to search Medium for “India” as well. What stories are the most valuable? Which stories are in the greatest demand? Bob also conducts the same search on Youtube… which also clarifies demand.

Bob ends up with a fairly accurate treasure map. With some luck and skill he can cover the cost of his trip. Of course, a billion people in India will have access to the same exact treasure map! So Bob will have some pretty stiff competition when it comes to supplying the demands of consumers. Which is really wonderful for consumers.

Anyways, I’ve rambled enough! If not, then here are some more ideas on the same topic… Creating The Most Efficient Demand Net.

Public Finance in a Nutshell

Reply to: Money Is A Broken System Of Value

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The “minor” detail that you’re missing from your otherwise excellent and entertaining analysis is the free-rider problem.

Of course the private sector isn’t going to spend enough money on cancer research! Because if it did spend enough money on cancer research then the free-rider problem wouldn’t be a real problem and we wouldn’t need the government to solve it by forcing people to contribute to public goods (aka “taxation”).

So, by arguing that cancer research is undersupplied… your beef really isn’t with the private sector… it’s with the public sector. The entire point of the public sector is to ensure that public goods, such as cancer research, are not undersupplied.

The question is… why would the public sector fail to supply enough cancer research? Well… if the public sector was actually effective at supplying the optimal amounts of goods… then we really wouldn’t need markets at all. Socialism would be an adequately effective system for ensuring that society’s limited resources are put to their most valuable uses. However, as I’m sure you’re aware, there’s considerable evidence that socialism is far from effective at efficiently allocating resources.

We’re stuck between a rock and a hard place. Because of the free-rider problem… the private sector won’t supply enough cancer research. But because of the preference revelation problem… the public sector won’t supply the optimal amount of cancer research… or conservation… or welfare… or defense… or infrastructure… or any other public good.

We “unbreak” this predicament simply by creating a market in the public sector (pragmatarianism). The supply of public goods would be determined by the actual demand for public goods. If you demand more cancer research and less unnecessary wars… then you’ll spend your taxes accordingly.

Less formally… in the private sector, when it comes to public goods, you have a big incentive to be a big fat liar. “No… I don’t really value cancer research that much…” However, once the cost of contributing to public goods is a foregone conclusion (aka “taxation”)… your incentive to lie goes out the window. In fact, you have the maximum incentive to be truthful. “I might as well spend my taxes on the public goods that I have the greatest demand for! Like cancer research!”

More formally…

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 Buchanan, The Economics of Earmarked Taxes

Buchanan published that paper in 1963… nearly a decade after another Nobel economist published the most widely cited paper on the topic…

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

But, and this is the point sensed by Wicksell but perhaps not fully appreciated by Samuelson, now with democracy, because 1. around half the country doesn’t pay income taxes and 2. the burden isn’t evenly distributed among those who do pay income taxes (progressive taxation)… it is in the selfish interest of most voters to give false signals, to pretend to have more interest in a given collective consumer activity than he really has, etc.

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

Wicksell published that in 1896. A few decades later…

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

After 9/11 plenty of people shouted for war… but why not? It’s not like the money was coming out of their pockets.

It should be painfully obvious that, when it comes to public goods… the free-rider problem is just as applicable to democracy as it is to the private sector. This really shouldn’t be news though. Here’s what Adam Smith, the founder of modern economics, wrote in 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

If you read Samuelson’s very short paper… then you’d realize that he doesn’t mention democracy at all. As strange as it may sound, he simply assumes omniscience on the part of government planners. Clearly he didn’t truly believe that government planners are omniscient! But from his perspective… discerning the actual demand for public goods was a very minor detail. Because he perceived that preference revelation was a minor detail… his grasp of economic reality was… tenuous… at best…

The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive. — Paul Samuelson, Economics

Back in the day, Economics was the most widely used economics textbook!

In summary… it’s human nature to want more for less. This works great when it comes to private goods because we all have the maximum incentive to shop around for better deals. Consumer choice gives producers the maximum incentive to offer better deals. Offering better deals depends on discovering better uses of society’s limited resources.

But when it comes to public goods… human nature doesn’t work so great. There’s considerable incentive to free-ride on other people’s contributions. So it’s reasonable to conclude that the private sector will undersupply public goods. The solution only requires one step though… taxation. That’s it! Because once the cost of contributing to public goods is a foregone conclusion… then human nature can work just as well for public goods as it does for private goods.

Is there a shortage of unskilled labor?

Reply to: Thank you for the response.

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According to the Department of Complete and Utter Nonsense… limiting the wages of doctors to $10/hour would help a gazillion times more people than it would harm. 

Look, this is really simple…

Is there a shortage of unskilled labor?

1. Yes
2. No

If you answer “Yes” then please explain why it would be necessary to artificially increase the wages of unskilled workers. If there was a shortage of doctors… would it be necessary to artificially increase their wages? Wouldn’t their wages already be high? Wouldn’t their wages already accurately reflect/communicate the fact that doctors were in short supply? 

If you answer “No” then please explain why you’d want to artificially increase the wages of unskilled workers. If there was a surplus of doctors… why would you want to artificially increase their wages? If we had too many doctors…. why would you want to increase people’s incentive to become doctors? Can you imagine the problems with a society where everyone was a doctor? 

Picture a world with two countries. One country has no doctors. The other country has all doctors. Would you want to live in this world? If not, then why not? 

The point of prices is to help ensure that resources are efficiently allocated. If one country has a shortage of doctors while another country has a surplus of doctors… then there will be a disparity in their wages. In the country that has too many doctors (surplus)… their wages will be very low. In the country that has too few doctors (shortage)… their wages will be very high. This disparity in wages will incentivize the poorly paid doctors to move to the country where doctors are highly paid (in short supply). In a relatively short time… the disparity in wages will disappear. Prices helped facilitate the optimal (most valuable) distribution (allocation) of doctors (a resource).

In that scenario, in order to keep it simple, we assumed a fixed supply of doctors. But in reality… the supply of doctors is not fixed. People can study to become doctors… and doctors can go into other fields. 

Whether people go into a field and/or stay in a field depends largely on wages. If there’s a shortage of people in a certain field, then we need wages to incentivize people to go into that field and/or stay in that field. If there’s a surplus of people in another field, then we need wages to encourage people to go into fields that have higher wages (shortages of people). 

The beauty of markets is that wages adjust automatically…

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

Regarding the congressional budget report PDF document that you shared… I searched it for the word “shortage”. Guess how many results there were? ZERO. 

When congress can be bothered to come up with some evidence that America is suffering from a shortage of unskilled labor then, and only then, will I be willing to entertain the notion that perhaps a minimum wage is the solution rather than the problem. 

Now here’s something that’s going to blow your mind. The government doesn’t make decisions because they’re economically sound. It makes decisions because they are politically popular. And it’s rarely ever the case that politically popular decisions will be economically sound. 

The only other possible explanation is that the government is entirely fucking clueless about basic economics. 

Centralized vs Decentralized Government

Reply to replies: "senseless human greed"

So it sounds like Xerox's limited understanding of economics is based on the "rational choice" model. No wonder his posts are such bollocks. - Strange

If this is your perception then you're not familiar with either model. The rational choice model is based on the idea that people usually make rational economic choices.

The rational consequence model, on the other hand, doesn't say anything about "usually". Instead, it's based on the idea that irrational choices have rational consequences. If Bob, who inherits $50,000, spends that money irrationally, then this will logically decrease his influence (over how society's limited resources are used). If, on the other hand, he spends that money rationally, then this will increase his influence.

Because irrational choices have rational consequences... there's no point in debating whether or not people are Homo economicus. Anybody who consistently makes irrational choices will have decreasingly smaller amounts of resources to irrationally allocate.

Therefore, the market doesn't need everybody to always make rational choices in order for it to maximize benefit. It just needs to punish irrational choices and reward rational choices... and that's exactly what it does. Taxpayers have more income/influence as a consequence of rational choices that they've made in the past. Arbitrarily decreasing their influence in the public sector places massive amounts of resources in less rational hands.

What i see as the major problem with this idea is how the hell is anyone of the agencies supposed to do any sort of budgeting? The constant flux of funds with no predictability would make it impossible and shut most of them down in rapid order. - Paleoichneum

Countless for-profit and non-profit organizations in the private sector manage to budget themselves despite the fact that they are fully subjected to the vagaries of demand. What's the alternative?

Should your favorite restaurant get paid to serve people who aren't there? Should you pay some kid to shovel snow during summer? Should people continue giving Apple the same amount of money regardless of what Apple does with it?

People don't exist to ensure that McDonald's is optimally funded. McDonald's exists to ensure that people's hunger is optimally satisfied. The more effectively McDonald's does its job... the more money it will receive.

Severing the direct connection between performance and reward will have logically detrimental consequences.

We don't exist for the government... the government exists for us. What the government does with our limited resources should provide us with the maximum benefit. And this can only occur when people are given the freedom to use their tax dollars to accurately communicate which government organizations (GOs) are providing them with the most benefit. Less beneficial GOs will have less resources to allocate and more beneficial resources will have more resources to allocate. Influence will be correctly proportioned to benefit provided.

What tool does evolution use for managing a species that, due to the error we call "mutation", ceases to be the most fit for its niche? Extinction. To avoid that outcome, we wield our governmental power differently than we wield our private purchasing power. - billvon

Centralization decreases the risk of extinction? So having humans all on one planet decreases the risk of extinction? You've got it really backwards. Decentralization is how we decrease the risk of extinction. - Xero

Nope, never claimed that. That is a strawman you have created.
It is difficult to have a serious discussion with someone who resorts to such childish tactics. - billvon

You said that we need the government as it currently is (centralized) in order to decrease the risk of extinction. Because I'm pretty sure that you didn't say that we need a decentralized government (pragmatarianism) in order to decrease the risk of extinction. And those are pretty much your only two options.

Pragmatarianism is better than the current system for two main reasons...

1. Maximizing benefit
2. Maximizing progress

These two things are closely related but they are definitely different. If you love a steak, and you're really in the mood for steak, then ordering, receiving and eating a great steak will maximize your benefit/enjoyment/utility/value. Your benefit will not be maximized if, instead of receiving a steak, you receive a big bowl of quinoa. Just like how Jacob's benefit was not maximized when, after working so many years to earn the right to marry Rachel, he was tricked into marrying her sister instead...

21 And Jacob said unto Laban, Give me my wife, for my days are fulfilled, that I may go in unto her.
22 And Laban gathered together all the men of the place, and made a feast.
23 And it came to pass in the evening, that he took Leah his daughter, and brought her to him; and he went in unto her.
24 And Laban gave unto his daughter Leah Zilpah his maid for an handmaid.
25 And it came to pass, that in the morning, behold, it was Leah: and he said to Laban, What is this thou hast done unto me? did not I serve with thee for Rachel? wherefore then hast thou beguiled me? - Genesis 29.

Hey Lynx_Fox... since you know so much about the reliability of Bible stories... what do you say about this one? Real or fake? Whether it's fact or fiction, it still makes me laugh whenever I read it.

Getting what we order maximizes benefit.

But...there's always room for improvement. Even great steaks have room for improvement. It's entirely possible that we could use laboratories, science and technology to "grow" steaks that are way more delicious than even the best "real" steaks. This would free-up millions and millions of acres currently used for cattle. We could free-up even more acres by doing the same thing with chicken and pigs. It would certainly make vegetarians really happy if we stopped slaughtering so many animals. And of course it would be entirely nonsensical to continue allocating the same amount of resources to raising and slaughtering animals once the need for doing so has been eliminated. Fortunately for us, markets largely ensure that irrational choices have rational consequences.

Just because there's always room for improvement though doesn't necessarily mean that it will always be easy to find and make improvements. The problem with a centralized system is that it severely limits the number of places that people look for improvements. Not only does it place too many eggs in too few baskets... but it also severely limits the incentive to look for improvements. Therefore, because of these two things, centralization results in less progress being made and... by extension... increases the risk of causing (or failing to prevent) very large failures... including extinction. Humans, because we are all different, naturally engage in diverse economic activities. Centralization decreases the variety of human activity and as such, stifles the very source of our progress and subjects us all to much greater risk.

To summarize... centralization decreases both benefit and progress. More often than not there's a disparity between what we order and what we receive. This disparity decreases the benefit that we derive from society's limited resources. Long-term benefit is also decreased because the items on the menu are less frequently improved in terms of their variety and benefit.

The problems of centralization could easily be eliminated simply by allowing people to choose where their taxes go. People would receive what they ordered and government organizations would have the maximum incentive to find and make improvements.

I think there's at least some concern that allowing people to choose where their taxes go would mean a lot more work for everybody. Who wants more work!?

This concern is really unfounded. It's like saying that everybody has to work more just because we're free (more or less) to shop in Africa. Nobody is forcing you to shop in both America and Africa. If you don't see any benefit of shopping in Africa then you're free not to shop in Africa. But just because you don't see the benefit doesn't mean that other people won't see the benefit.

Same thing with Home Depot and Bed Bath and Beyond. Just because you have the option to shop in these places doesn't mean that you are forced to do so. Clearly many people do choose to shop in these places... so it's a given that society increases its benefit by giving people the option to do so.

With pragmatarianism, because of the free-rider problem... paying taxes won't be optional. However, anybody that doesn't want to shop in the public sector will have the option to give their taxes to their impersonal shoppers (congress). How many people will choose this option? In other words, what's the demand for impersonal shoppers? We don't know. It would behoove us to find out given that congresspeople are currently spending several trillion dollars a year.

If most taxpayers choose to give their taxes to congress... then no harm, no foul. Evidently congress is doing an adequate job of divining the demand for public goods. But if, on the other hand, many taxpayers choose to spend their taxes themselves... then they'll only make this effort because they perceive a benefit to doing so. Their efforts to correct the disparities between supply and demand will greatly increase society's total benefit. What if most taxpayers choose to spend their taxes themselves? Then evidently congress is doing a terrible job of divining demand.