The Inadequacy Of The Opportunity Cost Concept

Imagine a carpenter using a headless hammer to try and drive a nail.  After a while he stops hitting the nail with the wooden handle and scratches his head wondering what the problem is.  Would you tell him that, in order for a hammer to be effective, the handle needs a solid metal head?

For a while now I've been trying to use the opportunity cost concept to knock some economic sense into people.  Unfortunately it's not working.  Opportunity cost, as a tool, is obviously missing something essential.  But what's it missing?

Maybe it will help to have a day dream discussion with the liberal economist John Quiggin (my second favorite Crooked Timber liberal)...

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Xero:  Thanks for paying for my plane ticket to Australia...I've always wanted to visit.
Quiggin:  You're very welcome.  I've been looking forward to meeting you for a while.
Xero: Likewise!
Quiggin: Are you hungry?  I've got the barbie fired up and there's plenty of cold beer.
Xero: Awesome!  I love bbq and beer...almost as much as I love economics.  Speaking of which...how's it going with Hazlitt's sequel?
Quiggin: As you know, I've been working on this book for a really long time now.  I'd like to make sure that it's as solid as possible, which is of course why you're here!
Xero: You're writing a book based on the fact that opportunity cost is what matters...so I'm more than happy to help out any way that I can.
Quiggin:  As somebody who has extensively studied the opportunity cost concept, what faults do you see with my understanding of it?
Xero:  You argue, for example, that war has significant opportunity costs (here, here and here), which I completely agree with. Perhaps more often than not, there are much more valuable uses of society's limited resources.  The inherent problem I see with your argument is that you give no plausible method for accurately assessing the value of war compared to the value of the alternatives.  You just list some nice alternatives to war and expect your readers to assume that any of these alternatives would have created more value for society.
Quiggin: And your solution would be to allow taxpayers to choose where their taxes go?
Xero:  Yes, if our theory is correct that war really isn't the most valuable use of society's limited resources, then most members of society will not be willing to sacrifice the alternative uses of their own tax dollars.
Quiggin:  Isn't there another way to accurately asses the value of the alternatives?
Xero:  The mainstream method has been to simply assume omniscience on the part of government leaders.  But if you maintain this absurd assumption, then you really can't ever question whether war is truly the most valuable use of society's limited resources.  Given that you do question the allocation decisions of government leaders, it means that you've dropped this absurd assumption...but you haven't shared which valuation system you've replaced it with.

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Let's break it down...

1. War uses limited resources that could have been put to different uses
2. Some of those different uses might have created more value for society
3. It's important for resources to create more, rather than less, value for society

What Would Tyler Cowen Do For A Klondike Bar?

Would Tyler Cowen do this for a Klondike Bar?  Does it really matter what Cowen would do for a Klondike Bar?  Does it really matter how much Cowen values a Klondike Bar?  Does it really matter how much Cowen values dessert?  Does it really matter how much Cowen values food?  Does it really matter how much Cowen values national defense?

How could these things not matter?  Perhaps Cowen's valuation of food matters but his valuation of defense does not?  Because...he needs to be a defense expert in order for his valuation of his own safety to matter?  Just like he needs to be a food expert in order for his valuation of his own hunger to matter?

Personally, I think Cowen's valuations do matter.  Not just some of them...but all of them.  If I didn't, then I wouldn't be such a big fan of the idea of allowing everybody to directly allocate their taxes.

What's surprising and very intriguing is that neither Cowen nor his co-blogger Alex Tabarrok agree with me.  They don't believe that all their valuations matter...just some of them.  Why do they have a valuation double standard (VDS)?  How important could individual valuation really be if it's only partially applicable?

In a few blog entries I've encouraged them to defend/explain/justify their VDS...

• Prices vs Chips - 16 May 2014
• Heaven's Going To Burn Your Eyes - 20 May 2014
• Crazy Cable Confusion: Costless Content Creation - 2 June 2014
• Progress as a Function of Freedom - 1 July 2014

To his credit, Tabarrok did take the the time to respond.  Unfortunately, his response didn't really clear things up.

But a few days ago I was happy to discover that Cowen posted a blog entry that provided some tantalizing insight into his VDS...

My thoughts on quadratic voting and politics as education

The concept of quadratic voting was first brought to my attention last year in a comment on the tax choice FAQ page.  This was my reply to the comment...

Dear Rothbard, The Government Isn't Beyond Repair

Context: Progress Depends on Freedom

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LO! I have definitively proven that Neodoxianism maximizes output and utility. What is this missing? Microfoundations explaining how I get here. The problem with this analysis is that it is missing analysis. What I have learned about the true economist, for if there's one thing that I am, it's a true economist, and of the difference between the faux and the true economist, for if there's one thing that I've seen in failed economic analyses it is this, is that the true economist explains in a step-by-step manner the underlying foundations of his theory. We have a million utopian schemes, and few economic ones, exactly because this is so hard to do. - Neodoxy

The underlying foundation of my theory is that consumers want the most bang for their buck. If, in a pragmatarian system, taxpayers choose X rather than Y, then it's because X > Y. Do you want to argue that they will choose the less valuable option? If so, then you're arguing that markets create less, rather than more, value over time.

Let's consider a specific example...

X = boycotting congress
Y = supporting congress

Is X > Y? Does X provide more value than Y does? If so, then wouldn't taxpayers choose X rather than Y? If they did...then pragmatarianism -> (would lead to) anarcho-capitalism. If they didn't...then here are some possible explanations...

#1. Y > X
#2. taxpayers are not value maximizers
#3. taxpayers are mistaken...and they are too dumb to exchange error for truth
#4. taxpayers are mistaken...but they are smart enough to exchange error for truth

Which explanation do you pick?

If #1, then: pragmatarianism > anarcho-capitalism
If #2, then: socialism (imposed valuation) > pragmatarianism AND anarcho-capitalism
If #3, then: socialism (imposed valuation) > pragmatarianism AND anarcho-capitalism
If #4, then: pragmatarianism -> anarcho-capitalism

Is there another possible explanation for why taxpayers would support, rather than boycott, congress?

And once more, no economist are you! This time your error is merely of exact incarnation, rather than type, however. If you're interested in the exact error that you are making, Dr. Rothbard describes it best here: Toward a Reconstruction of Utility and Welfare Economics.  In short, utility cannot be quantified and the only standard we have for welfare maximization is pareto-optimality, which you violate. - Neodoxy

Really, no economist am I? I already explained that I will always beat you because I always do my homework. I'm not a slouch like yourself. If you had done your homework you would have realized that I cite that exact paper by Rothbard in 5 different blog entries...

• Libertarian Economics
• Will Noah Smith Sing My Praises?
• Noah Smith vs Austrians
• Visualizing And Evaluating The Public Goodness Threshold
• Clarifying The Dark Enlightenment

Rothbard correctly identified exactly how the government is seriously broken...99.999% of citizens are prohibited from individually valuating goods supplied by the government. Except he mistakenly concluded that the government is beyond repair. Therefore, Rothbard's recommendation, which was to throw the government away, was incorrect. The government can easily be repaired simply by permitting individual valuation. Taxpayers just need to be free to choose where their taxes go. Each and every taxpayer would valuate whether X > Y. This would ensure, assuming as Rothbard (and every other free-market economist) does that consumers are utility maximizers, that whatever the government does, it will increase, rather than decrease, social utility. If allowing congress to determine the tax rate increases social utility...then taxpayers will support it. If it doesn't, then they won't. Presuming what does, or doesn't, increase social utility is the fatal error of socialism. Rothbard ironically, but inadvertently, made this exact same error by being more than willing to push a button that would abolish the government in one fell swoop.

I have to explain this to you because clearly you don't grasp Rothbard's argument. If you did, then you would understand that pragmatarianism (individual valuation in the public sector) completely invalidates Rothbard's recommendation.

Let me break it down for you...

1. Rothbard correctly diagnosed the disease (absence of individual valuation)
2. But he incorrectly assumed that there wasn't a cure (addition of individual valuation)
3. So he incorrectly recommended that the patient be euthanized.

Rothberror = right diagnosis, wrong remedy.

1. The doctor correctly diagnosed that the disease was scurvy (absence of vitamin C)
2. But he incorrectly assumed that there wasn't a cure (addition of vitamin C)
3. So he incorrectly recommended that the patient be euthanized.

The doctor committed a rothberror.

The question is...why are you citing a paper that you either haven't read or don't understand? Oh yeah, it's because you're a slouch. Please do us all a favor and follow the advice that I gave you last time...spend less time writing and more time reading.

The rest of what you wrote is just as ignorant as your understanding of Rothbard.

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Here's an update on some Reddit communities...

• r/AnarchoCapitalism - 17,870 readers
• r/Austrian_Economics - 6,979 readers
• r/ThoughtfulLibertarian - 463 readers
• r/InvisibleHand - 198 readers
• r/Neoreaction - 86 readers
• r/PublicFinance - 25 readers
• r/Linvoid - 2 reader

The Taxpayer is King

Last year Rep. John Campbell (R-Calif.) proposed legislation that would make it easier for people to donate money to the US government.  He called it the "Put Your Money Where Your Mouth Is Act".  Coincidentally I recently created a Wikipedia entry for the same expression...put your money where your mouth is.  Unfortunately the bill seems to only have a 1% chance of being enacted.

It's a really great idea though so I sent an e-mail to Rep. Campbell.  Unfortunately, I forgot to read the small print (it really wasn't that small).  Here was the automated message I received...

Your zip code indicates that you are outside of the 48th District of California.  Regrettably, I am unable to reply to any email from constituents outside of the 48th District of California.  Click Here to return to my home page.

Eh.  I'm only an hour away from Orange County.  "Close enough" shouldn't just count for horseshoes and hand grenades...it should also count for political representation.  Anyways, I decided to just post the letter here...

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Greetings,

I really liked your "Put Your Money Where Your Mouth Is Act" so thought I'd share a proposal based on the same concept.  It's called tax choice.  It would give taxpayers the option to choose which government organizations they give their taxes to.  Here's the Wikipedia entry I created for the concept...
http://en.wikipedia.org/wiki/Tax_choice

One topic that frequently comes up is the issue of granularity.  That got me thinking about whether taxpayers might want the option to give their taxes to specific congresspeople.  People who voted for you could give their taxes to you...and you'd have complete discretion over how you spent their taxes in the public sector.  If they were happy with their ROI then they'd continue giving their taxes to you.  If not...then they'd just give their taxes to another congressperson or shop for themselves.

Did you know that there are 3,520,000 google search results for "the customer is king" and only 55 results for "the taxpayer is king"?  That's a problem.

So nothing would be a stronger signal of your genuineness than proposing the Taxpayer is King Act.  Go big or go home...right?

Cheers,
Carlos