Choosing Wrongly

Reply to: Going with your example of Bob and his bakery, I do trust him to know best what decisions he makes…

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Why would Bob choose to spend his tax dollars on medical research? How can infrastructure funds possibly be put to their most valuable uses without Bob’s valuation?

Your concern is that Bob is going to spend his tax dollars on the wrong things. How many tax dollars do you imagine Bob spending in the public sector? Maybe $1,000 dollars? Or $10,000 dollars? Or $100,000 dollars? Or $1,000,000 dollars? The smaller his tax obligation… the less harmful the misallocation… the weaker your argument. The more tax dollars that Bob is able to wield in the public sector… the greater the potential damage… and the stronger your argument. Except for one minor detail…

If Bob is likely to make such terrible allocation decisions… then how did he earn so much money? Absolutely nothing is preventing baker Bob from randomly spending all his revenue on medical research. He has the freedom to do so. He has the freedom to spend his revenue on a gazillion other equally irrelevant things. So why doesn’t he? My guess is that it’s because he strongly prefers making, rather than losing, money.

I’m pretty sure that you’re not going to find Bob at Home Depot filling up his shopping cart with a bunch of expensive items which he has absolutely no need for. At least not regularly. Just like I’m pretty sure that you’re not going to find items at Home Depot that few people are putting into their shopping carts.

If you trust that Bob isn’t going to put a dozen unnecessary lawnmowers in his shopping cart… then why do suspect that he’s going to be inclined to put a bridge to nowhere in his shopping cart?

Thanks for the book recommendations. Not familiar with Fukuyama’s work but I’ve read a few things on behavioral economics. Just recently I think that Cass Sunstein might have somehow choice architectured me into writing a blog entry about the privatization of marriage.

It’s interesting digging into the psychology of human error… but it’s “funny” that the takeaway is usually more top down control. It’s as if human error doesn’t apply to voters and to the people they elect to prevent us from making the wrong decisions.

Apparently, then, the legislators and the organizers have received from Heaven an intelligence and virtue that place them beyond and above mankind; if so, let them show their titles to this superiority. — Frédéric Bastiat, The Law

People are fallible…except for public servants? People are fallible… therefore… we should put more eggs into one basket?

For me fallibilism means tolerance. It means giving people the freedom to choose where their taxes go… even when I strongly suspect that they are choosing wrongly.

Nobody’s written a book about pragmatarianism yet. Perhaps the closest books on the topic have been written by Julian Le Grand.

Welfare Theorem vs Progress Theorem

My post over at Bad Economics subreddit... Welfare Theorem vs Progress Theorem

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I'm a little confused...this link that I recently submitted was only upvoted by 13% of you.  Does this mean that 87% of you believe that my blog entry was an example of good economics?  Based on the few comments that were made, I'm guessing it doesn't...but then it means that most of you downvote good examples of bad economics.

It's entirely possible that my economics are truly super bad, but simply downvoting my submission doesn't show me where the badness is.   Neither does simply saying that it's bad economics.

When I was in school, the math teachers were always admonishing us to show our work.  That was a long time ago though.  I'm guessing that they don't do that anymore?  That's really too bad.  Being able to show how you reached a conclusion helps people understand whether you truly grasp the relevant concepts.  In other words, showing your work facilitates learning.

In the comments of my previous entry, abetadist was the only person who attempted to show their work.  This redditor brought up the Welfare Theorem so I thought I'd submit my reply as a new text post in order to show more of my own work and give everybody another opportunity to show their work.  If the bad economics are on my side, then I'd really like to fix the problem.  And if they are on your side, then I'd really like to help you fix the problem.

The Second Welfare Theorem (SWT) basically shows that redistributing wealth from the rich to the poor can improve total welfare.  The general logic is pretty straightforward... a poor person derives far more utility from one additional dollar than a rich person does.

My Progress Theorem (PT), on the other hand, shows that progress depends on difference.  From my perspective, this is also pretty straightforward...we can't make any progress by doing the same exact things with society's limited resources.  Therefore, the greater the variety of activity the more progress we'll make.

Both theorems want to eliminate poverty...but for different reasons.  The SWT wants to eliminate poverty because this would maximize total utility/welfare.  PT wants to eliminate poverty because this would increase the rate of progress.

By way of analogy, let's imagine a vegetable garden.  Right now a few of the veggies are really thriving, happy and productive because they are getting a lot of water while many of the other veggies are struggling, sad and unproductive because they aren't getting enough water.  In economic terms, the allocation of water is inefficient.

The logic of SWT is that redistributing water would increase the total happiness of the plants (Pareto optimal).  The logic of PT is that redistributing water would result in a much more bountiful and diverse harvest (more progress).

It might seem like PT only takes the SWT's logic one step further...

more happiness -> more difference (progress)

This in itself is pretty valuable.  A selfish person isn't going to care about the happiness of poor people.  Instead, he's going to care about his own happiness.  PT endeavors to show that we all benefit when difference is cultivated and developed.  Everybody stands to gain when we all have the opportunity to realize our full potential and share our unique contributions with society.

But the really important difference between PT and SWT is how they approach the elimination of poverty.

If we want to make real progress when it comes to the elimination of poverty...then, according to PT, we need difference in order to do so.  Trying the same approach over and over but expecting a different outcome is Einstein's definition of insanity.  It's also SWT's approach to the elimination of poverty.

If eliminating poverty was as easy as redistributing water in a vegetable garden...then poverty would have been eliminated long ago.  Clearly there's room for improvement and finding it requires facilitating different approaches.  This doesn't necessarily mean kicking welfare over to the private sector...it could also mean introducing a bottom up approach to public welfare.  Personally, I think this can be effectively accomplished by allowing taxpayers to choose where their taxes go.  People would still have to pay taxes but their direct allocations would reflect their very different perspectives.  As a result, there would be a diversity of public approaches to the elimination of poverty...which would increase the chances of room for improvement being found and progress being made.  

PT taps into Linus's Law which means that bugs (and solutions) will be spotted sooner rather than later.  Somebody with an especially keen eye might say, "The problem isn't a lack of water, it's these pesky little aphids.  All we have to do is introduce some ladybugs."

Put somewhat differently, PT makes the case for tolerance.  I'm arguing that tolerance and progress are positively correlated.  Tolerating difference, not just of opinion but of action, allows new paths to be taken and increases the chances of new discoveries being made.

So have you spotted any bugs with PT?  If so, then please show your work.

And if there's not enough economic "science" here for some of you, perhaps it might help if you realized that our current system of government is based on an economic model that assumes that congresspeople are omniscient.  You can't get any further from science than that.

Progress as a Function of Freedom

This blog entry is a brainstorm.  In other words...it's even less polished, organized and coherent than usual!  But I'm throwing it out there for the benefit of Mr. Kite.  I just looked that up.  Turns out that this is for the benefit of a long dead circus performer.  Sure...why not?

The topic of this high flying brainstorm is, as you can tell from the title, progress and freedom.  These two things are very much related.  Here's how I've very terribly illustrated this...

Freedom is the ability to allocate your resources differently.  The majority allocates their resources in one direction...and you can choose to allocate your resources in a different direction.

The perfect example is the story of Noah's ark.  Does it bother you that the story is fictitious?  It really shouldn't.  As the story goes...God informs Noah that he's going to destroy the world with a flood.  This information provides Noah with the incentive to use his resources to build a giant boat.  Even though he shares his partial knowledge with others...he's the only one who acts on it.  Everybody else laughs at him because they really doubt the business model.  The majority believes one thing and an extremely small minority believes another thing.  Both groups can't be right.  And in this case, neither can both groups be wrong.  Either the world will be destroyed by a flood...or it won't be.  Despite the fact that each group is certain that the other is wrong...there's no attempt to restrict each other's freedom.  Each group can allocate their resources differently.  The majority takes one path...and the minority takes another path.  It's a good thing that Noah's freedom was not restricted because it turns out that he chose the right path.

The moral of the story is that heterogeneous activity is essential.  Because the future is uncertain...we should hedge our bets by protecting individual freedom.  Doing so maximizes the variety of economic activity which maximizes discovery which maximizes progress.

Uncertainty, Risk, Fallibilism, Tolerance, Diversify, Hedge, Discovery, Innovation, Progress

This is the companion page for my next blog entry...Progress as a Function of Freedom.  This entry consists of a collection of quotes and passages that are relevant to the topic of progress.

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By dividing the whole circulation into a greater number of parts, the failure of any one company, an accident which, in the course of things, must sometimes happen, becomes of less consequence to the public. This free competition, too, obliges all bankers to be more liberal in their dealings with their customers, lest their rivals should carry them away. In general, if any branch of trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so. - Adam Smith, Wealth of Nations

Among men, on the contrary, the most dissimilar geniuses are of use to one another; the different produces of their respective talents, by the general disposition to truck, barter, and exchange, being brought, as it were, into a common stock, where every man may purchase whatever part of the produce of other men's talents he has occasion for. - Adam Smith, Wealth of Nations

Slaves, however, are very seldom inventive; and all the most important improvements, either in machinery, or in the arrangement and distribution of work which facilitate and abridge labour, have been the discoveries of freemen. - Adam Smith, Wealth of Nations

It is of importance that the landlord should be encouraged to cultivate a part of his own land. His capital is generally greater than that of the tenant, and with less skill he can frequently raise a greater produce. The landlord can afford to try experiments, and is generally disposed to do so. His unsuccessful experiments occasion only a moderate loss to himself. His successful ones contribute to the improvement and better cultivation of the whole country. - Adam Smith, Wealth of Nations

When a great company, or even a great merchant, has twenty or thirty ships at sea, they may, as it were, insure one another. The premium saved upon them all, may more than compensate such losses as they are likely to meet with in the common course of chances. - Adam Smith, Wealth of Nations

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. There are many commodities, therefore, which, in consequence of these improvements, come to be produced by so much less labour than before, that the increase of its price is more than compensated by the diminution of its quantity. - Adam Smith, Wealth of Nations

Prayer and Sacrifice

Jason Kuznicki, over at the League of Ordinary Gentlemen, recently posted this blog entry on voting...Voting Part I: I Am Jason, of the Lizard People.  It's pretty great except for a few minor details.

In his post he compares voting to sacrifice.  Actually...voting is closer to praying...and paying taxes is the sacrifice.  To sacrifice means to give up something you value.  But if you just give up something you value for nothing...then that isn't a sacrifice...it's a waste.  That's why, when we sacrifice something we value, we expect something of greater value in return...   

Sacrifice will always be distinguished from the pure gift (if there is any).  The sacrifice proposes an offering but only in the form of a destruction against which it exchanges, hopes for, or counts on a benefit, namely, a surplus-value or at least an amortization, a protection, and a security. - Jacques Derrida, Given Time: Counterfeit Money

In other words...we all want to profit.  Therefore, "sacrificing" is the same thing as "spending".  Consider this dialogue from John Holbo's book on Reason and Persuasion...

S: You could have been much more concise, Euthyphro, if you wanted to, by answering the main part of my question.  You're not exactly dying to teach me - that much is clear.  You were just on the point of doing so, but you turned aside.  If you had given the answer, I would already be well versed in holiness, thanks to you.  But as it is, the lover of inquiry must chase after his beloved, wherever he may lead him.  Once more then: what do you say that the holy is, or holiness?  Don't you say it's a kind of science of sacrifice and prayer?
E: I do.
S: To sacrifice is to give a gift to the gods; to pray is to ask them for something?
E:  Definitely, Socrates.
S: Then holiness must be a science of begging from the gods and giving to them, on this account.
E: You have grasped my meaning perfectly, Socrates.
S: That is because I want so badly to take in your wisdom that I concentrate my whole intellect upon it, lest a word of yours fall to the ground.  But tell me, what is this service to the gods?  You say it is to beg from them and give to them?
E: I do
S: And to ask correctly would be to ask them to give us the things we need?
E: What else?
S: And to give correctly is to give them in return what they need from us?  For it would hardly represent skill in giving to offer a gift that is not needed in the least.
E: True, Socrates
S: Holiness will then be a sort of art for bartering between gods and men?
E: Bartering, yes - if you prefer to call it that.

Oh man, Socrates cracks me up.  That's probably one of the earliest documented cases of economic imperialism...as in economics invading other fields of study...in this case religion.  There's famine (scarcity of rain) so you sacrifice a cow to your god and pray for rain.  The objective is always abundance...which is epitomized by Eden and Heaven.  And it's the same concept with our political system.  We sacrifice our taxes and pray for economic growth...aka abundance.  So here's the breakdown...

Religion: trade between man and god
Politics: trade between man and government
Economics: trade between man and man

But it's all trade!  Therefore, it's all economics.  The debate...as always...is which company/party/god actually does listen to our prayers and is capable of providing abundance.  By far the very best reference that I've run across that encapsulates this debate is in the Bible...1 Kings 18.  If you haven't already read the Bible then this is the one story that will give you the most bang for your buck.

Here's a bit of background on the story.  The people of Israel started worshiping another god...Baal...and because God is a jealous god...he caused a severe drought.  These days droughts are still a big deal...but thanks to the extent of international trade...they don't have as severe an impact as they used to have.  The closest equivalent we have are depressions/recessions.

In order for the Israelites to understand exactly why they were experiencing such a severe drought...God sent his prophet Elijah to inform them.  Perhaps most of them already suspected that other people's behavior had something to do with the drought...but they couldn't be certain.  Kind of like with us and depressions.  What we all want is irrefutable proof.  So Elijah offers to conclusively prove which god is the true god.

20 So Ahab sent unto all the children of Israel, and gathered the prophets together unto mount Carmel.
21 And Elijah came unto all the people, and said, How long halt ye between two opinions? if the Lord be God, follow him: but if Baal, then follow him. And the people answered him not a word.
22 Then said Elijah unto the people, I, even I only, remain a prophet of the Lord; but Baal's prophets are four hundred and fifty men.
23 Let them therefore give us two bullocks; and let them choose one bullock for themselves, and cut it in pieces, and lay it on wood, and put no fire under: and I will dress the other bullock, and lay it on wood, and put no fire under:
24 And call ye on the name of your gods, and I will call on the name of the Lord: and the God that answereth by fire, let him be God. And all the people answered and said, It is well spoken.
25 And Elijah said unto the prophets of Baal, Choose you one bullock for yourselves, and dress it first; for ye are many; and call on the name of your gods, but put no fire under.
26 And they took the bullock which was given them, and they dressed it, and called on the name of Baal from morning even until noon, saying, O Baal, hear us. But there was no voice, nor any that answered. And they leaped upon the altar which was made.
27 And it came to pass at noon, that Elijah mocked them, and said, Cry aloud: for he is a god; either he is talking, or he is pursuing, or he is in a journey, or peradventure he sleepeth, and must be awaked.
28 And they cried aloud, and cut themselves after their manner with knives and lancets, till the blood gushed out upon them.
29 And it came to pass, when midday was past, and they prophesied until the time of the offering of the evening sacrifice, that there was neither voice, nor any to answer, nor any that regarded.
30 And Elijah said unto all the people, Come near unto me. And all the people came near unto him. And he repaired the altar of the Lord that was broken down.
31 And Elijah took twelve stones, according to the number of the tribes of the sons of Jacob, unto whom the word of the Lord came, saying, Israel shall be thy name:
32 And with the stones he built an altar in the name of the Lord: and he made a trench about the altar, as great as would contain two measures of seed.
33 And he put the wood in order, and cut the bullock in pieces, and laid him on the wood, and said, Fill four barrels with water, and pour it on the burnt sacrifice, and on the wood.
34 And he said, Do it the second time. And they did it the second time. And he said, Do it the third time. And they did it the third time.
35 And the water ran round about the altar; and he filled the trench also with water.
36 And it came to pass at the time of the offering of the evening sacrifice, that Elijah the prophet came near, and said, Lord God of Abraham, Isaac, and of Israel, let it be known this day that thou art God in Israel, and that I am thy servant, and that I have done all these things at thy word.
37 Hear me, O Lord, hear me, that this people may know that thou art the Lord God, and that thou hast turned their heart back again.
38 Then the fire of the Lord fell, and consumed the burnt sacrifice, and the wood, and the stones, and the dust, and licked up the water that was in the trench.
39 And when all the people saw it, they fell on their faces: and they said, The Lord, he is the God; the Lord, he is the God.
40 And Elijah said unto them, Take the prophets of Baal; let not one of them escape. And they took them: and Elijah brought them down to the brook Kishon, and slew them there.
41 And Elijah said unto Ahab, Get thee up, eat and drink; for there is a sound of abundance of rain.

Man, I really love that story.  It's timeless and infinitely applicable.  For example...it applies to the debate between liberals and conservatives and it also applies to me right here right now.  Who am I?  I am Elijah...I am a prophet of Baal...I am Joel Osteen...I am Rand Paul...I am Paul Krugman...I am just another entrepreneur trying to sell you a product/belief/idea that will increase your abundance.

What I want you to consume is the belief that tolerance will produce abundance.  You spend your money on your products/services and I'll spend my money on my products/services.  You make your sacrifices to your gods and I'll make my sacrifices to my gods.  You spend your taxes on your public goods and I'll spend my taxes on my public goods.  There's no fundamental difference...it's all trade for abundance sake.  The thing is...most of you already believe in economic and religious tolerance...but barely anybody believes in political tolerance.  But if you don't believe in political tolerance...then unfortunately you don't understand how tolerance produces abundance.

How does tolerance produce abundance?  Tolerance produces abundances because it allows for heterogeneous activity.  It gives people the freedom to tackle the same problem from different angles.  The problem of scarcity has an infinite number of solutions...and abundance abounds when we give each other the freedom to come up with new and innovative solutions.  And this is as true in the public sector as it is in the private sector.

Eject vs Exit

It was the first day of class and I was the first person there.  The second person there was some gangster looking Chinese guy...who decided to sit right next to me.  Who does that?  It's not as bad as violating the one urinal rule...but it's pretty darn close.

That was a long time ago.  Andy and I have been good friends ever since.  He's not at all a gangster...but he's at least one standard deviation from the norm.

Another friend that I met at school was Ming.  He's also Chinese and also at least one standard deviation from the norm.  He's an Asian redneck with a degree in physics.  Andy and I give him a hard time because  Dick Cheney shot him twice.  Dick Cheney is an old, half blind Chinese guy that Ming goes hunting with.  Who does that? 

Not too long ago the three of us were hanging out.  Ming and Andy were sitting together on a loveseat sofa.  Andy was on his laptop while Ming was reading some gun magazine.   I was going to ask Ming a question when I noticed that Andy was about to sneeze.  Here's where it gets good.  Rather than turning his head away from Ming, Andy sneezed directly on Ming, quickly glanced at me and then went right back to his laptop without saying a single thing.  What's even stranger is that Ming didn't say a thing either.

Woah!  It was remarkable!  I couldn't even remember the last time that I had observed some new human behavior.  So I asked Ming if he was going to tell Andy something.  Ming's quick response was, "It's ok it's ok."   Then I gave Andy a hard time...especially the part where he glanced up at me to see if I had witnessed his transgression.  Andy was not at all remorseful.  

It didn't bother me one bit that Andy sneezed directly on Ming...I thought it was hilarious.  But wouldn't it have been strange if I had made Andy sit somewhere else?  It would have been strange because Ming was perfectly capable of "exit".  Nothing was stopping him from sitting elsewhere.  So if he wasn't bothered enough by Andy's behavior to move...then why would I "eject" Andy from the couch?

A few days ago I was "ejected" from the EconLog Blog because of my comment on Bryan Caplan's blog entry...Is Bleeding-Heart Libertarianism Evil?  Here was the comment that I submitted...

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You know who else wanted to throw the baby out with the bath water? My Mommmm!! That was a Muscle Man reference. Errr...he's a character on the Regular Show.

Actually, Murray Rothbard also wanted to throw the baby out with the bath water. The "minor" detail he missed was...well...the baby. Neither the government...nor the BHL project...is all bath water. The government does a few things pretty well...and so does the BHL project. You know what the BHL project does well? Heterogeneous activity. It hedges its bets. It doesn't put all its eggs in one basket.

There's Peter Boettke...From Capitalism and Freedom to Free to Choose...and Andrew Cohen...States Must Do Bad...and Gary Chartier...Violence, Wars, and States...and Jessica Flanigan offers some interesting food for thought... Can you sell your future self into slavery?

You know which part of the BHL project consists of bath water? The part where Zwolinski banned me from commenting on his website. My comments are pretty much priceless...so not sure why Zwolinski would want to ban me. Well...unless value is subjective. Which would be a pretty good argument for allowing taxpayers to use their taxes to indicate which part of the government is the baby and which part is the bath water.

Yeah, pragmatarianism is on the rise.

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You can compare my comment to the EconLog's comment policy.  Or...you can just take my word for it that my comment did not even come close to violating their comment policy.   According to the e-mail I received, the problem was that it was the 4th time that I had linked to the Wikipedia entry on Tax Choice.

Clearly they were willing to tolerate the first three times that I sneezed on them.  But the fourth time was when they decided to put an end to my nonsense.  Everybody has a breaking point.

Is the problem with me or them?  Well...given that I've also been ejected from the Crooked Timber blog and the BHL blog...it would seem pretty straightforward that I'm the one with the behavioral problems.

It's not all that straightforward though because readers are perfectly capable of picking and choosing what they read.  If people decide it's not worth it to read my comments...then nobody is forcing them to read my comments.  They can easily "exit" from  my comments simply by skipping over them.  I have no problem skipping over comments.  Who has a problem skipping over comments?  Anybody who has difficulty skipping over comments will sacrifice a lot of their time to the Gods of the Internet.

The trick is understanding that...just because I might not find value in your comments does not mean that nobody will find value in your comments.  The subjectivity of values forms the basis of tolerance.  But moral arguments are not sufficient for tolerance.  Just because somebody understands the moral arguments for tolerance does not mean that they will understand why taxpayers should be free to choose which government organizations they give their taxes to.  People just don't understand why we should be tolerant enough to allow people to directly allocate their taxes.

Therefore, economics trumps philosophy.  Well...maybe not...but that will be the subject of my next post.  Unless my priorities change.