Perfect Information versus Partial Knowledge

People know external things (circumstances) and internal things (values). They know how many potholes they run over and how much cancer research they'd be willing to forego to fix them. They know how many times they've been mugged and how much education they'd be willing to forego for more police. They know how many nights they've lost sleep because of the threat of terror and how much space exploration they'd be willing to forego for more peace of mind.

All this information would be integrated in the public sector if people were free to shop for themselves.  If you don't want people to shop for themselves then it's because you believe one of the following...

A. the political process allows this information to be adequately conveyed to congresspeople
B. resources can be put to their most valuable uses without all this information
C. congresspeople are omniscient

Which one do you believe?

Buchanan insisted on the same conclusion in an article published a few months after the conference in October 1959 in the Journal of Law and Economics. “Positive Economics, Welfare Economics, and Political Economy” opposed the positive political economy approach of welfare economics -- in which the role of the economist consists in discovering “what people want” (1959, p. 137) and “what is the structure of individual values” (1959, p. 130) -- to the normative new welfare economics -- in which the economist, seeing himself as an external and omniscient observer, is capable of “reading” the individual preferences of the individuals and accordingly of determining the best possible outcome for the collectivity - Alain Marciano, Why markets do not fail

It must be confessed, however, that we seldom know enough to decide in what fields and to what extent the State, on account of the gaps between private and public costs could interfere with individual choice. - Arthur Pigou, Some Aspects of the Welfare State.

At this point, a question naturally arises: how can we justify the fact that the central government is less capable (because of less information) of satisfying citizens' preferences (Oates 2005)? - Brian Dollery, Lorenzo Robotti, The Theory and Practice of Local Government Reform

Jay Lund's chapter explores the informational problems implied in finding the best way to allocate water resources. In this respect, the main advantage of water trading is that its effectiveness does not require having in advance detailed information on the value of water on any place and for any alternative use. Engaging in trade is a voluntary decision, thus the market is itself a preference revelation mechanism. No particular prior information on people's preferences is then required in advance for trading to find mutually beneficial deals. By definition, when a transaction takes place, the maximum willingess to pay of those buying water is higher than the minimum compensation required by the sellers of water property rights and the deal improves the welfare of those engaged in it. Allowing for water trading thus reduces the information burden of water authorities as they do not need detailed information beyond that required to reach a decision on the overall constraints on the water use in the entire economy. - Carlos Mario Gomez, Incentives and prices in water trading

Third, keeping citizens off the street meant that 99% of the eyes and brains that might solve a crime were being wasted. Eric S Raymond famously said that "given enough eyeballs, all bugs are shallow". It was thousands of citizen photographs that helped break this case, and it was a citizen who found the second bomber. Yes, that's right – it wasn't until the stupid lock-down was ended that a citizen found the second murderer - Clark, security theater, martial law, and a tale that trumps every cop-and-donut joke you've ever heard

Our discontent with the original Samuelson rule stems from its failure to account for tax payers’ response to public expenditure and taxation. The rule was derived for an omnipotent, omniscient and benevolent government, a government which, by definition, need not consider people’s responses to its actions. Drop that assumption, restrict government to the choice of tax rates and public expenditures, and the response to its actions must be taken into account. - Dan Usher, Should the Samuelson Rule Be Modified to Account for the Marginal Cost of Public Funds?

The instruments of intervention became the tools with which to apply government knowledge. Resources were directed and allocated by the state, by political and bureaucratic decision making, rather than by the elemental forces of supply and demand - forces shaped by the knowledge of those in the marketplace. - Daniel Yergin, Joseph Stanislaw, The Commanding Heights

One of the strongest arguments in favor of letting people interact freely in a market under property rights institutions is that it is the best known way to utilize the decentralized knowledge of the society— including the knowledge that each individual has about his own values. - David Friedman, The Machinery of Freedom

Individuals express preferences about changes in the state of the world virtually every moment of the day. The medium through which they do this is the market place. A vote for something is revealed by the decision to purchase a good or service. A vote against, or an expression of indifference, is revealed by the absence of a decision to purchase. Thus the market place provides a very powerful indicator of preferences. - David Pearce, Dominic Moran, Dan Biller, Handbook of Biodiversity Valuation A Guide for Policy Makers

Individuals’ actions necessarily rest on imperfect knowledge, and people often appear to act without sufficient information. However, intractable problems of knowledge and incentives impede government officials’ attempts to improve on market-generated knowledge. Knowledge, consisting of information plus judgment, is highly subjective. Therefore, the optimal amount of information varies from person to person, depending on the expected costs and benefits. It should not be surprising that government attempts to improve consumer knowledge frequently are disappointing. Hayek labels as the fatal conceit the idea that human beings can determine what is best for society and use the political process to shape the world according to their wishes. - E.C. Pasour, Consumer Information and the Calculation Debate

Hayek stressed that the knowledge needed to achieve a rational economic order consists of dispersed bits of knowledge held by individuals. This knowledge is highly specialized: only individuals involved in deciding resource use know the relative importance of the various ends or purposes for which resources might be used. Thus, the crucial problem confronting society is how to use the specialized knowledge of different people in the production of goods and services to satisfy consumers. - E.C. Pasour, Consumer Information and the Calculation Debate

Economic planning in a socialist system must necessarily founder on the rocks of ignorance. First, the data necessary to find out the pattern of production that best fits consumer preferences are never given, as often assumed by planning proponents. Second, and even more important, the central planner cannot obtain the necessary data. Much of the data on available resources, production alternatives, and consumer demand constantly changes as economic conditions change. Thus, decentralization is the only means of coordinating economic activity through which the specialized knowledge of individuals can be taken into account and used promptly. - E.C. Pasour, Consumer Information and the Calculation Debate

Governments, like private firms, do not necessarily have ‘the necessary information’ about people’s demand functions to provide public goods at efficient levels. Without non-exclusion there does not seem to be a compelling role for government provision, that is, there is no 'public' in 'public goods'. The general consensus seems to be that it is better to restrict public goods, and hence the a priori case for government intervention, to goods that are both non-rival and non-excludable. - Frances Woolley, Why public goods are a pedagogical bad

It is a world of change in which we live, and a world of uncertainty. We live only by knowing something about the future; while the problems of life, or of conduct at least, arise from the fact that we know so little. This is as true of business as of other spheres of activity. The essence of the situation is action according to opinion, of greater or less foundation and value, neither entire ignorance nor complete and perfect information, but partial knowledge. - Frank H Knight, Risk, Uncertainty, and Profit

To the naïve mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions, and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account. This is the main reason for rejecting the requirements of constructivist rationalism. - Friedrich A. Hayek, The Fatal Conceit

It may be admitted that, so far as scientific knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available...[Yet] scientific knowledge is not the sum of all knowledge...[A] little reflection will show that there is . . . the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others in that he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation. - Friedrich A. Hayek

The problem is thus in no way solved if we can show that all the facts, if they were known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world. - Friedrich A. Hayek, The Use of Knowledge in Society

It is the extensive cooperation among highly specialized workers that enables advanced economies to utilize a vast amount of knowledge. This is why Hayek's emphasis on the role of prices and markets in combining efficiently the specialized knowledge of different workers is so important in appreciating the performance of rich and complex economies. - Gary S. Becker

A free society is one in which individuals are free to discover for themselves the available range of alternatives. In his masterly critiques of the theory of central planning, Hayek directed attention to the circumstance that the information available in an economy is always scattered among countless individuals, never concentrated in the mind of a single central planner. Hayek pointed to the need for a social institutional structure capable of organizing the scattered scraps of available information so they can be used for the efficient allocation of society’s resources. The competitive market, Hayek showed us, is a discovery process, one in which society discovers what options are feasible and how important they are. - Israel Kirzner, Perception, Opportunity, and Profit

An individual is fully sensible of the value of the article he is consuming; it has probably cost him a world of labour, perseverance, and economy; he can easily balance the satisfaction he derives from its consumption against the loss it will involve. But a government is not so immediately interested in regularity and economy, nor does it so soon feel the ill consequences of the opposite qualities. Besides, private persons have a further motive than even self-interest; their feelings are concerned; their economy may be a benefit to the objects of their affection; whereas, the economy of a ruler accrues to the benefit of those he knows very little of; and perhaps he is but husbanding for an extravagant and rival successor. - J.B. Say, A Treatise on Political Economy

It must be remembered, besides, that even if a government were superior in intelligence and knowledge to any single individual in the nation, it must be inferior to all the individuals of the nation taken together. It can neither possess in itself, nor enlist in its service, more than a portion of the acquirements and capacities which the country contains, applicable to any given purpose. - J.S. Mill, Principles of Political Economy with some of their Applications to Social Philosophy

The fact that such a tax institution always exists conceptually does not, of course, imply that it can be determined independently of the revealed choices of individuals themselves. If an omniscient observer should be present, and if he were asked to "read" all individual preference maps, he could then describe the "optimal" structure of tax prices. Failing this, there is no means of ascertaining with any degree of accuracy the "efficient" tax structure or institution. - James M. Buchanan, Public Finance in Democratic Process

Individuals are not, of course, omniscient, even those who think themselves to be. The securing of information about the predicted effects of alternatives is a costly process, even in a world with reasonable certainty. Recognizing this, individual utility-maximizing behavior remains “rational” when choices are made on the basis of less-than-perfect information. There is some “optimal” investment in fact-finding and analysis for the deciding individual at each stage of his deliberation. - James M. Buchanan

Markets, for instance, are usually prima facie diverse because they are made up of people with different attitudes toward risk, different time horizons, different investing styles, and different information. On teams or in organizations, by contrast, cognitive diversity needs to be actively selected, and it's important to do so because in small groups it's easy for a few biased individuals to exert undue influence and skew the group's collective decision. - James Surowiecki

Pareto-optimal provision clearly also requires full knowledge of individual preference functions by the central planning agency. The preference-revelation problems involved in practice are a familiar theme in the modern public goods literature. - John G. Head, Public Goods and Multi-Level Government

If the knowledge problem identified by Mises and Hayek make rational central planning impossible for something as simple as a quart of milk, what chance do central planners have to make rational, effective plans for something as complex and difficult as educating the children of a diverse nation of more than 300 million? - Kevin D. Williamson, The Politically Incorrect Guide to Socialism

As we've seen, socialism cannot serve citizens' interests because central planners have no way of knowing what those interests are. In the absence of the information conveyed through marketplace activity - particularly through prices - economic planners are left with highly defective sources of information: opinion polling, surveys, stated preferences (which normally differ dramatically from real or revealed preferences), and the like. - Kevin D. Williamson, The Politically Incorrect Guide to Socialism

This process of redistribution of wealth is not prompted by a concatenation of hazards. Those who participate in it are not playing a game of chance, but a game of skill. This process, like all real dynamic processes, reflects the transmission of knowledge from mind to mind. It is possible only because some people have knowledge that others have not yet acquired, because knowledge of change and its implications spread gradually and unevenly throughout society. - Ludwig M. Lachmann, The Market Economy and the Distribution of Wealth

If well-meaning policymakers possess all the relevant information about individuals' true preferences, their cognitive biases, and the choice contexts in which they manifest themselves, then policymakers could potentially implement paternalist policies that improve the welfare of individuals by their own standards. But lacking such information, we cannot conclude that actual paternalism will make their decisions better; under a wide range of circumstances, it will even make them worse. New paternalists have not taken the knowledge problems that are evident from the underlying behavioral and economic research seriously enough. - Mario J. Rizzo, Douglas Glen Whitman, The Knowledge Problem of New Paternalism

Deprived of this guidance, and without the incentive of personal interest, accounts and statistics, however complete, would be of very little use, and unless they were the mundane representatives of an omniscient providence, the directors of production would be quite unable to avoid occasional excess or deficiency of supply, which would cause terrible disorder and confusion, with effects infinitely more serious than mistakes made by private enterprise, which, as a whole, is never actuated by precisely similar motives; thus its errors correct each other, and being uninfluenced by prejudice, or amour proper, it shows a marvellous quickness of adoption; mistakes committed by the state would be not only far more serious, but far more difficult to remedy. - Paul Leroy Beaulieu, Collectivism

Each individual is unique, not fully duplicated anywhere else. Therefore, each individual possesses considerable knowledge that is not and cannot be fully known by anyone else - by government or by any group of people. Each individual has preferences - needs and wants - of which only he can be cognizant at any point in time; he also has a unique capacity to envision new wants when old ones have been partially or fully satisfied. The individual knows, within limits, what gives him gain and causes him pain; and he knows this before any of his actions are revealed to others. He can understand the subjective basis for his actions before he acts; others can only observe his actions after the fact and guess at his motivation by reflecting on their own, different preferences. - Richard B. McKenzie, Bound to Be Free

True, consumers do demand a given product, say, a certain model automobile. But how, outside the market process, can the government know what consumers want? Can the government simply ask consumers what they want? - Richard B. McKenzie, Bound to Be Free

The very division of knowledge increases the necessary ignorance of the individual of this knowledge. The division of knowledge increases the need for a decentralized decision-making system - the market. - Richard B. McKenzie, Bound to Be Free

Expositions of welfare economics typically assume that the analyst possesses knowledge that is in no one’s capacity to possess. A well-intentioned administrator of a corrective state would face a vexing problem because the knowledge he would need to act responsibly and effectively does not exist in any one place, but rather is divided and dispersed among market participants. Such an administrator would seek to achieve patterns of resource utilization that would reflect trades that people would have made had they been able to do so, but by assumption were prevented from making because transaction costs were too high in various ways. A corrective state that would be guided by the principles and formulations of welfare economics would be a state whose duties would exceed its cognitive capacities. - Richard E. Wagner

We can never possess tomorrow’s knowledge today. We can never know what innovations, creative ideas, and useful improvements will be generated in the minds of free men in the years to come. That is why we must leave men and their minds free. The man of system, the social engineer, who sees only the apparent problems from these global changes, wants to plan America’s place in the new, emerging global economy. But to do so, he must confine and straitjacket all of us to what his mind sees as the possible, profitable, and desirable from his own narrow perspective with the knowledge he possesses in the present. - Richard M. Ebeling, Free Markets, the Rule of Law, and Classical Liberalism

There is no need to prove that each individual is the only competent judge of this most advantageous use of his lands and of his labor. He alone has the particular knowledge without which the most enlightened man could only argue blindly. He alone has an experience which is all the more reliable since it is limited to a single object. He learns by repeated trials, by his successes, by his losses, and he acquires a feeling for it which is much more ingenious than the theoretical knowledge of the indifferent observer because it is stimulated by want. - Turgot

We know that the essence of markets is that individual cost and value information is private and dispersed, and that command and control economies inevitable must fail to deliver the goods because the appropriate information is not, and cannot be, given to any one mind. - Vernon L. Smith, Commonwealth North Forum

Nevertheless, even without perfect knowledge, the government must decide whether or not to provide the public good. It also must decide how much of the public good it should provide. Finally, the government must decide, all without guaranteed information, on a tax schema. Under such circumstances, it is not possible for the government to reach an optimal solution and a Pareto distribution of taxes for the public good. - Wilfried Eecke, Ethical Dimensions of the Economy

Development happens thanks to problem-solving systems. To vastly oversimplify for illustrative purposes, the market is a decentralized (private) problem solving system with rich feedback and accountability. Democracy, civil liberties, free speech, protection of rights of dissidents and activists is a decentralized (public) problem solving system with (imperfect) feedback and accountability. Individual liberty in general fosters systems that allow many different individuals to use their particular local knowledge and expertise to attempt many different independent trials at solutions. When you have a large number of independent trials, the probability of solutions goes way up. - William Easterly, The Answer Is 42!

Bushels Over Brilliance

Rainbows and Rivers wrote:  I think you may have misunderstood me. The money that would be distributed would be the money that is already collected in taxes. Since it is meant to be spent on behalf of the citizens of a country rather than on behalf of its taxpayers, you should have no problem including all the citizens' value preferences. After all, however successful a millionaire may be, there is no way he can know someone else's preferences, right? Or at least your own argument goes like that.

Xero wrote: Imagine that your preferences are a giant diamond with a billion different facets. A successful millionaire isn't successful because he knows all your facets...he's successful because he shines one of your facets better than anybody else does. That's why you choose him to give your money to.

So there he is shining one of your facets. But obviously he's not a alone. There are a billion other people all over your giant diamond and each one is focusing on shining the facet that you paid them to shine.

Shopping is the process by which you find the people who can shine one of your facets better than anybody else can. Right now you're shopping for economic discussion. And here I am trying to shine this particular facet of yours. But I'm completely oblivious to all your other facets. I have no idea whether you have an artichoke facet or a Paris Hilton facet.

But in the public sector...rather than having a billion representatives each focused on shining a different facet...you have one representative who is trying to shine all your facets. Given that the public sector is half our economy, it behooves us to understand which method is more productive/effective/efficient/valuable.

I think maybe the person closest to you might know quite a few of your facets...but nobody can know your facets better than you can. Nobody can know how you rank the importance of each of your facets. Therefore, everybody would be infinitely better off if taxpayers could choose where their taxes go. Even if you don't make enough money to pay taxes...you're still going to get infinitely better/accurate/customized/tailored representation from your billion representatives who do have to pay taxes.

If the artichoke farmer is one of your representatives then he's going to spend his taxes on the public goods inputs he needs to successfully output artichokes. If Hot Chip is one of your representatives then they are going to spend their taxes on the public goods inputs they need to successfully output awesome music.

The moral of the story is...shine on you crazy diamond. Don't let them put a bushel over your brilliance.

Xero's Rule

... an increase in the power of the State ... does the greatest harm to mankind by destroying individuality which lies at the heart of all progress… - Gandhi

The public collectively is abundantly ready to impose, not only its generally narrow views of its interests, but its abstract opinions, and even its tastes, as laws binding upon individuals. And the present civilization tends so strongly to make the power of persons acting in masses the only substantial power in society, that there never was more necessity for surrounding individual independence of thought, speech, and conduct, with the most powerful defences, in order to maintain that originality of mind and individuality of character, which are the only source of any real progress, and of most of the qualities which make the human race much superior to any herd of animals. - J.S. Mill, Principles of Political Economy with some of their Applications to Social Philosophy 

Xero's Rule: by the time a species has progressed to the point that they can travel to other inhabited planets...they would have discovered the positive correlation between trading and progress.

While it's entertaining/exciting/scary to watch movies with alien space invaders attacking our planet in order to take our resources...the concept has no basis in economic reality...

1. Scarcity is relevant no matter what solar system you're from
2. Progress depends on how scarce resources are used
3. Different perspectives can see different uses of the same resource
4. Therefore, the rate of progress depends on...

A. how much difference there is between people's perspectives (diversity)
B. how much freedom people have to apply their perspectives to their scarce resources

If a species has 100% freedom but no variation in perspectives...then they won't come up with different uses of their resources...which will result in a 0% rate of progress.  Same thing if a species has 0% freedom but incredible variation in perspectives.  Of course neither extreme is possible...but where a species falls on the spectrum will determine its rate of progress.

In all likelihood it would probably be relatively easy for an advanced alien civilization to enslave/kill/eat us and take our resources. They would then be able to use our resources in their own alien ways. But if they did take our resources then they would be greatly hindering their own progress.  This is because if they hadn't taken our resources...then us humans would have been able to apply our very different perspectives to our resources.  We would have come up with new and innovative uses that the aliens would have been able to benefit from...but wouldn't have thought of on their own.

The same concept is applicable to China. China could certainly try and invade our country and take our resources. And if they were successful...then they would temporarily benefit. They would have more resources...but they would still just be applying the same set of perspectives to them.  And having resources isn't nearly as important as what you do with them.  Therefore, China would be sacrificing the significantly greater benefit that they would have derived from all future American innovations.

Here's what John Stuart Mill wrote in 1869...

China—a nation of much talent, and, in some respects, even wisdom, owing to the rare good fortune of having been provided at an early period with a particularly good set of customs, the work, in some measure, of men to whom even the most enlightened European must accord, under certain limitations, the title of sages and philosophers. They are remarkable, too, in the excellence of their apparatus for impressing, as far as possible, the best wisdom they possess upon every mind in the community, and securing that those who have appropriated most of it shall occupy the posts of honour and power. Surely the people who did this have discovered the secret of human progressiveness, and must have kept themselves steadily at the head of the movement of the world. On the contrary, they have become stationary—have remained so for thousands of years; and if they are ever to be farther improved, it must be by foreigners. They have succeeded beyond all hope in what English philanthropists are so industriously working at—in making a people all alike, all governing their thoughts and conduct by the same maxims and rules; and these are the fruits. The modern régime of public opinion is, in an unorganized form, what the Chinese educational and political systems are in an organized; and unless individuality shall be able successfully to assert itself against this yoke, Europe, notwithstanding its noble antecedents and its professed Christianity, will tend to become another China. - J.S. Mill, On Liberty

And here's what Mao Zedong wrote nearly a 100 years later...

Apart from their other characteristics, the outstanding thing about China's 600 million people is that they are "poor and blank". This may seem a bad thing, but in reality it is a good thing. Poverty gives rise to the desire for changes the desire for action and the desire for revolution. On a blank sheet of paper free from any mark, the freshest and most beautiful characters can be written; the freshest and most beautiful pictures can be painted. - Mao Zedong

Subjugation/taking greatly slows the rate of progress. This fatal conceit squanders the most valuable resource... individuality/uniqueness/originality. Therefore, the rate of progress is far greater if we rely on persuasion/trading.

Unfortunately, as a species, clearly we still are not aware of the positive correlation between trading and progress. The pattern is there...but most have yet to see it.  As more and more people start to see the pattern, there will be more recognition of the immense value of giving taxpayers the freedom to shop for themselves in the public sector.  The unique perspectives of millions of diverse people would be applied to public goods and the result would be infinitely beneficial.

If people aren't free to shop for themselves...then the specificity and ranking of their preferences and the uniqueness of their circumstances will not be input into the function which determines how society's scarce resources are used. As a result, the output will be the wrong quantities of an extremely narrow selection of poor quality products/services. Pseudo-demand, pseudo-supply.  Garbage in, garbage out.

Pragmatarianism can't be implemented if the positive correlation between shopping and progress is not clear to most...just like we won't be capable of traveling to other inhabited planets if the pattern is not clear to all.  Given that economic reality is not constrained by time/space... convergence is certain: an alien civilization won't be able to visit other inhabited planets before they've seen the pattern.      

What I've shared is basically a consequentialist argument against taking. Or conversely...a consequentialist argument for trading/liberty.  It should be clear that consequentialist arguments for liberty have far more substance than moral arguments for liberty.

The amount of benefit the future holds depends on you!  So please carefully read the following passages on heterogeneous activity...

Solutions to complex social problems require as many creative minds as possible — and this is precisely what the market delivers. - Donald J. Boudreaux

I’m not here to say that men are to blame for the [financial] crisis and what happened in my country [Iceland]. But I can tell you that in my country, much like on Wall Street and the city of London and elsewhere, men were at the helm of the game of the financial sector. That kind of lack of diversity and sameness leads to disastrous problems. - Halla Tomasdottir, Co-founder of Audur Capital 

Austrians believe that we get more solutions – and better, more creative solutions – if the energy, imagination, alertness and specialist knowledge of many individuals are engaged on the task. In economics, this is achieved through the process of competition, which gives diverse entrepreneurs the incentive to seek out new and better ways of enhancing value to consumers. By the same reasoning, our social and political problems may also be best solved if we give individuals the widest possible freedom to come up with a variety of creative responses, rather than hoping that a single collective approach will suffice. - Eamonn Butler, Austrian Economics

The generation to which we belong is now learning from experience what happens when man retreats from freedom to a coercive organization of their affairs.  Though they promise themselves a more abundant life, they must in practice renounce it; as the organizational direction increases, the variety of ends must give way to uniformity.  That is the nemesis of the planned society and the authoritarian principle in human affairs. - Walter Lippmann

Development happens thanks to problem-solving systems. To vastly oversimplify for illustrative purposes, the market is a decentralized (private) problem solving system with rich feedback and accountability. Democracy, civil liberties, free speech, protection of rights of dissidents and activists is a decentralized (public) problem solving system with (imperfect) feedback and accountability. Individual liberty in general fosters systems that allow many different individuals to use their particular local knowledge and expertise to attempt many different independent trials at solutions. When you have a large number of independent trials, the probability of solutions goes way up. - William Easterly, The Answer Is 42!  

So far as this is the case, it is evident that government, by excluding or even by superseding individual agency, either substitutes a less qualified instrumentality for one better qualified, or at any rate substitutes its own mode of accomplishing the work, for all the variety of modes which would be tried by a number of equally qualified persons aiming at the same end; a competition by many degrees more propitious to the progress of improvement than any uniformity of system. - J.S. Mill, Principles of Political Economy with some of their Applications to Social Philosophy

It is not by wearing down into uniformity all that is individual in themselves, but by cultivating it and calling it forth, within the limits imposed by the rights and interests of others, that human beings become a noble and beautiful object of contemplation; and as the works partake the character of those who do them, by the same process human life also becomes rich, diversified, and animating, furnishing more abundant aliment to high thoughts and elevating feelings, and strengthening the tie which binds every individual to the race, by making the race infinitely better worth belonging to. In proportion to the development of his individuality, each person becomes more valuable to himself, and is therefore capable of being more valuable to others. There is a greater fulness of life about his own existence, and when there is more life in the units there is more in the mass which is composed of them. - J.S. Mill, On Liberty

Similarly, Niskanen attacked the monopoly power of public bureaucracies, school districts among them.  More recently, Coons and Sugarman have championed the case for parental freedom of choice, indicating that we should "substitute mutual respect as a ground of a social accord" and use freedom of choice to reduce the perils of uniformity. - Daniel J. Brown, The Case For Tax-Target Plans 

While declaring “Let the government handle it” comes across as a solution, it’s no such thing. Instead, it is merely a sign of a simple and baseless faith — a simple and baseless faith that people invested with power will not abuse that power; that political appointees possess or will find better answers than will millions of people pursuing solutions in their own ways, and staking their own resources and reputations on their efforts; that only those ‘solutions’ that are spelled out in statutes and regulations and that have officials paid to implement them are true solutions. - Donald J. Boudreaux

In 1956, economist Charles Tiebout (pronounced TEE-bow) asked: What is it about the private market that guarantees optimal provision of private goods that is missing in the case of public goods?  His insight was that the factors missing from the market for public goods were shopping and competition. - Jonathan Gruber, Public Finance and Public Policy

Prices and the Efficient Allocation of Resources

Just how important are prices anyways?  Can resources be efficiently allocated without them?  What percentage of activities have actual price tags?

Wake up or sleep in? Price tag? No.
Put on clothes? Price tag? No.
Brush your teeth? Price tag? No.
Shave? Price tag? No.
Use the toilet? Price tag? No.
Go for a jog? Price tag? No.
Take a shower? Price tag? No.
Eat breakfast? Price tag?  No.
Brush your teeth?  Price tag?  No.
Put on deodorant?  Price tag?  No
Go to Starbucks? Price tag? No.
Buy a cup of coffee?  Price tag?  Yes.

Clearly the vast majority of our allocation decisions do not have literal price tags.  But they do all have an opportunity cost.  Each use of a resource requires that you sacrifice all the alternative uses.  Every course of action requires the sacrifice of all the alternative courses of action. This means that resources are put to their most valuable uses when individuals have the freedom to choose which uses they value most.  Therefore, it really does not seem that prices are necessary in order for resources to be efficiently allocated.

I might be wrong though.  But because I'm a pragmatarian...it's not necessary for me to be 100% certain one way or the other.  This is because if prices are truly necessary...if they facilitate the creation of more value...then if congress lowered the tax rate, taxpayers would give them more of their taxes.  A lower tax rate would mean a larger private sector (prices) and a smaller public sector (no prices).

Even though it's purely academic in nature, it's quite enjoyable to discuss the feasibility of pragma-socialism.  Pragma-socialism is a pragmatarian system with a 100% tax rate.  Maybe it's pretty much the same thing as a market economy without any prices.  Every organization would be a non-profit...but you could choose which non-profits you donate to.

Over on Peter Boettke's blog entry... ABCT Providing the Missing Gap...I've been discussing the topic with Nicholas (also his comment on the pragmatarianism FAQ).  As a result of our discussion, I think it would be informative if he could try and quantify exactly how necessary prices are to ensure the efficient allocation of resources.  So I created the following graphic...

Here's my answer... A-0, B-7.5, C-8.  From my perspective, there's a huge disparity in the allocative efficiency between planned economies and market economies...and little, if any, of that has to do with prices.  It simply has to do with the fact that in a planned economy people's preferences are either assumed, or disregarded.  As a result, how society's limited resources are used (the supply) does not reflect the actual demand for goods/services.  When individuals do not have the freedom to decide which uses of their limited resources they value most...it's a given that resources will not be put to their most valuable uses.

However, from Nicolas' perspective (and the perspective of most/all free-market economists), the disparity in allocative efficiency between planned economies and market economies is in no small part due to the presence of prices in market economies.  Therefore, my guess is that he'll place B on anywhere from 3 to 5 on the allocative efficiency scale.

Anybody is welcome to share the graphic that I created and repost it elsewhere.  Also, for more discussion on the topic just google "A World Without Prices or Profit" and "A Survey on the Importance of Prices".

[Update]

Other blog entries on the topic...

Hey Mungerfesto, Prices OR Consumer Sovereignty?
Prices vs Chips

Frequently Asked Questions (FAQ)

Here are some answers to frequently asked questions regarding pragmatarianism (tax choice).  I've selected the Environmental Protection Agency (EPA) to be my default example.

Wouldn't important government organizations be underfunded?

This is logically impossible because "importance" can only be determined by how much an individual is personally willing to sacrifice for something (opportunity cost).  If many taxpayers give a significant amount of their own tax dollars to the EPA then, and only then, could we say that protecting the environment is important to the American public.

Wouldn't taxpayers have to be better informed for this to work?

If environmentalists and the EPA have a good reason to believe that the environment should be a higher priority for taxpayers...then it would be their responsibility to share their information with taxpayers.  With the current system, taxpayers can't choose where their taxes go...so it would be pointless for them to make the effort to learn about the environment or the EPA's efforts to protect it.  Therefore, pragmatarianism would eliminate rational ignorance.

How would it work?

At anytime throughout the year you could go directly to the EPA website and make a tax payment of any amount.  The EPA would give you a receipt and you'd submit all your receipts to the IRS by April 15.  Anybody who didn't want to shop for themselves would have the option of giving their taxes to their impersonal shoppers (congress).

How specifically could taxpayers allocate their taxes?

The granularity would be determined by the EPA and its supporters.  The greater the granularity, the less control the EPA would have, but the greater its knowledge of taxpayers' environmental priorities.  Any disparity in environmental priorities would reflect disparities in information.  Taxpayer choice would increase information intercourse.  

How would the tax rate be determined?

Congress would still be in charge of the tax rate.  If they set the tax rate too low...or too high...then they would lose funding.  This is because taxpayers would boycott congress if they weren't happy with the tax rate.  For example, if the tax rate was 40%, but taxpayers derived 60% of their value from the public sector, then they would be unhappy with the tax rate.  If congress wanted to earn more money, then they would increase the tax rate.  So the optimal tax rate would be the rate at which congress maximized its funding.  For more info please see Tax Choice Tax Rate.

Wouldn't this give too much influence to the wealthy?

Creating a market in the public sector would show us the exact percentage of the population that gives their taxes to the EPA. If this percentage is too small (insufficient demand breadth), then taxpayers would no longer have the option of giving their taxes to the EPA.  Therefore, in a pragmatarian system, the wealthy would only be able to fund truly public goods (goods that are broadly beneficial).  This means that pragmatarianism would eliminate the problem of concentrated benefits and dispersed costs.  For more info please see...Visualizing And Evaluating The Public Goodness Threshold.

Parrot Sovereignty

In this thread... Pseudo-demand, Pseudo-supply...Silknor wrote...

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

That has virtually nothing to do with what I was asking. So lets rephrase. You have the option of living in two societies:
#1 The US as it is now.
#2 InequalityLand. Here, 1% of the population is incredibly wealthy, another 2% are comfortably middle class, and 97% live in abject poverty. But the overall level of production and wealth is 10% higher than in #1.

It's clear that the InequalityLand ranks higher on efficiency (must be all those socialist redistributive policies in the US, holding their efficiency down). Now, if you can pick which society you'd prefer to live in, but you don't know where in the wealth distribution you'll end up (we'll assign you at random), which would you pick?

Personally, I would pick #1. Would you? And if you would as well, why in the world would we approach economic policy caring only about efficiency and consumer sovereignty. So, what's your true preference? The more efficient society? Or the less efficient but more equitable one?

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

My reply...

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

This reminds me of a terrible critique of pragmatarianism written by two anarcho-capitalists... Pragmatarianism Disproved. It made me laugh because they attempted to demonstrate how a pragmatarian system with a 100% tax rate wouldn't work. But when I asked them to explain how we would end up at a 100% tax rate...they were unable to do so.

How does consumer sovereignty lead to the second option?

Here in Southern California it's kind of the coolest thing. We have flocks of wild parrots that have completely naturalized. Have you ever heard a flock of wild parrots? It's pretty much the noisiest thing. Especially at the butt crack of dawn right outside my open bedroom window when they are swarming the large fig tree that's weighed down with a ton of ripe fruit.

There the parrots are...happy as can be...squawking and squawking and chowing down on fig after fig. Then, in a flash of green, they fly off to who knows where. Maybe to another fig tree? Surely my fig tree can't be the only fig tree that they visit. I wonder how many fig trees they visit? But wherever they go, they deposit fig seeds. During fig season...what's the average amount of seeds that each parrot poops out? What percentage of seeds actually germinate and make it to maturity?

I wonder if you can already see my point here. I'm talking about parrot sovereignty. With this process at work...how could we end up with fig trees that did not match the preferences of the parrots? Why would the parrots eat figs that didn't match their preferences? How could uneaten seeds possibly be dispersed? Given that no two seed grown fig trees are exactly alike, wouldn't the parrots prioritize and eat the figs that provided them with the most bang for their buck?

I'm sure you've heard the expression..."as happy as a kid in a candy store". That expression is applicable to the parrots during fig season. Why is the kid in the candy store so happy? Because there are so many items that match his preferences. Why are their so many items that match his preferences? Because he has the freedom to choose whichever candies match his preferences and candy makers are free to innovate and offer newer types of candies. Less wonderful candies are replaced by more wonderful candies...it's creative destruction that results in more and more value.

Basically, consumer sovereignty will lead us to heaven on earth. Except, not in your scenario. What gives? The next time you're at the mall...step back, sit down and pay attention to the throngs of consumers picking x or y. You won't be the only one doing so. If producers want consumers' money...then they are going to have to produce items that are closer matches to the preferences of consumers.

Am I wrong? Perhaps. If so, then please walk me through a step by step process showing exactly how consumer sovereignty leads us to society #2.

In The Future We're All Going To Be Light Brown and Bisexual

Is that true?  It came up on page six of this post...Pseudo-demand, Pseudo-supply.