Pragmatarianism vs Anarcho-capitalism

Discussion on David Friedman's blog entry...The Killer App for Google Glass

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Xero: What if the government ended up being responsible for creating the app? Then the usual suspects could list it along with the internet.

So is it market failure that the private sector hasn't already created this app?

See...I'm pretty sure this is an example of why pragmatarianism is superior to anarcho-capitalism. With anarcho-capitalism...the demand would exist but the supply wouldn't reflect it. It might eventually reflect it...but who knows when. But with a pragmatarianism system...if there was sufficient demand...a government program could be created to work on the provision of whatever it was that people were willing to spend their taxes on.

The government would be the embodiment of demand unmet by the private sector. How could that not be better than anarcho-capitalism?

Tibor Mach:  How does the government judge wether there is or is not the demand? How does anyone do that without the market? The problem is that if David decides to invest in his killer app tomorrow, he might become a very succesful businessman ... or lose all his invested money (since for example I would not want an app like that and I would even probably be a little bit hostile to anyone using it on me...I might get used to it after some time but maybe I would not). If government does, it takes all our money and either makes a success which however does not mean giving the taxpayers a share of profits or it is a failure...which means not only that money it collected is wasted but more often than not it also means it collects even more money to subsidize the "important feature of the society" for which there is no (sufficient) demand but that is apparently not important. So that is why letting government invest in business projects is not a good idea. It may be that some demand is not recognized or is recognized with a significant delay on a private market. But there are no reasons to expect government to do better...and a plenty to expect it to do worse.

Xero: you're correct... demand cannot be accurately determined without a market... which is exactly why we should create a market in the public sector (pragmatarianism FAQ).

In an anarcho-capitalist system...the demand would be there...but there's no guarantee that Atlas will take the risk to do something about it. But in a pragmatarian system, taxpayers could allocate their taxes accordingly. Resources would be directed by demand.

In an anarcho-capitalist system...the ball would just sit there indefinitely. In a pragmatarian system...the ball would start rolling as soon as there was sufficient demand. Therefore, pragmatarianism is better than anarcho-capitalism.

Tibor Mach: Who decides how freely you can allocate your taxes? If there is total freedom, you don't actually have to pay them (you allocate them on yourself and there is just the cost of collecting them), if someone says you cannot allocate it on this or that, you have problems. If the government says you can spend it either on apples or oranges when I want bananas, then I will choose oranges which I prefer to apples but not to bananas.

Who decides how high the taxes are? If you have to pay 10% while the optimum height would be 5% then again you have these inefficiencies.

So either you have a system where you don't have to pay the taxes really anyway...and that de facto is anarcho-capitalist even if there is some institution out there which calls itself government, or you have politicians decide how large the taxes will be and what are the restrictions of what you can spend it on. And that leads to many problems. Also, since I can allocate them relatively freely, there might probably be strong freerider tendencies. I want something but it only is possible if a lot of other people decide to allocate their taxes to. My own contribution does not change the outcome, so I instead spend it on something else making myself better off. Everyone knows that so a lot of people will do the same...and you don't get the think that would benefit "us all" anyway.

So I'd say pragmatarianism either collapses to our current system (or something very close) or to anarcho-capitalism.

Xero:  voters would decide what's on the menu and taxpayers would decide which items they "order". If enough voters decide that David's app should be on the menu...then he would be able to spend his taxes on it. Why not allow taxpayers to order from any country's menu?

Congress would still be in charge of the tax rate. Like any organization, their goal would be to maximize their own revenue. If they set the tax rate too high...or too low...taxpayers would give them less positive feedback (tax dollars). So the tax rate that maximized their revenue would be the optimal tax rate.

Eh? The free-rider problem? Are you assuming that in a pragmatarian system people would intentionally deviate from their preferences more than they are currently forced to? I drew a drawing to illustrate this...Incentivizing Honest Preference Revelation for Public Goods.

If anarcho-capitalism is the optimal allocation of resources... then why wouldn't applying the invisible hand to the public sector lead to anarcho-capitalism? If it didn't lead to anarcho-capitalism...then clearly anarcho-capitalism wasn't the optimal allocation of resources. This is a very simple but solid proof that pragmatarianism is superior.

Tibor Mach: There is a problem with this also.

Majority chooses what you can spend your tax money on, right? Now, it is in my interest to limit the "menu" so that you basically only can buy the items I want you to spend money on. If I can succeed in making the menu more limited - towards things I like the money spent on - I can benefit on the fact that you are now forced to choose between the subsidies for apples or oranges (both of which I like) whereas otherwise you would choose to subsidize bananas.

I'm not sure if this would lead to better or worse results than our system, maybe a bit better. But still you would have this element present. It would be possible for the majority to limit the choices of the minority so that they effectively have to subsidize the majority choice.

You don't have this kind of problem on the ordinary (free) market. The problem is that voters, when they restrict the choices on the menu, don't bear the costs of doing so...while they potentially reap the benefits.

I think your system would lead to competing political groups trying to restrict the menu to precisely the items they are interested in. And that is not very different from our present system.

Xero: earlier you acknowledged that we can't know what the demand is in the absence of a market. But now you're saying that a pragmatarian system (market in the public sector) might be a bit better than the current system. That's saying that socialism would be a bit worse than capitalism. Resources can't be efficiently allocated if we don't know what people's preferences truly are.

I don't know what the majority would want you to spend your tax dollars on. But it seems doubtful that creating a market in the public sector would decrease the quantity/quality of available options. This is because consumers want better options...they reward the producers who offer the best options.

You certainly wouldn't have the problem of concentrated benefits and dispersed costs in a pragmatarian system. This is because creating a market in the public sector would eliminate rational ignorance.

Importing Poverty

Vivek Wadhwa has reservations about importing poverty.

Here's poverty...

It's an Afghan mother and her child scavenging a garbage heap.  This is what Wadhwa does not want to import.   But what if it was just the child on the garbage heap.  Would Wadhwa be against importing an orphan?  Is he against allowing children to be adopted from all countries or just poor countries?

Imagine there's a childless couple in the US...and a parentless child in Afghanistan.  All things being equal...why not allow the American couple to adopt the Afghan child?  Wouldn't that be a more efficient allocation of resources?

Obviously it wouldn't be a more efficient allocation of resources if the American couple already had "enough" children and/or the Afghan child already had parents.

So perhaps Wadhwa is arguing that there aren't enough available jobs in the US.  If so, then why would he be against allowing poor people to choose which countries they move to?  If there aren't enough available jobs here in the US...then why would the Afghan mother make the effort to vote with her feet for the US?

Maybe it's because Wadhwa would lie to the Afghan mother?  Perhaps he would tell her that there were plenty of jobs available here when in reality there were precious few.  Why would Wadhwa do that?

The problem is that Wadhwa doesn't understand the importance of true signals in markets.  This is why he wants to raise the minimum wage.  He wants to lie to poor people all over the world by telling them that we value unskilled labor more than we really do.  So of course he has reservations about allowing resources to freely flow.  We'd be deluged by all the poor people he lies to.

Hey Wadhwa...resources can't flow to where they are most valued if we don't know how much society values the various uses of society's limited resources.  The Afghan mother can't make an informed decision as to which country will provide her with the best option if wages do not honestly communicate which country has the biggest shortage of labor.

Therefore, if you actually and genuinely care about helping the Afghan mother...then you should support the elimination of minimum wages.  Once minimum wages are eliminated...if poor people make the effort to come to the US...then it will be because we could honestly use the help.  Therefore the new allocation of labor would be an improvement...it would be mutually beneficial.  Value would be created.

Incentivizing Honest Preference Revelation for Public Goods

You have written elegantly but doesn't address the public good problem. I was hoping more of some link to mechanism design literature that can explain why it's incentive compatible. - urnbabyurn, Reddit Discussion on Public Finance

Let's review.  The reason that taxation isn't voluntary is because people would have an incentive to lie about how much they value public goods.

EPA: How much is environmental protection worth to you?
Erin: Around $400 a year
EPA: Please pay us $400 a year
Erin: Oh, in that case...it's only worth $100 a year

Here it is from the horse's monkey's mouth...

One could imagine every person in the community being indoctrinated to behave like a "parametric decentralized bureaucrat" who reveals his preferences by signalling in response to price parameters or Lagrangean multipliers, to questionnaires, or to other devices. But there is still this fundamental technical difference going to the heart of the whole problem of social economy: by departing from his indoctrinated rules, any one person can hope to snatch some selfish benefit in a way not possible under the self-policing competitive pricing of private goods; and the "external economies" or "jointness of demand" intrinsic to the very concept of collective goods and governmental activities makes it impossible for the grand ensemble of optimizing equations to have that special pattern of zeros which makes laissez-faire competition even theoretically possible as an analogue computer.

And here as well...

However no decentralized pricing system can serve to determine optimally these levels of collective consumption. Other kinds of "voting" or "signalling" would have to be tried. 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. I must emphasize this: taxing according to a benefit theory of taxation can not at all solve the computational problem in the decentralized manner possible for the first category of "private" goods to which the ordinary market pricing applies and which do not have the "external effects" basic to the very notion of collective consumption goods. - Paul A. Samuelson, The Pure Theory of Public Expenditure

"departing from his indoctrinated rules" = lying
"give false signals" = lie

If Erin lies about how much she values the environment...then she can pay less money while still receiving approximately the same amount of benefit.  If everybody else does the same thing, then the EPA would receive far less money than it should.  As a result, people who value the environment would be worse off.

The common solution is to force people to pay taxes.  Unfortunately, the government doesn't just force people to pay taxes...it also spends their taxes for them.  We give our money to the IRS...and the IRS gives it to congress...and congress decides how to divvy up the money among the various government organizations.

The problem is that there's no real plausible way for congress to determine how much Erin values the environment.  Samuelson the monkey tried to get around this by assuming that congresspeople are omniscient.

As a pragmatarian, my argument is that we should drop this fundamentally absurd assumption and allow taxpayers to choose where their taxes go.  How Erin allocates her taxes will reveal how much she values public goods.  If the cost is a foregone conclusion, then it's in her selfish interest to get her money's worth.

It's like going to an all you can eat buffet.  The cost is a foregone conclusion.  It's fixed.  What's variable is the amount of benefit you derive...which depends entirely on the selections you make.  Therefore, it's in your selfish interest to pick the dishes that you find most deeeelish.  In other words, you have an incentive to pick the items that most closely match your preferences.

Under most real-world taxing institutions, the tax price per unit at which collective goods are made available to the individual will depend, at least to some degree, on his own behavior. This element is not, however, important under the major tax institutions such as the personal income tax, the general sales tax, or the real property tax. With such structures, the individual may, by changing his private behavior, modify the tax base (and thus the tax price per unit of collective goods he utilizes), but he need not have any incentive to conceal his "true" preferences for public goods. - James M. Buchanan The Economics of Earmarked Taxes

Yet, as you can see from urnbabyurn, there's still some concern regarding a lack of honesty in a pragmatarian system.  This primarily stems from people's mistaken belief that our system adequately gauges people's preferences for public goods.  It secondarily stems from the fact that few of the goods supplied by the government are actually public goods.  Most are simply private goods with beneficial spillovers (positive externalities).  So some public goods are more collective than others.  Therefore the argument is that people will have an incentive to pay for the individually beneficial public goods while hoping that others will pick up the tab for the collectively beneficial public goods.

It boils down to who would lie about your preferences more...you or congress.  If you would lie about your preferences more than congress would...then we'd be worse off in a pragmatarian system.  Here's how I've illustrated this...

If you would place yourself at a 6...but congress would have placed you at a 5...then if this was the only factor, we'd be worse off in a pragmatarian system.

As Adam Smith wrote in the passage in the picture, "every single piece has a principle of motion of its own...".  In a pragmatarian system...how far would you deviate from your own principle of motion?

With our current system pacifists are forced to pay for war.  This is a huge deviation from their own principles of motion.  They wouldn't deviate nearly as much in a pragmatarian system.  The same could be said of people who support the legalization of drugs.  Shutting down the Silkroad would probably be the last thing that they'd want their taxes spent on.

In the current system people are forced to fund things they are diametrically opposed to.  Conservatives are forced to fund liberal public goods and liberals are forced to fund conservative public goods.  In a pragmatarian system however, the forced rider problem would be limited to those who didn't want to pay taxes.  But at least they wouldn't be forced to fund the IRS.  Of course there would be far less people who didn't want to pay taxes, given that studies show that people are more inclined to pay taxes when they actually value what their taxes are being spent on...

We find that allowing earmarks more than doubles both contributions and the likelihood of giving to government organizations. Participants give on average $1.68 from a $20 initial payment for general purposes, compared to $5.52 for cancer research and $4.04 for disaster relief; the likelihood of giving increases from 30 percent for general purposes to 66 percent for cancer research and 61 percent for disaster relief. - Sherry Xin Li et al, Do Earmarks Increase Giving to Government?

The important thing to consider here is that everybody has their own principle of motion.  This means that it's unlikely that any two individuals are going to put exactly the same things in their shopping carts.  When people are free to shop for themselves...the quality/quantity of products/services will reflect the diversity of people's preferences.

In 1978 when Deng Xiaoping started to help China transition from a planned economy to a mixed economy...the quality/quantity of products/services available reflected the fact that people had not been free to shop for themselves.  Their principles of motion were designated by government planners.

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

The people were essentially marionettes.  They were unable to dance to the beat of their own drum.  This homogenization/standardization of preferences invariably prevents the diversification of products/services.

Once people were given more freedom...as some of the strings were cut from the marionettes ...their own principles of motion began to bear fruit.  The quality/quantity of products/services now available in China is infinitely greater than it was 35 years ago.  

If we created a market in the public sector...then in 35 years from now the quality/quantity of public goods available will be infinitely greater than it is now.

So even in the extremely unlikely situation that some collective public goods received less funding than they really should...the greater quality/quantity of those public goods will more than make up for the less than optimal funding.

Basically, it's a given that all government organizations can do far more with significantly less.

The only way to maximize the incentive for government organizations to do better things with society's limited resources is to allow taxpayers to choose which government organizations they give their taxes to.  If the carrot on a stick is not held by consumers...then it's a given that the government will not be a servant of the people.  Nothing limits progress more than having the government be our master. In order to guarantee a government for the people and by the people...in order to ensure maximum responsiveness...people must have the freedom to give their positive feedback (tax dollars) to the most beneficial government organizations.

In closing, here are some supporting arguments in other people's words...

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder. - Adam Smith, The Theory of Moral Sentiments

Within the market society each serves all his fellow citizens and each is served by them. It is a system of mutual exchange of services and commodities, a mutual giving and receiving. In that endless rotating mechanism the entrepreneurs and capitalists are the servants of the consumers. The consumers are the masters, to whose whims the entrepreneurs and the capitalists must adjust their investments and methods of production. The market chooses the entrepreneurs and the capitalists, and removes them as soon as they prove failures. The market is a democracy in which every penny gives a right to vote and where voting is repeated every day. - Ludwig von Mises, Omnipotent Government

There are two basic and diametrically opposed views of taxation.  Those who favor the ability to pay approach view the state as a master, who extracts tribute from its subjects on the basis of how much they are able to pay.  Those who take this first approach often also view the state as a benevolent father figure, who distributes tax benefits on the basis of need.  In Karl Marx's words, "From each according to his abilities; to each according to his needs." 

Those who take the cost-benefit approach view the state as the servant of the people.  Government provides services and taxpayers pay for the services.  Those who benefit the most from the services should pay the most.  And those who do not use a particular government service should not be forced to pay for it. - Robert W. McGee, The Philosophy of Taxation and Public Finance

The fundamental difference between decision-makers in the market and decision-makers in government is that the former are subject to continuous and consequential feedback which can force them to adjust to what others prefer and are willing to pay for, while those who make decisions in the political arena face no such inescapable feedback to force them to adjust to the reality of other people’s desires and preferences. - Thomas Sowell, Intellectuals and Society

The second common feature relates to the joint professional belief that the value asymmetry will disappear in a market-like environment.  A market-like environment will accomplish the role of providing both incentives to accurately state demand and learning opportunities to the individual.  The first important attribute of the market-like environment is the incentive property; specifically, the design of a public good allocation process which provides the greatest possible incentive for truthful revelation of value.  Once truthful values are obtained, any sources of bias which lead to the asymmetry should then disappear. Additionally, the market-like environment is important because recurrent and reversible transactions can take place in a market. The importance of these transactions lies in the fact that attitudes toward losses may change as the individual becomes familiar with the experience of obtaining a public good and then giving it up. After a period of time, what is given up will be perceived as an opportunity cost, rather than a loss. The loss-aversion phenomenon can then be expected to become a less predominant factor in the valuation measurement process. - David S. Brookshire and Don L. Coursey, Measuring the Value of a Public Good

The second argument for the use of market based frames relates to the opportunities provided by markets for repeated choice and learning in an environment where sub-optimal choice is punished (by a failure to achieve maximum utility).  It is a preference-revelation-based argument in that these are usually considered to be exactly the kinds of conditions most likely to uncover preferences.  Consequently the decisions made in markets yield good outcomes in the sense that they are true to any underlying preferences. - Alistair Munro, Bounded Rationality and Public Policy: A Perspective from Behavioural Economics

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

Using dollars in open markets muffles the rhetorical din and forces persons to reveal honestly the strength of their preferences in a common medium understood by all.  "Put your money where your mouth is" is a coarse reminder of a high philosophical truth.  If the tax collector cannot measure utility straight up, neither can the regulator who is all too likely to succumb to the demands of local residents (and voters) and to overlook or undervalue the preferences of outsiders.  Direct political measurements of utility tend to destroy utility itself.  The wealth proxy has a lot to commend it in straight utilitarian terms. - Richard A. Epstein,  Mortal Peril: Our Inalienable Right to Health Care?

The economic approach stresses the fact that any expenditure always has an opportunity cost, i.e. a benefit that is sacrificed because money is used in a particular way.  For example, since biodiversity is threatened by many factors, but chiefly by changes in land use, measures of value denominated in monetary terms can be used to demonstrate the importance of biodiversity conservation relative to alternative uses of land.  In this way, a better balance between 'developmental' needs and conservation can be illustrated.  To date, that balance has tended to favour the conversion of land to industrial, residential and infrastructure use because biodiversity is not seen as having a significant market value.  Economic approaches to valuation can help to identify that potential market value, whilst a further stage in the process of conservation is to 'create markets' where currently none exist. - David Pearce, Dominic Moran, Dan Biller, Handbook of Biodiversity Valuation A Guide for Policy Makers

S Is Never Going To Shrug...at this rate...

None of the vulgar libertarians (VLs) I showed my last drawing to managed to figure out who S is.  So I added another "clue" to the drawing.  Plus, I added myself to the drawing.  I'm the guy saying, "The stupid monkey is over here!!!"  S is actually a chimpanzee...so I'm being rayshist (a bit racist).

Ummm...I suppose for some it might not be obvious that I'm channeling quite a bit of Ayn Rand in this drawing.  "S Is Never Going To Shrug" instead of "Atlas Shrugged"...and "Who is S?" instead of "Who is John Galt?".

Libertarians: Riding a Moral High Horse and Tilting at Windmills

Most libertarians don't know who "S" is.  We can refer to these libertarians as Vulgar Libertarians (VLs).  Because VLs don't know who S is...it means that whatever it is they are attacking...it sure isn't S.  Does it matter that VLs aren't attacking S?  Of course.  S is the person who provided the model that our current system is based on.  So by not attacking S...they are in fact doing their darndest to keep him safe.  They use their precious resources to throw others off the trail.  They go door to door handing out directions to the windmill.  They aren't intentionally sabotaging themselves...but it's just a logical consequence of riding a moral high horse.  A moral argument is a mental crutch that makes it entirely unnecessary to make the effort to learn anything about public finance.

If you don't want to be a VL anymore...then read my last blog entry...The Logical Absurdity of Libertarianism - Partial Omniscience...and see if you can't figure out who S is.

The Logical Absurdity of Libertarianism - Partial Omniscience

1. Our current system is based on the assumption that congresspeople are omniscient (see below)
2. The political process does not adequately communicate the preferences of citizens (source)
3. Therefore, the provision of public goods is suboptimal (source)

With the help of equations and diagrams, Samuelson showed how the planner would derive for each individual his demand function and the collective consumption goods that would contribute to his utility maximization. In this system, the planner is expected to have an omniscient presence and be able to ascertain individual preferences even when they are not voluntarily revealed. Samuelson attempted to show the combination of public and private goods and their distribution that would maximize social welfare. His concern was with the total community's welfare and with all goods; it did not have much to do with the central reality of the budget in the ordinary world. - A. Premchand, Government Budgeting and Expenditure Controls: Theory and Practice

"Market failure" has always been defined as being present when conditions for Pareto-optimality are not satisfied in ways in which an omniscient, selfless, social guardian government could costlessly correct. One of the lessons of experience with development is that governments are not omniscient, selfless, social guardians and corrections are not costless. - Anne O. Krueger, Government Failures in Development

The traditional social welfare approach implicitly and often explicitly assumes an omniscient benevolent dictator (see Brennan and Buchanan 1986; Buchanan 1991). The dictator has the power to put all political ideas into action. He is completely informed and has the best of intentions. He wants to help individuals to reach the highest utility possible according to their own evaluations. - Bruno S. Frey and Alois Stutzer, Mispredicting Utility and the Political Process

When arguing that government intervention is needed to correct market failures when public goods, externalities and other sorts of market failures are present, the economics literature often makes the implicit assumption that these failures can be corrected at zero cost. The government is seen as an omniscient, benevolent institution that dictates policies in order to achieve a Pareto-optimal allocation of resources. The public choice literature challenges this utopia model of government by examining not how governments may or ought to behave, but how they do behave. It reveals that governments, too, can fail in certain ways. - Camilla Bretteville Froyn, International environmental cooperation: the role of political feasibility

Surprisingly, prior to 1957, economists stopped short when confronted with political markets, abandoned homo economicus, and fell back upon notions of impartial, omniscient, public interest motivated government, despite millennia of history that clearly invalidated such premises. In large part, this bifurcation in the research program reflected the utility perceived by economists from their role as philosopher-kings, an elite with acknowledged special access to their sovereign. Juvenile as this perception now seems, it was the dominant view among economists prior to the public choice revolution. It remains the dominant view, unfortunately, among the Ivy League elite that still controls the debate on the economics of underdevelopment. - Charles K. Rowley, Institutional Choice and Public Choice: Lessons for the Third World

Samuelson, laying particular emphasis on the problem of preference revelation, takes as a premise the existence of an omniscient planner. - Christian Bastin, Theories of Voluntary Exchange in the Theory of Public Goods

Under this condition the key difficulty of getting voters to reveal the relative intensities of their preferences for various public goods is virtually eliminated through the free exchange of votes in markets, and vote trading becomes a decentralized way for obtaining information on public goods, which is just as efficient as the private goods market is at obtaining information about consumer preferences. The omniscient benevolent dictator so frequently invoked in social welfare theory can be replaced by a system of decentralized markets. - Dennis C. Mueller, Geoffrey C. Philpotts, Jaroslav Vanek, The Social Gains From Exchanging Votes: A Simulation Approach

The new welfare economists view private markets as failing extensively because of perceived weaknesses in property rights, pervasive externalities and public goods and widespread asymmetries in information. In contrast, they view democratic government as benevolent, omniscient and impartial in its role as the White Knight riding to rescue individuals from unavoidable private market failures (Baumol and Oates, 1988). The public choice revolution redressed this bias by analysing government as it is and not as a figment of some excessively cloistered imagination. - Donald Wittman, Efficiency of Democracy?

In what follows we shall assume an omniscient planner who seeks to maximize social welfare subject to the scarcity constraints of the economy. This is standard practice in normative economics. - Elisha A. Pazner, Merit Wants and the Theory of Taxation

Standard theory pronounces these situations to be cases of market failure because that theory, blandly assuming a perspective of imagined omniscience (and skillfully side-stepping the problems of interpersonal comparisons of utility) believes it possible to identify the resulting market outcomes as socially inferior to patterns of resource alocation attainable through government intervention. From this perspective the market must, in such situations, fail to achieve that which is its assigned function to achieve, viz. a socially optimal pattern of resource allocation. - Israel M Kirzner, The Driving Force of the Market: Essays in Austrian Economics

The complexities of modern politics and bureaucracy should not, however, conceal the underlying realities, and gross misunderstanding can result if individual participation in, and reaction to, public decisions is either neglected or assumed away. The omniscient and benevolent despot does not exist, despite the genuine love for him sometimes espoused, and, scientifically, he is not a noble construction. To assume that he does exist, for the purpose of making analysis agreeable, serves to confound the issues and to guarantee frustration for the scientist who seeks to understand and to explain. - James M. Buchanan, Public Finance in Democratic Process

The possible advantages are, however, greatly increased when the unrealistic assumption of omniscient planning is relaxed and the preference-revelation problems in a world of diverse preferences are explicitly recognized. - John G. Head, Public Goods and Multi-Level Government

The traditional approach describes the allocation and distributive failures of the market, and the normative role of government in correcting those failures. Tax revenues from several sources are put into a single pot, a general fund, from which public services are provided. Equity in raising taxes is judged by ability to pay rather than by the benefit criterion on which earmarking is based. In the orthodox account, the government is shown to act as an omniscient and benevolent institution which improves on the market outcome and achieves an efficient allocation of resources. Traditional theory employs the device of a 'social welfare function' which guides an independent decision-taking budgetary authority. Critics of this account argue that in this approach, 'the government' is a black box into which voter preferences are fed and from which outcomes, which are claimed to be welfare-maximizing, emerge. - Margaret Wilkinson, Paying for Public Spending - Is There a Role for Earmarked Taxes

In Samuelson’s model, the optimum value of public goods expenditure is determined by an ethical observer who has information on the preferences and incomes of all individuals in the economy. - Marianne Johnson, Public Economics, Market Failure, and Voluntary Exchange 

The well-known Samuelson (1954, 1955) public goods articles offer a good example. Samuelson titles his first article “The Pure Theory of Public Expenditure,” indicating that his analysis of a possible market failure in the production of public goods is, in fact, not a theory, but the theory, of public expenditure even though the article contains no analysis of how government would succeed in producing public goods where the market would fail. The only way Samuelson's public good theory can be a theory of government expenditure is if the government is an omniscient benevolent dictator. - Randall G. Holcombe, Make Economics Policy Relevant: Depose the Omniscient Benevolent Dictator

Though an old theme, Samuelson's rigorous analysis of public goods in a general equilibrium setting (Samuelson, 1954) captured the attention of a wide range of theorists, and soon became the center of fiscal theory. Wicksell's concern with how to secure preference revelation was noted, but was set aside as unmanageable by economic analysis. Implementation of budget choice was again left to an omniscient referee. - Richard A. Musgrave, Public finance and the three branch model

The problem would disappear if government were omniscient, as implicitly assumed by Hotelling, but government is not omniscient and throughout his career Coase has insisted very sensibly that in evaluating the case for public intervention one must compare real markets with real government, rather than real markets with ideal government assumed to work not only flawlessly but costlessly. - Richard A. Posner, Nobel Laureate: Ronald Coase and Methodology

The essential point is that, in the standard formulation, the omniscient economist-observer (Graaff 1957, p. 13) is presumed to advise a benevolent despot (4.4). That the observer cannot 'know' the disparate desiderata of individual, autonomous agents is clear (Chapter 6). That the benevolent despot formulation unrealistically suppresses narrowly construed self-interest is also clear. In the event, both because the observer can only presume to know the relevant preference (and value) structures, and because any 'index of group welfare just inevitably make normative judgements in which the gains to some are weighed against the losses to others', it is plausible to argue that, in fact, 'measures of group welfare used by practitioners have been developed in an ad hoc manner with little or no welfare economic justification' (Slesnick 1998, p. 2137). - Timothy P. Roth, The Ethics and the Economics of Minimalist Government

PPB analysis rests upon much the same theoretical grounds as the traditional theory of public administration. The PPB analyst is essentially taking the methodological perspective of an "omniscient observer" or a "benevolent despot." Assuming that he knows the "will of the state," the PPB analyst selects a program for the efficient utilization of resources (i.e., men and material) in the accomplishment of those purposes. As Senator McClelland has correctly perceived, the assumption of omniscience may not hold; and, as a consequence, PPB analysis may involve radical errors and generate gross inefficiencies. - Vincent Ostrom and Elinor Ostrom, Public Choice: A Different Approach to the Study of Public Administration

The Provision of Public Goods is Suboptimal

1. Our current system is based on the assumption that congresspeople are omniscient (source)
2. The political process does not adequately communicate the preferences of citizens (source)
3. Therefore, the provision of public goods is suboptimal

How, then, are demand functions revealed? It would be disingenuous, to say the least, in an exercise whose object is to discover how demand is revealed, to assume that, ex ante, centers of power know the preferences of consuming households. We must then begin our analysis of the forces that motivate citizens to reveal their preferences by focusing on a fundamental information problem. I therefore assume that as a consequence of imperfect information concerning the preferences of citizens, centers of power will provide, except by accident, goods and services in quantities that will be either larger or smaller than the quantities desired by consuming households at the taxprices they confront, and I show that these departures from optimality inflict utility loses on these households. - Albert Breton, Competitive Governments: An Economic Theory of Politics and Public Finance

There are many problems with this public good argument. The most glaring problem that should be noted immediately is that, assuming that education indeed cannot be provided optimally by private means, what in the world would move someone to believe that government can better determine the optimal amount? Buchanan (1975) correctly notes that many economists, as soon as they believe that they have diagnosed a public good, fail to consider critically the role that government can play: "It was as if the alternatives for public choice were assumed to be available independently from some external source; there was no problem concerning the behavior of [government] suppliers and producers." - Andrew Young and Walter Block, Enterprising Education: Doing Away with the Public School System

One aspect of public goods that prevents the government making efficient decisions is the government's lack of knowledge of households' preferences and willingness to pay for public goods. - Gareth D. Myles, Public Economics

Prices must also play a more important role as a mechanism for revealing the true demand for - and therefore, indicating the efficient supply of - public infrastructure. The current disconnect between payment by users and services provided by specific infrastructure assets has led to too much public capital in some sectors and too little in other sectors. - Harry Kitchen, Physical Infrastructure and Financing

Thus, the revised definition allows us to see that public goods do not only face the long recognized risk of under-provision; they may also suffer from mal-provision – providing positive utility only for some and for others nothing, or sometimes even, only costs. A way to reduce the risk of such mal-provision could be to grant all concerned population groups a more direct say in selecting and shaping public goods, i.e. to better match publicness in consumption with publicness in decision-making. More issue-specific policy dialogue among all concerned actors and stakeholders could help achieve that. - Inge Kaul, Public Goods: Taking the Concept to the 21st Century

Because of the coercive nature of government activity, two additional results come forth. First, by voluntarily purchasing an item on the market, an individual demonstrates that he values the item more than the money price. But in paying taxes, he makes no such demonstration. The government does not know, as a business does, the value individuals place on its activity. Since government cannot obtain the information and incentive by demonstrated preferences of individuals, they cannot efficiently serve individuals. - Jeffrey Herbener, Austrian Methodology: The Preferred Tax Type

One cause of inefficiency in the provision of collective goods is familiar from the theoretical writings in welfare economics and public finance, but rarely mentioned in the PPB or cost-benefit literature. That is the difficulty of getting consumers to reveal their preferences concerning a collective good or externality, and preferences must of course be known to determine how much it is optimal to provide. - Mancur Olson, Evaluating Performance in the Public Sector

But this argument generates far more difficulties than it solves. It proves too much in many directions. In the first place, how much of the deficient good should be supplied? What criterion can the State have for deciding the optimal amount and for gauging by how much the market provision of the service falls short? Even if free riders benefit from collective service X, in short, taxing them to pay for producing more will deprive them of unspecified amounts of private goods Y, Z, and so on. We know from their actions that these private consumers wish to continue to purchase private goods Y, Z, and so on, in various amounts. But where is their analogous demonstrated preference for the various collective goods? We know that a tax will deprive the free riders of various amounts of their cherished private goods, but we have no idea how much benefit they will acquire from the increased provision of the collective good; and so we have no warrant whatever for believing that the benefits will be greater than the imposed costs. The presumption should be quite the reverse. And what of those individuals who dislike the collective goods, pacifists who are morally outraged at defensive violence, environmentalists who worry over a dam destroying snail darters, and so on? In short, what of those persons who find other people's good their "bad?" Far from being free riders receiving external benefits, they are yoked to absorbing psychic harm from the supply of these goods. Taxing them to subsidize more defense, for example, will impose a further twofold injury on these hapless persons: once by taxing them, and second by supplying more of a hated service. - Murray Rothbard, The Myth of Neutral Taxation

Nevertheless, the classic solution to the problem of underprovision of public goods has been government funding - through compulsory taxation - and government production of the good or service in question. Although this may substantially alleviate the problem of numerous free-riders that refuse to pay for the benefits they receive, it should be noted that the policy process does not provide any very plausible method for determining what the optimal or best level of provision of a public good actually is. When it is impossible to observe what individuals are willing to give up in order to get the public good, how can policymakers access how urgently they really want more or less of it, given the other possible uses of their money? There is a whole economic literature dealing with the willingness-to-pay methods and contingent valuation techniques to try and divine such preference in the absence of a market price doing so, but even the most optimistic proponents of such devices tend to concede that public goods will still most likely be underprovided or overprovided under government stewardship. - Patricia Kennett, Governance, globalization and public policy

One problem with the government's redistributional activities is that because the government is not run by an omniscient and benevolent despot, but rather by democratic decision-making, there is no underlying principle that determines how redistribution will occur. Rather, as Stigler noted, benefits are transferred to those with political power. This leads interests to engage in rent-seeking, with the attendant political costs. And because benefits go to those with political power rather than to those who, according to some justification, deserve them, it is unlikely that the ultimate result of government redistributional activity will satisfy any reasonable criteria for efficiency or equity. Meanwhile, the rent-seeking and political costs remain. - Randall G. Holcombe, Taxation, Production, and Redistribution

If a revenue source is earmarked but has no logical connection with the expenditure function it supports, then from an efficiency perspective the amount of the public service supplied will almost certainly be either too great or too small. - Richard M. Bird and Thomas Tsiopoulos, User Charges for Public Services: Potentials and Problems

Since these policies are bundled together and voters cannot evaluate them individually, the election margin cannot reveal which of these interpretations is correct, nor can the election reveal the specific amount of resources voters want to devote to each of the three policy areas. Yet for political parties to allocate resources to satisfy social preferences, parties must determine which interpretation accurately describes voters’ preferences. For if a party were elected to power because voters wanted the party to alter foreign policy—but not any of the other policies—and the party did not realize this, the party could allocate resources in ways that did not reflect social preferences. - Samuel DeCanio, Democracy, the Market, and the Logic of Social Choice

Voting and other democratic procedures can help to produce information about the demand for public goods, but these processes are unlikely to work as well at providing the optimal amounts of public goods as do markets at providing the optimal amounts of private goods. Thus, we have more confidence that the optimal amount of toothpaste is purchased every year ($2.3 billion worth in recent years) than the optimal amount of defense spending ($549 billion) or the optimal amount of asteroid deflection (close to $0). In some cases, we could get too much of the public good with many people being forced riders and in other cases we could get too little of the public good. - Tyler Cowen, Alex Tabarrok, Modern Principles of Economics

Because most public goods and services are financed through a process of taxation involving no choice, optimal levels of expenditure are difficult to establish. The provision of public goods can be easily over-financed or under-financed. Public officials and professionals may have higher preferences for some public goods than the citizens they serve. Thus they may allocate more tax monies to these services than the citizens being served would allocate if they had an effective voice in the process. Under-financing can occur where many of the beneficiaries of a public good are not included in the collective consumption units financing the good. Thus they do not help to finance the provision of that good even though they would be willing to help pay their fair share. - Vincent Ostrom and Elinor Ostrom, Public Goods and Public Choices

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

Evaluating Mistakes on an X Y Graph

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Infactum: How do you define the word "mistake"?

Xero: How many different ways can you allocate the resources that you now have? Each possible allocation is going to provide you and others with a different amount of value. Because values are subjective, an allocation that might create value for you...might destroy value for others. So we're dealing with an x y graph...your value is on the x axis and other people's values are on the y axis. Can you figure out where mistakes would be on this graph?

Context: Are Congresspeople Omniscient?

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I decided to create the x y graph...

At any given time you have a finite amount of resources at your disposal.  Just having these resources though isn't as important as how you use them.  Each particular use (allocation) of your resources will provide you with x amount of value and others with y amount value.  Given that that no two allocations of your resources will create/destroy the same exact amount of value, every single possible allocation of your resources can be plotted on a different point on this graph.

Where would you plot the following?

Forgetting to wear deodorant
Helping your friend move
Realizing after it's too late that there isn't any toilet paper
Donating $100 to your favorite cause
Pranking your friend
Going to a party instead of studying for an exam
Having sex with your best friend's significant other
Curing cancer
Losing $1000 at the race track
Starting WWIII

When you compare any two points on the graph, whichever point is closest to (10,10) is the more efficient (less wasteful) allocation.  A mistake is when the less efficient allocation is chosen.  The size of the mistake can be determined by subtracting the shorter distance from the longer distance.

We're all fallible, but we're not all equally fallible.  It's a given that some people are going to make less mistakes than other people.  Markets work because people can give you positive feedback (money) if your resource allocations create value for them.  As a result, the more value that you create for others, the more influence you'll have over how society's limited resources are used.  This fail safe device limits the amount of resources that end up in the hands of the people who make the most mistakes.

If we can't give people feedback on how well they are using society's limited resources, then too many resources will end up in the wrong hands.  Even when resources do happen to end up in the right hands...producers will be decentivized because the size of the carrot will not depend on their effort to research and accurately predict the most valuable allocations.

If anybody is interested in a critique of dollar voting please read On the Phenomenon of Bullshit Jobs by David Graeber.  For a short and sweet rebuttal please read BS Jobs and BS Economics by Alex Tabarrok.  For a longer, but relatively accessible, rebuttal I highly recommend reading Democracy, the Market, and the Logic of Social Choice by Samuel DeCanio.

Market Success Versus Government Success

Public choice is a theory of ‘government failure’ here in the precisely analogous sense that theoretical welfare economics has been a theory of ‘market failure' - James M. Buchanan

Before I use a title for a blog entry, sometimes I'll conduct a Google search to determine just how (un)original it is...

• "Market failure versus government failure" - 32,200 results
• "Government failure versus market failure" - 28,500 results
• "Government success versus market success" - 0 results
• "Market success versus government success" - 0 results

Right now when you search for "government success"...the second result is the Wikipedia entry for "government failure".  Not sure how personalized the results are though.  But let's have some fun by Google bombing the heck out of "government success" by linking it to the Wikipedia article for government failure.  Like so...government success.

We often hear of market failure...but what exactly does it mean for markets to fail?  The standard answer typically contains concepts such as irrationality, wealth inequality, information asymmetries, negative externalities, monopolies and public goods.  These concepts are frequently used to justify government intervention.  But in order to truly understand market failure...I think it's essential to first understand market success.

Right now you're surrounded by examples of market success.  Every product/service that you purchase is an example of market success.  The toothpaste that you purchase is an example of market success.  Yet, for most of recorded history, the private sector did not supply toothpaste as we know it.  The market failed, but now it succeeds.

But isn't it reasonable to believe that there's still room for improvement when it comes to toothpaste?  It's hard to imagine that 200 years from now people are still going to be using exactly the same toothpaste that we use.  I'm pretty sure that in the future you're simply going to put a tablet in your mouth that will quickly dissolve away anything that shouldn't be in there.  Not having to brush your teeth will free up your time for more valuable uses.  That's progress.

Because there's always room for improvement...there's no such thing as perfect success.  Every product/service we purchase is successful because consumers decided that it reduced the shortcomings of previously available products/services.  Therefore, consumers incentivize entrepreneurs to not just find where there's room for improvement, but to actually make the improvements.  It's relatively easy to find where there's room for improvement, but actually making the necessary improvement takes considerable amounts of effort, skill, ingenuity, perseverance...and a good dose of luck.  This is why incentives matter.

The key concept is that the only way we can measure the extent of an entrepreneur's success is by observing how consumers react to the new product.  If Erin, the entrepreneur, develops a tooth tablet, then the success of her product will be determined by how many consumers stop buying toothpaste/toothbrushes and buy tooth tablets instead.  If toothpaste and toothbrushes become as outmoded as buggy whips, then we can definitively say that Erin successfully corrected a market deficiency/inadequacy/shortcoming/failure.

We know that the market succeeds because people are willing to pay for products.  We also know that the market fails because there's always room for improvement.  But can we say that the government succeeds?  Nope nope nope nope.  Why not?  Simply because consumers don't have the freedom to demonstrate how effectively/efficiently the government is taking up the slack.

Here's how I've illustrated this...

The point of these graphs is to illustrate that the success of government depends on how accurately the supply of public goods reflects the true breadth/depth of market failure.  

Graph 1 - what government success would look like

Graph 2 - what government failure looks like

Graph 3 - government success depends on knowing the breadth/depth of market failure

If we don't know the breadth/depth of market failure, then we can't truly know how well the government is complementing the private sector.  For all we know it could be making mountains out of mole hills...and whatever the opposite analogy is.  

The theory of pragmatarianism is that allowing taxpayers to choose where their taxes go will show us the breadth/depth of market failure.

It is, of course, not desirable that anything should be done by funds derived from compulsory taxation, which is already sufficiently well done by individual liberality. - J.S. Mill, Principles of Political Economy with some of their Applications to Social Philosophy

If education is sufficiently well done by individual liberty, then taxpayers won't spend any of their taxes on public education.  The more money that taxpayers do spend on public education, the greater the depth of market failure and the greater the height of government success in terms of education.

The Essential Value of Incentives - For Kevin Vallier

Over at the Bleeding Heart Libertarian blog, the political philosopher Kevin Vallier recently called out the market economists Peter Boettke and Peter Leeson (CoordinationProblem.org)... The Essential Relationships Between Duty and Coordination – For Boettke and Leeson

The heart of his argument...

Here’s the problem. Many moral philosophers (including me) think a purely instrumental agreement is seriously deficient from a moral point of view. For one thing, instrumentally rational agreements might be subject to gross inequalities of wealth, and worse, inequalities of bargaining power. It might be instrumentally rational, for instance, for a drowning man to give up all of his money to the only person in a position to rescue him. But we think such an agreement would be unjust because the rescuer is exploiting the man who needs rescuing. The result is that instrumentalist contracts are not properly normative. They don’t give us the right reasons to comply with social and political rules.

Kevin Vallier, I'll be your huckleberry!  Let's see how much my response differs from those fine fellows over at CoordinationProblem.

Here's the bottom line up front...

Decreasing the amount of benefit that people can receive from being at the right place at the right time, decreases their incentive to make the effort to be at the right place at the right time.  Basically, incentives matter.

I'm going to attach two epiphytes to the same branch by sharing the rest of the lines sandwiched in the middle of this rather pretty decent discussion with Infactum...

Of course not. However, that sentence directly contradicts the claim that the following is proven: - Infactum

opportunity cost ensures the efficient allocation of resources - Xero

You're lumping two extremely different types of earmarking...

The standard normative "theory" of earmarking adopts the reference system of the budget-maker, the budgetary authority, who is, by presumption, divorced from the citizenry in the political community. An alternative working hypothesis of political order is the individualistic
one in which the reference system becomes that of the individual citizen. - James M. Buchanan, The Economics of Earmarked Taxes

The standard idea of earmarking is individual congresspeople allocating funds to specific programs. Buchanan discussed earmarking in terms of individual taxpayers allocating funds to specific programs. What do you think the difference is between the two types of earmarking in terms of opportunity cost?

Since economists do not agree, then we conclude that opportunity cost is not proven to ensure efficient allocation of resources (regardless of market). This logic only applies as of 1963, of course. It is possible that that statement was proven since then. - Infactum

So find a paper that substantiates your specific claim that opportunity costs do not ensure the efficient allocation of resources.

I'll admit, I had only read the first page since I dislike making more internet accounts. The paper was, however, disappointing in it's narrow applicability.

His argument, in The Economics of Earmarked Taxes (1963), was, essentially, that if you make enough assumptions, then earmarking is optimal. To do prove earmarking is optimal, he explicitly rejects strategic allocation by assuming that the good provided by a public service is directly proportional to the amount of funding that service receives (p.460). He himself admits (as I would expect most any self respecting economist to do) that these are just assumptions and the real world may behave far differently from his idealization. He especially focuses on the political nature of the actor as far from his ideal actor and the "decision making cost." See section V for his cautions on the applicability of the results. Note especially where he says that the violation of these assumptions might mean that a traditional allocation system could be better. I will note that all 3 of these things have been brought up in one way or another in this thread by me or others. - Infactum

You missed the point regarding bundles and preference revelation...

Institutionally, earmarking provides a means of compartmentalizing fiscal decisions. The individual citizen, as voter-taxpayer-beneficiary, is enabled to participate, separately, either directly or through his legislative representative, in the several public expenditure decisions that may arise. He may, through this device, "vote" independently on the funds to be devoted to schools, to sanitation, and so on, given the specified revenue sources. Only in this manner can he make "private" choices on the basis of some reasonably accurate comparison of the costs and the benefits of the specific public services, one at the time. By contrast, general-fund budgeting, or non-earmarking, allows the citizen to "vote" only on the aggregate outlay for the predetermined "bundles" of public services, as this choice is presented to him by the budgetary authorities. - James M. Buchanan, The Economics of Earmarked Taxes

Remember what I wrote in my original post? Our current system is based on the assumption that congresspeople are omniscient (True/False)...

The basic argument assumes a full range of possible baskets of public goods available at the start. But how is this spectrum of opportunities established? Two possibilities come to mind: some central authority or auctioneer could set up different local communities and clubs with different baskets of public goods and inform all potential citizens of the characteristics of each community club. There are two obvious difficulties to this resolution of the problem, however. First, assuming a central authority knows what baskets of public goods must be supplied disposes of a large portion of the preference revelation problem, which the model is supposed to solve. If the central authority knew which people had which preferences, it could simply assign individuals to the appropriate club or local polity. Second, even if it is to some extent feasible, this solution to the preference-revelation problem violates the decentralized spirit of the Buchanan and Tiebout models. - Dennis C. Mueller, Public Choice III

Scholars have examined a number of factors that are taken to be structural components of governmental systems and that are presumed to induce utility losses. Among them is the "bundling" of goods and services, that is, the provision in a single package of a number of goods and services. Yoram Barzel (1969) has shown that bundling can impose utility loses on citizens. - Albert Breton, Competitive Governments: An Economic Theory of Politics and Public Finance

Every year, 100 million homes pay for a bundle of cable channels. Like any bundle, it's hard to see exactly what they are paying for. That is somewhat the point of bundling -- to disguise the true cost of the constituent items. - Derek Thompson, The End of TV and the Death of the Cable Bundle

Bundling...

1. assumes omniscience on the part of congresspeople
2. decreases utility for citizens
3. prevents citizens from being aware of the (opportunity) costs

Your argument is largely centered around the idea that taxpayers will have an incentive to conceal their true preferences if they could choose where their taxes go. Buchanan argued against this in his paper...

Under most real-world taxing institutions, the tax price per unit at which collective goods are made available to the individual will depend, at least to some degree, on his own behavior. This element is not, however, important under the major tax institutions such as the personal income tax, the general sales tax, or the real property tax. With such structures, the individual may, by changing his private behavior, modify the tax base (and thus the tax price per unit of collective goods he utilizes), but he need not have any incentive to conceal his "true" preferences for public goods. - James M. Buchanan, The Economics of Earmarked Taxes

This substantiates my claim that taxpayers would allocate their taxes according to their preferences. If you claim otherwise, then the responsibility is on you to find any papers that substantiate your claim. Just like if you claim that opportunity costs do not ensure the efficient allocation of resources, then the responsibility is on you to find any papers that substantiate your claim.

Opportunity cost is the difference in value derived from one choice versus the best of the choices not picked. - Infactum

You derive x amount of value from replying to this thread (1st best option) and y amount of value from reading your book (2nd best option). The opportunity cost of replying to this thread is not x - y...it's simply y. It's the value that you would have derived from reading your book.

In theory, if everyone is rational (i.e. makes no "mistakes"), then they will pick the option with the least opportunity cost. - Infactum

People pick the most valuable option, which requires the sacrifice of the second most valuable option. The value that you would have derived from the second best option is the opportunity cost.

I honestly cannot find a discussion of this concept with relation to multiplayer games, but that is quite important, as the opportunity cost of defecting in the prisoner's dilemma is dependent on the other player's action. This prevents the analysis from extending to collectively funded public goods IMO. My claim, however isn't that strong.

[...]

1) "If you're not willing to cooperate with your coconspirator, then clearly you'd prefer to sit in jail for 3 years instead of 1." Is that a true statement in your opinion? Can you see this as a valid analogy?

[...]

Opportunity cost is not well defined in (some) multiplayer games. That was the point of the second sentence. You can't tell me my opportunity cost for defecting in the prisoner's dilemma/Chicken/etc without information on another actor. This means that, even if I were a homo economicus, I would have insufficient information to determine the magnitude of my opportunity cost. How do you expect poor little normal me to do so? If I cannot determine the magnitude of my opportunity cost, I cannot determine how much I am sacrificing. If I cannot determine how much I am sacrificing, then I cannot compare the value of different options. If I cannot compare the value of different options, I cannot choose the one I prefer. Do you disagree with anything in that logic chain? - Infactum 

Imagine a river right next to a soup kitchen. When you arrive at the soup kitchen to volunteer you notice that there's a group of people picking up trash along the river. How is the prisoner's dilemma relevant/applicable?

My original guess was that you were going to claim that the private sector was more complex, and therefore people ought to have an easier time deciding what was of value to them in the public sector. After tracing the thread of conversation back a bit, it seems more likely that you intend to show that (government provided?) public goods tend to compete with each other far less, so it is much more important to choose one over the other. Was I even close? - Infactum

Not really. My point was for you to explain why there's such a greater diversity/variety of goods in the private sector. What do you attribute this to?

I'll admit, I hadn't considered "voting" as asking people how much things are worth to them with the understanding that that will be how much they pay. When we vote we have the opportunity to make other people pay for things we value. I know this is a problem you have with the system, but it means that our method of voting is not exactly a contingent valuation system.

[...]

No, it's not. The reason people like Hitler become powerful is that they are able to change others' preferences. Hitler could easily have risen to head of government. If he could get any small fraction of the people to give their taxes to his military, he could seize power.

Clearly you believe that voting adequately allows people to communicate their true preferences/values. So please substantiate your claim.

No, but Congress does have access to experts and (in theory) studies the issue constantly. Now you are pretty much requiring that everyone do some fraction of this if they want to allocate to the best of their ability. I believe this is what Buchanan referred to as "Decision cost." Perhaps their will be a new industry of allocation advisers spawned, if so that would cut down, but not remove this decision cost. It also wouldn't get rid of the incentive to "defect". - Infactum

Keep climbing the mountain by reading up on rational ignorance...

This greater complexity of political choice is compounded by an inability to gain from any investment in knowledge. In a market setting, a person can gain by storing food during the boom periods; it is a simple task to profit directly from knowledge. In a political setting, however, even if a person has acquired knowledge about the more complex question of "why," there is no way that he can profit from his knowledge because a change in policy will take place only after a majority of people have come to the same conclusion. Consequently, it is rational to be considerably more ignorant about general policy matters than about matters of market choice. - James M. Buchanan, The Theory of Public Choice: II

We all gain as a society when we incentivize people to be at the right place at the right time. Being at the right place at the right time requires doing homework. But there's no point in doing homework if there's absolutely no benefit from being at the right place at the right time.

Consider this recent blog entry over at the Bleeding Heart Libertarian blog...

Here’s the problem. Many moral philosophers (including me) think a purely instrumental agreement is seriously deficient from a moral point of view. For one thing, instrumentally rational agreements might be subject to gross inequalities of wealth, and worse, inequalities of bargaining power. It might be instrumentally rational, for instance, for a drowning man to give up all of his money to the only person in a position to rescue him. But we think such an agreement would be unjust because the rescuer is exploiting the man who needs rescuing. The result is that instrumentalist contracts are not properly normative. They don’t give us the right reasons to comply with social and political rules. - Kevin Vallier, The Essential Relationships Between Duty and Coordination – For Boettke and Leeson

Clearly Vallier needs to read Bastiat...

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. - Frédéric Bastiat, What Is Seen and What Is Not Seen

It might seem morally wrong for Dave to exploit (take advantage of) Bob, who's drowning. But the fact of the matter is, nobody else was around. If we limit/restrict Dave's ability to benefit from his effort/research/luck/insight/foresight, then we decentivize people to be where we need them most. It's the equivalent of removing sirens and flashing lights from emergency vehicles. If we don't know how valuable all the different uses of society's limited resources are...then it's impossible for resources to flow to where they create the most value. Without this essential information, it's a given that resources will flow the wrong directions and we will all be worse off.

So you feel secure placing our future in the hands of 300 congresspeople and their entourage of experts. But I would feel infinitely more secure if everybody could receive the benefit of their accurate estimates of future value.

If the socialists mean that under extraordinary circumstances, for urgent cases, the state should set aside some resources to assist certain unfortunate people, to help them adjust to changing conditions, we will, of course, agree. This is done now; we desire that it be done better. There is, however, a point on this road that must not be passed; it is the point where governmental foresight would step in to replace individual foresight and thus destroy it. - Frédéric Bastiat

given enough eyeballs, all bugs are shallow - Linus's Law

Right now in this thread there are numerous people looking for the bugs in pragmatarianism. Clearly they are finding bugs. Maybe the bugs are imagined rather than real, but they should be allowed to allocate their resources accordingly. This is exactly how the public sector should work as well. Let many people look for the bugs in public programs and allocate their taxes accordingly.

Earlier you said that how much I sacrifice is the same as how much I valued something. If this is true, then no value is created in trades, as I am sacrificing something to receive something of equal value (and so is "Trusty"). Do you believe value is created in trades? - Infactum

People only sacrifice something if they suspect that what they receive in return will be more valuable than what they have to give up. Otherwise they'll simply suffer a loss. Given that nobody intentionally wants to suffer a loss, the more that somebody is willing to sacrifice, the more they value what they are trading for.

The exsistence of a costless exit is not even obvious. "Cost," can only be defined relative to other things (as you assert when talking about oppurtunity cost). Therefore, the existence and placement of a zero (i.e. "costless") is at best arbitrary. - Infactum

There's a difference between internal "barriers" and external barriers. Costless exit just means that I'm not preventing you in any way shape or form from leaving this discussion. With our current system, it's very costly for a pacifist not to fund the DoD. They can either avoid making enough money to pay taxes or risk going to jail or try to move to a country where they aren't forced to fund war.

I tend to think abundance has to do with how well society uses societies limited resources. There is so much aping and riffing on eachothers' ideas in industry that it is basically impossible to define who is responsible for a given business practice. And make no mistake, it is technological innovations and business practices that are responsible for the abundance, as they are what allow us to multiply our labor.

And you haven't answered my question. If, say, the poorest third of the people on SNAP (5% - 15 Million people) starved to death after implementing tax choice, would you say the market valued them more dead than alive? - Infactum

You agree that abundance depends on how well society's limited resources are being used. Yet, you want me to address an unrealistic scenario with millions starved to death because we implemented tax choice. It reminds me of these anarcho-capitalists who critiqued pragmatarianism using a pragmatarian system with a 100% tax rate as their example. If you want me to address your unrealistic scenario, then please provide a detailed and credible explanation of how we arrive at your scenario.

Step 1: Implement pragmatarianism
Step 2: ?
Step 3: Millions starve to death

I can't be certain that P doesn't lead to pragmatarianism. In principle, I could if I could show some kind of contradiction, but I would prefer things be better defined before attempting that again. It may not lead to anywhere interesting or useful on it's own. That's just the nature of logic. You still have to rigorously show it leads to pragmatarianism; logic isn't a Bayesian analysis. - Infactum

You're defending the current system, and you agree that values are subjective (P). Please give me an example rigorously showing that P leads to our current system. Or acknowledge that you hold my arguments to a far higher standard than you hold your own.