Friday, August 7, 2015

Pretty Face Means Ugly Logic

Reply to: What does government do?


Pretty face means ugly logic.

The Pure Theory of Public Expenditure is the best (most widely cited) economic defense of government. It’s a really short paper that was written by the Nobel Prize winning liberal economist Paul Samuelson.

In his paper, Samuelson argues that we can’t rely on citations to determine which papers are best. Google never got the memo so it created a search engine that ranks webpages according to the number of links that they have received. Medium never got the memo either so it ranks stories according to number of recommendations that they have received. You didn’t get the memo either so you think that votes accurately reflect what the people actually want. So here you are patting the government on its back and encouraging other people to do the same.

Democracy is a survey. If surveys were trustworthy then we wouldn’t need taxes. You think we need taxes. Yet, you also think that surveys are trustworthy.

The private sector can and has supplied roads. The private sector can and has supplied everything that the public sector supplies. Well… generally… not specifically. Clearly the private sector hasn’t put a man on the moon or built pyramids or started a world war.

The problem with the private sector’s provision of public goods is that the supply won’t be optimal. People can benefit from public goods without having to contribute to their provision. So, because of the free-rider problem, we can reasonably suspect that public goods will be undersupplied.

Therefore? Taxation and public provision. That’s it.

Here’s another Nobel Prize economist…

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

Peter Diamandis could spend his taxes on whichever public goods he wants the most. Creating a market in the public sector would help ensure that the provision of public goods is optimal.

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