Friday, December 25, 2015

The Demand For Defense - Relevant Passages

Some passages relevant to this blog entry... Clarifying The Demand For Defense


Bang For The Buck


To satisfy our wants to the utmost with the least effort - to procure the greatest amount of what is desirable at the expense of the least that is undesirable - in other words, to maximize pleasure, is the problem of economics. - William Stanley Jevons, The Theory of Political Economy


Presumably, individuals would prefer to pay less for virtually any good or service, since doing so rationally maximizes their utility from payment (Becker 1962). - Cait Lamberton, A Spoonful of Choice


The desire of food is limited in every man by the narrow capacity of the human stomach; but the desire of the conveniencies and ornaments of building, dress, equipage, and houshold furniture, seems to have no limit or certain boundary. Those, therefore, who have the command of more food than they themselves can consume, are always willing to exchange the surplus, or, what is the same thing, the price of it, for gratifications of this other kind. - Adam Smith, Wealth of Nations


If we now turn to consider the immediate self-interest of the consumer, we shall find that it is in perfect harmony with the general interest, i.e., with what the well-being of mankind requires. When the buyer goes to the market, he wants to find it abundantly supplied. He wants the seasons to be propitious for all the crops; more and more wonderful inventions to bring a greater number of products and satisfactions within his reach; time and labor to be saved; distances to be wiped out; the spirit of peace and justice to permit lessening the burden of taxes; and tariff walls of every sort to fall. In all these respects, the immediate self-interest of the consumer follows a line parallel to that of the public interest. He may extend his secret wishes to fantastic or absurd lengths; yet they will not cease to be in conformity with the interests of his fellow man. He may wish that food and shelter, roof and hearth, education and morality, security and peace, strength and health, all be his without effort, without toil, and without limit, like the dust of the roads, the water of the stream, the air that surrounds us, and the sunlight that bathes us; and yet the realization of these wishes would in no way conflict with the good of society. - Frédéric Bastiat, Abundance and Scarcity


The produce of industry is what it adds to the subject or materials upon which it is employed. In proportion as the value of this produce is great or small, so will likewise be the profits of the employer. But it is only for the sake of profit that any man employs a capital in the support of industry; and he will always, therefore, endeavour to employ it in the support of that industry of which the produce is likely to be of the greatest value, or to exchange for the greatest quantity either of money or of other goods. - Adam Smith, Wealth of Nations


Whilst every man is free to employ his capital where he pleases, he will naturally seek for it that employment which is most advantageous; he will naturally be dissatisfied with a profit of 10 per cent., if by removing his capital he can obtain a profit of 15 per cent. This restless desire on the part of all the employers of stock, to quit a less profitable for a more advantageous business, has a strong tendency to equalize the rate of profits of all, or to fix them in such proportions as may, in the estimation of the parties, compensate for any advantage which one may have, or may appear to have, over the other. - David Ricardo, On the Principles of Political Economy and Taxation


The selective process of the market is actuated by the composite effort of all members of the market economy.  Driven by the urge to remove his own uneasiness as much as possible, each individual is intent, on the one hand, upon attaining that position in which he can contribute most to the best satisfaction of everyone else and, on the other hand, upon taking best advantage of the services offered by everyone else.  This means that he tries to sell on the dearest market and to buy on the cheapest market.  The resultant of  these endeavors is not only the price structure but no less the social structure, the assignment of definite tasks to the various individuals. The market makes people rich or poor, determines who shall run the big plants and who shall scrub the floors, fixes how many people shall work in the copper mines and how many in the symphony orchestras.  None of these decisions is made once and for all; they are revocable every day.  The selective process never stops.  It goes on adjusting the social apparatus of production to the changes in demand and supply.  It reviews again and again its previous decisions and forces everybody to submit to a new examination of his case.  There is no security and no such thing as a right to preserve any position aquired in the past.  Nobody is exempt from the law of the market, the consumers' sovereignty. - Ludwig von Mises, Human Action


Geometry presupposes an arbitrary definition of a line, "that which has length but not breadth." Just in the same manner does Political Economy presuppose an arbitrary definition of man, as a being who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labour and physical self-denial with which they can be obtained. - J.S. Mill, Essays on Some Unsettled Questions of Political Economy


The interest of a nation in its commercial relations to foreign nations is, like that of a merchant with regard to the different people with whom he deals, to buy as cheap and to sell as dear as possible. But it will be most likely to buy cheap, when by the most perfect freedom of trade it encourages all nations to bring to it the goods which it has occasion to purchase; and, for the same reason, it will be most likely to sell dear, when its markets are thus filled with the greatest number of buyers. - Adam Smith, Wealth of Nations


If this doctrine is true, and as all men think and invent, as all, in fact, from first to last, and at every minute of their existence, seek to make the forces of Nature co-operate with them, to do more with less, to reduce their own manual labor or that of those whom they pay, to attain the greatest possible sum of satisfactions with the least possible amount of work; we must conclude that all mankind is on the way to decadence, precisely because of this intelligent aspiration towards progress that seems to torment every one of its members. - Frédéric Bastiat, What Is Seen and What Is Not Seen


Are all men, without exception, interested in acquiring all things cheaply, that is to say, in getting the utmost possible amount of things in exchange for the smallet amount of labour?  Yes.  Therefore all men have an equal interest in hindering destruction, in countenancing production and saving. - Edmond About Handbook of Social Economy: Or, The Worker's A B C


Everybody is eager to charge for his services and accomplishments as much as the traffic can bear. In this regard there is no difference between the workers, whether unionized or not, the ministers, and teachers on the one hand and the entrepreneurs on the other hand.  Neither of them has the right to talk as if he were Francis d'Assisi. - Ludwig von Mises Planning for Freedom



The Free Rider Problem



I have received more telegrams in the last two weeks than I ever received during the consideration of any other bill.  I have received telegrams worded patriotically, that each and every person whom we intend to tax is willing to pay his share to carry on the war; but … they all think some other fellow ought to pay the tax. - William Collier


If the individual is to spend his money for private and public uses so that his satisfaction is maximized, he will obviously pay nothing whatsover for public purposes (at least if we disregard fees and similar charges).  Whether he pays much or little will affect the scope of public services so slightly, that for all practical purposes he himself will not notice it at all.  Of course, if everyone were to do the same, the State will soon cease to function.  The utility and the marginal utility of public services (Mazzola's public goods) for the individual thus depend in the highest degree on how much the others contribute, but hardly on how much he himself contributes….Equality between the marginal utility of public goods and their price cannot, therefore, be established by the single individual, but must be secured by consultation between him and all other individuals of their delegates. - Knut Wicksell,  A New Principle of Just Taxation


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. - Paul Samuelson, The Pure Theory of Public Expenditure


It is also important, that the assembly which votes the taxes, either general or local, should be elected exclusively by those who pay something towards the taxes imposed. Those who pay no taxes, disposing by their votes of other people's money, have every motive to be lavish, and none to economize. As far as money matters are concerned, any power of voting possessed by them is a violation of the fundamental principle of free government; a severance of the power of control, from the interest in its beneficial exercise. It amounts to allowing them to put their hands into other people's pockets, for any purpose which they think fit to call a public one; which in some of the great towns of the United States is known to have produced a scale of local taxation onerous beyond example, and wholly borne by the wealthier classes. - J.S. Mill, Considerations on Representative Government


The standard argument for government provision of national defense is that purely private provision will be insufficient because national defense is a “public good.” If a private group fields an army that protects the country from invasion, everyone benefits, so few people will voluntarily pay for this good and instead free-ride on others. - Jeffrey Miron, Libertarianism and Anti-Poverty Programs


First, where the characteristics of a good or service are such that it provides a general benefit that cannot be limited to specific individuals (as is the case with pure public goods like national defence), economic theory suggests that public provision financed by compulsory taxation is essential for efficiency reasons to prevent the undersupply that would result, under private provision, from ‘free riders’ who could enjoy the good or service without contributing to its cost. - David Duff, Benefit Taxes and User Fees in Theory and Practice


The primary line of justification that has been advanced for the power to tax is the problem of free ridership. If taxes were replaced by voluntary contributions, it would be impossible for anyone to claim that the state was involved in expropriating private property. At the same time, it is argued, people would have strong incentives to take free rides on the contributions of others. As a result, services such as civil order and national security, which we all value, are likely to be underfunded. - Ronald Hamowy, The Encyclopedia of Libertarianism


Federal taxation of individuals would succeed where “requisitioning” the states for their fair share of contributions to the national treasury had failed. In the Critical Period, the states acted individually when they needed to act collectively, free riding on the contributions of other states to the federal treasury. Moreover, the Articles of Confederation denied Congress any power to solve this problem. With no authority to tax, Congress had little money to spend. The Revolutionary War debts remained unpaid. — Siegel Cooter, Not the Power to Destroy: An Effects Theory of the Tax Power


The Forced Rider Problem



It would seem to be a blatant injustice if someone should be forced to contribute towards the cost of some activity which does not further his interests or may even be diametrically opposed to them. - Knut Wicksell, A New Principle of Just Taxation


Indeed, the generally ignored problem of the forced rider, from who taxes are extracted but who receives no value in return, may be more severe than the problem of the free rider. - Richard Wagner, Public Finance


To compel a man to furnish funds for the propagation of ideas he disbelieves and abhors is sinful and tyrannical. - Thomas Jefferson


To constrain men to any thing inconvenient doth seem unreasonable. - John Locke, Second Treatise on Government


To use the expedient of taxation as a stimulative to increased production, is to redouble the exertions of the community, for the sole purpose of multiplying its privations, rather than its enjoyments. For, if increased taxation be applied to the support of a complex, overgrown, and ostentatious internal administration, or of a superfluous and disproportionate military establishment, that may act as a drain of individual wealth, and of the flower of the national youth, and an aggressor upon the peace and happiness of domestic life, will not this be paying as dearly for a grievous public nuisance, as if it were a benefit of the first magnitude? - J.B. Say, A Treatise on Political Economy: Or, The Production, Distribution, and Consumption of Wealth


Over time, any individual in the community will expect this rule to produce unfavorable results in particular instances, results that run counter to his own preferences. Public-goods projects which he urgently desires may not be undertaken because a majority of his fellow citizens does not agree with his evaluation. Or, conversely, he may be required to contribute to the costs of projects that he considers to be worthless. - James Buchanan, The Demand and Supply of Public Goods


Individuals who have particularly negative feelings concerning a publicly provided good (e.g. Quakers on military expenditures, Prolifers on publicly funded abortions) have also at times suggested that they should be allowed to dissent by earmarking their taxes toward other public uses. - Marc Bilodeau, Tax-earmarking and separate school financing


This problem becomes particularly acute in that tax policy - as an expediency - does not distinguish between "forced riders" and other public good consumers.  A pacifist, for example, must pay the same tax price charged for defense as any other individual, his negative marginal evaluation notwithstanding. - William Loehr, Todd Sandler, Public Goods and Public Policy


Of course just because everyone can be made better off by taxation does not mean that everyone will be made better off.  Some people want more national defense, some people want less, pacifists want none.  So, taxation means that some people will be turned into forced riders, people who must contribute to the public good even though their benefits from the public good are low or even negative. - Alex Tabarrok, Tyler Cowen, Modern Principles of Economics


Occasionally, this is unfair. Some champions of legal abortion, for example, are all too happy to talk about choice until it comes to the taxpayers' choice not to subsidize abortion. Then their reluctance to impose their values on others quickly goes out the window. Ditto for some proponents of gay rights who don't just want to be free of restrictions on personal behavior, like oppressive anti-sodomy laws, but are actually willing to drive the Catholic Church out of the adoption business because of the church's opposition to placing children with same-sex couples.  "Freedom for me and not for thee" is a very common refrain in politics. - W. James Antle III, Whose liberty?


This problem becomes particularly acute in that tax policy - as an expediency - does not distinguish between "forced riders" and other public good consumers.  A pacifist, for example, must pay the same tax price charged for defense as any other individual, his negative marginal evaluation notwithstanding. - William Loehr, Public Goods and Public Policy


However, if an individual genuinely has no interest whatsover in the provision of a public good but is still compelled to contribute to the costs he is the opposite of a free-rider; he becomes a forced-rider (Tanzi, 1972).  He is forced to contribute towards what he does not want to consume. - Gavin Kennedy, Defense economics


Voluntarism need not characterize a pure public good, inasmuch as such goods may harm some recipients who cannot avoid the good’s spillovers at a reasonable cost. Examples include defense provision received by a pacifist, or sound carried from an open-air concert to a surrounding neighborhood. In the Samuelsonian sum of marginal rate of substitution (MRS) condition, some MRSs can be negative for a pure public good. The same is not the case for privately provided club goods, because the right of costless exit is always available. - Todd Sandler, John Tschirhart, Club theory: Thirty years later


The distinguishing characteristic of [public] goods is not only that they can be consumed by everyone, but that there is no escape from consuming them unless one were to leave the community by which they are provided.  Thus he who says public goods says public evils.  The latter result not only from universally sensed inadequacies in the supply of public goods, but from the fact that what is a public good for some - say, a plentiful supply of police dogs and atomic bombs - may well be judged a public evil by others in the same community.  It is also quite easy to conceive of a public good turning into a public evil, for example, if a country's foreign and military policies develop in such a way that their "output" changes from international prestige to international disrepute. - Albert Hirschman, Exit, Voice, and Loyalty


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. - Alex Tabarrok, Tyler Cowen, Modern Principles of Economics


Taking an alternative point of view, however, we see a whole set of public goods that people are forced to consume, whether they like them or not, and this gives rise to the problem of the "forced rider,"  When the consumer can choose to consume the good or not, no problem arises, since no consumer will choose voluntarily to consume an item which reduces individual well-being. - Jon T. Cauley, William Loehr, Todd Sandler, The political economy of public goods and international cooperation


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


Only the free market, then, can determine different qualities or degrees of a service. Second, and even more important, there is no indication that for a particular taxpayer, the government is supplying a "service" at all. Since the tax is compulsory, it may well be that the  "service" has zero or even negative value for individual taxpayers. Thus, a pacifist, philosophically opposed to any use of violence, would not consider a tax levied for his and others' police protection to be a positive service; instead, he finds that he is being compelled, against his will, to pay for the provision of a "service" that he detests. In short, equal pricing on the market reflects demands by consumers who are voluntarily paying the price, who, in short, believe that they are gaining more from the good or service than they are giving up in exchange. But taxation is imposed on all people, regardless of whether they would be willing to pay such a price (the equal tax) voluntarily, or indeed whether they would voluntarily purchase any of this service at all. - Murray Rothbard, The Myth of Neutral Taxation


We have no idea how much the taxpayers would value these services, if indeed they valued them at all. For example, suppose that the government levies a tax of X dollars on A, B, C, and so on, for police protection—for protection, that is, against irregular, competing looters and not against itself. The fact that A is forced to pay $1,000 is no indication that $1,000 in any sense gauges the value to A of police protection. It is possible that he values it very little, and would value it less if he could turn to competing defense agencies. Moreover, A may be a pacifist; so he may consider the State's police protection a net harm rather than a benefit. But one thing we do know: If these payments to government were voluntary, we can be sure that they would be substantially less than present total tax revenue. - Murray Rothbard, The Myth of Neutral Taxation


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


Going to war accelerated the move from indirect to direct rule. Almost any state that makes war finds that it cannot pay for the effort from its accumulated reserves and current revenues. Almost all war-making states borrow extensively, raise taxes, and seize the means of combat – including men – from reluctant citizens who have other uses for their resources. - Charles Tilly, Roads from Past to Future


Current practice rising from that conviction leads to strange tactics in allocating benefits from certain public expenditures: Defense is always seen as a good, even in a country embarking on a disastrous war which brings untold suffering.  Typically, in studies of expenditure incidence, households are seen to value services for police, and administration at cost, even though they have not the slightest idea as to the amount or costs of resources used on their behalf in these services.  Under such circumstances, would not value equal to costs be an extremely unlikely outcome even in those few countries with representative government?  And what about those residents of a country who are actively or passively in opposition to the status quo?  Do they really benefit from expenditure on internal and external security as the empirical studies always assume?  Is it clear that such expenditures even enter into household utility functions?  Of consider further: If the community spends twice as much on diplomacy and administration while reducing education expenditures pari passu, is it obvious that there has been no change in total economic value as measured in the national accounts?  Extreme assumptions are the usual way to deal with the problems suggested by these situations.  But the fact that the assumptions are extreme, suggests that there is something wrong with the usual techniques in allocating benefits from certain general expenditures. - Jacob Meerman, Are Public Goods Public Goods?


Actions (Spending) VS Words (Opinions)



The people feeling, during the continuance of the war, the complete burden of it, would soon grow weary of it, and government, in order to humour them, would not be under the necessity of carrying it on longer than it was necessary to do so. The foresight of the heavy and unavoidable burdens of war would hinder the people from wantonly calling for it when there was no real or solid interest to fight for. The seasons during which the ability of private people to accumulate was somewhat impaired would occur more rarely, and be of shorter continuance. Those, on the contrary, during which the ability was in the highest vigour would be of much longer duration than they can well be under the system of funding. - Adam Smith, Wealth of Nations

The ordinary expence of the greater part of modern governments in time of peace being equal or nearly equal to their ordinary revenue, when war comes they are both unwilling and unable to increase their revenue in proportion to the increase of their expence. They are unwilling for fear of offending the people, who, by so great and so sudden an increase of taxes, would soon be disgusted with the war; and they are unable from not well knowing what taxes would be sufficient to produce the revenue wanted. The facility of borrowing delivers them from the embarrassment which this fear and inability would otherwise occasion. By means of borrowing they are enabled, with a very moderate increase of taxes, to raise, from year to year, money sufficient for carrying on the war, and by the practice of perpetually funding they are enabled, with the smallest possible increase of taxes, to raise annually the largest possible sum of money. In great empires the people who live in the capital, and in the provinces remote from the scene of action, feel, many of them, scarce any inconveniency from the war; but enjoy, at their ease, the amusement of reading in the newspapers the exploits of their own fleets and armies. To them this amusement compensates the small difference between the taxes which they pay on account of the war, and those which they had been accustomed to pay in time of peace. They are commonly dissatisfied with the return of peace, which puts an end to their amusement, and to a thousand visionary hopes of conquest and national glory from a longer continuance of the war. - Adam Smith, Wealth of Nations


A bet instantly raises the marginal private cost of error, which leads to a sharp increase in rationality. Faced with financial consequences, people suddenly - if temporarily - admit to themselves that they know a lot less than they like to believe - and bet accordingly. - Bryan Caplan, Beating the Odds: Why Do People Insist on Even Bets?


As was noted in Chapter 3, expressions of malice and/or envy no less than expressions of altruism are cheaper in the voting booth than in the market.  A German voter who in 1933 cast a ballot for Hitler was able to indulge his antisemitic sentiments at much less cost than she would have borne by organizing a pogrom. - Loren Lomasky, Democracy and Decision


You know it's easy to be a saint with nothing on the line. You wait till you've got a serious sacrifice to make and then you'll find out who you really are. - Agent Snow, Lockout


If once the lower classes are definitely in possession of the power to legislate and tax, there will certainly be a danger that they may behave no more unselfishly than those classes which have so far been in power.  In other words, there will be danger that the lower classes in power may impose the bulk of all taxes on the rich and may at the same time be so reckless and extravagant in approving public expenditures to which they themselves contribute but little that the nation's mobile capital may soon be squandered fruitlessly.  This may well break the lever of progress.  - Knut Wicksell, A New Principle of Just Taxation


All Christians believe that the blessed are the poor and humble, and those who are ill-used by the world; that it is easier for a camel to pass through the eye of a needle than for a rich man to enter the kingdom of heaven; that they should judge not, lest they be judged; that they should swear not at all; that they should love their neighbour as themselves; that if one take their cloak, they should give him their coat also; that they should take no thought for the morrow; that if they would be perfect, they should sell all that they have and give it to the poor. They are not insincere when they say that they believe these things. They do believe them, as people believe what they have always heard lauded and never discussed. But in the sense of that living belief which regulates conduct, they believe these doctrines just up to the point to which it is usual to act upon them. - J.S. Mill, On Liberty


Miss Dunham, reflecting celebrity culture at large, makes a fetish of voting, and it is easy to see why: Voting is the most shallow gesture of citizenship there is, the issuance of a demand — a statement that “this is how the world should be,” as Miss Dunham puts it — imposing nothing in the way of reciprocal responsibility. Power without responsibility — Stanley Baldwin would not have been surprised that Miss Dunham and likeminded celebrities think of voting in terms of their sex lives. Miss Dunham, in an earlier endorsement of Barack Obama, compared voting in the presidential election to losing one’s virginity — you want it to be someone special. Understood that way, voting is nothing other than a reiteration of the original infantile demand: “I Want!” - Kevin Williamson, Five Reasons Why You’re Too Dumb to Vote


Given these problems, agencies often run so-called “Contingent Valuation” (CV) surveys that ask individuals to report their personal valuations for (usually public) goods.  Contingent valuation surveys cannot guarantee that people answer questions honestly or after thinking carefully about how public resources should be used. In fact, participants in such surveys never have an incentive to tell the truth unless they expect the survey to have no impact on public policy; but if this is true, why run the survey in the first place?  Empirical evidence indicates that in practice these surveys deliver information of little value. - Eric Posner, E. Glen Weyl, Voting Squared: Quadratic Voting in Democratic Politics


The WtP [Willingness to Pay] of taxpayers could be discovered by CVM [Contingent Valuation Methods] studies.  However, as was pointed out in the hypothetical case of merit goods consumers belonging to the workforce: why should we be content with finding out the hypothetical WtP of taxpayers for merit goods?  Their actual WtP carries much greater weight as a measure of benefits.  So, real earmarked taxes as a solution to the financing problem of pure merit goods is the answer. - Jan Owen Jansson, Public Policy Towards Services


Furthermore, social scientists know that there is often a big gulf between consumers' answers to survey questions and what they actually do when confronted with real choices involving real prices and the immediate circumstances of consumption. - Richard B. McKenzie, Bound to Be Free


There are, however, several other considerations that are sometimes mentioned in the context of revealed preference that do suggest a systematic and predictable bias in the divergence between actions and words (and by extrapolation between market and electoral preference), and these considerations are of more interest in the current setting. - Geoffrey Brennan, Loren Lomasky, Democracy and Decision

One-to-a-citizen ballot votes, which are the currency of the formal democratic marketplace, do not allow voters to show the intensity of their preferences, as dollar votes do when citizens focus their budgets—some spending more on housing, others on entertainment, education, or their favorite charity. - Richard L. Stroup, Political Behavior


Neither can alternative metrics, such as public opinion polls or cost-benefit analysis, overcome these problems.  Public opinion polls cannot reveal the tradeoffs voters are willing to make among different policies, and they cannot reveal whether voters actually are willing to pay specific costs for goods.  Similarly, cost benefit analysis suffers from the simple problem that the price voters are willing to pay for goods, and the benefits they receive from them, cannot be known prior to their production and consumption (Pollack 1995). - Samuel DeCanio, Democracy, the Market, and the Logic of Social Choice


It’s very easy to support programs that other people will have to pay for. But voters, like everyone else, should bear the costs of their own decisions. Letting people vote for expensive programs that “somebody else” will finance is a good recipe for getting people to vote irresponsibly. - Steve Landsburg, Blast from the Past


They will not indeed submit to more labours and privations than other people, for the relief of distressed fellow creatures: but they make amends by whining over them more.  It is not difficult to trace this sort of affectation to its cause. It originates in the common practice of bestowing upon feelings that praise which actions alone can deserve. By properly regulating his actions, a man becomes a blessing to his species.  His mere feelings are a matter of consummate indifference to them. And who will say that praise is well bestowed on that which by no possibility can be of any use whatever? Not to mention that nothing is so easily counterfeited as feeling, and that the most intense demonstrations of it are not inconsistent with the total absence of the reality; what can be more absurd than to praise a man because he has a feeling; to praise him because he has something which he can no more help having, than he can help having ten fingers, or two feet, and which, for any good which it does, he might as well not have at all. The effect is, to create fictitious virtues, and thus to hold out the means of atonement for the absence of real ones; to render it possible, nay easy, to obtain a reputation for virtue, without the trouble of deserving it. Whether this is likely to give any great encouragement to real virtue, is a question which we may fairly leave it to the reader to determine. - J.S. Mill, Periodical Literature: Edinburgh Review


In other words, polls uncover only unconstrained wants—wants that people have independent of the costs of expressing these wants.- Donald Boudreaux, The Market: The Only Trustworthy Pollster


I want a new Lexus automobile. No lie; I really want a new Lexus. As used here, the verb “to want” means nothing more than a fancy or a whim. If I tell you in idle conversation that I want a new Lexus, all this pronouncement means is that if I could acquire a Lexus at little or no cost to myself, I’d happily acquire one. - Donald Boudreaux, The Market: The Only Trustworthy Pollster


Economics Joke #l: Two economists walked past a Porsche showroom. One of them pointed at a shiny car in the window and said, "I want that." "Obviously not," the other replied. - David Friedman, How Economists Think


Smith: Two economists walk past a Tesla showroom, a beautiful Tesla showroom, and one of them points to a shiny car in the window and says, I want that one. And the other economist says obviously not.
Kestenbaum: Total silence.
Harford: There was tumbleweed blowing across the stage during that joke.
Smith: You're going to make me explain it? One of the worst moments of my life (laughter) it was so - my stomach hurt so bad, and you're going to make me explain it?
Kestenbaum: Yeah, you got to explain it.
Smith: OK, this goes back to one of the fundamental things in economics, which is this - every time you buy something, you are showing a preference. You are saying that I want that item - let's say a sweater - I want that item more than I want the $40 in my pocket.
Kestenbaum: That's why you're doing the exchange 'cause you'd rather have the sweater than the money in your pocket.
Smith: Exactly. So clearly, the economist in the joke didn't really want the car because if the economist really wanted the car, he would've already bought it. - Robert Smith, Tim Harford, David Kestenbaum, Episode 614: Two Radio Guys Walk Into A Bar


Fiscal Illusion VS Fiscal Equivalence 



Ordinary households — and that’s who makes consumption decisions — have no idea what the government is spending, whether it is temporary or permanent, whatever. - Paul Krugman, Multipliers and Reality


The payment is not tied directly to the benefit received by the taxpayer (e.g., it involves collective, indirect benefits). - Cait Lamberton, A Spoonful of Choice


By the first law of economics, persons will “demand” a larger quantity of the goods and services that have been reduced in price. This demand will take the form of pressures brought to bear on elected politicians for expansions in the levels of budgetary outlay. - James Buchanan, Richard Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes


Until people are made to bear the full costs of their decisions, those decisions are unlikely to be socially sound, in this as in other areas of public policy. - Richard Bird, Charging for Public Services: A New Look at an Old Idea


Deficit spending and inflationary finance tend to alleviate the intensity of taxpayer resistance, ensuring a relative expansion in the size of public budgets. Inflationary finance becomes a means of securing public acquiescence in larger public budgets. - James Buchanan, Richard Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes


Current methods of taxation have been shaped largely by the endeavor to raise funds in such a manner as to cause the least resistance or resentment on the part of the majority who had to approve the expenditure.  They certainly were not designed to assure responsible decisions on expenditure, but on the contrary to produce the feeling that somebody else would pay for it.  It is regarded as obvious that the methods of taxation should be adjusted to the amount to be raised, since in the past the need for additional revenue regularly led to a search for new sources of taxation.  Additional expenditure thus always raised the question of who should pay for it.  The theory and practice of public finance has been shaped almost entirely by the endeavor to disguise as far as possible the burden imposed, and to make those who will ultimately have to bear it as little aware of it as possible.  It is probable that the whole complexity of the tax structure we have built up is largely the result of the efforts to persuade citizens to give the government more than they would knowingly consent to do so. - Friedrich Hayek, Law, Legislation, and Liberty


[O]ur modern expedient, which has become very general, is to mortgage the public revenues, and to trust that posterity will pay off the incumbrances contracted by their ancestors: And they, having before their eyes, so good an example of their wise fathers, have the same prudent reliance on their posterity; who, at last, from necessity more than choice, are obliged to place the same confidence in a new posterity. - David Hume, Essays, Moral, Political, and Literary


The introduction of the debt alternative to taxation makes the bridge between cost and benefit more difficult for the individual to construct. - James Buchanan, Fiscal Policy and Fiscal Choice


Figure 1 also illustrates one of the detrimental effects of government finance through general taxes. Since the general taxes that individuals pay are not directly linked to their use of publicly provided goods and services, the price that must be paid in order to obtain additional units of a publicly provided good or service is effectively zero, causing individuals to demand more of these goods or services (q0) than they would be prepared to pay for if they were required to bear the marginal costs of their production directly. The resulting inefficiency, denoting resources that could be employed more efficiently for other purposes, is illustrated by the area efq0. - David Duff, Benefit Taxes and User Fees in Theory and Practice


In addition, the seperation of the two sides of the budget makes it more difficult to understand the distributional implications of various ways of providing and financing of public programs.  This opaqueness may be exploited by those who are in a position to use public resources for their own purposes. - Stanley Winer, Walter Hettich, The Political Economy of Taxation


Because the only way to curb spending in the long run is to make as large a number of Americans as possible truly feel the consequences of the expenditures they appear to desire. - Mario Rizzo, Raise Middle Class Taxes Now!


The only reason for recalling the Wicksellian Connection in this chapter is the long and solidly held conviction of many Public Finance economists that vertical fiscal imbalance and the intergovernmental flows of funds that it necessarily implies breaks the connection between revenue and expenditures and leads to fiscal illusion, bureaucratic manipulation, and waste. - Albert Breton, Competitive Governments: An Economic Theory of Politics and Public Finance


It appears that instead of constraining spending, deficit financing was contagious. If deficits don’t matter when considering tax cuts, why should they be considered when evaluating a new drug benefit or a “bridge to nowhere?”

The late William Niskanen posited a public choice critique of “starve the beast” when he was president of the libertarian Cato Institute. If deficits finance 20 percent of government spending, then citizens perceive government services as being available at a discount. Services that are popular at 20 percent off the listed price would garner less support at full price. - Leonard Burman, Statement To Senate Budget Committee


The restoration of the balanced-budget rule will serve only to allow for a somewhat more conscious and careful weighting of benefits and costs. The rule will have the effect of bringing the real costs of public outlays to the awareness of decision makers; it will tend to dispel the illusory “something for nothing” aspects of fiscal choice. - James Buchanan, Richard Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes


Perhaps the public is not fully culpable because others have misled them. But the nonsense majorities have endorsed practically has no limit. To take Bastiat’s most famous example, he accuses the public of ‘broken window’ thinking – ignoring opportunity costs. People favor wasteful government programs because they fail to consider the alternative uses of wasted resources. They want a large military in peacetime because they implicitly assume that there is nothing else for discharged soldiers to do. They favor fruitless public works projects to ‘create jobs,’ not realizing that the taxes that fund these projects destroy as many jobs as they create. - Edward Stringham, Mises, Bastiat, Public Opinion, and Public Choice


Ralph Nader had a heuristic for war. He said that if you are going to vote for war, you should have a member of your family--a descendent, a son or grandson--on the draft. And then you can vote for war. - Nassim Taleb, Taleb on Skin in the Game


In any of these economic settings, the substitution effect emphasized earlier with debt-financed deficits will come into play. Persons will sense that publicly supplied goods and services are relatively lower in “price” than they were before the fiscal policy shift. This remains true whether the shift involves a simple tax-rate reduction, an increase in budgetary outlays, or some combination of both. By the first law of economics, persons will “demand” a larger quantity of the goods and services that have been reduced in price. This demand will take the form of pressures brought to bear on elected politicians for expansions in the levels of budgetary outlay. There will be the same public-sector bias from the acceptance of Keynesian economics as that which we previously discussed in the debt-financing case. - James Buchanan, Richard Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes


The republican constitution, besides the purity of its origin (having sprung from the pure source of the concept of law), also gives a favorable prospect for the desired consequence, i.e., perpetual peace. The reason is this: if the consent of the citizens is required in order to decide that war should be declared (and in this constitution it cannot but be the case), nothing is more natural than that they would be very cautious in commencing such a poor game, decreeing for themselves all the calamities of war. Among the latter would be: having to fight, having to pay the costs of war from their own resources, having painfully to repair the devastation war leaves behind, and, to fill up the measure of evils, load themselves with a heavy national debt that would embitter peace itself and that can never be liquidated on account of constant wars in the future. But, on the other hand, in a constitution which is not republican, and under which the subjects are not citizens, a declaration of war is the easiest thing in the world to decide upon, because war does not require of the ruler, who is the proprietor and not a member of the state, the least sacrifice of the pleasures of his table, the chase, his country houses, his court functions, and the like. He may, therefore, resolve on war as on a pleasure party for the most trivial reasons, and with perfect indifference leave the justification which decency requires to the diplomatic corps who are ever ready to provide it. - Immanuel Kant, Perpetual Peace


Secondly, at all events in a war on the scale of that which recently closed, it is generally agreed that a policy of finance through taxation alone, however excellent it might be in theory, is in practice out of the question, for the simple reason that people would not stand it. - Arthur Pigou, The Political Economy of War


On the strength of these various considerations it is generally agreed that, though the creation of bank credits may be a convenient means of meeting war requirements at an early stage, before there has been time to organise an adequate scheme of taxation and public loans, yet, even apart from its aftermath of monetary and exchange complications, to which reference will be made in a later chapter, the method is inherently bad, and a government at war should restrict it within the narrowest possible limits. As was indicated, however, in the third paragraph of this chapter, the fear of popular resentment against high taxation in an overt form and the fear that an offer of very high interest for loans might make upon neutrals an impression of financial weakness are likely to compel even strong governments to resort to it in some measure. - Arthur Pigou, The Political Economy of War


In two respects, however, Smith's discussion of public debt took a modern turn not found in Hume. First, he raised the problem that we would call fiscal illusion, noting that governments often avoid raising taxes during wartime in order to conceal the real financial burden of war and that politicians cynically or shortsightedly ignore the burden of the future taxes made necessary by public debt. - Daniel Shaviro, Do Deficits Matter?


When the pressure of the war is felt at once, without mitigation, we shall be less disposed wantonly to engage in an expensive contest, and if engaged in it, we shall be sooner disposed to get out of it, unless it be a contest for some great national interest. - David Ricardo, The Works of David Ricardo


There cannot be a greater security for the continuance of peace, than the imposing on ministers the necessity of applying to the people for taxes to support a war. - David Ricardo, The Works of David Ricardo


Some indeed advocated a policy of "pay as you go" [financing 100 percent with taxes] and even proposed a conscription of wealth, if necessary to meet the war costs. Others favored a more equal division between taxes and loans. These views, however, did not prevail. There was fear of "frightening capital" and arousing popular discontent which would retard the progress of military and naval plans. Although no exact ratio was formally adopted, there slowly developed an accepted convinction that taxation should provide at least one-third of the costs of the war. - Davis Dewey, Financial History of the United States


Financing wars through borrowing rather than taxation is likely to obscure the costs of war from the public eye compared to financing it through taxes. A seemingly lower cost of war in turn reduces public opposition and inflates public support. If, as scholars suggest, “an unfavorable public opinion environment ultimately constrains the range of politically acceptable policies for successfully concluding a military operation” (Larson and Savych 2005, xvii) then the opposite is also likely to be true. A favorable public opinion environment increases the latitude in terms of how leaders conduct wars. When the financial expense of war is not passed along in the form of higher taxes, the populace is far less likely to pressure leaders to keep wars short and low cost. It is no coincidence that two of the longest wars in American history, the Iraq and Afghanistan wars, were financed through borrowing rather than taxation, creating fewer visible costs than the other wars the United States financed through explicit war taxes. - Gustavo Flores-Macías, Sarah Kreps, Bearing No Burden:How Wars without Apparent Costs Affect Democratic Accountability


Based on the volume of research showing the public’s awareness of and often antipathy towards higher taxes, then high cost wars passed along to the electorate in the form of higher taxes are more likely to trigger domestic opposition to the war. Lower public support acts as a constraint on the leader’s conduct of that war, since leaders are more likely to incur high political costs for continuing an unpopular war. By contrast, wars financed other than through taxes are less likely to provoke opposition and release leaders from those institutional checks. - Gustavo Flores-Macías, Sarah Kreps, Bearing No Burden:How Wars without Apparent Costs Affect Democratic Accountability


Financing wars other than through taxation mask the apparent cost of the war and in turn undermine democratic accountability by slackening public opposition to the war. Without facing these costs, there is likely to be less domestic opposition to a given war, meaning that leaders can more easily initiate and perpetuate wars without the threat of electoral opprobrium. Thus, contemporary wars financed through borrowing submerge the costs of war and consequently benefit from considerably higher levels of public support than if they were financed through taxation, a historical mainstay of American war finance. - Gustavo Flores-Macías, Sarah Kreps, Bearing No Burden:How Wars without Apparent Costs Affect Democratic Accountability


War taxes create a palpable connection with the conflict that will give the populace pause in terms of engaging in costly military endeavors. Without such reminders, individuals have few incentives to put restraints on leaders, costly wars drag on, and the budget pressures intensify. We end up with policies such as the Sequester that elicits rare bipartisan agreement: that it was an outcome that no one wanted. - Gustavo Flores-Macías, Sarah Kreps, How today’s budget woes owe their debt to the financing of recent wars


As the above section suggests, leaders can finance wars through taxes, which directly expose individuals to the costs of war and introduce political risk in terms of public support for both the leader and the war. Alternatively, they can pursue finance options that impose costs indirectly, whether through borrowing or increasing the money supply. While in general the directness of taxation is likely to be unpopular, tax policies have enormous distributional consequences, benefitting particular political constituencies and offsetting the political disincentives that Adam Smith attributed to leaders and war taxes. - Gustavo Flores-Macías, Sarah Kreps, Political Parties at War:A Study of American War Finance, 1789-2010


A related implication is that the way leaders finance wars may affect war duration. War taxes “make the cost of war painfully obvious to the general public and undermine support for it” (Rockoff 2012, 317), or at least create incentives for leaders to keep wars short and low cost, just as body bags returning home from war can create political blowback because of the apparent cost in blood. Wars financed other than through direct taxation, such as those in Iraq and Afghanistan, may reduce the apparent cost and affect leaders’ political incentives to bring wars to an efficient conclusion. Shrouding the cost of war may give leaders institutional slack but also contribute to wars that are longer enduring. It may be no coincidence that the two longest wars in US history have not had war taxes; without apparent costs, the polity has few incentives to bring the war to a more expedient close. - Gustavo Flores-Macías, Sarah Kreps, Political Parties at War:A Study of American War Finance, 1789-2010


The political costs associated with taxes are potentially even more relevant for leaders during wartime than peacetime. Not only might war taxes have adverse impacts on a leader’s longevity, they can affect support for the war itself. Suggesting this possibility, the Washington Post (1919) editorialized that World War I taxes “will bring daily, almost hourly, reminders to the people of the United States of the burden that is entailed in the prosecutions of a just and victorious war. The average citizen feels the effect of the war tax when he arises in the morning…he is reminded of it the last thing at night when he puts on his tax-assessed pajamas.” Daily reminders of the direct burden might taint the war itself and, insofar as “unfavorable public opinion environment ultimately constrains the range of politically acceptable policies for successfully concluding a military operation” (Larson and Savych 2005, xvii), leaders might be justifiably cautious about drawing increased scrutiny and in turn unwanted constraints on the war effort. As one editorial summarized pithily at the beginning of World War I, “increased taxes are never a good political expedient” (Washington Post, 1914). All things being equal, leaders have incentives to finance the cost of war through measures that less directly expose the populace to the cost of conflict, such as borrowing or increasing the money supply. - Gustavo Flores-Macías, Sarah Kreps, Political Parties at War:A Study of American War Finance, 1789-2010


In short, borrowing is politically advantageous relative to taxation; while it adds to the overall debt, it is one of many sources and the ultimate repayment takes place long after the leader that initiated the war has stepped down and the war has ended, reducing the political costs in terms of the leader and the war. In the run-up to the Spanish-American War, the Chicago Daily Tribune (1898a) anticipated that such political expediency would drive decisions about war finance. The editors noted derisively, “Legislative demagogues always favor the borrowing method. They think high taxes will be unpopular with their constituents.” - Gustavo Flores-Macías, Sarah Kreps, Political Parties at War:A Study of American War Finance, 1789-2010


The findings have important implications for democratic accountability and the conduct of war. Immanuel Kant (1795) famously observed that “If the consent of the citizens is required in order to decide that war should be declared…nothing is more natural than that they would be very cautious … decreeing for themselves all the calamities of war. Among the latter would be: having to fight, having to pay the costs of war from their own resources.” Similarly, Reiter and Stam (2002) conclude in their study of democratic warfighting that because “the people ultimately pay the price of war in higher taxes and bloodshed,” their support is conditional on the war being justified and fought at a reasonable cost. We show that a democracy such as the United States does not always expose its populace to the direct costs of war in the form of war taxes. Thus, much as leaders can design conscription institutions to reduce constraints on their decision making (Gowa 2000)—which affects the distribution of casualties across income classes—they can also reduce their constraints by affecting the way the populace experiences the costs of war in treasure. Insofar as taxation imposes the most direct form of costs and most fully exposes the actual costs of the war than any alternative, then war taxes will be associated with the most significant institutional constraints on leaders’ use of force whereas alternatives will slacken these constraints. In contrast, financing through borrowing or increasing the money supply will tend to reduce institutional constraints on how leaders use force (Flores-Macías and Kreps 2013). - Gustavo Flores-Macías, Sarah Kreps, Political Parties at War:A Study of American War Finance, 1789-2010


Whether the approach to increasing the money supply is printing money or relying on buying government debt, both have the political virtue of concealing the costs of war. John Maynard Keynes’ observation about the concealed costs is apt: financing wars in this manner “engages all the hidden forces of economic law on the side of destruction, and does it in a manner which one man in a million is able to diagnose.” (quoted in Rockoff 2012, 22). As such, the connection with the war is less direct than taxation and therefore the potential political costs are lower. - Gustavo Flores-Macías, Sarah Kreps, Political Parties at War:A Study of American War Finance, 1789-2010


Raising taxes, of course, communicated the cost of the war to the public. So most governments did what they could to mitigate the political fallout. One strategy was to press for a tax bill as soon as a war began. In this way the government could take advantage of the early enthusiasm for the war. In the Spanish-American War the government relied in part on "sin" taxes, such as those on alcohol, tobacco, and chewing gum. In the First World War it increased income tax only for the very wealthy. In World War II and Korea, however, a combination of liberal administrations and broad-based support for the war led to broad-based increases in taxes. Indeed, a kind of high point was reached during the Korean War, when under the indefatigable Harry S. Truman the government financed most of the war with taxes. The Vietnam War, however, was a different story, and marked a return to an earlier form of war finance. President Lyndon Johnson was deeply concerned that a tax increase would reveal the cost of the Vietnam War to the public and undermine support for his Great Society program. Despite rising inflation and recommendations from his economic advisors Johnson refused, for a long time, to call for higher taxes. Eventually, however, he relented and called for a limited tax "surcharge". - Hugh Rockoff, America's Economic Way of War


The unpopularity of direct taxation, contrasted with the easy manner in which the public consent to let themselves be fleeced in the prices of commodities, has generated in many friends of improvement a directly opposite mode of thinking to the foregoing. They contend that the very reason which makes direct taxation disagreeable, makes it preferable. Under it, every one knows how much he really pays; and if he votes for a war, or any other expensive national luxury, he does so with his eyes open to what it costs him. If all taxes were direct, taxation would be much more perceived than at present; and there would be a security which now there is not, for economy in the public expenditure.

Although this argument is not without force, its weight is likely to be constantly diminishing. The real incidence of indirect taxation is every day more generally understood and more familiarly recognized: and whatever else may be said of the changes which are taking place in the tendencies of the human mind, it can scarcely, I think, be denied, that things are more and more estimated according to their calculated value, and less according to their non-essential accompaniments. - J.S. Mill, Principles of Political Economy with some of their Applications to Social Philosophy


Here our republican philosopher might have proposed as a model to lawgivers, that war should not only be declared by the authority of the people, whose toils and treasures are to support its burdens, instead of the government which is to reap its fruits: but that each generation should be made to bear the burden of its own wars, instead of carrying them on, at the expence of other generations. And to give the fullest energy to his plan, he might have added, that each generation should not only bear its own burdens, but that the taxes composing them, should include a due proportion of such as by their direct operation keep the people awake, along with those, which being wrapped up in other payments, may leave them asleep, to misapplications of their money.

To the objection, if started, that where the benefits of war descend to succeeding generations, the burdens ought also to descend, he might have answered; that the exceptions could not be easily made; that, if attempted, they must be made by one only of the parties interested; that in the alternative of sacrificing exceptions to general rules, or of converting exceptions into general rules, the former is the lesser evil; that the expense of necessary wars, will never exceed the resources of an entire generation; that, in fine the objection vanishes before the fact, that in every nation which has drawn on posterity for the support of its wars, the accumulated interest of its perpetual debts, has soon become more than a sufficient principal for all its exigencies.

Were a nation to impose such restraints on itself, avarice would be sure to calculate the expences of ambition; in the equipoise of these passions, reason would be free to decide for the public good; and an ample reward would accrue to the state, first, from the avoidance of all its wars of folly, secondly, from the vigor of its unwasted resources for wars of necessity and defence. Were all nations to follow the example, the reward would be doubled to each; and the temple of Janus might be shut, never to be opened more.

Had Rousseau lived to see the rapid progress of reason and reformation, which the present day exhibits, the philanthropy which dictated his project would find a rich enjoyment in the scene before him. And after tracing the past frequency of wars to a will in the government independent of the will of the people; to the practice by each generation of taxing the principal of its debts on future generations; and to the facility with which each generation is seduced into assumption of the interest, by the deceptive species of taxes which pay it; he would contemplate, in a reform of every government subjecting its will to that of the people, in a subjection of each generation to the payment of its own debts, and in a substitution of a more palpable, in place of an imperceptible mode of paying them, the only hope of Universal and Perpetual Peace. - James Madison, Universal Peace


In either case, the war debt contributed to fiscal illusion in that it covered up the destruction of real resources and property and so helped carry out policies which, had their true costs been obvious to the citizens, would never have been accepted. - Jürgen Backhaus, Richard Wagner, Handbook of Public Finance


Niskanen and New might actually have understated the effect of deficits on spending. The message during the last decade seems to have been not that spending and tax cuts were available at a discount, but that they were free. Spending for wars, Medicare expansion, and “no child left behind” happened at the same time that taxes were falling. Citizens could be forgiven for forgetting that there is any connection between spending and taxes.

My guess is that if President Bush had announced a new war surtax to pay for Iraq or an increase in the Medicare payroll tax rate to pay for the prescription drug benefit, both initiatives would have been less popular. Given that the prescription drug benefit only passed Congress by one vote after an extraordinary amount of arm-twisting, it seems unlikely that it would have passed at all if accompanied by a tax increase. - Leonard Burman, Statement To Senate Budget Committee


When citizens who bear the burdens of war elect their governments, wars become impossible. - Michael Doyle, Liberal Internationalism: Peace, War and Democracy


Pareto's conclusion is reminiscent of Mill's: "Deficit financing is one way of inducing the citizens to accept what they would not accept with taxes. For example, if during the [first world] war the governments had tried to collect through taxes as much as they collected through loans, it is very likely that they would not have succeeded" 7 (Griziotti, 1944). As we reported in an earlier chapter, much of World War I was financed by loans and by money creation rather than by higher taxes. Thus, public debt and indirect taxes allow governments to get citizens' support for higher spending. In the decade of the 1960s and the 1970s, economists rediscovered the "Ricardian equivalence" and used it to challenge Keynesian countercyclical policies based on deficit financing (Bailey, 1962; Barro, 1974). - Vito Tanzi, Government versus Markets: The Changing Economic Role of the State


We must, then, argue provisionally (the argument will be modified somewhat later) that there is a need for a separate governmental institution for every collective good with a unique boundary, so that there can be a match between those who receive the benefits of a collective good and those who pay for it. This match we define as "fiscal equivalence." - Mancur Olson, Association The Principle of Fiscal Equivalence


Some of the libertarian Right today appear to go further than Buchanan and take little account of the various caveats to which he drew attention.  For them, the attractive quality of the earmarked tax is that it informs taxpayers of the costs of public services and dispels any fiscal illusion. - Margaret Wilkinson, Paying for Public Spending - Is There a Role for Earmarked Taxes


First, if properly administered, it makes citizens aware of the costs of public services, both in general and to them personally. The opaqueness consequent on the pooling of revenue would be lifted. Information is an essential element to being an active and autonomous citizen, and hypothecation is a way of ensuring that a key part of that information is available. Second, it restricts the power of government relative to that of its citizens. Governments cannot simply do what they like with the tax revenues; instead, they have to allocate those resources in a pre‐specified way. The balance of power between citizens and their government is shifted in the direction of citizens. - Julian Le Grand, Motivation, Agency, and Public Policy


When people who expressed themselves in favor of increased spending on a variety of government programs were reminded of tax costs, a substantial proportion revised their opinions. Yet half of the people indicated that they would be willing to pay additional taxes for two or more government programs. - Eva Mueller, Public Attitudes Toward Fiscal Programs


There are two principle means to assess equity: (1) on the basis of the equality between individuals' contributions to an effort and the benefits they derive and (2) on the basis of differential abilities to pay.  The concept of equity that underlies an exchange economy holds that those who benefit from a service should bear the burden of financing that service.  Perceptions of fiscal equivalence or a lack thereof can affect the willingness of individuals to contribute toward the development and maintenance of resource systems. - Elinor Ostrom, Vincent Ostrom, The Institutional Perspective on Values and Virtues


The Public VS Taxpayers



It can seldom happen, indeed, that the circumstances of a great nation can be much affected either by the prodigality or misconduct of individuals; the profusion or imprudence of some being always more than compensated by the frugality and good conduct of others. - Adam Smith, Wealth of Nations


Finally, the divergence of expectations, apart from being an obstacle to equilibrium, has an important positive function in a market economy.  It is an anticipatory device.  The more extended the range of expectations, the greater the likelihood that somebody will catch a glimpse of things to come and be “right.”  Those who take their orientation from the future rather than the present, the “speculators,” permit the future to make its impact on the market process earlier than otherwise.  They contrive to inject a glimpse of future knowledge into the emergent market pattern.  Of course they may make mistakes for which they will pay.  Without divergent expectations and incoherent plans, however, it would not happen at all. - Ludwig Lachmann, On the Central Concept of Austrian Economics: Market Process


It occasions a general and most pernicious subversion of the fortunes of private people, enriching in most cases the idle and profuse debtor at the expence of the industrious and frugal creditor, and transporting a great part of the national capital from the hands which were likely to increase and improve it to those which are likely to dissipate and destroy it. - Adam Smith, Wealth of Nations


The simple reality is that people who are smart with money can get rich. If they keep doing the same things that made them rich, they often get richer. Taking money away from successful people through higher income and wealth taxes and giving the money to people who have not demonstrated the ability to wisely invest capital is virtually guaranteed to make a country poorer. Further, giving money to people who are not smart with money typically ends up with them still just as poor as before the wealth transfer. After all, in fighting the war on poverty we have now spent about $16 trillion and the poverty rate is roughly unchanged. - Jeffrey Dorfman, Thomas Piketty's Path to Poverty For the Masses


Fifth, people's abilities to produce differ. Those with greater abilities tend to have higher incomes, by definition. Again, we should remember that trades in free markets tend to benefit both parties to the trades. People with lower abilities tend to benefit from others' greater abilities. Would the disadvantaged of the country be better or worse off if, for some reason, the gifted disappeared? On average, the disadvantaged would be worse off. - Richard B. McKenzie, Bound to Be Free


A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it. - Adam Smith, Wealth of Nations


With regard to profusion, the principle which prompts to expence is the passion for present enjoyment; which, though sometimes violent and very difficult to be restrained, is in general only momentary and occasional. But the principle which prompts to save is the desire of bettering our condition, a desire which, though generally calm and dispassionate, comes with us from the womb, and never leaves us till we go into the grave. In the whole interval which separates those two moments, there is scarce perhaps a single instant in which any man is so perfectly and completely satisfied with his situation as to be without any wish of alteration or improvement of any kind. An augmentation of fortune is the means by which the greater part of men propose and wish to better their condition. It is the means the most vulgar and the most obvious; and the most likely way of augmenting their fortune is to save and accumulate some part of what they acquire, either regularly and annually, or upon some extraordinary occasions. Though the principle of expence, therefore, prevails in almost all men upon some occasions, and in some men upon almost all occasions, yet in the greater part of men, taking the whole course of their life at an average, the principle of frugality seems not only to predominate, but to predominate very greatly. - Adam Smith, Wealth of Nations


While the market conduces to learning by concentrating the costs of mistakes on those who make them, politics diffuses costs and thereby encourages the perpetuation of ignorance. - Loren Lomasky, Geoffrey Brennan, Democracy and Decision


It is often asserted that the poor man's failure in the competition of the market is caused by his lack of education. Equality of opportunity, it is said, could be provided only by making education at every level accessible to all. There prevails today the tendency to reduce all differences among various peoples to their education and to deny the existence of inborn inequalities in intellect, will power, and character. - Ludwig von Mises, Human Action


The entrepreneurs are neither perfect nor good in any metaphysical sense. They owe their position exclusively to the fact that they are better fit for the performance of the functions incumbent upon them than other people are. They earn profit not because they are clever in performing their tasks, but because they are more clever or less clumsy than other people are. They are not infallible and often blunder. But they are less liable to error and blunder less than other people do. Nobody has the right to take offense at the errors made by the entrepreneurs in the conduct of affairs and to stress the point that people would have been better supplied if the entrepreneurs had been more skillful and prescient. If the grumbler knew better, why did he not himself fill the gap and seize the opportunity to earn profits? It is easy indeed to display foresight after the event. In retrospect all fools become wise. - Ludwig von Mises, Planning for Freedom


Entrepreneurial discovery represents the alert becoming aware of what has been overlooked. The essence of entrepreneurship consists in seeing through the fog created by the uncertainty of the future. When the Misesian human agent acts, he is determining what indeed he 'sees' in this murky future. He is inspired by the prospective pure profitability of seeing that future more correctly than others do. These superior visions of the future inform entrepreneurial productive and exchange activity. The dynamic market process is made up of such profit-motivated creative acts in regard to the future. - Israel Kirzner, How Markets Work


Viewing society, then, as a want-satisfying machine and applying the single test of efficiency, free enterprise must be justified if at all on the ground that men make decisions, exercise control, more effectively if they are made responsible for the results of the correctness, or the opposite, of those decisions. If property were socialized we should still have to concentrate the function of the actual making of decisions, but it would be in a far greater degree than now a routine task, with the remuneration independent of the results. - Frank Knight, Risk, Uncertainty, and Profit


Unfortunately, with any reasonable level of product safety, people will be killed and injured in accidents. The cost and carnage of these accidents are easily seen, as is the fact that the damage would have been less if only more safety had been built into the product being used. Not as easily seen are the advantages millions of people realize from not having to pay for more safety than they want—advantages like more money to spend on education, medicine, clothing, and housing. And more education, better medicines, and improvements in the clothing and housing available are all associated with longer life expectancies. Those whose lives are cut short by accidents are obviously identifiable, while we will never know who avoided a premature death because of the prosperity generated by an economic system guided by market prices and profits. But there can be no doubt that the latter far outnumber the former. - Dwight R. Lee, Sacrificing Lives for Profits


There is no objective standard for judging how much care and effort are required in a particular case; also, as medicine advances, it becomes more and more clear that there is no limit to the amount that might profitably be spent in order to do all that is objectively possible. Moreover, it is also not true that, in our individual valuation, all that might yet be done to secure health and life has an absolute priority over other needs. As in all other decisions in which we have to deal not with certainties but with probabilities and chances, we constantly take risks and decide on the basis of economic considerations whether a particular precaution is worthwhile, i.e., by balancing the risk against other needs. - Friedrich Hayek, The Constitution of Liberty


What is so obviously true about those undertakings which we commonly regard as risky is scarcely less true of any chosen object we decide to pursue.  Any such decision is beset with uncertainty, and if the choice is to be as wise as it is humanly possible to make it, the alternative results anticipated must be labeled according to their value.  If the remuneration did not correspond to the value that the product of a man's efforts has for his fellows, he would have no basis for deciding whether the pursuit of a given object is worth the effort and risk.  He would necessarily have to be told what to do, and some other person's estimate of what was the best use of his capacities would have to determine both is duties and his remuneration. - Friedrich Hayek, The Constitution of Liberty


Financial irresponsibility. Society doesn’t offer large rewards for self-indulgence. I suspect that the more high-paying jobs are ones for doing work that benefits others, not jobs that cater to narcissistic interests. A healthy society depends on citizens who cooperate, sacrifice and try to help each other out. It depends on professions such as biomedical engineers, clinical nurse specialists, software architects, reservoir engineers, database administrators, information assurance analysts, accountants, occupational therapists, optometrists, and biochemists. We may enjoy the arts but we really don’t need an endless supply of artists, actors and dancers — we appear well-stocked in these specialty areas. - Gary Klein, Are You Pursuing A Pipedream?


Yet, if the individual is to be free to choose, it is inevitable that he should bear the risk attaching to that choice and that in consequence he be rewarded, not according to the goodness or badness of his intentions, but solely on the basis of the value of the results to others. We must face the fact that the preservation of individual freedom is incompatible with a full satisfaction of our views of distributive justice. - Friedrich Hayek, Individualism and Economic Order


In a capitalist society the transfers of capital from the less to the more efficient entrepreneur is brought about by the former making losses and the latter making profits. The question of who is to be entitled to risk resources and with how much he is to be trusted is here decided by the man who has succeeded in acquiring and maintaining them. Will the question in the socialist state be decided on the same principles? Will the manager of a firm be free to reinvest profits wherever and whenever he thinks it is worth while? At present he will compare the risk involved in further expansion of this present undertaking with the income which he will obtain if he invests elsewhere or if he consumes his capital. Will consideration of the alternative advantages which society might derive from that capital have the same weight in this computation of risk and gain as would his own alternative gain or sacrifice? - Friedrich Hayek, Individualism and Economic Order


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


Irrational Choices Have Rational Consequences



And the rich do not tend to throw their money away easily; those who do, do not stay rich very long. - Robin Hanson, Shall We Vote on Values, But Bet on Beliefs?


In markets, individuals and businesses often make bad decisions. But if they continue down the wrong path, their resources get depleted. A business making misguided investments will be punished by financial losses and may face bankruptcy or a takeover. About 10 percent of all U.S. companies go out of business each year, which is a remarkably high exit rate. But losses and business failures prompt the beneficial reallocation of resources to more promising activities. - Chris Edwards, Why the Federal Government Fails


Now one of the main functions of profits is to shift the control of capital to those who know how to employ it in the best possible way for the satisfaction of the public. The more profits a man earns, the greater his wealth consequently becomes, the more influential does he become in the conduct of business affairs. Profit and loss are the instruments by means of which the consumers pass the direction of production activities into the hands of those who are best fit to serve them. Whatever is undertaken to curtail or to confiscate profits impairs this function. The result of such measures is to loosen the grip the consumers hold over the course of production. The economic machine becomes, from the point of view of the people, less efficient and less responsive. - Ludwig von Mises, Planning for Freedom


Fortunately, in the great majority of cases, self-interest is most sensibly and immediately affected by a loss of this kind; and in the concerns of business, like pain in the human frame, gives timely warning of injuries, that require care and reparation. If the rash or ignorant adventurer in production were not the first to suffer the punishment of his own errors or misconduct, we should find it far more common than it is to dash into improvident speculation; which is quite as fatal to public prosperity, as profusion and extravagance. A merchant, that spends 10,000 dollars in the acquisition of 6000 dollars, stands, in respect to his private concerns and to the general wealth of the community, upon exactly the same footing, as a man of fashion, who spends 4000 dollars in horses, mistresses, gluttony, or ostentation; except, perhaps, that the latter has more pleasure and personal gratification for his money. - J.B. Say, A Treatise on Political Economy


Huge profits are the proof of good service rendered in supplying the consumers. Losses are the proof of blunders committed, of failure to perform satisfactorily the tasks incumbent upon an entrepreneur. - Ludwig von Mises, Planning for Freedom


Ownership of the means of production is not a privilege, but a social liability.  Capitalists and landowners are compelled to employ their property for the best possible satisfaction of the consumers.  If they are slow and inept in the performance of their duties, they are penalized by losses.  If they do not learn the lesson and do not reform their conduct of affairs, they lose their wealth.  No investment is safe forever.  He who does not use his property in serving the consumers in the most efficient way is doomed to failure.  There is no room left for people who would like to enjoy their fortunes in idleness and thoughtlessness.  The proprietor must aim to invest his funds in such a way that principal and yield are at least not impaired. - Ludwig von Mises, Human Action

Second, where residual claimancy and control rights are closely aligned, market competition provides a decentralized and relatively incorruptible disciplining mechanism that punishes the inept and rewards high performers.  Markets are a way of increasing what biologists call selective pressure: they have the effect of reducing the variance of performance and hence (under suitable conditions) increasing average performance. - Samuel Bowles Microeconomics: Behavior, Institutions, and Evolution


Neither does the average man comprehend that profits are indispensable in order to direct the activities of business into those channels in which they serve him best. He looks upon profits as if their only function were to enable the recipients to consume more than he himself does. He fails to realize that their main function is to convey control of the factors of production into the hands of those who best utilize them for his own purposes. He did not, as he thinks, renounce becoming an entrepreneur out of moral scruples. He chose a position with a more modest yield because he lacked the abilities required for entrepreneurship or, in rare cases indeed, because his inclinations prompted him to enter upon another career. - Ludwig von Mises, Planning for Freedom


Crony Capitalism / Corporate Welfare / Rent Seeking



There are multitudes with an interest in peace, but they have no lobby to match those of the 'special interests' that may on occasion have an interest in war. - Mancur Olson, The Logic of Collective Action

Even in the crucial role of providing national defense, the pursuit of parochial advantage “has become a full-time preoccupation that permeates Congress’s activities and members’ decisionmaking processes.” That is the view of Winslow Wheeler in his book, The Wastrels of Defense. As a long-time congressional aide, Wheeler found that members responsible for national defense put most of their efforts into grabbing benefits for their states, rather than overseeing the Pentagon and ensuring the effectiveness of our armed forces. He argued that Congress has “degenerated into a gaggle of wastrels competing for selfish advantage.” - Chris Edwards, Why the Federal Government Fails


Incentives Matter



Public services are never better performed than when their reward comes only in consequence of their being performed, and is proportioned to the diligence employed in performing them. - Adam Smith, Wealth of Nations


This is a gross fallacy; but one that has been productive of infinite mischief, inasmuch as it has been the pretext for a great deal of shameless waste and dilapidation. The value paid to government by the tax-payer is given without equivalent or return: it is expended by the government in the purchase of personal service, of objects of consumption. - J.B. Say, A Treatise on Political Economy


The incidents of our private lives often prove to us the fallibility of our judgments—our "best laid schemes.. .gang aft agley." How then can we be so very confident about our schemes for public welfare, in respect of which our judgments, because of complicated data, are so much more liable to err. And should not our hesitation be immensely increased on contemplating the blunderings of our ancestors, seen in the almost countless statutes which century after century have been passed and repealed after severally doing mischief. Again, why should we hope so much from State-agency in new fields, when in the old fields it has bungled so miserably? Why, if the organizations for national defence and administration of justice work so ill that loud complaints are daily made, should we be anxious for other organizations of kindred type? And conversely, why, considering that private enterprise has subdued the land, built the towns, made our means of communication, and developed our civilized appliances at large, should we be reluctant to trust private enterprise in further matters? Why slight the good and faithful servant and promote the unprofitable one from one talent to ten? Human desires are the motive forces from which come all social activities. These desires may use for their satisfactions direct agencies, as when men individually work to achieve their ends, or voluntarily combine in groups to do it; or they may use for their satisfactions indirect agencies, as when electors choose representatives, who authorize a ministry, who form a department, which appoints chief officials, who select subordinates, who superintend those who do the work. Among mechanicians it is a recognized truth that the multiplication of levers, wheels, cranks, &c., in an apparatus, involves loss of power, and increases the chances of going wrong. Is it not so with governmental machinery, as compared with the simpler machinery men frame in its absence? Moreover, men's desires when left to achieve their own satisfactions, follow the order of decreasing intensity and importance: the essential ones being satisfied first. But when, instead of aggregates of desires spontaneously working for their ends, we get the judgments of governments, there is no guarantee that the order of relative importance will be followed, and there is abundant proof that it is not followed. Adaptation to one function presupposes more or less unfitness for other functions; and pre-occupation with many functions is unfavourable to the complete discharge of any one. - Herbert Spencer, An Autobiography


There is a case for saying that there are certain kinds of spending which are more efficient when carried out by government... because of the economies of scale that government posses. However, this is almost always outweighed (and I would argue in fact always outweighed) by the huge inefficiency costs that come with the less productive public management and the fact that public provision does not face the profit and loss incentives which lead private providers to constantly look to improve the quality of their service and cut out waste and unnecessary costs. - Stephen Davies, How Government Crowds Out Private Investment


The government should not help to save Chrysler, of course not.  This is a private enterprise system.  It's often described as a profit system but that's a misleading label.  It's a profit and loss system.  And the loss part is even more important than the profit because it's what gets rid of badly managed, poorly operated companies.  When Chrysler loses money…it's got to do something.  When Amtrak loses money it goes to congress and gets a bigger appropriation. - Milton Friedman, What is Greed?


By rewarding success and penalizing failure, the profit system provides a strong disciplinary mechanism which continually redirects resources away from weak, failing, and inefficient firms toward those firms which are the most efficient and successful at serving the public. A competitive profit system ensures a constant reoptimization of resources and moves the economy toward greater levels of efficiency. Unsuccessful firms cannot escape the strong discipline of the marketplace under a profit/loss system. Competition forces companies to serve the public interest or suffer the consequences. - Mark Perry Why Socialism Failed: Collectivism Is Based on Faulty Principles


No one denies that contributors to private charities also fail to monitor those charities diligently and that those charities often fail to make the best possible use of the money they spend. But there is an important difference. If the word gets out that the American Red Cross, for example, is not making good use of donations, people can shift their contributions to other private charities that are doing a better job. We don’t have this option with FEMA. Instead of getting less money because of its poor performance, FEMA will almost surely get more, with the justification that more is needed to do a better job. - Dwight R. Lee, Mitigating Disaster: Abolish FEMA and Let Gas Prices Rise


Electoral propaganda for novel proposals is often of exactly the same nature. But a product which does not come up to the claims made for it will not be repurchased, whereas policies for which politicians may have made possibly extravagant claims, once adopted, cannot be so easily discarded. - W.H. Hutt, Politically Impossible


In this particular, small states have an advantage over more extensive ones. They have more enjoyment from a less expenditure upon objects of public utility or amusement; because they are at hand to see that the funds, destined to the object, are faithfully applied. - J.B. Say, A Treatise on Political Economy


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


Overall, government action seems likely to reduce the robustness of institutions and to exacerbate collective-good problems because removing the ‘exit’ option prevents individuals from judging how their personal contributions affect outcomes.  When taxpayers who fund failing programmes cannot exit with their own money, then the only form of accountability left is that of democratic voice.  Yet, given the minuscule chance of affecting the result of a large-number election it is rational for voters to remain ignorant about the relative effectiveness of specific programmes.  It is precisely this ignorance that may allow opportunistic behaviour to go unchecked. - Mark Pennington, Robust Political Economy


The public can facilitate this acquisition by establishing in every parish or district a little school, where children may be taught for a reward so moderate that even a common labourer may afford it; the master being partly, but not wholly, paid by the public, because, if he was wholly, or even principally, paid by it, he would soon learn to neglect his business. - Adam Smith, Wealth of Nations


In other universities the teacher is prohibited from receiving any honorary or fee from his pupils, and his salary constitutes the whole of the revenue which he derives from his office. His interest is, in this case, set as directly in opposition to his duty as it is possible to set it. It is the interest of every man to live as much at his ease as he can; and if his emoluments are to be precisely the same, whether he does or does not perform some very laborious duty, it is certainly his interest, at least as interest is vulgarly understood, either to neglect it altogether, or, if he is subject to some authority which will not suffer him to do this, to perform it in as careless and slovenly a manner as that authority will permit. If he is naturally active and a lover of labour, it is his interest to employ that activity in any way from which he can derive some advantage, rather than in the performance of his duty, from which he can derive none. - Adam Smith, Wealth of Nations


To make more money in the private economy, you have to offer people something they want. If you do, you’ll attract customers; if you don’t, you may go out of business, or lose your job, or lose your investment. That keeps businesses on their toes, trying to find ways to better serve consumers. But bureaucrats don’t have customers. They don’t make more money by satisfying more consumers. Instead, they amass money and power by enlarging their agencies. - David Boaz, What Big Government Is All About


I think if we tried to jog researchers out of basic left-right political alignments we might get a little bit more clarity on what everyone thinks the real issues are. I get the overwhelming impression that with a few exceptions the issue is basically that right-of-center economists (like right-of-center people) generally think the existing level of government spending is too high and that additional government spending is likely to be wasteful—the equivalent of conscripting soldiers to fight in an unnecessary war—while left-of-center economists have the reverse view. - Matthew Yglesias, The Frustrating Fiscal Stimulus Debate


The Necessity Of Defense



Commerce and manufactures can seldom flourish long in any state which does not enjoy a regular administration of justice, in which the people do not feel themselves secure in the possession of their property, in which the faith of contracts is not supported by law, and in which the authority of the state is not supposed to be regularly employed in enforcing the payment of debts from all those who are able to pay. Commerce and manufactures, in short, can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government. - Adam Smith, Wealth of Nations


When a civilized nation depends for its defence upon a militia, it is at all times exposed to be conquered by any barbarous nation which happens to be in its neighbourhood. The frequent conquests of all the civilized countries in Asia by the Tartars sufficiently demonstrates the natural superiority which the militia of a barbarous has over that of a civilized nation. A well-regulated standing army is superior to every militia. Such an army, as it can best be maintained by an opulent and civilized nation, so it can alone defend such a nation against the invasion of a poor and barbarous neighbour. It is only by means of a standing army, therefore, that the civilization of any country can be perpetuated, or even preserved for any considerable time. - Adam Smith, Wealth of Nations


During the late war, another tax of the same kind was proposed upon shops. The war having been undertaken, it was said, in defence of the trade of the country, the merchants, who were to profit by it, ought to contribute towards the support of it. - Adam Smith, Wealth of Nations


It seems not unreasonable that the extraordinary expence which the protection of any particular branch of commerce may occasion should be defrayed by a moderate tax upon that particular branch; by a moderate fine, for example, to be paid by the traders when they first enter into it, or, what is more equal, by a particular duty of so much per cent. upon the goods which they either import into, or export out of, the particular countries with which it is carried on. The protection of trade in general, from pirates and free-booters, is said to have given occasion to the first institution of the duties of customs. But, if it was thought reasonable to lay a general tax upon trade, in order to defray the expence of protecting trade in general, it should seem equally reasonable to lay a particular tax upon a particular branch of trade, in order to defray the extraordinary expence of protecting that branch. - Adam Smith, Wealth of Nations


That the State should leave exports to the exporters, to industry, and to the merchants, and should not identify itself with the interests of the exporting class... If industry... values the protection afforded by warships, let them go and shell out a part of the surplus profit they have captured in this way and build the cruisers for themselves. - Eckart Kehr, Schlachtflottenbau und Parteipolitik


The first source of funding for Britain’s navy was a variety of taxes earmarked for certain agencies and collected directly by them. Since 1347, the tonnage and poundage—a customs duty levied on merchant vessels docking in British ports—had been collected by the Royal Navy directly to compensate it for convoy protection duties.  If merchants could not trade in British ports, the Royal Navy would be stripped of this important source of revenue; this gave the Royal Navy an incentive to protect convoys and keep British ports open to trade. - Alex Nowrasteh, Privateers! Their History and Future


There is nobody in this country who got rich on his own. Nobody. You built a factory out there — good for you! But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did. — Elizabeth Warren


The Opportunity Cost Of War



The area we inhabitat is limited, but the production of useful things is unlimited.  Oh!  How fine would be the victories and how vast the conquests if, instead of fighting against each other, we were to unite all our efforts against blind and stupid nothingness! - Edmond About, Handbook of Social Economy: Or, The Worker's A B C


War costs a nation more than its actual expense; it costs, besides all that would have been gained, but for its occurrence. - J.B. Say, A Treatise on Political Economy


In each of those periods, however, there was not only much private and public profusion, many expensive and unnecessary wars, great perversion of the annual produce from maintaining productive to maintain unproductive hands; but sometimes, in the confusion of civil discord, such absolute waste and destruction of stock, as might be supposed, not only to retard, as it certainly did, the natural accumulation of riches, but to have left the country, at the end of the period, poorer than at the beginning. Thus, in the happiest and most fortunate period of them all, that which has passed since the Restoration, how many disorders and misfortunes have occurred, which, could they have been foreseen, not only the impoverishment, but the total ruin of the country would have been expected from them? The fire and the plague of London, the two Dutch wars, the disorders of the Revolution, the war in Ireland, the four expensive French wars of 1688, 1702, 1742, and 1756, together with the two rebellions of 1715 and 1745. In the course of the four French wars, the nation has contracted more than a hundred and forty-five millions of debt, over and above all the other extraordinary annual expence which they occasioned, so that the whole cannot be computed at less than two hundred millions. So great a share of the annual produce of the land and labour of the country has, since the Revolution, been employed upon different occasions in maintaining an extraordinary number of unproductive hands. But had not those wars given this particular direction to so large a capital, the greater part of it would naturally have been employed in maintaining productive hands, whose labour would have replaced, with a profit, the whole value of their consumption. The value of the annual produce of the land and labour of the country would have been considerably increased by it every year, and every year's increase would have augmented still more that of the following year. More houses would have been built, more lands would have been improved, and those which had been improved before would have been better cultivated, more manufactures would have been established. and those which had been established before would have been more extended; and to what height the real wealth and revenue of the country might, by this time, have been raised, it is not perhaps very easy even to imagine. - Adam Smith, Wealth of Nations


Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some fifty miles of concrete pavement. We pay for a single fighter plane with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people. This is, I repeat, the best way of life to be found on the road the world has been taking. This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron...Is there no other way the world may live? - Dwight D. Eisenhower, The Chance for Peace


On June 13, 1915, Moseley shipped out to Turkey and two months later he was killed at Gallipoli as part of a thoroughly useless and badly bungled campaign, his death having brought Great Britain and the world no good (except for what cold comfort could be obtained out of the fact that he had willed his money to the Royal Society). In view of what he might still have accomplished (he was only twenty-seven when he died), his death might well have been the most costly single death of the war to mankind generally. - Isaac Asimov

In determining the application of the revenue sum derived, a second choice must be made between the satisfaction of alternative wants by public economy.  If more is spent for armaments, less can be spent for education. - Richard Musgrave, The Voluntary Exchange Theory of Public Economy


We could solve our problems as children do, by fighting it out, but that would be wasteful.  The fights would represent the diversion of resources from productive uses, like farming and construction, to destruction uses, like throwing punches and shaping bigger and better sticks as weapons.  Because people would have to eat and sleep, there would be some production.  However, many people would devote their time to plundering the production of others or to defending themselves against plundering. - Richard B. McKenzie, Bound to Be Free


Supposing we are looking at things from the position of the British and Australian left, as Harry suggests. I think the opportunity cost analysis applies pretty well to the expenditure by the British and Australian governments. The Australian government estimated costs of $1 billion, and it’s always short of money for health. So we can estimate that it could have spent the money on health, with an implied saving of 100-200 lives. Alternatively, if you agree that Australian public expenditure priorities aren’t radically skewed, you can say that if the money wasn’t spent on health, it would probably have been spent on something equally valuable at the margin (say education, or firefighting). I assume much the same would be true to the UK. - John Quiggin, Opportunity costs redux


Even at the cost of lining up with Friedman, I’d be pleased if the idea that war is a mostly futile waste of lives and money became conventional wisdom. Switching to utopian mode, wouldn’t it be amazing if the urge to “do something” could be channeled into, say, ending hunger in the world or universal literacy (both cheaper than even one Iraq-sized war)? - John Quiggin, War and waste


A second common feature of pro-war analysis is a failure to take account of the opportunity cost of the resources used in war. The $300 billion used in the Iraq war would have been enough to finance several years of the Millennium Development project aimed at ending extreme poverty in the world, and could have saved millions of lives. But even assuming this is politically unrealistic, the money could surely have been spent on improved health care, road safety and so on in the US itself. At a typical marginal cost of $5 million per live saved, 60,000 American lives could have been saved. This is morally relevant, but is commonly ignored. - John Quiggin, War and its consequences


Exclusive VS Inclusive Valuation



The Third Reich will always retain the right to control property owners - Adolf Hitler (1931)


However well balanced the general pattern of a nation's life ought to be, there must at particular times be certain disturbances of the balance at the expense of other less vital tasks. If we do not succeed in bringing the German army as rapidly as possible to the rank of premier army in the world...then Germany will be lost! - Adolf Hitler (1936)


There is another more obvious difference from 1914. The whole of the warring nations are engaged, not only soldiers, but the entire population, men, women and children. The fronts are everywhere. The trenches are dug in the towns and streets. Every village is fortified. Every road is barred. The front line runs through the factories. The workmen are soldiers with different weapons but the same courage. These are great and distinctive changes from what many of us saw in the struggle of a quarter of a century ago. There seems to be every reason to believe that this new kind of war is well suited to the genius and the resources of the British nation and the British Empire; and that, once we get properly equipped and properly started, a war of this kind will be more favorable to us than the somber mass slaughters of the Somme and Passchendaele. If it is a case of the whole nation fighting and suffering together, that ought to suit us, because we are the most united of all the nations, because we entered the war upon the national will and with our eyes open, and because we have been nurtured in freedom and individual responsibility and are the products, not of totalitarian uniformity, but of tolerance and variety. If all these qualities are turned, as they are being turned, to the arts of war, we may be able to show the enemy quite a lot of things that they have not thought of yet. Since the Germans drove the Jews out and lowered their technical standards, our science is definitely ahead of theirs. Our geographical position, the command of the sea, and the friendship of the United States enable us to draw resources from the whole world and to manufacture weapons of war of every kind, but especially of the superfine kinds, on a scale hitherto practiced only by Nazi Germany. - Winston Churchill


The recognition that each person has his own scale of values which we ought to respect, even if we do not approve of it, is part of the conception of the value of the individual personality.  How we value another person will necessarily depend on what his values are.  But believing in freedom means that we do not regard ourselves as the ultimate judges of another person's values, that we do not feel entitled to prevent him from pursuing ends which we disapprove so long as he does not infringe the equally protected sphere of others. - Friedrich Hayek, The Constitution of Liberty


Thrift should be the guiding principle in our government expenditure. It should be made clear to all government workers that corruption and waste are very great crimes. Our campaigns against corruption and waste have already achieved some results, but further efforts are required. Our system of accounting must be guided by the principle of saving every copper for the war effort, for the revolutionary cause and for our economic construction. - Mao Zedong


To act reasonably means to sacrifice the less important to the more important. We make temporary sacrifices when we give up small things to obtain bigger things, as when we cease to indulge in alcohol to avoid its physiological after-effects. Men submit to the effort of labour in order that they may not starve. -  Ludwig von Mises, Capitalist Ethics


One must learn from war: one must learn to sacrifice many and to take one’s cause seriously enough not to spare men. - Friedrich Nietzsche, The Will to Power


The Diversity Of Demand For Defense



There are, especially, in all countries and at all times groups that have reached a more or less stationary position, in which habits and ways of life have been settled for generations.  These ways of life may suddenly be threatened by developments with which they have had nothing to do, and not only the members of such groups but often outsiders will wish them to be preserved.  Many of the peasants of Europe, particularly those in the remote mountain valleys, are an example.  They cherish their way of life, though it has become a dead end, though it has become too dependent on urban civilization, which is continually changing, to preserve itself.  Yet the conservative peasant, as much as anybody else, owes his way of life to a different type of person, to men who were innovators in their time and by their innovations forced a new manner of living on people belonging to an earlier state of culture; the nomad probably complained as much about the encroachment of inclosed fields on his pastures as does the peasant about the encroachments of industry. - Friedrich Hayek, The Constitution of Liberty


A recent survey by the Federal Reserve Board indicated the wealthiest 2 percent of American households own 28 percent of the nation’s physical property. At first glance, this appears to be enormous power in the hands of a few people. However, reflection should cause one to question this view. This wealth, enormous as it is, is in the hands of 1.6 million house­holds, representing diverse political, religious, ethnic, and personal interests. Unless it is used to provide services to others in exchange for income, the wealth of these property owners will shrink. Compare the power of these wealthy households with the power of 536 elected federal office holders. This latter group, comprising just .0000025 percent of our population, determines how one-quarter of our national output is allocated. They tax approximately one-fifth of our national income away from earners and allocate it to nonearners. They set the dollar value of the social security benefits received by thirty-six million Americans. The regulatory power under the jurisdiction of the 536 individuals holds a life or death grip on the economic health of literally millions of businesses. In contrast with private owners, members of Congress have the power to take property, a portion of your earnings for example, without your consent. One could go on and on, but the point is clear. When government ownership is substituted for private property, enormous power over the lives of others is bestowed upon a small handful of political figures. One of the major virtues of private property is its ability to check the excessive concentration of economic power in the hands of the few. Widespread ownership of property is the enemy of tyranny and abusive use of power. This proposition is just as true today as it was a couple of hundred years ago.  - James Gwartney, Private Property, Freedom and the West


A second point of broad consensus among critics stresses that publicness in consumption must not necessarily mean that all persons value a good’s utility equally, Mendez (1999), for example, illustrates this point by examining peace as a PG. Some policy-makers might opt for increased defense spending in order to safeguard peace. However, this decision could siphon off scarce resources from programmes in the areas of health and education. Other policy-makers might object to such a consequence and prefer to foster peace through just the opposite measure -- improved health and education for all. Especially under conditions of extreme disparity and inequity, the first strategy could indeed provoke even more conflict and unrest, securing national borders by unsettling people’s lives. - Inge Kaul, Public Goods: Taking the Concept to the 21st Century


Defense is a public good and we don't know what quantity of defense results from a given defense budget; we don't know whether a larger defense budget will deter an attack or provoke an arms race, whether antiballistic missiles will be effective or not, whether it is better to use tanks or Maginot lines, to carry a big stick or to sign a nonaggression pact. We do not, in short, know the production function for the collective good of national security, so that beliefs about that production function rest as much upon ideology and fashion as upon empirical estimation. - Mancur Olson, Evaluating Performance in the Public Sector


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, The Wisdom of Crowds


I have suggested a different model and metaphor. The world is not a single machine. It is a complex, interactive ecology in which diversity -- biological, personal, cultural and religious -- is of the essence. Any proposed reduction of that diversity through the many forms of fundamentalism that exist today -- market, scientific or religious -- would result in a diminution of the rich texture of our shared life, a potentially disastrous narrowing of the horizons of possibility. Nature, and humanly constructed societies, economies and polities, are systems of ordered complexity. That is what makes them creative and unpredictable. Any attempt to impose on them an artificial uniformity in the name of a single culture or faith, represents a tragic misunderstanding of what it takes for a system to flourish. Because we are different, we each have something unique to contribute, and every contribution counts. A primordial instinct going back to humanity's tribal past makes us see difference as a threat. That instinct is massively dysfunctional in an age in which our several destinies are interlinked. Oddly enough, it is the market -- the least overtly spiritual of concepts -- that delivers a profoundly spiritual message: that it is through exchange that difference becomes a blessing, not a curse. When difference leads to war, both sides lose. When it leads to mutual enrichment, both sides gain. - Rabbi Jonathan Sacks, The Dignity of Difference

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