Dear Jag Bhalla

If you search ScientificAmerican.com for "invisible hand" you could learn that there's some guy named Jag Bhalla who is critical of the Invisible Hand.  I found his website and sent him an e-mail, which was when gmail immediately notified me that his e-mail address was broken.  So here we are.

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Karl Popper was so cool...

If I am standing quietly, without making any movement, then (according to the physiologists) my muscles are constantly at work, contracting and relaxing in an almost random fashion, but controlled, without my being aware of it, by error-elimination so that every little deviation from my posture is almost at once corrected. So I am kept standing, quietly, by more or less the same method by which an automatic pilot keeps an aircraft steadily on its course. — Karl Popper, Of Clouds and Clocks

But he wasn't nearly as cool as Adam Smith...

It is thus that the private interests and passions of individuals naturally dispose them to turn their stocks towards the employments which in ordinary cases are most advantageous to the society. But if from this natural preference they should turn too much of it towards those employments, the fall of profit in them and the rise of it in all others immediately dispose them to alter this faulty distribution. Without any intervention of law, therefore, the private interests and passions of men naturally lead them to divide and distribute the stock of every society among all the different employments carried on in it as nearly as possible in the proportion which is most agreeable to the interest of the whole society.  — Adam Smith, Wealth of Nations

Contrary to popular belief, the Invisible Hand is not about self-interest, it's about people using their money to communicate what their interests are.  The supply is regulated by the spending signals of countless consumers.

In Friedrich Hayek's 1945 Nobel essay he reinforced the idea that markets are all about communication...

We must look at the price system as such a mechanism for communicating information if we want to understand its real function — a function which, of course, it fulfils less perfectly as prices grow more rigid. (Even when quoted prices have become quite rigid, however, the forces which would operate through changes in price still operate to a considerable extent through changes in the other terms of the contract.) The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement. — Friedrich Hayek, The Use of Knowledge in Society

Command economies fail because, in the absence of prices, they are unable to utilize all the relevant and necessary knowledge that is dispersed among all the consumers and producers.

In 1954 the Nobel economist Paul Samuelson critiqued Hayek's essay by pointing out that, because of the free-rider problem, prices don't work so well for public goods...

But, and this is the point sensed by Wicksell but perhaps not fully appreciated by Lindahl, now it is in the selfish interest of each person to give false signals, to pretend to have less interest in a given collective consumption activity than he really has, etc. —  Paul Samuelson, The Pure Theory of Public Expenditure

Samuelson's basic assumption was that the optimal supply of all goods is entirely dependent on honest signals.  Again, it's about using money to communicate your interests.  The problem with a good like Linux is that you can benefit from it without having to pay for it.  Let's say that your true valuation of Linux is $40 bucks.  If you only donate $20 dollars to it, you still can fully benefit from it, but you can take the $20 bucks that you saved and use it to buy a nice steak.  The amount that you spent on Linux would be a false signal because it would be less than your true valuation of it.  On its own, your false signal isn't so much of a problem... after all... you only cheated Linux out of $20 bucks.  The issue is when everybody else does the same thing.  When everybody's contribution to Linux is a lot less than their true valuation of it, then naturally it's going to be a lot lower quality than everybody truly wants it to be.  Also, there's going to be far fewer freely available alternatives to Linux than everybody truly wants.

To be clear, the only reason that consumers have the incentive to be dishonest about their true valuation of Linux (a public good) is because they have the option to spend their money on steak (a private good) instead.  If this option was eliminated, then so too would be the incentive to be dishonest.  This was the point that the Nobel economist James Buchanan made in 1963...

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

I'll hedge my bets by sharing how other people have explained the idea of individual earmarking...

One strand of this approach-initiated in Buchanan’s (1963) seminal paper-argues that the voter who might have approved a tax increase if it were earmarked for, say, environmental protection would oppose it under general fund financing because he or she may expect the increment to be allocated to an unfavored expenditure such as defense. Earmarked taxation then permits a more satisfactory expression of individual preferences. — Ranjit S. Teja, The Case for Earmarked Taxes

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

Imagine if Netflix gave subscribers the opportunity to use their monthly fees to help rank the content.  Would subscribers have any incentive to be dishonest? Nope. This is simply because they would not have the option to spend their fees on things like food or clothes. Subscribers would not have the option to spend their fees outside of Netflix. Therefore, how subscribers earmarked their fees would honestly communicate their true valuations of the content.  The result would be the optimal supply of content.

The most relevant economic discussion looks basically like this...

Smith: Consumers should have the freedom to spend their money to help rank goods.
Hayek: It's true, the market is the only way to utilize all the dispersed knowledge.
Samuelson: While the market does work for private goods, it fails for public goods.
Buchanan: Actually, earmarking would allow the market to also work for public goods.

So what do you think?  Have I successfully changed your mind about the Invisible Hand?  Have I efficiently eliminated one of the biggest errors that you live by?  Have I fulfilled my moral obligation to economically educate and enlighten you?

To be clear, my own beliefs in the Invisible Hand can potentially be falsified.  If Netflix gives the Invisible Hand the opportunity to regulate the content, and it didn't noticeably improve, then this would falsify my belief in the Invisible Hand.

Science is, or should be, the most fertile common ground.

Unfortunately I doubt Netflix will conduct this experiment any time soon.  Here's a potential experiment that's much more accessible.  Imagine if a bunch of people rank the following books...

The Origin Of Species
Harry Potter and the Sorcerer’s Stone
The Handmaid’s Tale
A Tale of Two Cities
50 Shades of Grey
Principia
The Bible
War and Peace
12 Rules For Life
A Theory of Justice
The Cat in the Hat
The Wealth of Nations
The Hunger Games

First the participants would vote for all the books that match their preferences.  Then they would spend their own money to quantify just how closely these books match their preferences.

To be clear, the participants would not be buying the books.  They would simply have the opportunity to spend any amount of their own money in order to reveal the size of their love for each book.  All the money they spent would help crowdfund this experiment.

How differently would voting and spending rank the books?  My hypothesis is that voting would elevate the trash while spending would elevate the treasure.  If, however, voting ranked the Wealth of Nations higher than spending did, then this would falsify my hypothesis.

The relative effectiveness of the Invisible Hand can easily, relatively speaking, be compared to the alternative ranking systems.  The fact that these tests have not been conducted is the biggest error ever.  Let's combine our forces and eliminate this error.  Together we can demolish the massively detrimental disparity between where the world is, and where it should be.

Which Economic Nutshell Is Better?

It seems like I'm forever endeavoring to stuff economics into a better nutshell.  Here are two recent nutshells... the first is bigger and more technical while the second is smaller and more accessible.  Which one is better?

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Nutshell #1 (shared here)

Here's Adam Smith's Invisible Hand...

It is thus that the private interests and passions of individuals naturally dispose them to turn their stocks towards the employments which in ordinary cases are most advantageous to the society. But if from this natural preference they should turn too much of it towards those employments, the fall of profit in them and the rise of it in all others immediately dispose them to alter this faulty distribution. Without any intervention of law, therefore, the private interests and passions of men naturally lead them to divide and distribute the stock of every society among all the different employments carried on in it as nearly as possible in the proportion which is most agreeable to the interest of the whole society.  — Adam Smith, Wealth of Nations

Contrary to popular belief, it's not about self-interest, it's about people using their money to communicate what their interests are.  The supply is regulated by the spending signals of countless consumers. 

In Friedrich Hayek's 1945 Nobel essay he reinforced the idea that markets are all about communication...

We must look at the price system as such a mechanism for communicating information if we want to understand its real function — a function which, of course, it fulfils less perfectly as prices grow more rigid. (Even when quoted prices have become quite rigid, however, the forces which would operate through changes in price still operate to a considerable extent through changes in the other terms of the contract.) The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement. — Friedrich Hayek, The Use of Knowledge in Society

Hayek argued that command economies fail because, in the absence of prices, they are unable to utilize all the relevant and necessary knowledge that is dispersed among all the consumers and producers.

In 1954 the Nobel economist Paul Samuelson, who was a liberal, critiqued Hayek's essay by pointing out that, because of the free-rider problem, prices don't work so well for public goods...

But, and this is the point sensed by Wicksell but perhaps not fully appreciated by Lindahl, now it is in the selfish interest of each person to give false signals, to pretend to have less interest in a given collective consumption activity than he really has, etc. —  Paul Samuelson, The Pure Theory of Public Expenditure

Samuelson's basic assumption was that the optimal supply of all goods is entirely dependent on honest signals.  The problem with a good like Linux is that you can benefit from it without having to pay for it.  Let's say that your true valuation of Linux is $40 bucks.  If you only donate $20 dollars to it, you still can fully benefit from it, but you can take the $20 bucks that you saved and use it to buy a nice steak.  The amount you spent on Linux would be a false signal because it would be less than your true valuation of it.  Your false signal on its own isn't so much of a problem... after all... you only cheated Linux out of $20 bucks.  The issue is when everybody else does the same thing.  When everybody's contribution to Linux is a lot less than their true valuation of it, then naturally it's going to be a lot lower quality than everybody truly wants it to be.  Also, there's going to be far fewer freely available alternatives to Linux than everybody truly wants. 

To be clear, the only reason that consumers have the incentive to be dishonest about their true valuation of Linux (a public good) is because they have the option to spend their money on steak (a private good) instead.  If this option was eliminated, then so too would be the incentive to be dishonest.  This was the point that the Nobel economist James Buchanan made in 1963...

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

Let me hedge my bets by sharing how other people have explained the idea of individual earmarking...

One strand of this approach-initiated in Buchanan’s (1963) seminal paper-argues that the voter who might have approved a tax increase if it were earmarked for, say, environmental protection would oppose it under general fund financing because he or she may expect the increment to be allocated to an unfavored expenditure such as defense. Earmarked taxation then permits a more satisfactory expression of individual preferences. — Ranjit S. Teja, The Case for Earmarked Taxes

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

Imagine if Netflix gave subscribers the opportunity to use their monthly fees to help rank the content.  Would subscribers have any incentive to be dishonest? Nope. This is simply because they would not have the option to spend their fees on things like food or clothes. Subscribers would not have the option to spend their fees outside of Netflix. Therefore, how subscribers earmarked their fees would honestly communicate their true valuations of the content.  The result would be the optimal supply of content. 

The expert economic discussion looks basically like this...

Adam Smith (1776): Consumers should have the freedom to spend their money to help rank goods.
Friedrich Hayek (1945): It's true, the market is the only way to utilize all the dispersed knowledge.
Paul Samuelson (1954): While the market does work for private goods, it fails for public goods.
James Buchanan (1963): Actually, earmarking would allow the market to also work for public goods.

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Nutshell #2 (shared here)


Right now, because of democracy, you assume that congress makes decisions that take my well-being into consideration. My well-being? In the private sector I have to spend so much time and energy going around using my money to inform producers what works for my well-being. I shop and shop and shop. For example, I go to the supermarket and buy some artichokes. In doing so I essentially tell Frank the farmer, "Hey buddy! Good job guy! You correctly guessed that my well-being depends on artichokes! Thanks! Good lookin' out! Here's some money! Keep up the good work!" His behavior benefits my well-being, so I have to use my cash to positively reinforce his beneficial behavior.

Now here you are with the assumption that congress somehow knows what works for my well-being despite the fact that I've never once in my life shopped in the public sector. I've never once decided to give any of my tax dollars to the EPA, NASA, the DMV or any other organization in the public sector. I've never once used my tax dollars to positively reinforce behavior that benefits my well-being. Yet, despite the fact that I've never once shopped in the public sector, congress knows what works for my well-being? Woah. This boggles my mind. It blows my mind. It puts my mind into a blender. Your assumption bears repeating with emphasis... congress knows what works for my well-being despite the fact that I've never once in my life shopped in the public sector. Your assumption is really that shopping is entirely unnecessary. If you truly believe that shopping is entirely unnecessary... then please... don't hide your insight under a bushel. Start a thread here, there and everywhere and say "Hey folks! Shopping is entirely unnecessary! It's a massive waste of everybody's limited time and energy to use our money to communicate what works for our well-being! All we need to do is infrequently vote! And occasionally write our representatives!"

Every democracy has been bundled together with a market. The market, not the democracy, is why these societies have been relatively successful. Societies always work better when we better understand each other's needs... and markets are far better at revealing our needs than democracies are. Our needs aren't simple things... they are incredible complex and dynamic. The idea that infrequently voting and occasionally writing our representatives can adequately reveal our needs is the most harmful idea that has ever existed. But it's not like I can show you all the additional prosperity we would currently be enjoying if it weren't for democracy.

However I can show you the difference between voting and spending. All we need to do is use voting and donating to rank prominent skeptics. Then you'll see the difference between voting and spending and decide for yourself which ranking better reflects your own need for skeptics.

Public Finance In A Nutshell

Here's a reply I just posted on Medium...

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“This sounds like you’ve read a lot of mises.org…”

Evidently you haven’t read mises.org or James Buchanan. Which means that you haven’t studied austrian economics or public finance.

The Nobel economist Paul Samuelson was not an austrian economist. He was a very orthodox economist who studied public finance and other subjects. Here’s what he wrote in a paper that was published in 1954…

But, and this is the point sensed by Wicksell but perhaps not fully appreciated by Lindahl, now it is in the selfish interest of each person to give false signals, to pretend to have less interest in a given collective consumption activity than he really has, etc. — Paul A. Samuelson, The Pure Theory of Public Expenditure

The premise here is that the optimal supply of public goods depends on people’s true signals. The supply of defense won’t be optimal if you pretend that it is less important to you than it truly is. However, the only reason that you’d have an incentive to be dishonest is if you had the option to spend your money on private goods rather than on public goods. If this option was eliminated, then your incentive to be dishonest would also be eliminated…

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

Imagine if Netflix gave you the opportunity to divide your subscription dollars however you wanted among all your favorite content. Would you have any incentive to be dishonest? Nope. This is simply because you wouldn’t have the option to spend your subscription dollars on things like food or clothes. Therefore, how you divided your limited dollars would accurately reflect your true preferences.

Paul Samuelson and James Buchanan were both Nobel economists. Samuelson was a liberal economist while Buchanan was a libertarian economist. Despite their ideological differences, they both agreed that the optimal supply of public goods depends on people’s true preferences for them.

Just like it would suboptimal for the private sector to supply meat if everybody was a vegetarian… it would be suboptimal for the public sector to supply war if everybody was a pacifist.

There you go, public finance in a nutshell. Any questions?

NPR

My letter to NPR

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I just read "Readers Rankled By 'Democracy In Chains' Review" by Elizabeth Jensen.  It made me laugh.  Yes, it's progress to at least publicly consider and address the issue of whether a historian, rather than a novelist, should have reviewed Nancy MacLean's book.  But the fact of the matter is that the subject of the book is a Nobel economist's evaluation of democracy.  How can a historian possibly be qualified to effectively judge the validity of James Buchanan's economic arguments?  Of course this is the inherent problem with MacLean's book.

Since I'm here anyways, I might as well endeavor to explain the relevant economic concepts...

"NPR has made a push in the past year to review or interview the authors of all major nonfiction books that are published, and as close to publication date as possible."

Why just the major nonfiction books?  Why not the minor ones as well?  It's because NPR's resources are limited.  So it makes sense for NPR to allocate its limited resources to the more important books.  But it's also the case that the major books aren't equally important.  So then the real issue is... how, exactly, do you determine the importance of a book?

The NY Times maintains a list of the bestselling books.  Why should we care how many people have purchased a book?  Why does it matter how many people have been willing to pay for a book?  Would it be more effective to use voting (democracy) to determine the importance of books?  Or would it be more effective to vote for the representatives who vote to determine the importance of books?

One book that has never made the NY Times' list of bestsellers is The Wealth of Nations by Adam Smith.  Does this mean that it's less important than Thomas Piketty's book, which has made the list?  The issue is that, unlike Piketty's book... Smith's book is freely available.  This means that the two books are on an extremely unlevel playing field.

In order for NPR to optimally/efficiently divide its limited resources between these two books, it's necessary to correctly determine their importance.  Here are some possibilities...

1. Direct democracy.  NPR could give the public the opportunity to vote to determine the importance of the two books.

2. Representative democracy.  NPR could give the public the opportunity to vote for the representatives who will vote to determine the importance of the two books.

3. Charitable market.  NPR could give the public the opportunity to donate to NPR and earmark their donations to determine the importance of the two books.

Which system would most correctly determine the importance of the two books, which, in turn, would most efficiently divide NPRs limited resources between them?

This is what Buchanan worked on.  Well... unfortunately his work was entirely theoretical.  He never devised any experiments to test the effectiveness of these very different allocation systems.  But it's hard to blame him for failing to stand on his own shoulders.  Especially since these fundamental issues continue to be almost entirely overlooked/ignored by most economists.

We use representative democracy to allocate around a third of our country's limited resources.  Yet, this system has never been scientifically tested.  We all assume that it works, but there's absolutely no credible evidence that it works better than the alternatives would.  Historians can certainly explain how we ended up with this system, but they definitely can't prove or justify it.  For this we need economics/experiments/science.  We really don't need a novelist reviewing a book written by a historian criticizing an economist's work on public finance.

Let's say that NPR conducted an experiment to determine the importance of Smith's book and Piketty's book.  With direct democracy... historians and novelists would certainly have no problem voting for Piketty's book.  Neither would they have a problem voting for representatives who would vote for Piketty's book.  With the charitable market though, perhaps they'd have no problem donating and earmarking $5 dollars... or perhaps $20 dollars to Piketty's book.  But with larger amounts of money, they'd have to seriously confront the limits of their economic knowledge.  Would it be worth it for them to spend so much money on a subject outside their area of expertise?  For most it wouldn't be worth it.  So the charitable market would do by far the best job of filtering out public ignorance.  Which is pretty much the same thing as minimizing virtue signalling.  The outcome/results would embody/reflect public knowledge... which would logically help to eliminate public ignorance.  It would be a virtuous cycle.  If this system expanded to include all books, then the most valuable knowledge in each field would cross-pollinate all the different fields.

NPR can, and should be, the platform that we, the people, use to help bring the most valuable knowledge to each other's attention.

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See also:

- Evonomics
- Public Finance For Andy Seal
- Show Me The Economic Case For Democracy
- The Pragmatarian Model For The NY Times

Public Finance For Andy Seal

Comment on: The Controversy over Democracy in Chains by Andy Seal

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In 1954 Paul Samuelson wrote "The Pure Theory of Public Expenditure".  He recognized the inherent problem with public goods.  You can benefit from national defense without paying for it, so you might as well pretend to have less interest in it than you truly do (false signal).  Therefore, taxation should be compulsory.  But then Samuelson simply assumed that planners would do an adequate job of correctly guessing your true valuation of defense.  He assumed omniscience.

The reason that I haven't purchased MacLean's book is because everything that I've read about it leads me to believe that she thinks that the other 1954 thing... "Brown v. Board of Education" was somehow more relevant to Buchanan and the formation of public choice than Samuelson's paper.

You've read MacLean's book... did she even mention Samuelson's paper?  Did she mention anything about the fact that the biggest economic defense of our current system of government is based on the assumption that planners are omniscient?

Buchanan had absolutely no issue with Samuelson's view on the inherent problem with public goods and the need for compulsory taxation.  But when it came to his assumption of omniscience, Buchanan had a very big issue.

In 1963 Buchanan wrote "The Economics of Earmarked Taxes".  He argued that taxpayer earmarking would eliminate the incentive to give false signals.  Since you are paying taxes anyways, if you were given the opportunity to earmark your taxes, then the amount of your tax dollars that you earmarked to defense would accurately reflect your valuation of defense.  Say that your valuation of national defense is $1000 of your tax dollars but you only earmark $100 tax dollars to national defense.  It doesn't mean that you'll be able to spend the difference on private goods (ie clothes, food). It means that you'll have $900 tax dollars to earmark to other public goods (ie education, healthcare)... which you value less than national defense. Therefore, there's absolutely no incentive to give a false signal.

MacLean is correct that Buchanan's work is anti-democratic.  Unfortunately, as a result of her economic ignorance, she thinks that his work is inspired by racism and/or the ultra-wealthy.  No.  Seriously?  No.  His work is inspired by his very serious concern about the assumption of omniscience.  If this absurd assumption is abolished, then the conclusion really can't be direct democracy.  No economist in their right mind is going to argue for voting on the amount of money to spend on defense.  Because if that was sane, then we might as well vote on the amount of money to spend on milk.  Except, if voting is used to allocate all resources, then money itself would be pointless.

Buchanan is our Goliath.  MacLean is not your David.  But at least she tried.  If she hadn’t, it’s doubtful that you would have written anything about Buchanan.

Wicksellian Interest vs Wicksellian Benefit

Scott Sumner posted yet another blog entry on Wicksellian Interest.  Why is Sumner far more interested in Wicksellian Interest than he is in Wicksellian Benefit?  In his entry Sumner asks what he's missing.  Here's my guess...

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

Justice would thereby have been done at least to the extent that each man received his money’s worth.  - Knut Wicksell, A New Principle of Just Taxation

It is impossible for anyone, even if he be a statesman of genius, to weigh the whole community's utility and sacrifice against each other.  - Knut Wicksell, A New Principle of Just Taxation

For Buchanan, Wicksell is “the intellectual father of modern public finance” (Buchanan, 1968: 192), and he states: “In any overall evaluation of the history of fiscal thought, Wicksell alone commands the heights of genius” (Buchanan, 1967: 285).  Buchanan’s Nobel-prize speech honored Wicksell with the accolade that Wicksell deserves designation as the most important precursor in public finance theory. (Buchanan, 1987: 243). - Bernd Hansjürgens, The Influence of Knut Wicksell on Richard Musgrave and James Buchanan

The effect (of the Finanztheoretische Untersuchungen, B.H.) on me was dramatic. Wicksell laid out before me a set of ideas that seemed to correspond precisely with those that I had already in my head, ideas that I could not have expressed and would not have dared to express in the public-finance mindset of the time.  - James Buchanan, Economics from the Outside in: "Better Than Plowing" and Beyond

A second analytical principle emerged more than a century after Smith’s Wealth of Nations, and it was not explicitly incorporated into the norms for policy. But it may have been implicitly recognized. It is important because it reinforces the classical principles from a different and essentially political or public-choice perspective. In 1896, Knut Wicksell noted that an individual could make an informed, rational assessment of various proposals for public expenditure only if he were confronted with a tax bill at the same time. Moreover, to facilitate such comparison, Wicksell suggested that the total costs of any proposed expenditure program should be apportioned among the individual members of the political community. These were among the institutional features that he thought necessary to make reasonably efficient fiscal decisions in a democracy. Effective democratic government requires institutional arrangements that force citizens to take account of the costs of government as well as the benefits, and to do so simultaneously. The Wicksellian emphasis was on making political decisions more efficient, on ensuring that costs be properly weighed against benefits. A norm of balancing the fiscal decision or choice process, if not a formal balancing of the budget, emerges directly from the Wicksellian analysis. - James Buchanan, Richard Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes

Essential though the efficiency model of public goods is as a theoretical construct, standing by itself it has little practical use.  The omniscient referee does not exist and the problem of preference revelation must be addressed.  The Wicksellian perspective is thus needed. -  Richard Musgrave, The Nature of the Fiscal State

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

The free-rider problem is an argument against democracy

Reply to: Friedrich Hayek Supported a Guaranteed Minimum Income

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Friedrich Hayek supported welfare like he opposed democracy. Welfare on its own is entirely wonderful. Same thing with democracy. But when you combine the two…

The best (most widely cited) justification for government is based on the fact that everybody wants a free lunch. The liberal Nobel Prize economist Paul Samuelson argued that taxation has to be compulsory because we can’t trust people to tell us how much they value public goods.

The free-rider problem is a real problem. Everybody wants the most bang for their buck. Which is great when it comes to private goods… we all shop around for the best deals. But when it comes to public goods… we all hope to enjoy the benefits and pass the costs onto others.

In order to be logically consistent, anybody who agrees that the free-rider problem is a real problem must also agree that democracy should be limited to issues that are not susceptible to this problem. If democracy isn’t limited accordingly, then it’s a given that resources are going to be diverted away from far more productive uses… which means less opportunities… which means a greater need for welfare. It’s a vicious cycle.

Did Hayek support a minimum welfare? Yup, you got that right. But the “minor” detail you either accidentally or conveniently forgot to mention was that Hayek also supported a definite limit to democracy. He clearly understood the problem with the majority directly or indirectly determining the amount of welfare that they receive.

The limit on democracy is just one, of many, conditional clauses which Hayek based his support of a minimum welfare on. If all these conditions are not met, then it’s very likely that the harm of government welfare will greatly exceed the benefit.

Uh, do you need me to go through and list all the conditions? Eh… it would be a lot of work. Plus, it’s really doubtful that anybody is going to successfully argue against the condition regarding democracy. Or even attempt to do so.

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James Kwak left this note…

You have the conceptual order backwards.. His argument for a guaranteed minimum isn’t conditioned on anything. He then observes that democracy can lead to problems.

Does concept/condition/concern/clause order matter? Even if it does, chapter 19, which contains the minimum welfare bits you referred to, begins with this quote…

The doctrine of the safety net, to catch those who fall, has been made meaningless by the doctrine of fair shares for those of us who are quite able to stand. — The Economist

Clearly Hayek was concerned with the ever-present and very popular topic of “fairness”. The problem isn’t with a bare minimum… it’s with people who think it’s unfair that others have so much more than they do. Of course, these people usually fail to recognize that they have so much more than many people in places like Africa. Everybody always wants more. Like I argued, everybody wants a free lunch. When it comes to public goods, the free-rider problem is a real problem.  

Along these same lines, Hayek wrote…

It is probably inevitable that this relief should not long be confined to those who themselves have not been able to provide against such needs (the “deserving poor,” as they used to be called) and that the amount of relief now given in a comparatively wealthy society should be more than is absolutely necessary to keep alive and in health.

Again, the concern is that people will want more than the minimum welfare. Who’s satisfied with a minimum amount of anything good? In a shopping mall… the powerful desire to maximize benefit is a powerful force for good. In a voting booth, however, this same exact desire becomes a powerful force for bad. This is true regardless of where or when Hayek points this out. 

Next he brings up the part you mentioned about compelling people to insure themselves against the “common hazards of life”. Hayek justifies this by arguing that, if people weren’t compelled to do so, then everybody would have to suffer larger harms. Of course, this recommendation, like all his welfare recommendations, has to be considered in terms of all the relevant and applicable conditions. 

In the second section, Hayek shares what I consider to be a very important condition/clause…

It is probably true that, at any given moment, a unified organization designed by the best experts that authority can select will be the most efficient that can be created. But it is not likely to remain so for long if it is made the only starting point for all future developments and if those initially put in charge also become the sole judges of what changes are necessary. It is an error to believe that the best or cheapest way of doing anything can, in the long run, be secured by advance design rather than by the constant re-evaluation of available resources. The principle that all sheltered monopolies become inefficient in the course of time applies here as much as elsewhere.

True, if we want at any time to make sure that we achieve as quickly as we can all that is definitely known to be possible, the deliberate organization of all the resources to be devoted to that end is the best way. In the field of social security, to rely on the gradual evolution of suitable institutions would undoubtedly mean that some individual needs which a centralized organization would at once care for might for some time get inadequate attention. To the impatient reformer, who will be satisfied with nothing short of the immediate abolition of all avoidable evils, the creation of a single apparatus with full powers to do what can be done now appears therefore as the only appropriate method. In the long run, however, the price we have to pay for this, even in terms of the achievement in a particular field, may be very high. If we commit ourselves to a single comprehensive organization because its immediate coverage is greater, we may well prevent the evolution of other organizations whose eventual contribution to welfare might have been greater. 

Decentralization is far more effective than centralization at finding where there’s room for improvement. If well-planned steps were frequently taken in the best directions…then socialism (= command economies = our public sector) would work. And there’d be absolutely nothing wrong with putting all our eggs in one basket. Hedging bets would be a waste. There’d be no point in allowing consumers to choose for themselves. There’d be no point in allowing entrepreneurs to freely enter and exit from endeavors of their choosing. In the real world, however, no amount of top down expertise can ensure that the best course of action is taken. Hence the value of decentralization. 

Hayek agrees that a minimum welfare should be provided. But how should it be provided? Liberals think it should be provided centrally. Hayek thought otherwise. This is a general condition. Are there some exceptions to this condition? For Hayek…probably defense, maybe justice… but certainly not welfare. And I’m using the term “welfare” broadly. 

Hayek again returns to the concern with “fairness”… 

Though a redistribution of incomes was never the avowed initial purpose of the apparatus of social security, it has now become the actual and admitted aim everywhere. No system of monopolistic compulsory insurance has resisted this transformation into something quite different, an instrument for the compulsory redistribution of income. The ethics of such a system, in which it is not a majority of givers who determine what should be given to the unfortunate few, but a majority of takers who decide what they will take from a wealthier minority, will occupy us in the next chapter. At the moment we are concerned only with the process by which an apparatus originally meant to relieve poverty is generally being turned into a tool of egalitarian redistribution. It is as a means of socializing income, of creating a sort of household state which allocates benefits in money or in kind to those who are thought to be most deserving, that the welfare state has for many become the substitute for old-fashioned socialism. Seen as an alternative to the now discredited method of directly steering production, the technique of the welfare state, which attempts to bring about a “just distribution” by handing out income in such proportions as it sees fit, is indeed merely a new method of pursuing the old aims of socialism. The reason why it has come to be so much more widely accepted than the older socialism is that it was at first regularly presented as though it were no more than an efficient method of providing for the specially needy. But the acceptance of this seemingly reasonable proposal for a welfare organization was then interpreted as a commitment to something very different. It was mainly through decisions that seemed to most people to concern minor technical issues, where the essential distinctions were often deliberately obscured by an assiduous and skillful propaganda, that the transformation was effected. It is essential that we become clearly aware of the line that separates a state of affairs in which the community accepts the duty of preventing destitution and of providing a minimum level of welfare from that in which it assumes the power to determine the “just” position of everybody and allocates to each what it thinks he deserves. Freedom is critically threatened when the government is given exclusive powers to provide certain services — powers which, in order to achieve its purpose, it must use for the discretionary coercion of individuals. 

Minimum welfare? Sure… if, and only if… we can keep fairness, redistribution, egalitarianism and socialism out of the process. This is a fundamentally important condition. Hayek is fundamentally concerned with this condition. To leave this condition out is to fundamentally misrepresent Hayek’s position on the matter. 

The third section contains the condition that there has to be a way for experts to provide an objective valuation of the welfare institutions. When this condition is not met, the barber is in charge of deciding whether we need a haircut. 

The fourth section reemphasizes the condition of decentralization…

Are we really so confident that we have achieved the end of all wisdom that, in order to reach more quickly certain now visible goals, we can afford to dispense with the assistance which we received in the past from unplanned development and from our gradual adaptation of old arrangements to new purposes? Significantly enough, in the two main fields which the state threatens to monopolize — the provision of old age and for medical care — we are witnessing the most rapid spontaneous growth of new methods wherever the state has not yet taken complete control, a variety of experiments which are almost certain to produce new answers to current needs, answers which no advance planning can contemplate. Is it really likely, then, that in the long run we shall be better off under state monopoly? To make the best available knowledge at any given moment the compulsory standard for all future endeavor may well be the most certain way to prevent new knowledge from emerging. 

Confidence in planning = fatal conceit. It’s a fatal conceit to fail to understand the universality of fallibilism. Embracing the fact of fallibilism means appreciating the value of heterogeneous activity (variety of experiments). Maximizing heterogeneous activity maximizes beneficial discoveries which maximizes progress and prosperity. Because people are all different… maximizing heterogeneous activity can be accomplished simply by protecting people’s freedom to allocate their resources as they best see fit. However, given that the free-rider problem is a real problem… when it comes to public goods… it’s not unreasonable to coerce people to contribute… but this really does not mean that we have to take away their choice regarding which public goods they contribute to. 

The fifth section contains the condition of fiscal equivalence. Fiscal equivalence is when there’s a clear and direction connection/bridge between taxes paid and services received. If this bridge is largely absent… then the result is fiscal illusion… people are clueless about the costs. The government becomes the Santa Claus for adults. Public goods are made by elves in the North Poll. Reindeer fly and there is such a thing as a free lunch. The logical consequence of fiscal illusion is that, even if people wanted to make rational democratic decisions, it’s impossible for them to do so. 

This development can be prevented only if, from the outset, the distinction is clearly made between the benefits for which the recipient has fully paid, to which he has therefore a moral as well as a legal right, and those based on need and therefore dependent on proof of need. 

The first part is the benefit principle. The second part contains the proof-of-need condition.

Further in… Hayek combines the limited democracy condition and the fiscal equivalence condition…

Though in a formal sense the existing social security systems have been created by democratic decisions, one may well doubt whether the majority of the beneficiaries would really approve of them if they were fully aware of what they involved. 

In the sixth section we also encounter the democracy condition…

It is easy to see how such a complete abandonment of the insurance character of the arrangement, with the recognition of the right of all over a certain age (and all the dependents or incapacitated) to an “adequate” income that is currently determined by the majority (of which the beneficiaries form a substantial part), must turn the whole system into a tool of politics, a play ball for vote-catching demagogues. 

Politicians milk the free-rider problem for their own personal gain. Also…

An inevitable result of this situation, which has become a normal feature in other countries besides the United States, is that at the beginning of every election year there is speculation as to how much social security benefits will again be raised. That there is no limit to the demands that will be pressed for is most clearly shown by a recent pronouncement of the British Labour Party to the effect that a really adequate pension “means the right to go on living in the same neighbourhood, to enjoy the same hobbies and to be able to mix with the same circle of friends.”

“No limit to the demands”. Again, Hayek was clearly concerned with the free-rider problem in terms of democracy. In no way, shape or form was he handing a blank check to government welfare. 

In the seventh section we find the condition of individual valuation…

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. Even the richest man will normally not do all that medical knowledge makes possible to preserve his health, perhaps because other concerns compete for his time and energy. Somebody must always decide whether an additional effort and additional outlay of resources are called for. The real issue is whether the individual concerned is to have a say and be able, by an additional sacrifice, to get more attention or whether this decision is to be made for him by somebody else. 

Just because something is generally beneficial… doesn’t mean that it will be the most beneficial choice in every circumstance. Brushing our teeth is beneficial… but we don’t spend every second of every day brushing our teeth. Given the impossible-to-fathom diversity of preferences and circumstances… we maximize benefit by minimizing top down control. We should allow people to decide for themselves whether something is trash or treasure. 

In the eighth section we find the main sentence that you shared…

We shall again take for granted the availability of a system of public relief which provides a uniform minimum in all instances of proved need, so that no member of the community be in want or shelter. 

Here again we see the proof condition. 

In the following paragraph we find the limited union condition and the no minimum wage condition…

There is also the important instance in which unemployment is the direct effect of wages being too high in a particular trade, either because they have been pushed too high by union action of because of a decline in the industry concerned. In both cases the cure of unemployment demands flexibility of wages and mobility of workers themselves; however, these are both reduced by a system which assures to all unemployed a certain percentage of the wages they used to earn.

More about the limited union condition…

Such a system, which relieves the unions of the responsibility for the unemployment that their policies create and which places on the state the burden not merely of maintaining but of keeping content those who are kept of jobs by them, can in the long run only make the employment problem more acute.

In the final section Hayek again brings up the limited democracy condition…

The difficulties which social insurance systems are facing everywhere and which have become the cause of recurrent discussion of the “crisis of social security” are the consequence of the fact that an apparatus designed for relief of poverty has been turned into an instrument for the redistribution of income, a redistribution supposedly based on some non-existing principle of social justice but in fact determined by ad hoc decisions. It is true, of course, that even the provision of a uniform minimum for all those who cannot provide for themselves involves some redistribution of income. But there is a great deal of difference between the provision of such a minimum for all those who cannot maintain themselves on their earnings in a normally functioning market and a redistribution aiming at a “just” remuneration in all the more important occupations — between a redistribution wherein the great majority earning their living agree to give to those unable to do so, and a redistribution wherein a majority takes from a minority because the latter has more. The former preserves the impersonal method of adjustment under which people can choose their own occupation; the latter brings us nearer and nearer to a system under which people will have to be told by authority what to do. 

Also, more about the proof condition…

The assurance of an equal minimum for all in distress presupposes that this minimum is provided only on proof of need and that nothing which is not paid for by personal contribution is given without such proof.

And again with the decentralized condition…

The hope is now sometimes expressed by liberals that “the whole Welfare State apparatus must be regarded as a passing phenomenon,” a kind of transitional phase of evolution which the general growth of wealth will soon make unnecessary. It must seem doubtful, however, whether there exists such a distinct phase of evolution in which the net effects of those monopolistic institutions are likely to be beneficial, and still more whether, once they have been created, it will ever by politically possible again to get rid of them. In poor countries the burden of the ever growing machinery is likely to slow down considerably the growth of wealth (not to mention its tendency to aggravate the problem of overpopulation) and thus to postpone indefinitely the time when it will be thought unnecessary, while in the richer countries it will prevent the evolution of alternative institutions that could take over some of its functions. 

….also…

The introduction of such a system therefore puts a strait jacket on evolution and places on society a steadily growing burden from which it will in all probability again and again attempt to extricate itself by inflation. Neither this outlet, however, nor a deliberate default on obligation already incurred can provide the basis for a decent society. Before we can hope to solve these problems sensibly, democracy will have to learn that it must pay for its own follies and that it cannot draw unlimited checks on the future to solve its present problems. 

These are most of the conditions that Hayek places on minimum welfare… in Chapter 19. There are other necessary conditions in other chapters and in other books. 

Let’s review the conditions in Chapter 19…

1. Limited democracy condition. Because the free-rider problem is a real problem… we can’t trust votes on issues where people can put their hands in other people’s pockets. Demand is unlimited… which is why democracy must be limited. 
2. Decentralized condition. Institutions improve when they compete for consumers. Take away consumer choice and you minimize the incentive for institutions to discover better ways to serve consumers.
3.  Unbiased condition. Any welfare experts we rely on shouldn’t stand to gain by an expansion of welfare. 
4. Fiscal equivalence condition. Benefits have to be directly tied to (opportunity) costs. Every allocation has an opportunity cost. There’s no such thing as a free lunch. If people can’t clearly see and feel what they are sacrificing… then it’s a given that, more often than not, they will suffer net losses. “Free” shoes aren’t worth the cost of shooting yourself in the foot.
5. Individual valuation condition. People don’t all have the same values, priorities, preferences, circumstances, goals, concerns, hopes, dreams and desires. Nobody can truly fathom the complexity of human variety. But this doesn’t mean that it doesn’t exist. Progress depends on difference…. so overriding human variety is a fatal conceit that will certainly harm humanity as a whole.
6. Proof condition. Anybody who wants a minimum welfare must prove that they lack a minimum welfare. Again, any and every allocation has an opportunity cost. More resources for the less needy means less resources for the more needy. 
7. Limited unions condition. The efficient allocation of labor depends on wages accurately communicating where labor is most needed. When unions, via coercion, prevent wages from doing their job, the logical result is that labor will be inefficiently allocated. The point of wages isn’t to compensate… it’s to communicate. When coercion is used to change the information that’s communicated, it results in a garbage in, garbage out (GIGO) situation. Labor is misallocated and the harm to everybody greatly exceeds the benefit to the few.  
8. No minimum wage condition. Same reasoning as with unions. 

I suppose we could argue back and forth whether these were strict conditions. Maybe they weren’t all deal breakers. Maybe none of them were deal breakers. Maybe they weren’t strings attached. Maybe they weren’t conditions or clauses. Maybe they were just concerns. Maybe they were just mild concerns. Maybe they were just frivolous concerns. Maybe they are truly minor details. 

But this debate would really miss the point. The point is that Hayek’s support for a minimum welfare really didn’t exist in a vacuum. It was a part of a really powerful picture. Unfortunately, I don’t have the skills to really do the picture justice. Hence the quotes. Needless to say, Hayek’s picture of government is fundamentally different than the current picture of government. 

Hayek’s picture is so powerful because it shows us a world in which the need for a minimum welfare is truly minimized. Minimizing the need for welfare can be accomplished by maximizing opportunities. The greater the quantity and variety of opportunities that people have… the lesser the role for welfare. 

Perhaps it’s easy to think of welfare as a way to increase the opportunities available to people. But, there’s a fundamentally important distinction between opportunities that have been sponsored by consumer choice… and those that haven’t been. I’ll borrow Bastiat’s classic example. The government could sponsor the opportunity for people to get paid to dig unnecessary ditches. But what consumer in their right mind would choose to sponsor this opportunity? If you’re going to pay somebody to do something… then why not pay them to do something that you benefit from? Why pay for an unnecessary ditch when you can pay for a necessary ditch? Why pay for an unnecessary bridge when you can pay for a necessary bridge? Why pay for an unnecessary war when you can pay for a necessary war? 

Because consumer choice is missing from the government, diverting resources from the market to the government means hurting consumers. But, since we live in a democracy, it’s actually the consumers that hurt themselves. 

Consumers distribute resources. Voters redistribute resources. Voters override the spending decisions that they made as consumers. They buy a loaf of bread for $4 dollars and then reach into the register to take $1 dollar out and put it back into their pocket. Is it an after-purchase discount? Is it a democratic rebate? Is it buyer’s remorse? Is it theft? The morality isn’t the issue… as usual the real issue is abundance. When consumers use votes to change their original answers… the production shifts accordingly. There’s less bread and less opportunity for workers to help make bread… which is a problem if consumers truly wanted more bread. 

Who should we trust… Dr. Jekyll or Mr. Hyde? Do we trust consumers or voters? Do we trust people’s spending decisions… or should we trust their voting decisions? Should we trust their actions… or should we trust their words? According to the free-rider problem… we really shouldn’t trust their voting decisions. The free-rider problem is the best argument for compulsory taxation and limited democracy. 

The desire to maximize benefit has two sides… a good side and a bad side. The goal is creating an environment which maximizes the Dr. Jekyll and minimizes the Mr. Hyde… 

If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants. There is danger in the exuberant feeling of ever growing power which the advance of the physical sciences has engendered and which tempts man to try, “dizzy with success”, to use a characteristic phrase of early communism, to subject not only our natural but also our human environment to the control of a human will. The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society — a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals. — Friedrich Hayek, The Pretense of Knowledge 

Democracy as it currently is, isn’t just tyranny over others, it’s tyranny over ourselves. We spend hours and hours shopping every week making the effort to research and find the best deals and reward the most beneficial producers and sponsor the most valuable opportunities… but then every couple years we spend a couple hours overriding all the consumption decisions that we made. We can’t see the difference in realities that our votes effect… but the difference is there. It’s reflected in the amount of welfare that’s truly needed.

Once we learn how untrustworthy Mr. Hyde is, then our reality will improve immeasurably, there will be an abundance of beneficial opportunities and the genuine need for welfare will become vanishingly small. 

Me Being Unclear On The Importance Of Clarity

I’m mostly convinced, and this article supports me regarding architects, that opacity in communication is inversely correlated with the quality of the content. - Daniel Miessler, Stop Being Proud of Complexity

I wish that your rule was true! Then we could safely skip over any opaque writing and be utterly confident that we weren't overlooking an Easter Egg!

But think about a layman trying to read some programming code. It would be the epitome of Greek to him. This doesn't necessarily mean that the code is not conveying something important.

Check this doozy out...

Recall the strong path dependence of individual connectionist learning. The use of external memory systems helps ameliorate some of the effects of this path dependence by allowing achieved innovations ("redescriptions") to be transmitted between individuals. This allows the collective construction of representational trajectories that crisscross individual cognizers and hence increase the chance of a good idea finding a viable niche for further development. This is, of course, an old idea. But it is one whose value cannot be fully appreciated except in the context of our increasing understanding of the boundedness and extreme path dependence of individual reason. - Andy Clark, Economic Reason: The Interplay of Individual Learning and External Structure

Hah... what? I don't grasp everything that's going on here... but I like what I do grasp! It's definitely a good idea to increase the chances of good ideas finding fertile places to germinate, grow and benefit humanity. Honestly though I only really skimmed the paper. I'd like to read through it more carefully... someday.

The issue is that communicating and understanding are two entirely different skill sets. Some people have one skill but not the other... while some lucky bastards have both skills!

Personally, I'm a lot better at understanding than I am at communicating. Words fail me more often than not! There's always room for improvement though. But, on the other hand, a jack of all trades is a master of none. More breadth means less depth. Everybody learning to read/write programming language would shift their limited time away from other uses. However, everybody learning programming language would increase the rate at which programming languages were improved... which would decrease the time required to learn programming languages. Eh? Does English's rate of improvement depend on the number of speakers? But English doesn't seem like it's gotten easier to learn over time. I have no idea if that's true or not.

Anyways, regarding the distinct skills... one metaphor that comes to mind is playing volleyball... one person "sets" the ball... and another person "spikes" it.  It's a division of labor.  One person finds an Easter Egg... and another person clearly communicates why it's an Easter Egg. This clear communication increases the chances that other people will be able to perceive different and potentially beneficial uses of the Easter Egg.

Except, when there are a lot of balls being "set"... what are the chances that a clear communicator will "spike" the most valuable one?

Right now we use citations to determine a paper's importance. More citations means more importance. This is a defective system because, in the real world, importance is a function of sacrifice. And a citation isn't much of a sacrifice. Just like a vote isn't much of a sacrifice. Same thing with links. Here's a link to the most widely cited defense of government. The fact that I linked to this paper doesn't really clarify my demand for this paper. Well... I actually linked to the search results for this paper... the order of which was determined by links.

Eventually we'll switch over to putting our money where our citations, links, votes and likes are. When we quantify our interests then, and only then, will it be readily apparent which discoveries should be clearly communicated sooner rather than later. Personally, I'd spend a lot more money on this link...

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

I'm certain that this passage is opaque to most people... but, based on my understanding of public finance, the content is very high quality. The content gets to the heart of the matter of government.

Samuelson said that we need taxes because, without them, people will lie about their valuations of public goods in order to save a buck...

Gov: How much do you value national defense?
Citizen: Does my payment depend on my answer?
Gov: Yes
Citizen: Then not very much

Buchanan pointed out that, if taxes were a foregone conclusion, then there's no point in lying...

Gov: How much do you value national defense?
Citizen: Does my tax obligation depend on my answer?
Gov: Nope, just your allocation
Citizen: Then, allocate 100% of my taxes to defense

The free-rider problem means taxation... it really doesn't mean allowing 500 congresspeople to allocate everybody's taxes. In other words, the free-rider problem really doesn't mean socialism.

Socialism would work if our valuations do not matter. However, our valuations do matter... which is why socialism does not work.

Clearly communicating with words is important... but words can never communicate as clearly as actions.  How we spend our money reflects our priorities... which reflect our preferences as well as our circumstances... which are constantly changing. So when we spend our money... we effectively communicate our preferences and changing circumstances to the rest of society... and limited resources freely flow in the most valuable directions.

So if you care about clear communication... then you should care about the fact that actions (spending) speak louder than words (votes, likes, links, citations, etc). Giving more weight to words results in a garbage in, garbage out situation.

The Satt - Economic Coherence Test

Posted in various forums...

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Just how economically coherent are you?  If you'd like to find out, then here's a 10 question test.  First, some acronyms...

CS = current system
SI = shallow input (thumbs up/down, stars, etc)
VC = voluntary contribution
MMC = mandatory minimum contribution
CC = consumer choice (you decide where your contribution goes)
RC = representative choice (elected officials decide where your contribution goes)
FRP = free-rider problem (everybody wants a free lunch)
PRP = preference revelation problem (officials don't know how much you'd be willing to pay)


What is the best system for each of the following? Is it the current system (CS) or one of the other systems?


1. Youtube

A. CS = SI + FRP
B. VC + CC + FRP
C. MMC + CC (+ FRP?)
D. MMC + RC + PRP

2. Patreon

A. CS = VC + CC + FRP
B. MMC + CC (+ FRP?)
C. MMC + RC + PRP

3. Netflix

A. CS = MMC + SI
B. MMC + CC (+ FRP?)
C. MMC + RC + PRP

4. Non-profit sector

A. CS = VC + CC + FRP
B. MMC + CC (+ FRP?)
C. MMC + RC + PRP

5. Public sector

A. CS = MMC + RC + PRP
B.  MMC + CC (+FRP?)
C.  VC + CC + FRP

6. Wikipedia

A. CS = VC + CC + FRP
B. MMC + CC (+ FRP?)
C. MMC + RC + PRP

7. Reddit

A. CS = SI + FRP
B. VC + CC + FRP
C. MMC + CC (+ FRP?)
D. MMC + RC + PRP

8. Medium

A. CS = SI + FRP
B. VC + CC + FRP
C. MMC + CC (+ FRP?)
D. MMC + RC + PRP

9. Less wrong

A. CS = SI + FRP
B. VC + CC + FRP
C. MMC + CC (+ FRP?)
D. MMC + RC + PRP

10. NationStates (Forum)

A. CS = FRP
B. SI + FRP
C. VC + CC + FRP
D. MMC + CC (+ FRP?)
E. MMC + RC + PRP


If you need some help with the basic concepts and/or imaging the logistics for the websites... then I'll use this forum as an example...

A. The current system.  You can derive a ton of benefit/enjoyment from this thread without having to pay me even a single penny for all the time and effort it took me to create it.  This is known as the free-rider problem (FRP).
B. There would be some type of rating system to allow us to indicate whether we like or dislike a thread.  For example... you could give this thread a thumbs up or down.  The FRP would still be relevant.
C. Each one of us would have our own forum bank account (FBA).  You could use paypal to deposit any amount of money into your FBA.  If you did derive some benefit from this thread, then you could allocate any amount of money to this thread...even as little as a penny.  All the money allocated to this thread would go into my FBA.  Each thread would display how much money was allocated to it and we could sort threads by value.  The FRP would still be relevant.
D. Same as the previous system but every single one of us would have to spend a minimum amount of money on other people's threads.  Maybe something like $2/month.  But it would be entirely up to us which threads we spent our money on.  Do you want to argue that the FRP would still be relevant?  If so, do me a favor and come up with a new term.
E. Same as the previous system but rather than each of us deciding for ourselves which threads we allocated our $2/month to... we'd pool all our money together and elect some people to decide which threads to give it to.  The theory is that RC would solve the previous system's "FRP"... but then we'd have the preference revelation problem (PRP).  How would our representatives know how much each and every one of us truly valued each and every thread?

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

Is it me or do MMC + CC type systems not have a name?

"Pragmatarianism" = (MMC + CC) * (public sector)

"Pragmatarianism" <> (MMC + CC) * Youtube

MMC + CC = ?

In the meantime, I'll use the word "linvoid" to refer to MMC + CC.

There is a name, more or less, for when people choose how much money they pay for something... Pay What You Want (PWYW).

Here are a couple of decent sources...

A Brief History of ‘Pay What You Want’ Businesses
Pay What You Want: A New Participative Pricing Mechanism

If Youtube switched over to a linvoid system, then people could pay what they want for each video... but each year they would have to spend a minimum amount of money in the Youtube "sector".  

If the government switched over to a linvoid system... aka "pragmatarianism"... then people could pay what they want for each public good... but each year they would have to spend a minimum amount of money in the public sector.

Personally, I've never even heard of a linvoid system being used anywhere.  Have you?  It's strange to imagine that nobody's thought to try it.  Somebody's got to try it eventually... right?

See also: Satt's Paradox

Amanda Palmer vs Public Finance

Just learned about that video from this article by Mike Errico... Appraising Amanda Palmer’s New Patreon Campaign.

In the beginning of the video I almost stopped watching it, but I'm glad that I didn't.  Amanda Palmer, who I never heard of before, is a musician who was rejected by her label because her album only sold 25,000 copies.  She created a kickstarter campaign with a goal of raising $100,000.  Instead, she received over a million dollars.

Now she's on Patreon... Amanda Palmer is Creating Art... and she receives over $20,000 for every thing that she creates.

While I was watching her TED talk video... I kept trying to imagine what it would be like if she was in charge of the IRS.  What I able to imagine was pretty darn wonderful.

So I searched my database for passages tagged with "alienated altruism" and found this gem...

Thus we have the gentle, softening, elevating intercourse that should be habitually taking place between rich and poor, superseded by a cold, hard, lifeless mechanism, bound together by dry parchment acts and regulations— managed by commissioners, boards, clerks, and collectors, who perform their respective functions as tasks—and kept going by money forcibly taken from all classes indiscriminately.  In place of the music breathed by feelings attuned to kind deeds, we have the harsh creaking and jarring of a thing that cannot stir without creating discord—a thing whose every act, from the gathering of its funds to their final distribution, is prolific of grumblings, discontent, anger—a thing that breeds squabbles about authority, disputes as to claims, brow-beatings, jealousies, litigations, corruption, trickery, lying, ingratitude—a thing that supplants, and therefore makes dormant, men's nobler feelings, while it stimulates their baser ones. - Herbert Spencer, Social Statics

Honestly I can't help but laugh every time I read this.  In fact, it's entirely possible that this entry was an excuse just to share this passage.  I'm guessing that Spencer probably wasn't talking about rich and poor people having soft gentle sex with each other.  But I could be wrong.

Silliness aside, Spencer perfectly captures the difference between Amanda Palmer's art of asking and the government's "art" of asking.  Another relevant passage...

Calling for the abolition of public relief, Tocqueville lauded private charity for establishing a "moral tie" between giver and receiver. In contrast, impersonal government relief destroys any sense of morality. The donor (read taxpayer) resents his involuntary contribution, while the recipient feels no gratitude for what he receives and inevitably believes that what he receives is insufficient. - Michael Tanner

In this entry that I wrote last year... Razotarianism - Supplementing Public Revenue By Incentivizing Voluntary Contributions... I explored a wide range of ideas regarding how the government might encourage people to donate.  One of my favorites is that every government organization should have a donate button on their website.  Is that really too much to ask?

Here's a relevant comment that I posted on this blog entry by Peter Boettke...Quiz for the Austrian Economists Among Us

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Using a specific example...let's say that the show Firefly was prematurely canceled. Resources were diverted away from the show even though there was sufficient demand. The problem was that the demand was "latent". It was only revealed after the show was canceled. Many people bought the DVD and campaigned on behalf of the show.

As I've argued before...price theory is too narrow. There are certainly situations where we can correctly determine Hayek's "solution" without using prices. The producers of Firefly could have clarified the demand by creating a crowdfunding campaign. This would have allowed each and every fan of the show to decide for themselves exactly how much they were personally willing to contribute/sacrifice in order to keep the show alive. There wouldn't have been one price...there would have been a continuum of "prices". People would have been paying vastly different amounts for the same exact product. It's the same thing with the non-profit sector.

Price theory, as it stands, is not a great prophylactic because it's got a giant hole in it. It doesn't account for the vast majority of situations where we sacrifice in order to try and keep something alive. A better theory would be something like "input theory"...or "positive feedback theory"...or some other better name. Maybe "flowcilitation theory"?

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I'm tagging this entry with "civic crowdfunding".  Is it really "civic" though for people to donate money to support Amanda Palmer?  If we created a market in the public sector... would people be able to give their taxes to specific artists?

See also:

• Prices vs Chips
• Crazy Cable Confusion: Costless Content Creation
• Rescuing Robin Hanson From Unmet Demand

The Basics Of Public Finance

Thread posted at The Science Forum... Nature: Supply and Demand

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Is nature a public good? In this thread in the biology category... Rapid evolution in cities... Lynx_Fox wasn't so sure that it really is. This topic is more suited for the economics category so figured that I'd post my reply here instead.

My front yard here in Southern California is the only one in my neighborhood that has a tropical dry forest (TDF) instead of a lawn. This is a pretty good clue that I demand more nature than my neighbors do.

However, several of my neighbors have remarked that they really enjoy my TDF. This is a clue that either they were just being polite or that they have some demand for nature. It also indicates that it's very possible that my TDF is a public good. This is because my neighbors can benefit from my TDF without having to chip in to help cover the costs of creation or maintenance.

Is it a problem if my neighbors are free-riding? It's hard to say. But let's pretend that, in the absence of their contributions, I decided that it was no longer worth it to keep my TDF. Then my neighbors would be worse off because they didn't chip in to support something that they benefited from.

The government addresses the free-rider problem by forcing people to pay taxes. Elected representatives decide how much of the money to give to the various public goods (defense, education, healthcare, environment, etc.). This would be the equivalent of each person in my neighborhood chipping in and electing representatives to decide how much of the money to give to my TDF, litter cleanup, graffiti removal, neighborhood watch and so on.

The problem with this system is that if elected representatives were any good at knowing just how much benefit each and every one of my neighbors derives from my TDF... then all the time we spend shopping would be a fundamental waste of time. Except, who argues that we should get rid of shopping and replace it with the valuations of elected representatives? Nobody in their right mind does... which should give you a clue that there's no reason to believe that elected representatives know how much benefit you derive from nature or any other public good.

Therefore, the current supply of nature is wrong.

If you're incredulous, then here's a more advanced, but very excellent, treatment of the subject... Handbook of Biodiversity Valuation - A Guide for Policy Makers


The easy solution is to allow taxpayers to choose where their taxes go (pragmatarianism). People would be able to shop in the public sector just like they can shop in the private sector.

For more details check out the FAQ.

Basically, in the absence of a market in the public sector... we can't look at the current supply of nature and say that society's heart is in the wrong place. Well... you can say this but it would just reveal that you don't have a basic grasp of public finance.

Once people could choose where their taxes go, then we'd see exactly where society's heart truly is. If we have reason to believe that it's in the wrong place... then it would be our responsibility to share our reasoning with others.

It might take some work to persuade others that they would benefit from more nature, but if we're successful... then it would be easy enough for them allocate their taxes accordingly. With the current system, even if we do manage to convince somebody that we should have more nature, it's not like they can choose where their taxes go. This is why our current system is the cause of rational ignorance.

For a real life conservation example of the problem of not having a market in the public sector... The Ingenious Gentleman George Monbiot.


Let me hedge my bets by using another example...

In the thread on animals rapidly evolving in cities, TomFoolery wrote that she really enjoyed watching the Coywolf documentary on Netflix. I really enjoyed it as well. Are we the only two people in this boat? Probably not.

The thing is, Netflix doesn't know just how much we enjoyed this documentary. It knows how many stars we gave it.... and whether we watched the entire thing... and whether we watched it more than once... but is this information adequate? Nope.

Imagine if we could allocate our monthly fees to the content (shows/movies/documentaries) that we valued most. How many dollars would TomFoolery allocate to the Coywolf documentary? How many dollars would I allocate to it? The amount of money that we allocated to our favorite content would far more accurately reflect our valuations than stars or views would.

It stands to reason that people would watch plenty of shows that they wouldn't allocate any of their monthly fees to. They might even derive some benefit from some of this content. It's not a problem though because they would be allocating their money to the most beneficial content. If Netflix passed this money, minus its cut, to the creators of the most beneficial content... the logical consequence is that less beneficial content would quickly be replaced with more beneficial content.

For more on the problem with content bundles... Crazy Cable Confusion: Costless Content Creation.

Let me know if you have any questions.