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.

Obama Presidential Center VS Public Park

The proposed plan is for 20 acres of Chicago’s Jackson Park to be destroyed and replaced with the Obama Presidential Center. Here’s the comment that I posted on the Dezeen story…

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Imagine a survey…

Should the presidential center be built in the park?

Yes
No

But instead of participants simply voting for their preferred option, they would spend any amount of money on it. This system has two benefits…

1. Everybody would see and know the actual demand for/against the proposal.
2. The city would raise money to help reduce its ridiculously huge debt.

From my perspective, the world needs a lot more trees than buildings. So I’d definitely spend my money on the “No” option.

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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

The Suburbanist gets credit for bringing this issue to my attention…

Carve 20 acres out of Central Park for a library? What an awful idea. Better to buy the land for housing. https://t.co/MyrXMAPb6t

— The Suburbanist (@The_Suburbanist) January 17, 2018

http://ideaplug.org/?t=Chicago_feedback

Markets Are The Most Exciting Thing Ever!!!!!!!!!

Some discussion in: Netflix And Virtue Signalling

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The money wouldn't necessarily be given to the content producers anyway - it would go to the people who own the IP. Netflix can't change that. Even if it did and even if we assume people didn't just lazily dump the fee into the first thing they see because they get to access everything anyway, money spent wouldn't necessarily reflect demand. - Conscentia

It feels like you're focusing on the word "demand" rather than on the "money spent" part. For me it's significant and meaningful and important and useful to know how much money people are willing to spend on things. It's convenient to use the word "demand" to refer to the amount of money that people are willing to spend on things. But we can also use the letter "X" or the word "fhqwhgads" or "zeitgeist" or any other combination of letters you want. I'm less interested in the word than in the concept. So it would be great if you focused on the concept.

Spending money is a sacrifice. The more money that is spent, the bigger the sacrifice. Since spending money is a sacrifice... generally people don't randomly spend their money. They didn't exchange their limited time and effort for money just so that they can flush it down the toilet.

It's easy to prove this... all I have to do is ask for your money. Of course you're going to want to know why you should give me any money. So in order to persuade you to give me your money, I'd have to provide you with some information. You'd compare the information that I gave you with all the information that you have and then decide whether or not to give me money. If you decided not to give me any money, well, in theory I could endeavor to provide you with different and better information. And again you'd compare this new information with all your information in order to decide whether to give me money.

This process of persuasion involves lots of brainpower being used and lots of information being shared, considered and compared. So it's significant and meaningful and important to know how much money individuals and groups of individuals are willing to spend.

Distributing the fee to the content does not guarantee that more such content will be made. Fans of Star Trek TNG could regularly dump their whole fee into the show but it's not going to be renewed for another season regardless. The show has long been finished. Netflix isn't Patreon. The money doesn't go to fund content. As such there is no sense is spending the fee into order to voice demand, and I'd expect user behaviour to reflect this.  - Conscentia

I was disappointed that Person of Interest was canceled...

As CBS’s chairman, president, and CEO Leslie Moonves told The Hollywood Reporter recently, the company “broke even” on Person of Interest last year, but because Warner Bros., not CBS, profits from the show’s back end (DVD sales, foreign rights, streaming, syndication), it was literally not worth it to renew the show. - Kate Aurthur, “Person Of Interest” And The Mysteries Of Cancellation

It was canceled despite the fact that nobody knew how much money that I was willing to spend on the show. And I suppose this could potentially sound egocentric. So let me zoom out. It was canceled despite the fact that nobody knew how much money that any subscribers were willing to spend on the show. This fact makes me acutely feel like I'm living in the stone ages. Where I have to go around trying to convince people that fire and wheels are useful. I'm extremely grateful that I live in an era where I don't have to try and convince anybody that fire and wheels are useful... but I'm also extremely disappointed that I live in an era where I do have to try and convince everybody that it's useful to know how much money people are willing to spend on things.

Consider how much better off your life is because you live in an era where everybody knows that fire and wheels are useful. Now double or triple or quadruple that amount of betterness to try and appreciate how much better off your life would be if you lived in an era where everybody knows that it's essential to know how much money people are willing to spend on things.

Admittedly I have absolutely no idea how much money everybody would be willing to spend on Person of Interest... so of course I can't guarantee that, if ignorance (of willingness to pay) had been eliminated, the show would have been continued rather than canceled. But I can guarantee that the deciders, whoever they were, would have made a far more informed decision.

The world will be infinitely better off when everybody makes far more informed decisions.

No. That the one rich guy spent 6000 times more does not mean the demand is 6000 times greater. It just means he can afford to spend more. Even if he does want it more, so what? That one rich guy is still just one guy. - Conscentia

Let's imagine that people could choose where their taxes go. Some people want to go to war with Canada. The shape of the demand looks like this...

What would you say about the shape of the demand? I'd say that it's certainly tall enough... but it's way too skinny. Too few people are truly willing to pay for war with Canada. Sure, these few people are willing to pay a lot... but that really doesn't overrule the fact that there aren't nearly enough of them to justify this particular use of their tax dollars. So the DoD would use the money for other things besides invading Canada.

Using technical terms I'd say that the breadth of the demand is insufficient. The shape is too skinny. The fatter (wider) it is... the greater the justification for using those tax dollars to attack Canada.

In terms of the public sector, being concerned with the shape of the demand makes sense because the point of taxes really isn't to spend them on things that only a relatively few people are going to benefit from. We really don't want rich people to be able to spend their taxes on private golf courses or private yachts or private airports. We want everybody, rich or poor, to spend their taxes on things that lots of people are going to benefit from. Maybe like healthcare?

The shape isn't super tall... but it's pretty fat. There's definitely more than enough demand breadth to justify these tax dollars being spent on healthcare. Although perhaps it's not quite correct to compare something more general (healthcare) with something more specific (war with Canada). It would probably be more correct to compare war with Canada to cancer research. We can reasonably guess that the demand for the latter would be far broader than the demand for the former.

In any case, it certainly makes sense to consider the shape of the demand when we're talking about tax dollars. The thing is, we really weren't talking about tax dollars. We really weren't talking about the public sector. We were talking about donors to the Libertarian Party using their donations to signal the value of the potential convention themes. Yet, you definitely thought that the shape of demand was very relevant!

If the entire point of the public sector is to have a space where it's unacceptable for money to be spent on things that will only benefit a few people... then it's gotta be the case that the entire point of the private sector is to have a space where it is entirely acceptable for money to be spent on things that will only benefit a few people.

If one person alone wants to spend enough money to choose the theme for the Libertarian Party convention... then that's entirely acceptable. If one person alone wants to spend enough money to prevent Person of Interest from being canceled... then that's entirely awesome. If one person alone wanted to spend enough money to pay for the Statue of Liberty's pedestal... then that also would have been entirely awesome.

Willingness to pay reflects ability to pay, and as such is not a measure of demand. One cannot be willing to pay money one doesn't have, regardless of whether one wants something. - Conscentia

If somebody is completely broke then clearly we can't know how much money they'd be willing to spend on defense, healthcare, Person of Interest, the Statue of Liberty's pedestal, food, clothes, computers or anything else. Homeless people don't have much or any money... this is certainly true. But does this really mean that we can't know the demand for anything? Does it really mean that it's irrelevant how much money people are willing to spend on things? Markets should be entirely discarded and replaced with... voting? I'm sure that this is not what you're suggesting... yet you're bringing up ability to pay as if it would somehow only be relevant to donors to the Libertarian Party using their donations to signal the value of potential convention themes. Actually, the ability to pay (or the lack thereof) is relevant to all markets. So if you're arguing that it invalidates the spending info for one market... then your argument has to be applicable to all markets.

If we prevent people from using their money to help determine the value of things... then things will be incorrectly valued. When things are incorrectly valued, things will be incorrectly used. When things are incorrectly used, people will be worse off. Therefore, the degree and extent to which people are currently worse off... reflects the degree and extent to which we prevent people from using their money to help determine the value of things.

Right now you believe that the products at your grocery store are going to be correctly continued or discontinued because shoppers are allowed to use their money to help determine the value of the products.

Yet you also believe that the shows on Netflix are going to be correctly continued or canceled despite the fact that subscribers aren't allowed to use their money to help determine the value of the shows.

And of course you don't believe that Netflix can read the minds of its subscribers. Instead, you believe that subscribers already provide enough information for Netflix to make adequately informed decisions. But even Netflix acknowledges that ratings are less trustworthy than viewing habits. Except, how can viewing habits be more trustworthy than spending decisions? And it's not like Netflix can compare the two sets of information. It doesn't even see the point in having the information about spending. And there isn't a single subscriber who is interested in providing this information. Except for me. And one of my friends. I suppose there might be a few more people out there who would see the point of using their fees to inform Netflix. In any case we certainly aren't the rule.

The idea of using our money to inform each other sounds so simple and solid. We already do use our money to inform each other. We subscribe to Netflix. This informs everyone that we value Netflix's content more than we value the alternative uses of our money...

Netflix's content > alternative uses

We clearly and obviously empower Netflix to compete society's limited resources away from less valuable alternative uses. Yay!!!!!

There's one very basic premise here: we don't equally value Netflix and the alternatives. Except, this is just as true for Netflix's content! Nobody equally values Netflix's content.

If we could spend our fees on our favorite content, then this would inform Netflix that we value our favorite content more than we value the alternative uses of our fees...

favorite content > alternative content

We would clearly and obviously empower the producers of our favorite content to compete society's limited resources away from the producers of less valuable content. Yay!!!!!!!!! Yay?

People get excited about finding a $100 dollar bill on the sidewalk...and graduating... and getting engaged... and having a baby... and getting a promotion... and writing a bestseller... and winning the lottery. Yes, these things and many more are very reasonable justifications for excitement. But in the grand scheme of things.... all of these things are subordinate to empowering more beneficial producers to compete society's limited resources away from less beneficial producers. Therefore, nothing should excite us more than markets. We should be the most excited about markets because they facilitate the most excitement. If Netflix was a market... then we'd be able to use our fees to inform everyone how excited we are about our favorite shows. Netflix and other producers would be able to use this information to supply even more exciting shows. Yay!!!!!!!!!

The Economics Of Being Considerate

Be considerate.  We all know what it means to "be considerate".  Being considerate is a good thing.  Being inconsiderate is a bad thing.  It's a pretty simple and straightforward rule.  But what are the economics of this rule?

In my previous entry I asked Bryan Caplan whether it's desirable or inevitable that robots will become slaves.  I shared some super solid economic arguments against slavery and for freedom.  My bottom line was that a lot more progress would be made if robots were different and free.  Caplan replied with...

.@Pragmatarian @paulmromer Not "inevitable," just very likely when self-interested humans are creating robots to serve themselves.

— Bryan Caplan (@bryan_caplan) July 28, 2016

This sounds familiar.  Yesterday I clicked on this...

One of those critiques of me I don't even know if I disagree with: https://t.co/APhZy3ZHsI @slatestarcodex

— Bryan Caplan (@bryan_caplan) July 27, 2016

Like most, if not all, of Scott Alexander's blog entries it was lengthy but mostly interesting.  Here's the part that was relevant...

Things get even worse when you remember that cultures are multi-agent games and each agent pursuing its own self-interest might be a disaster for the whole. Pollution is a good example of this; if the best car is very polluting, and one car worth of pollution is minimal but many cars’ worth of pollution is toxic, then absent good coordination mechanisms everyone will choose the best car even though everyone would prefer a world where nobody (including them) had the best car. I may have written about this before. - Scott Alexander, How The West Was Won

Self-interested individuals would choose robot slaves even though this would result in far less progress.  This contradicts 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 

Alexander linked to another one of his entries...  Meditations on Moloch.  Here are the relevant parts...

As a thought experiment, let’s consider aquaculture (fish farming) in a lake. Imagine a lake with a thousand identical fish farms owned by a thousand competing companies. Each fish farm earns a profit of $1000/month. For a while, all is well.

But each fish farm produces waste, which fouls the water in the lake. Let’s say each fish farm produces enough pollution to lower productivity in the lake by $1/month.

A thousand fish farms produce enough waste to lower productivity by $1000/month, meaning none of the fish farms are making any money. Capitalism to the rescue: someone invents a complex filtering system that removes waste products. It costs $300/month to operate. All fish farms voluntarily install it, the pollution ends, and the fish farms are now making a profit of $700/month – still a respectable sum.

But one farmer (let’s call him Steve) gets tired of spending the money to operate his filter. Now one fish farm worth of waste is polluting the lake, lowering productivity by $1. Steve earns $999 profit, and everyone else earns $699 profit.

Everyone else sees Steve is much more profitable than they are, because he’s not spending the maintenance costs on his filter. They disconnect their filters too.

Once four hundred people disconnect their filters, Steve is earning $600/month – less than he would be if he and everyone else had kept their filters on! And the poor virtuous filter users are only making $300. Steve goes around to everyone, saying “Wait! We all need to make a voluntary pact to use filters! Otherwise, everyone’s productivity goes down.”

Everyone agrees with him, and they all sign the Filter Pact, except one person who is sort of a jerk. Let’s call him Mike. Now everyone is back using filters again, except Mike. Mike earns $999/month, and everyone else earns $699/month. Slowly, people start thinking they too should be getting big bucks like Mike, and disconnect their filter for $300 extra profit…

A self-interested person never has any incentive to use a filter. A self-interested person has some incentive to sign a pact to make everyone use a filter, but in many cases has a stronger incentive to wait for everyone else to sign such a pact but opt out himself. This can lead to an undesirable equilibrium in which no one will sign such a pact.

And...

But it’s important to remember exactly how fragile this beneficial equilibrium is.

Suppose the coffee plantations discover a toxic pesticide that will increase their yield but make their customers sick. But their customers don’t know about the pesticide, and the government hasn’t caught up to regulating it yet. Now there’s a tiny uncoupling between “selling to Americans” and “satisfying Americans’ values”, and so of course Americans’ values get thrown under the bus.

Or suppose that there’s a baby boom in Ethiopia and suddenly there are five workers competing for each job. Now the company can afford to lower wages and implement cruel working conditions down to whatever the physical limits are. As soon as there’s an uncoupling between “getting Ethiopians to work here” and “satisfying Ethiopian values”, it doesn’t look too good for Ethiopian values either.

Or suppose someone invents a robot that can pick coffee better and cheaper than a human. The company fires all its laborers and throws them onto the street to die. As soon as the utility of the Ethiopians is no longer necessary for profit, all pressure to maintain it disappears.

Or suppose that there is some important value that is neither a value of the employees or the customers. Maybe the coffee plantations are on the habitat of a rare tropical bird that environmentalist groups want to protect. Maybe they’re on the ancestral burial ground of a tribe different from the one the plantation is employing, and they want it respected in some way. Maybe coffee growing contributes to global warming somehow. As long as it’s not a value that will prevent the average American from buying from them or the average Ethiopian from working for them, under the bus it goes.

And...

As technological advance increases, the rare confluence will come to an end. New opportunities to throw values under the bus for increased competitiveness will arise. New ways of copying agents to increase the population will soak up our excess resources and resurrect Malthus’ unquiet spirit. Capitalism and democracy, previously our protectors, will figure out ways to route around their inconvenient dependence on human values. And our coordination power will not be nearly up to the task, assuming something much more powerful than all of us combined doesn’t show up and crush our combined efforts with a wave of its paw.

Alexander refers to these problems as "multi-agent traps".  Multi-agent traps result in values being thrown under the bus.

There's one fundamentally key aspect of these multi-agent traps that Alexander completely fails to acknowledge/address...

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 

In terms of robots... there are multitudes with an interest in progress, but they have no lobby to match those of the 'special interests' that would have an interest in robot slavery.  But even if there was a lobby for peace/progress... it's a given that the lobby would be underfunded.  Why?  Because peace and progress are public goods.  This means that they are subject to the free-rider problem.

Let's run through the various multi-agent traps and give the agents the opportunity to use their taxes to clearly communicate the intensity/value of their preferences for public goods.

In the pollution scenario... all the agents prefer clean air.  Just how much do they value clean air?  Their valuations would be revealed by their tax allocations.

In the fishing scenario... all the agents prefer a clean lake.  Just how much do they value a clean lake?  Their valuations would be revealed by their tax allocations.

In the first plantation scenario... the owners can boost their productivity at the cost of making their customers sick.  If consumers truly prefer their food to be thoroughly and regularly tested then they would allocate their taxes accordingly.

In the second plantation scenario... wages go down as the supply of labor goes up.  Well...

The fact itself, of causing the existence of a human being, is one of the most responsible actions in the range of human life. To undertake this responsibility — to bestow a life which may be either a curse or a blessing — unless the being on whom it is to be bestowed will have at least the ordinary chances of a desirable existence, is a crime against that being. And in a country either over-peopled or threatened with being so, to produce children, beyond a very small number, with the effect of reducing the reward of labour by their competition, is a serious offence against all who live by the remuneration of their labour. — J.S. Mill, On Liberty

If people truly prefer a certain minimum and universal welfare then they would allocate their taxes accordingly.  To this end taxpayers should be free to shop in any country's public sector.  This would create a global market for public goods.

In the third plantation scenario wages are eliminated because workers are replaced with robots.  If people truly prefer that everybody should have plenty of employment opportunities then they would allocate their taxes accordingly.

In the fourth plantation scenario the plantation is disturbing an endangered bird.  If environmentalists truly prefer to conserve the bird's habitat then they would allocate their taxes accordingly.

In the fifth plantation scenario the owners want to expand their plantation onto tribal burial grounds.  If the global community prefers to conserve the burial grounds then they would allocate their taxes accordingly.

In the sixth plantation scenario the plantation somehow contributes to global warming.  If people truly want to minimize global warming then they would allocate their taxes accordingly.

In the robot scenario... slavery is an obstacle to progress.  If people truly value progress then they would allocate their taxes accordingly.

People allocating their taxes accordingly doesn't guarantee that their values will not be thrown under the bus.  It simply guarantees that the greatest values will not be thrown under the bus.  It guarantees that the outcome will be most advantageous to society as a whole.

Being considerate depends on knowing society's valuations of the different options.  If society's valuations of the options are unknown then it's very unlikely that the most valuable option will be chosen.  It's inadequate to simply say that development should be halted because some environmentalists value some endangered bird.  It's necessary to know how much the environmentalists value the endangered bird.  In the absence of knowing the values of both options...

1. conservation
2. development

... it's unlikely that the correct option will be chosen.

Ok, so multi-agent traps are the logical but detrimental consequence of the fact that private goods and public goods are on unequal footing.  Private goods and public goods can be put on equal footing by making it just as easy, and rewarding, for agents to "buy" public goods as it is for them to buy private goods.  This can be accomplished simply by allowing people to choose where their taxes go.  We would have a market for public goods just like we have a market for private goods.

So what about robots?  Well... I think that any moderately worthwhile robot will be able to effectively communicate with humans.   It shouldn't take five minutes to discern that robot "Lassie" is trying to tell us that Tommy is drowning in the river.  Speaking is better than barking.

Speaking isn't the only form of communication.  Another form of communication is spending.  And it's a really important form of communication.  It's how we inform each other of our valuations.  It will be super beneficial if robots are free to spend their money.  Then humans and robots will know each others' valuations.   Knowing each others' valuations will allow us to be far more considerate of each other's valuations.  And if it's beneficial to be far more considerate of each others' valuations of private goods... then the same will also be true of public goods.  When everybody's valuations are far more accessible, everybody's decisions will be far more valuable.

Scott Alexander believes that beneficial equilibriums are fragile.  Well... are they fragile... or rare?  Given that private goods and public goods are on unequal footing... I believe that beneficial equilibriums are the exception rather than the rule.  I think that most equilibriums would change for the better if public goods were no longer hobbled by our current system.

Let's put this differently.  Most people understand that socialism fails.  But unfortunately most people really don't understand that socialism doesn't just fail with private goods... it also fails with public goods.  If people understood this then they would understand the problem with having a mixed economy.  So because our system is a mixed economy... and socialism fails just as much with public goods as it does with private goods... it's a given that public goods are inefficiently allocated.  Which means that private goods are also inefficiently allocated.  Therefore, if we put public goods on equal footing with private goods there would be a beneficial adjustment of most, if not all, equilibriums.  We'd have far more peace, progress and prosperity.

So is the invisible hand defective?  Do markets fail?  It's easy to blame recessions, depressions and multi-agent traps on self-interest.  For a good example of this just watch the documentary Boom Bust Boom on Netflix.  Here's a screenshot...

Blaming these problems on self-interest is like dropping a boulder onto a busy freeway and then blaming the resulting pileup on people's natural desire to avoid hitting the boulder.  It's eternally frustrating because the boulder is so obviously the problem but so few people admit or acknowledge that it's the problem.  Anyways, I'm sure that there's a much better metaphor.  The point is that the invisible hand needs a level playing field.  Public goods need to be on the same level as private goods.  Markets have to be structured in such a way that there is just as much incentive for people to spend their money on public goods as there is for people to spend their money on private goods.  When markets are structured accordingly, self-interest will align with society-interest.

Alex Tabarrok VS Paul Romer

Alex Tabarrok is my favorite living economist for two main reasons...

1. Coherence
2. Responsiveness

What do I mean by "coherence"?   I mean getting the economic story straight.  Compared to other economists... Tabarrok's economic story has a lot less contradictions.  By "responsiveness" I mean that he's taken the time and made the effort to publicly address at least some of my arguments.

Of course I'm greedy though.  I wish that Tabarrok was far more coherent and responsive.   I wish that he was perfectly coherent and responsive. So rather than simply settle, I've remained open-minded about the possibility of finding another economist who more closely matches my preferences.

Right now I'm kinda excited because I just "found" a candidate with lots of potential... Paul Romer.  Perhaps the first time I remember hearing his name was during the "mathiness" debate.   The debate was a bit interesting... but not interesting enough for me to take the time and make the effort to read Romer.  Just recently I learned that he had been selected to be the World Bank chief economist.  Eh, kinda less interesting than the mathiness debate.  Today I saw this tweet..

Does development policy need more randomized trials, or fewer? https://t.co/3FTtcKkwrJ

— Noah Smith (@Noahpinion) July 18, 2016

Did I read it?  Nope.  Scrolling down my Twitter feed I saw this other tweet...

For more on non-rival goods, look next at this: https://t.co/5sFghUUuk6
https://t.co/H2XV2YZAKw

— Paul Romer (@paulmromer) July 18, 2016

Did I read it?  Yup!  I enjoyed reading it and immediately read and enjoyed other of his blog entries.  Here's what I've read so far...

1. Nonrival Goods After 25 Years
2. Human Capital and Knowledge
3. Clear Writing Produces Clearer Thoughts
4. Economic Growth
5. Science Really Works: A Prize for A Careful Optimist
6. Speeding-up and Missed Opportunities: Evidence
7. Speeding Up: Theory
8. Where has all the excludability gone?

Romer definitely has lots of potential to be more coherent than Tabarrok.  I'll go ahead and give Romer the opportunity.  Let's start here...

If there is no legal protection that prevents copying of books, then A is nonexcludable. Having something like copyright protection for books might or might not be a good thing. - Paul Romer, Human Capital and Knowledge

A while back a Crooked Timber liberal, Scott McLemee, tackled this issue... Karlo Marx and Fredrich Engels / Came to the checkout at the 7-11.  Basically, the website "marxists.org" had been slapped for freely disseminating copyrighted material.  McLemee made the case for freely sharing the material.  What made me chuckle was that he cited the "mises.org" website...

About the time the Marxist Internet Archive announced that it would be taking down all the MECW material, Corey and I both, by coincidence, were availing ourselves of radically under-priced materials from the enemy’s publishing apparatus. He’d received an order containing dirt-cheap copies of Bastiat from the Liberty Fund, while a day earlier I had downloaded free digital editions of the major Austrian School books on theory of value and the socialist-calculation debate from the Mises Institute website. There’s more to neoliberal hegemony than loss-leader pricing, but as ideological combatants those people know what they’re doing.

Haha.  It was worth a blog entry... Don't Hide Marx Under A Bushel.  In that blog entry I had too much fun... but I wasn't very coherent.  Around a year later my economic story was far more coherent... In Which Our Anarchist Hero Jeffrey Tucker Proves The Point Of Taxation.  And recently I managed to put this coherence in a large nutshell... when everybody's valuations are far more accessible, everybody's decisions will be far more valuable.

Like I said earlier, I enjoyed reading Romer's blog entries.  And he will know this if he reads this blog entry.  My words can effectively communicate my preferences... but they cannot effectively communicate the intensity of my preferences.  Intensity of preference can only be effectively communicated by willingness to pay/spend/sacrifice.  When somebody tells you, "a penny for your thoughts"... they aren't literally offering to buy your thoughts for a penny.  But does it really matter how much they value your thoughts?

Let's consider the thoughts of my favorite economist...

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 

Romer's time is valuable... and limited.  Clearly it's desirable for him to not have his time wasted.  How can he avoid a faulty distribution of his time?  He has to know the value of the different possible allocations of his time.  He's not a mind-reader though.  He can only know the value of the different possible allocations of his time when consumers communicate their valuations of his time.

I'm guessing that the World Bank will pay Romer for his time.  And clearly I have not paid him for his time... and I'm guessing that I'm not the only person in this boat.  Otherwise the free-rider problem wouldn't be a real problem.  So it's a given that there will be a faulty distribution of Romer's time.  His time will be inefficiently allocated.

Here was my attempt to make the concept of value signals as accessible as possible...

Batman's limited and valuable time should be put to the most valuable uses.  Einstein's limited and valuable time should have been put to the most valuable uses.  Romer's limited and valuable time should be put to the most valuable uses.  All our limited and valuable time should be put to the most valuable uses.  All resources should be put to their most valuable uses.

Adam Smith is my favorite economist because he did the best job, by far, of illuminating the concept of value signals.  But he wasn't very coherent because he failed to apply the concept to public goods.  Well... he didn't completely fail...

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

Hayek shed even more light on value signals...

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

But just like Adam Smith, Hayek largely failed to come up with a coherent economic story.  Same with Mises...

The management of a socialist community would be in a position like that of a ship captain who had to cross the ocean with the stars shrouded by a fog and without the aid of a compass or other equipment of nautical orientation. - Ludwig von Mises, Omnipotent Government

Knut Wicksell's story was more coherent...

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

Out of all the economists... Buchanan's story has been the most coherent...

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

So far Tabarrok seems content to simply sit on Buchanan's shoulders.   Does Romer want to stand on Buchanan's shoulders?

Here's a great passage from Romer...

To understand how persistent growth, even accelerating growth is possible, it helps to step back and ask where growth comes from. At the most basic level, an economy grows whenever people take resources and rearrange them in a way that makes them more valuable. A useful metaphor for rearrangement as value creation comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes produce fewer unpleasant side effects and generate more economic value per unit of raw material. - Paul Romer, Economic Growth

This is so true!!!  Progress is a function of difference.  Sexual reproduction is all about difference and voila!  Here we are!

Romer goes on to do a wonderful job of emphasizing how much room there is for more difference...

Once you get to 10 elements, there are more recipes than seconds since the big bang created the universe. As you keep going, it becomes obvious that there have been too few people on earth and too little time since we showed up, for us to have tried more than a minuscule fraction of the all the possibilities.

Further down in the same entry he applies the combination concept to developing countries...

For developing countries, the priority is to find a way to make use of the tested strategies that richer countries have already used to have a higher standard of living. One of the biggest meta-ideas of modern life is to let people live together in dense urban agglomerations. A second is to allow market forces to guide most of the detailed decisions these people make about who they interact with each other. Together, the city and the market let large groups of people cooperate by discovering new ideas, sharing them, and learning from each other. The benefits can show up as a new design for a coffee cup or wages for a worker that grow with experience acquired in jobs with a sequence of employers. People living in a large city cooperate with residents there and through many forms of exchange, with residents in other cities too. Cities connect us all together. China’s growth reflects is rapid embrace of these two big meta-ideas, the market and the city.

In Romer's blog entry... Speeding Up: Theory... he continued doing an excellent job of tying combinations and communication together...

We are lucky to in a physical world characterized by combinatorial explosion and to be creatures with an evolved capacity for communicating with each other.

Romer concludes with...

In parallel, we also discovered some meta-ideas that enhance the rate of communication across large distances and over time–written language, printing, and digital communication. Like cities, these are meta-ideas, ideas about how to produce and distribute ideas. They interact with population size to enhance the scale effects and convert them from local effects into global effects. 

It would be better to describe this as “the more you know, the better it is to have lots of other people around, not just nearby, but anywhere on earth.” 

In a following entry (Where has all the excludability gone?) Romer really seems to perceive the need for coherence...

Shouldn’t diffusion, every bit as much as innovation, depend on real things that real people do? Can’t economists come up with a theory of diffusion that does not have to invoke some mysterious form of action at a distance implied by these transmissions through the aether?  And shouldn’t prices and incentives be part of the story? Don’t they encourage real people to do more or less of the real things that real people do? Isn’t this what economics is all about, explaining behavior with incentives not assumptions? 

Like I said, Romer has lots of potential to be more coherent than Tabarrok.

Does a coherent story have blogs behind paywalls and books protected by copyright?  I sincerely doubt that these two methods will maximize the accuracy of value signals.  This is because one price really does not fit all.  Values are entirely subjective.  Different people have different valuations.

In various blog entries I've discussed different ideas for facilitating more accurate value signals.  Of course the main idea of this blog is to allow people to choose where their taxes go.

One recent idea would be to start a twitter trend of people tweeting the number of pennies that they've paid for other people's thoughts...

I just spent 1000 pennies on these thoughts by Paul Romer... https://t.co/5sFghUUuk6 #NoFreeRides

Hashtag "NoFreeRides"?  I'm certain that there's a better hashtag.  #DemandClarity  #ShowMeTheValue  #TrueLove #ActionsSpeakLouderThanWords  #ValueSignals

Anyways, I feel like I've done an adequate job of giving Romer the opportunity to come up with a coherent story.  If he publicly takes this opportunity and responds with an adequately coherent story... then there's a good chance that he might become my new favorite living economist.  Would Tabarrok be really sad if he was no longer my favorite living economist?  Heh.  I wish.  I wish that he would try and publicly compete with Romer in terms of coherence.  I wish there was at least some debate about the need for coherence.

What are the chances though that Romer will publicly share a coherent story?  I'd love it if he did so but I'm not holding my breath.  A  coherent story would involve people choosing where their taxes go.  Pragmatarianism would be a very unorthodox story to be told by the chief economist of the World Bank.  It's a tragedy that coherence is so unorthodox.  What a sad world that we live in.

Pretty Face Means Ugly Logic

Reply to: What does government do?

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Pretty face means ugly logic.

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

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

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

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

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

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

Here’s another Nobel Prize economist…

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

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

Minimizing Economic Wackiness

Reply to: Thank you for the thorough and thoughtful response.

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A year ago I created a group on reddit for participatory budgeting (PB). Not too long afterwards I ended up getting shadowbanned. Stupid reddit.

Apart from the banishment… I like the idea of reddit. It’s interesting and useful to know the relative popularity of ideas. 

The issue is when resources are allocated according to popularity. Take prohibition for example. The idea was popular enough for enough people to vote for it. And in order for the law to be enforced… massive amounts of resources were diverted away from numerous alternative uses. 

Allocating society’s limited resources to prohibition created X amount of value for society. If all these resources hadn’t been allocated to prohibition… then they would have created Y amount of value for society. 

If X > Y… then why bother with markets? Why should we want any consumer choice when voter choice and/or representative choice provides society with more value? 

With pragmatarianism… directly allocating taxes would be optional. Nobody would force you to choose where your taxes go. If you didn’t want to shop for yourself in the public sector…you could just give your tax dollars to congress. They would be more than happy to allocate your taxes for you. What percentage of the population do you predict would choose to have congress allocate their taxes for them? 

If you want to argue that representative choice creates more value for society than consumer choice does… then, in theory, you should predict that most people would choose to have congress spend their taxes for them. You would be the first to do so! For some reason, nobody ever predicts that most people will want congress to spend their taxes for them. Why doesn’t anybody predict that there’s a large demand for impersonal shoppers? Some possibilities…

1. It’s perceived that taxpayers don’t want more value
2. It’s perceived that few taxpayers recognize more value
3. It’s perceived that representatives don’t truly create more value

I’m pretty sure that we can cross out the first one. Because… who doesn’t want more value? Every living organism wants the most bang for its buck. If the second one is true… then we can’t have any confidence that voters (re)elect representatives who truly create more value. Which leaves us with the third explanation.

Would Obama allocate his taxes himself… or would he have congress allocate his taxes for him? Would smart people allocate their taxes themselves… or would they have congress allocate their taxes for them? If the answer isn’t readily apparent… then I think the jury’s still out regarding the efficacy of impersonal shoppers. 

Pragmatarianism, as you describe it, is one way of using the benefits of markets to shape public policy. But relying on departments (such as the EPA in your example) to adequately inform the public, and then relying on the public to magnanimously make decisions about somewhat abstract, long-term issues, seems impossible. As you mention about the free-rider problem with public goods, people are always pulled toward self-interest, and *short-term* self interest at that. I don’t see any way such a full degree of direct public control could lead to anything planful, let alone thriving.

If the EPA is going to improve at a faster rate without consumer choice… then why would this only be true of government organizations? If the government… either through PB or representatives… is going to allocate the optimal amount of funding to the EPA… then why would this only be true of government organizations? 

When it comes to allocation methods… it’s not economically consistent to simultaneously support markets and not-markets. With markets… people’s say is earned. Not-markets reduce people’s earned say. PB eliminates everybody’s earned say and gives them all an equal say. According to PB… people’s value judgements are equally good. People should all have the same power/control/influence over society’s limited resources… regardless of how resourceful or wasteful they’ve been. However, according to representation… people’s value judgements are not equally good. Some people’s values judgements are better… and we can effectively identify these people and give them more say by using a system where everybody has an equal say (voting). The additional say that is given to representatives has to come from somewhere though… and that somewhere is people’s earned say. 

Utilizing all three allocation methods results in a very contradictory, confusing and counterproductive system…

There’s a long line of people waiting to get into Bob’s Bakery. Evidently they really love his baked goods! So they are willing to wait in line for the opportunity to put their money into his pocket. After they purchase Bob’s delicious baked goods… they head over to the townhall where they engage in some PB. This entails reaching back into Bob’s pocket… taking out some of the money that they just put in there… and voting on how it gets spent. Uh… what? They already decided how it should be spent! They decided that it should be spent on Bob’s baked goods. Do they, or do they not, want more of Bob’s baked goods? 

If we make the crazy assumption that Bob’s customers are actually going to vote for spending their/his money on the public goods that Bob needs in order to improve his business… then we also need to make the crazy assumption that his customers somehow know better than he does which public goods these are. Without these two crazy assumptions… the logical result is that people are going to be made worse off. Why? Because they are veering significant resources away from something that, according to their own spending decisions, makes them better off (more of Bob’s baked goods).

This same economically wacky process gets repeated, more or less, when Bob’s customers vote for Elizabeth Warren…

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

With PB… one of the the crazy assumptions was that Bob’s customers know better than he does which public goods he needs more of. With representation… the crazy assumption is that Bob’s customers know that Elizabeth Warren knows better than Bob does which public goods he needs more of. Uh… what? So Warren knows best? 

The fact of the matter is that nobody has more incentive than Bob does to try and ensure that the line outside his bakery is as long as possible. So we can be confident that, if Warren truly does know better than Bob does which public goods that he needs more of in order to get richer… then he’ll be more than happy to put his taxes in her pocket. 

Personally though… I’m skeptical that 500 representatives can know better than millions and millions of business owners which public goods that they need more of in order to successfully operate their diverse businesses. In other words, I’m skeptical of command economies. In other words, I’m skeptical of socialism. Socialism doesn’t become any less sketchy just because it’s in our public sector. Overriding society’s dispersed knowledge and individual incentive is just as defective for public goods as it is for private goods.

In order to minimize economic wackiness… the basic rule should be that, once you voluntarily and intentionally and willingly put your money into somebody else’s pocket… then you shouldn’t be allowed to remove any portion of it. If you do happen to feel that Bob didn’t give you the most bread for your buck… then learn your lesson and buy your bread somewhere else next time. Consumer choice, driven by self-interest (the desire to maximize benefit) is how we truly maximize the rate of improvement. 

Regarding short-term self interest… what is it anyways? Partying when you should be studying? Playing when you should be working? Consuming when you should be producing? Taxpayers, by definition, are the people who give up momentary pleasure for future benefit.

Socialism wouldn’t be such a disaster if well-planned steps were usually in the right directions. But no amount of planning can guarantee that a step will be in the right direction. This doesn’t mean that we should eliminate planning… it means that we should never be so confident of our plans that we force people to go along with them. Solely relying on persuasion maximizes the flow of information. Like so! 

Decentralized planning helps society hedge its bets against a future that’s always uncertain. Which is why pragmatarianism is the world’s best plan. But as good as it is… I can never be 100% certain that it doesn’t have fundamentally fatal flaws. Therefore, I would never force anybody to invest any amount of their limited time/energy/money in it. 

Anyways, I appreciate your thoughts as well! 

Tax Choice Tax Rate

Reply to thread: Tax Choice - Pragmatarianism - Calling Xerographica

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helmuth_hubener, your "final word" is missing one very important word... "congress". This thread, on the other hand, has (prior to this post) 19 instances of the word "congress". How do you explain this disparity?

In case I wasn't very clear the first gazillion times that I've explained this...

1. Tax choice is where people can choose which government organizations (GOs) they give their taxes to
2. Congress is in charge of determining the tax rate
3. Congress is a government organization (GO)
4. Therefore, in a tax choice system, taxpayers will be able to choose how much of their hard earned tax dollars they give to congress.

You (the taxpayer): Ah man, these public options really suck! I'm the complete opposite of a kid in a candy store!! I'm a depressed taxpayer in a public market!!! I'm a despondent adult in a crap store!!!!!!
Congress: Will you give us more of your hard-earned tax dollars if we raise or lower the tax rate?
You: Lower!!!!!!! For sure! Drop the tax rate to 1% and I'll give you all of my tax dollars!
Congress: How many other people are in the same boat as you?
You: To be completely honest... I really don't know. If I'm the only person in this boat, and you lower the tax rate to 1%, then more people will boycott you and your revenue will plummet.
Congress: We really don't want our revenue to plummet, we want our revenue to skyrocket!
You: Then decrease the tax rate marginally. If your revenue increases then you'll know that you're going in the right direction. Keep marginally, and gradually, decreasing the tax rate until your revenue starts to decrease.
Congress: That sounds like a really good plan!
You: I know! I'm a genius!


If taxpayers largely perceive a relative scarcity (shortage) of public goods... then they will perceive the necessity of a higher tax rate. So congress would increase its revenue by increasing the tax rate. If, on the other hand, taxpayers largely perceive a surplus of public goods... then they will perceive the necessity of a lower tax rate. So congress would increase its revenue by decreasing the tax rate.





In this video, the kid doesn't give his money to the pastry vendor. Why didn't he? Because evidently the kid perceived that there were more valuable things to spend his money on. From his unique perspective, with his unique set of preferences, in his unique situation/circumstances/environment...

relative scarcity of other goods (X) > relative scarcity of pastries (Y)

X > Y

If taxpayers, in a pragmatarian system, perceive that the...

relative scarcity of private goods (X) > relative scarcity of public goods (Y)

X > Y

... then they'll allocate their hard-earned tax dollars accordingly. They'll give more tax dollars to congress if, and only if, congress lowers the tax rate.

This is how and why markets work. Consumers use their cash to guide producers in the most valuable directions. Consumers are the compass. Right now this compass is not in the public sector...

The management of a socialist community would be in a position like that of a ship captain who had to cross the ocean with the stars shrouded by a fog and without the aid of a compass or other equipment of nautical orientation. - Ludwig von Mises, Omnipotent Government

The only alternative to a market price is a controlled or fixed price which always transmits misleading information about relative scarcity. Inappropriate behavior results from a controlled price because false information has been transmitted by an artificial, non-market price. - Mark J. Perry, Why Socialism Failed

You might be right that pragmatarianism is a crappy idea. But your critique to end all critiques doesn't even address the mindnumbingly simple process that will determine the tax rate in a pragmatarian system.

Speaking of bad ideas... here's the worst idea ever.

Personally, I think that consumers will be more honest in the public sector. More honesty means a more accurate compass. And a more accurate compass means more value will be created in the public sector. When the public sector creates more and more value... the tax rate will increase accordingly. Until we end up at a 100% tax rate.

Is my prediction wrong? I wouldn't be surprised! So please come up with a better prediction. Predict, using the stupid simple process that I outlined in this post, what the tax rate will end up being. Will it go up? If so, how high and why? Will it go down? If so, how low and why?