Tag: incentives

Every Industry Gets Worse When Government Gets Involved

This is easily provable with Public Choice Theory, and consistently proven in practice.

Contrary to the absurdly naive belief that monopolizing an industry will produce “efficiencies”, it has the opposite effect.  All the wrong things are incentivized and no one has any clear signal of what creates value. (See “Socialist Calculation Problem“)

Antony Davies shared this depressing graph with me last week.  If you’ve been to a health care provider in the last few years, you’ve felt the pain this causes in the realm of customer experience.

 

Non-Physicians in Health Care

Intellectual Property and Incentives

The standard theory behind support for creating a legal monopoly for certain ideas, processes, and inventions is that absent such promise of monopoly there would be far less innovation.

It has a surface level logic to it.  People respond to incentives.  Legal monopoly means more money for the one who has it.  People tend to like the money incentive.  Therefore, more people will innovate because they have the incentive to capture greater rewards by securing a monopoly on the production or sale of their invention.

The weird thing is it doesn’t play out like this in the real world.  Something is missing.

Inventions typically spring from technicians and masters at a craft.  These are the types who are driven by a passion for what they do.  They want to solve problems, discover things, build things, and create things.  So they do.  If they seek a legal monopoly on their invention this happens after the fact.  It is hard to imagine many innovators saying, “Oh wow!  Think of possibility of solving this chemistry problem and discovering an entirely new way to do X!  Wait…get a lawyer in the lab before I go any further.  I refuse to make any discoveries without proof that I’ll be protected from competition once I do.”

And innovation doesn’t look like that.  You can see this by observing areas without the ability to get legal monopolies on their inventions.  Fashion, food, and football are a few of my favorites.  You can copy, borrow, and imitate fashion designs, recipes, and defensive schemes with abandon.  Many people do.  Yet each of these fields is as dynamic as any industry, constantly evolving and introducing new things.  Apparently the innovative offensive coordinator, cook, and designer don’t require the promise of monopoly to entice them to innovate.

People do respond to incentives.  This is a fact of life and one that need not be overturned to overturn the belief that IP laws are required for innovation.  Any good economist will tell you that incentives are many, and value is subjective.  The innovators are certainly responsive to money incentives, but 1) legal monopoly is not the only or best way to earn money for inventions and, 2) money isn’t the only incentive driving invention.

As for number one, consider how many people are typically working on a similar innovation simultaneously.  With the current IP regime, only one can get the monopoly.  If we want to take incentives seriously, what kind of incentive does this create for all the others?  Furthermore, the one most likely to get the monopoly is the one with all the lawyers and accountants and resources and willingness to take others to court, not the one with the greatest contribution to the discovery.  This would seem to drive upstart innovators away from the task for fear of being sued by the big guys as much or more than it would drive them to innovate for the possible promise of securing a patent.

As for number two, while the promise of monopoly may be the dominant incentive for lawyers and R&D departments, it’s not the dominant incentive for inventors.  They innovate first, driven by a passion for the task, the desire to solve a problem, create their dream, help a colleague, or improve their own daily life with some small innovation.  Yes, they want and seek money for the invention once successful, but the absence of a promise of monopoly does not stop them from creating.

Understanding incentives is crucial to really understanding how the world works and how to change it.  But an elementary look at incentives that examines only dollars and cents and only their intended, not actual, beneficiaries will not get you very far.

For more on the problems with intellectual property laws, check out “Against Intellectual Monopoly“.  It’s excellent.

Three Types of Racism

  1. Scientific Racism: “Some races are biologically inferior and should therefore be treated differently.”
  2. Cultural Racism: “Some races are culturally inferior and should therefore be made to adapt to the superior culture.”
  3. Institutional Racism: “Some institutions have bad incentives that attract scientific and cultural racists and enable them to act on their racism without fear of bad consequences.”

All three forms of racism exist.  I think the first two statements above are false, while the third is true.

Those who believe in either of the first two are not likely to change easily, and almost never through direct argument.  A steady drip of experience could potentially affect them, and more likely a generational change.

The third type of racism is the kind that can be meaningfully alleviated by ignoring, defying, or innovating around the bad institutions.  When the bad institutions are undermined the first two forms of racism tend to shrivel and go into hiding.  The existence of bad institutions protects and perpetuates racist beliefs and actions.

In the long term, markets do not reward racism.  Free association does not perpetuate it.  It is for this reason that racists everywhere are always forced to go to violent state institutions to codify racism in the face of market pressure in the opposite direction.  When the market isn’t racist enough, the law is invoked.

You can justifiably scream about people’s horrible beliefs, but until you alter the incentives they face the outcomes are unlikely to change.

A Tale of Two Cities Part 2: Why People are Dumb at the Ballot Box

This is the sequel to a post about the two spheres we all dwell in – the political and the civil – and how each affect our behavior.

Originally published in The Freeman.

Why do so many San Franciscans want to curb Airbnb’s innovative business model?

Proposition F would have restricted the number of nights owners could list their homes and which types of rooms could be listed; it would also have required a litany of paperwork and reporting to a city department. Listings that did not meet city standards would have incurred fines of up to $1,000 per day. The details are many, but the thrust is obvious: this proposal was to make Airbnb far less successful at creating value for customers and investors.

The proposal ultimately failed, but it wasn’t a landslide. Forty-four percent of voters supported it. Nearly half of the voters in a city that owes its recent prosperity and identity to this kind of innovative company wanted to strangle one of the geese on whose eggs they are feasting.

Most political action is signaling.

The simplest explanation is that proponents of this proposal were the minority of businesses and individuals who are in direct competition with Airbnb — hotels and those working or investing with them. True, but something deeper is at work. A surprising number of investors, entrepreneurs, and everyday residents of the city who are not involved with competing businesses voiced their support for the proposal. Some supporters were even Airbnb investors.

How could this be?

Here are five reasons (by no means an exhaustive list) why people behave so badly in the political realm.

1. Other People’s Problems

Milton Friedman famously described the four ways to spend money. You can spend your own money on yourself, your own money on someone else, someone else’s money on yourself, or someone else’s money on someone else. It’s clear that you’ll be most judicious in the first scenario, and less so in each that follows.

All political issues are a case of the fourth scenario, even when money is not directly involved. You’re voting on the use of resources that aren’t yours — the pool of taxpayer dollars that fund government bureaucracy — to solve someone else’s problem, in this case hoteliers threatened by competition and San Francisco residents supposedly being pushed out of affordable housing.

Ballot initiatives tell us that some people, somewhere, are having some kind of problem — and that we can vote to make it better. It’ll cost you nothing (at least nothing you can see at the moment), so why not?

Not only voters, but also the regulators, enforcers, and drafters of such propositions are so far removed from the issue at hand and have no personal stake in the outcome that it is impossible for them to make decisions or draft policies without unintended consequences.

2. Information Issues

Proposition F is ridiculously complex. To cast a fully informed vote on the Prop F, one would need to begin by reading all 21 pages of legal text. What’s more, the costs of obtaining the information far exceed the probability that your informed vote will be decisive. The result is what economists call “rational ignorance.”

Customers, employees, managers, and investors of Airbnb are best suited to optimize the service. Even the company’s competitors are in an excellent position to curb it or force it to improve if they channel their efforts where the information matters, namely in the markets where they stand to lose or gain.

3. Signaling for Survival

Most political action is signaling. It’s not so much that people want to buy American or recycle everything — we know this because when their own money is on the line in the real world of trade-offs, they mostly don’t. But people want to be seen as the kind of person who buys American or supports recycling. There is tremendous pressure in the political sphere to prove to everyone that you support all the right things — especially things that come at a direct personal cost to you. This proves you care about that abstraction called “society.”

Once control by force is an option, a great deal of otherwise productive energy and otherwise creative people are drawn into the crooked craft of politics.

The best thing a rich person can do in the political sphere is vote for higher taxes on the rich. The best thing an Airbnb investor can do is claim to support regulations that restrict Airbnb. You’ll get lots of cheap signal points, even if what you support would actually be bad for everyone.

4. Binary Choices

Voting is a yes or no affair. The political sphere is incapable of genuine pluralism. Imagine if markets worked the same way. What if your local grocery store sent out a survey asking you to vote on which kind of wine you wanted them to stock, or how much, or at what price (with any losses to be made up by adjusting other prices)?

Can Airbnb be improved? Of course. Can a bunch of people with no control over the outcome and little skin in the game be given an up or down vote on a single policy proposal and make it better? Don’t be silly.

The adaptability, nuance, and diversity of options, offerings, and solutions in a market are the greatest strength and the very stuff on which the startup scene was built. Cramming broad society-wide solutions into binary choices is absurd.

5. The Problem of Power

The infamous Stanford prison experiment didn’t go horribly wrong because the wrong batch of subjects was chosen: it was a case of dangerous institutions and incentives. When rules are enforced by raw power, the person who wields that power has more control than any human being can responsibly handle.

Contrary to Thomas Hobbes, it is not the “state of nature” that is a war of all against all; it is Leviathan that rewards force over cooperation and cultivates the worst traits. Once control by force is an option, a great deal of otherwise productive energy and otherwise creative people are drawn into the crooked craft of politics.

F.A. Hayek wrote at length in The Road to Serfdom about why, in the political sphere, the worst get on top. It’s a predictable outcome of a powerful state.

Democracy doesn’t keep this tendency in check so much as it directs the power toward those who are best able to appeal to the desire of rationally ignorant voters to signal the trendy positions on the latest issues.

Focus on Freedom

The innovative startup founders on the San Francisco scene are an amazing force for good when they are pursuing their own interests within the incentive structure of civil society. Not one of them would remain a positive influence if they were granted monopoly power through the ballot box. Nor would their customers: even the most forward-thinking minds in the most innovative city in the world become petty and stagnant when operating within the confines of the political sphere.

When you act as a consumer and choose which kind of vacation housing to purchase, your action sends information and incentives rippling through the market price system, helping entrepreneurs guide resources to their highest valued use. When you act as a voter to support or reject a policy, you create losers and enemies, and your vote generates a host of destructive effects.

If you want a freer, better world, you’ve got to build it in the private sphere.

Entrepreneurship Needs the Right Context

Entrepreneurship is really sexy right now.  Startup founders are like rock stars and you can’t go a day without seeing articles about them.  As far as it goes, I welcome this trend.  Entrepreneurship, as J.B. Say might define it, is the act of moving resources from lower to higher valued uses, or more concretely, creating a new process or product to solve old problems in innovative ways.  This seems a pretty good thing to glorify, at least compared with some other superficial traits that get a lot of attention.

Still, if entrepreneurship is praised across the board, regardless of the context, bad things can happen.

Absent competition and markets, being entrepreneurial has no value.  In fact, it can destroy value if channeled into the political process.  Political entrepreneurs find new ways to access resources first taken from others by force (taxation), and therefore do not create wealth.  They shift existing wealth around with no value-add, because the profit/loss signals are short-circuited.  Furthermore, they divert resources from productive activity to lobbying, currying favor, or massive projects with populist appeal but no market value.

Just about any entrepreneurial endeavor with the words “green” or “sustainable” has a high likelihood of being a fraudulent political game rather than genuine value creation.  The web of grants and subsidies and tax incentives and price supports and mandates in this industry make it all but impossible to identify real value creation as distinct from political shenanigans.  There are a great many media friendly entrepreneurs who chase government dollars instead of private investor or customer dollars, which are the real indicator of value creation.

Furthermore, all the buzz about entrepreneurship has given tech founders a huge platform from which to weigh in on a great many other issues.  Many people assume anyone smart enough to build a great app or billion dollar company could improve public policy.  The problem is that policy doesn’t get debated and implemented in a startup environment, but a monopolized, violence-backed, and fundamentally warped institution with all the wrong incentives.  The technocratic desire many startup types have to make gov’t more like a Silicon Valley company is what Hayek might call the fatal conceit.  It won’t work.  “If only smart people would control all the resources (and the guns that seize them) we’d make public infrastructure flawless!”  This kind of thinking is more dangerous, even if more noble on its face, than political actors openly seeking their own enrichment and not trying to solve grand problems with central plans.

The same thing happened in the industrial era.  Titans like Vanderbilt, Rockefeller, Morgan, and Carnegie were heroes because of their amazing success at improving the world through entrepreneurial action in the market.  When they turned their attention to politics, Gilded Age entrepreneurs built up a horrific behemoth of graft and monopoly that only slowed progress.

In a free or mostly free market entrepreneurs are the greatest force for good the world has ever known.  More than any amount of philanthropy or good intentions.  Outside the market context there is nothing inherently noble about entrepreneurship, and when directed to the political process it can be downright destructive.

One Simple Thing That Will Help You Live Your Values

In my weekly email to the Praxis participants and alumni, I talked about the power of aligning your values with the incentives you face, and the danger of having them out of sync.  It’s easy to overestimate our own willpower and ability to do the right thing even when the wrong thing is rewarded.  I think the best strategy for staying true to your values is to assume that you have zero willpower and stay out of systems that incentivize you to violate your values.  The Proverbs recommend taking the long way home over walking the path that goes by the house of the “wayward woman”, because you shouldn’t trust your ability to resist temptation.

One of the easiest ways is to consider institutions or laws that violate your values.  Then try to avoid all situations where you benefit from them.  It’s not always easy or possible (I may dislike government provision of roads, yet their near monopoly in this realm makes it hard for me to not benefit from and use a new road), but it often is more doable than we assume.  Wherever it is, try to put yourself in a position where your values align with your incentives.  Don’t get a job at an agency you think shouldn’t exist.  Don’t take a contract that incentivizes overcharging or dragging out a project, if you value thrift, honesty, and work ethic.

The analogy I used in my email was, if stealing violates your core values, try not to put yourself in a position where you are desperately hungry and sitting next to someone else’s unattended apple cart for hours on end.  No one is so strong that they can resists incentives to violate values indefinitely.

How Change Happens – Higher Ed. Edition

The current higher education model is flawed.  If we’re serious about changing it, first we need to get serious about understanding how social change happens.  Intentions and action are not enough to bring about desired ends.  We need an understanding of the causal relationships involved in order to effectively bring about change.

The great truth that flies in the face of civics textbooks and popular myth is that politics is not the source of social change.  It’s more like the last in a line of indicators of cultural shifts that have already occurred.  Politicians and the policies they create only change after the new approach is sufficiently beneficial to the right interests, and sufficiently tolerable to the public at large to help, or at least not harm, political careers.  Of course some politicians guess wrong and suffer accordingly, but by and large the political marketplace tends toward preservation of the status quo until a new direction is imperative for survival.

An entire, and entirely fascinating, branch of political economy called Public Choice Theory examines the incentives at work in the political marketplace in depth, and I highly encourage anyone attracted to political action to gain a working knowledge of this field.  It reveals, in short, that incentives baked into the democratic system create and perpetuate policies that are bad for the public at large, and good for particular concentrated interests.  What Public Choice has a difficult time accounting for is the role of changing beliefs.  There are countless policies that, based purely on the incentives of various interests, ought to be in place but are not, or vice versa.  Some things are simply out of bounds, no matter how much a particular group might benefit and be willing to lobby, because the general public finds them unacceptable.

Contrary to the seemingly ironclad rule of interest driven politics, public beliefs can and do change, and dramatically sometimes, putting parameters around the area within which political actors can ply their trade.  Slavery is a striking example.  At one point, it would’ve been hard to get elected, at least in some areas, if you publicly supported abolition.  Not too many decades later, it’s unthinkable to get elected anywhere if you’ve ever even joked about supporting slavery.  There is certainly a complex relationship between changing economic incentives and public beliefs, but it is undeniable that the about-face on the ethics of slavery was more than a mere shift in power among competing interests.  What most of the public found tolerable they now find reprehensible.

Our institutions are formed by incentives, and incentives are constrained by beliefs.  That makes the beliefs of the public the ultimate key to change.  Smaller changes might occur within the window of things already publicly acceptable, but major change requires a shift in that window.  How to change those beliefs?  There are two primary drivers, both of which feed each other; ideas and experiences.

Ideas are the raw data that form beliefs.  If you accept the idea that minimum wage laws make lower skilled individuals less employable, and you accept the idea that a society with fewer unemployed persons is desirable, then you will have the belief that minimum wage laws are bad.  If, on the other hand, you’ve never really thought about the economics behind minimum wage at all, but your low skilled neighbor lost his job when minimum wage increased, that experience might also cause you to believe minimum wage laws are bad.

I spent a good part of my life focusing entirely on disseminating ideas as a way of changing belief.  It was fulfilling and, I think, valuable work.  But it wasn’t until relatively recently that I began to understand the immense value of experience as a vital second prong when it comes to changing beliefs and the world.

Consider the difficulty of convincing your mother that the New York City taxi cartel is inefficient or immoral.  It requires a great deal of economic theory or philosophizing about rights and coercion.  Your mom might have other things she enjoys more than reading books on these subjects.  Even if you convince her, her newfound belief will probably barely register among things she cares about.  Sure, taxis aren’t the greatest.  So what?  She’s never had that bad an experience.  Even if a policy change to end the cartel were possible, your mom mighn’t pay any attention, or she may be concerned about what the new world without cartels would look like in practice.

Now consider recommending your mom use Uber on her next trip in to Manhattan.  She uses it, likes it, and becomes a regular customer.  She may be completely ignorant of the current cab cartel and the problems with it, but she’s now a believer in an alternative system.  If Uber comes under attack from vested interests, she’ll defend it.  If the chance to end the cartel comes up, she won’t fear because she already knows what the world looks like without it.  She can’t easily be convinced out of her experience.

It is for this reason that dictatorial countries not only ban literature that propagates new ideas, but also goods and services that compete with government monopolies and let people experience something better.  The Soviet Union feared blue jeans, jazz, and Marlboro cigarettes as much as free market textbooks.

If we want to break out of the educational rut it requires new ideas and new experiences.  We mustn’t only talk about new approaches, we must build alternatives.  The best part is, you don’t have to wait on anyone.  You can take your own path right now, and by so doing not only improve your life, but serve as an example to others of what’s possible outside the status quo.  Educational entrepreneurs, not just intellectuals, will change the hidebound approach to education.  It’s already happening.

While policymakers, pundits, professors, and provosts squabble about the future of higher education and jockey to secure their position, entrepreneurs are busy creating and delivering alternatives across the globe.  The educational consumer is enjoying new experiences and getting new ideas about education in the process.  The old guard can argue any which way they like, but at the end of the day they’ll have to prove more valuable to the learner than the myriad new options.  All the protections and advantages in the world can’t stop competition now.  Technology has helped break it wide open.

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Excerpted from The Future of School.

Why Pool Attendants Are Better Than Bureaucrats

Originally published in the Freeman, and there is also a mini podcast version below.

“We’re not checking IDs today,” the pool attendant told me.

We have a nice pool for the neighborhood, maintained with HOA dues. The homeowners association has tried different methods of monitoring who comes in to keep nonresidents from filling up the pool and squeezing out dues-paying members. A few times last summer, this was a problem. This year, a new company was hired to issue IDs and ensure that only residents use the pool. But not today.

Today the water was a bit cold and the pool wasn’t busy. The attendant realized this and didn’t hassle swimmers and sunbathers with an ID check. When he uttered those words it hit me in a flash just how profound it was. The ease with which he used common sense to bend the rules was a beautiful moment. Maybe you think I’m being dramatic, but let me offer a contrast.

A few years, ago I was in the security line at the airport with my wife. She removed her plastic baggy of size-approved liquids and gels and placed it in the container. The TSA agent picked it up and grunted, “Uh-uh.” Bewildered, I asked what the problem was. She said my wife needed to remove an item from the bag. I objected that every item was within the approved size and the bag was a recommended part of the procedure. The agent said that, according to regulations, the items are supposed to fit “comfortably” in the bag. They were pushing against the sides, ever so slightly stretching the plastic. We had to remove one. I asked her which individual item was a threat to security. She told us it didn’t matter which item was removed. The absurdity of the situation was beyond parody. There is no conceivable world in which a too-snug plastic bag of harmless toiletries could pose any possible threat to security. But it was the rule. Every bureaucrat knows rules must be followed without question.

If you’ve ever gotten a speeding ticket, as I have, for going 10 over at 3:00 a.m. on a five-lane road with no traffic, or for running a red light in a sleepy town with no cars for miles, you’ve felt the same. It’s clear that the reason for the rule — to keep drivers and pedestrians safe — is no possible explanation for its enforcement in these situations. Indeed, enforcement itself makes roads less safe due to police vehicles sticking out into the road and blocking other potential drivers. Meter maids handing out tickets for 2 minutes over in a lot surrounded by empty spaces is just as crazy. Parking meters and tickets are there to ensure spaces are available in high-demand times. What’s the point of ticketing when ample parking is available? Carding geriatrics for buying alcohol and so very many other examples of this silliness abound.

I posted a complaint to Facebook after the TSA incident. One of the commenters said, “Sure, following the letter of arbitrary laws in bad contexts is a pain, but would you rather have those agents doing whatever they want and using their own discretion on the spot?” The question becomes more poignant when you consider not just the bureaucrats armed with bad attitudes like those at the DMV but the ones armed with guns on the police force. Rule following is paramount in a bureaucracy because the alternative is also frightening.

It’s easy in the public sphere to get caught up in such debates. Is it more practical and just for government agents to use discretion in the moment when applying regulations, or for across-the-board universal application? It seems vexing: a problem without a solution. Whatever side of the debate you take feels uncomfortable. The letter of the law is oppressive and in some cases downright crazy, certainly counterproductive with respect to the law’s intended purpose; but discretion is a scary proposition as well, as many cases of selectively enforced law attest.

Outside of government, however, this is a nonproblem. When something is moved from the private, voluntary sphere to the public, coercive sphere, debates and division arise where none previously existed. The real problem is not rule following or flexibility; it’s monopoly. The absence of competition in the government sphere and all the attendant incentive problems create this unnecessary quandary.

It’s not that the police officers and TSA agents are worse people than my pool attendant; it’s that they face worse incentives. There is no metric for them to determine customer satisfaction or the value of their actions, because there is no profit-and-loss signal and no fear of losing our business. We are legally obliged to pay for and receive their service (or disservice.)

The pool attendant can be flexible with the rules when applying them strictly would annoy customers. He can become stringent when things get busy and residents complain about freeloaders. His company knows that at any time, they could lose the contract, and the only reason they are hired is to make residents happy and solve a problem. It’s the outcome that matters, and all procedures, policies, and rules are measured against that. This leaves ample room for experimentation and adaptation, with immediate feedback and accountability.

The public sector has no such flexibility because it faces no competition. The political sphere can make social and economic problems that have already been solved with incredible nuance seem unsolvable. It offers only yes-or-no, either/or, once-and-for-all-and-everywhere solutions, applied and enforced by people with almost limitless job security. It is a blunt tool, and incredibly unresponsive. It is unconcerned with outcomes and measures effectiveness only by inputs, intentions, and actions — not results.

Whether the letter of the law or individual discretion is preferable is the wrong question. Both are to be feared with state monopolized services. Neither is to be feared in competition because the choice is no longer binary but an ongoing dance of pluralistic discovery.

We’re not checking IDs today. Those five simple words reveal the beauty, complexity, and humanity of the voluntary market order.

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I recorded an audio version of this first, live on-the-spot at the pool using my iPhone.  I’m experimenting with some mini podcast episodes like this.

The Myth of Misanthropy

It’s normal to hate people.  Everyone hates people.  Fortunately, there is no such thing as people.  There are only individual persons.

There are no classes, groups, nations, or any other collective capable of acting or believing.  Only individuals love, hate, lie, steal, give, create, think, and act.  Collectivism is a convention of language, but it is probably the most dangerous paradigm in human history.  Not just because it has led to massive violence in the hands of mobs and states, but because of what it does to the individual.  It let’s us get sloppy in our thinking.

We like to collectivize because it lets us avoid responsibility and accountability.  I can say I hate people and that people are guilty of all manner of crimes and deserve what’s coming to them.  But if I’m forced to point out a single, actual individual that I hate and believe ought get it, things get very uncomfortable.  I want to place blame on a fictitious entity and get the self-righteous satisfaction of setting myself above it (while simultaneously benefiting from the false humility of lumping myself in with it) without any sort of repercussion.

If you find yourself angry at humanity it’s instructive to dig a little deeper.  It’s often not the millions of individual actors pursuing their own ends that cause annoyance as much as certain phenomena and patterns that result from these interactions.  Those are the result of the norms, rules, institutions, and incentives faced by the actors, and those can often be altered or worked-around.  It’s not people that cause traffic jams or bad movies, but individual persons responding to incentives and seeking satisfaction.  Maybe you can change the incentives or introduce new ones?

De-collectivising doesn’t necessarily make you any happier, but it can focus your discomfort onto real entities that are changeable or avoidable.

We Already Have the Solution: It’s Called Freedom

Milton Friedman once said of the political system,

“I do not believe that the solution to our problem is simply to elect the right people. The important thing is to establish a political climate of opinion which will make it politically profitable for the wrong people to do the right thing.”

There already exists an institution that ensures people, be they right or wrong, do the right thing.  It’s called the market.

Any wish to constrain government, or keep political interests behaving in the interest of the general public, is a wish that government behave more like a market; and that the political class behave more like individuals must behave to succeed in a market.  All reform efforts aimed at making the state smaller, less oppressive, more accountable, more efficient in it’s various activities, and less arbitrary are efforts to make it completely unlike itself, and completely like the market.

What I mean by the market is the entire realm of voluntary exchange and coordination.  Politics, like all institutions, is a type of market, but not the type I mean.  It has two unique feature that no other institution has, it produces a host of things unthinkable under other institutions.

The first unique feature is coercion.  The transactions in the political system are not voluntary.  This dramatically alters the incentives and signals in all the exchanges.  “Customers” tolerate what they hate, because it’s not worth being jailed for.  The second unique feature is near universal moral approval.  Though the coercion is real and known by all, it is not only accepted, but praised and condoned.  No other institution enjoys this kind of unskeptical reception and sanction.  Without these two features, there is no state.

It is easy to see why governments produce so much of what we hate, and destroy so much value.  Any market entity that attempted to engage in a single activity the way government does would cease to become profitable and receive universal scorn.  On the market, people think it immoral and tasteless to say you’ll provide a free soft drink with a sandwich and not make good.  That kind of behavior from a corner deli wouldn’t last a week.  On the political market, people think little of a politician who promises to stop sending young people to kill others across the globe, but then sends more instead.  That kind of behavior might get you another four years.

If we wish for the wrong people to do the right things, we can engage in the monumental task of altering public belief and preferences enough that they are willing to pay the price for resisting the state.  We can work to continually alter the incentives faced by politicians on every single issue, fighting back against every incentive built into government.  Of course, the state itself resists this by its very nature, and always will.

The real solution is not the state at all, but the market.  It’s not changing the state, it’s letting it fade into irrelevancy as markets grow up around it, carrying out all the activities states try so jealously to monopolize.  Markets don’t require perfect consumers or producers.  They put bad people in the position where they must do good to succeed.

Friedman was right.  The easiest way to do it is to force political entrepreneurs out of government, and into the realm where they’ll have to be market entrepreneurs.

Separation of School and State

While reading Peter Boettke’s wonderful new book “Living Economics,” I was reminded by Boettke of an interesting disagreement between Scottish Enlightenment figures Adam Smith and David Hume. Both Smith and Hume used economic thinking to understand a puzzling phenomenon of their day: Countries with publicly supported religion were less religiously devoted than those in which the church relied on private funds.

Boettke uses this example to illustrate the “value free” nature of economic analysis. Since Hume was a religious skeptic and preferred a less influential church, he argued in support of publicly funded religion. He understood that this would result in a less religious populace and welcomed that result. Smith used the same economic logic but did not share Hume’s negative feelings toward the church, and thus he opposed public support for religion. As Boettke points out, good economic thinking does not tell us what we “ought” to do, it only reveals cause and effect relationships and shows us what the outcome of various policies will be.

Despite their differences of opinion on the preferred outcome, the logic of economics was the same for both men: When the church is publicly supported it becomes less responsive to parishioners and less creative in gaining and retaining new members. When churches had to rely solely on voluntary support, they innovated. Sermons became more interesting to the listeners, facilities were built to meet the needs of attendees, and church leaders more aggressively and creatively looked for ways to show the applicability and value of religion to everyday life. This marketing, innovation and energy resulted in greater “consumption” of religious “goods” than in countries where the state supported the church.

This conclusion was counterintuitive. It was strongly believed by many at the time that religion was unlike other goods and services. It was a “public good” of sorts. Left unaided by tax dollars, short-sighted citizens would underfund religion in pursuit of more temporary gains at the cost of their moral character and eternal souls. Perhaps bricks and blankets and bread could be left to the market, but religion was too important. Religious ideas and values needed to be firmly in the heart of every citizen, and as such it was the duty of the state to ensure that the church did not wane.

Smith and Hume smashed this logic with clear economic analysis. The analysis itself did not choose sides. It neither supported nor opposed religion. It did not care for the pure or impure motives of the advocates or opponents of state funded religion. It only revealed that, contrary to the intent of its advocates (with the exception of people like Hume), governments who supported churches with tax dollars got a less religious populace.

It’s relatively easy to accept this analysis dispassionately in the United States today. The separation of church and state, at least in terms of direct funding, has been so firmly entrenched, and our experience of the wide variety of flourishing denominations and churches so extensive, that we have no trouble agreeing with Smith and Hume’s conclusion. It’s silly to suggest that religion cannot exist without state support, and even more absurd to suggest that the federal government could improve upon religion. Yet the vast majority of Americans fail to see the same cause and effect relationship between state funding of education and the level of education among the public.

If you like the idea of a population that is competent in math, science, reading, writing, physics, philosophy, biology, history, economics and every other field of knowledge, you should oppose state support for education. Without resorting to complicated debates about curricula, teachers unions and budgets, the same economic analysis Smith and Hume used to understand the relationship between church and state can be used to understand the relationship between school and state. State support for education results in a less educated populace.

As radical as that may sound today, it may not have sounded so radical to the early advocates of public schooling. Their main goal was not to increase the overall level of education or to educate where education was previously absent, but to reduce variety in education. They did not want to increase supply, but rather decrease the number of choices for parents and children so as to produce a more uniform set of beliefs and create a more civically minded and compliant citizen. They wanted graduates able to step in to the regimented Scientific Management of factory life and fit neatly into a centrally planned economy, which they saw as the future of mankind. Whether or not you agree with their intentions, their economic logic was correct: State funded and operated education would reduce the wide range of educational goods being consumed.

If we want a more educated populace, full of energy and a variety of methods and ideas, much like the innumerable churches and denominations on the American religious scene, the removal of state sponsorship is a must. Absent the secure fallback of the state’s coffers, educational institutions would be forced to innovate, listen to consumers, market their services and find new ways of making their offerings beneficial in the day-to-day life of their students. A thriving market for schooling and education (not necessarily the same thing) would produce a more educated populace with greater enthusiasm for knowledge, just as Smith and Hume found with religion.

Perhaps separation of school and state is the first step to a flowering of education.

Originally posted here.