Tag: markets

Carnivals Just Aren’t That Cool Anymore

We took the kids to a carnival of sorts last weekend.  It was nothing huge, but I thought it would be pretty exciting for them.  When we arrived, I was underwhelmed.  There was popcorn and hot dogs and a little cotton candy machine.  There was an inflatable slide and ski-ball.  There were a few games and a few people in Star Wars costumes.  We spent a few hours there and had a fine time, but it was nothing amazing.

It would be easy to fall back into the old-guy attitude of, “Things were so much more amazing when I was a kid”, or, “Kids these days are so spoiled, nothing is special anymore.”  But the more I thought about it, the more I realized that the Carnival wasn’t all that amazing simply because every day is so amazing for my kids.  We’ve been to numerous backyard birthday parties or get-togethers for no special occasion at all where the hosts have rented giant bounce castles, slides, or water playthings.  Cotton candy can be purchased cheaply almost anywhere.  My kids love these things no less than I did as a kid, they just have the ability to enjoy them more often and on their own terms, not only after waiting in long lines and being crammed in with sweaty strangers.

It’s pretty amazing that it doesn’t require a monumental feat of organization, fundraising, ticket sales, and planning to have a once a year event with cool stuff for the kids.  I appreciate this even more as I watch my kids have those nervous moments of indecision about whether or not to hazard the giant water slide.  If they chicken out, they don’t have to spend possibly years regretting that they missed that one opportunity, as I had done in similar situations as a kid.  They can take their time, and if they regret the decision not to give it a try, they’ll likely have a next time soon.  They probably make better decisions because of the everyday availability of carnival trappings – I remember feeling sick almost every time I pounded giant wads of cotton candy or elephant ears with all the pent-up demand of an inmate on holiday.

I could be bitter at the fact that, in many ways, my kids have it better than I did, and therefor they don’t seem as excited about stuff I loved.  But why?  Who cares?  I decided to enjoy the fact that I don’t have to run out and attend every fair, because my kids have a lot more options than I did.  Yeah, sometimes it hurts that they don’t lavish me with praise for getting them a pack of Big League Chew or a corn-dog, but that’s my problem, not theirs.  It doesn’t mean there’s anything wrong with them, it means I’m too sensitive and doing stuff more for me than them.  They’ll probably never realize how awesome their world is compared to the past, but none of us really can.  Let’s enjoy the present regardless!

Kiteboarders or Cops?

Last summer I had a conversation with a kiteboarder about his sport and the clan-like nature of his fellow athletes.  He told me that the local government body has entertained the idea of putting more rules and restrictions on kiteboarding but that, thus far, they’ve been stymied.  Every time they try, the community of boarders rallies information and support and kills the case for more regulation.

As usual, calls for government intervention follow highly visible events.  Political operatives rarely push legislation because they spent hours studying how to make life better; instead they respond to opportunities to gain public support by appearing as the savior after bad things happen.  In this case, there was a kiteboarder who cruised too close to swimmers and had a collision.  No major injuries resulted, but it got a local reporter to write about this “growing problem”.  Ordinances were proposed.  Kiteboarders were able to stop them, mostly because the public was pretty indifferent and the few people that did care heard their stories.

The boarders explained two things: that no one could police bad actors better than they already were, and that no one should forget the immense value of kiteboarders, which outweighs the slightly increased risk to swimmers.

To illustrate the first point, the guy I was talking to described how all the boarders know each other, and new kites quickly attract the old guard.  They get to know the new boarders and make sure they realize they are not only representing themselves, but are part of a community with all the benefits (helping each other in rough weather, etc.) and accountability.  He said when an “idiot boarder” showboats, is in over their level of experience, or gets too close to swimmers, others in the community are quick to respond.  Sometimes they even threaten to “take action” if the behavior doesn’t stop.  He told me this works remarkably well.  He laughed at the idea that shore-based beach police could respond to rogue boarders in any meaningful time-frame.  He said by the time they arrived, the bad actor would have been thoroughly dealt with by other boarders.

The second point was even more powerful.  Do kiteboarders increase the risks of beachgoing?  Sure, a little bit.  It’s one more thing going on and collision is a possibility, self-patrolling notwithstanding.  But what about the benefits?  Not just the economic benefits to beachside businesses from the popular sport, or the benefits to boarders themselves, but what about a reduction in risk to the beachgoing public?  This boarder told me that in the last two summers alone no fewer than three people, two of them children, were saved from drowning by his fellow athletes.  The kites allow boarders to zip across the water at lightening speed to the aid of struggling swimmers long before anyone from shore could.  I’d take a slightly increased risk of a collision with a rogue boarder along with an reduced risk of drowning any day.

Every perceived new danger brings calls for regulation and intervention.  But who is better at producing order and reducing risk; communities like the kiteboarders, or professional bureaucrats and enforcement agents?  For a pleasant and safe beach experience, I’d take kiteboarders over cops any day.

(Also posted at LFB.org)

Smith, Smith Everywhere

Everywhere I turn I see a theme: decentralized, unplanned order is superior to rigid top-down plans.

Popular economist Nassim Talib’s new book, Antifragile is about, “Things that gain from disorder”.  Historian James C. Scott’s latest book is called, Two Cheers for Anarchism.  A few years back I read a pop-business book called, The Starfish and the Spider, about the “Unstoppable power of leaderless organizations.”   Then there’s this discussion of the 2004 book, Sync, on, “The emerging science of spontaneous order.”

What do these have in common?  None of the authors describe themselves as libertarians, and only some of them reference F.A. Hayek or other libertarian thinkers who are known for the idea of spontaneous order.  This is exciting.

At first I noticed this trend and thought it was interesting how Hayek’s ideas are so fundamental that they are being explored in all disciplines by all kinds of thinkers.  But really, it goes back to Adam Smith (who doubtless drew on ideas from many others before him).  One of Smith’s core insights was that individuals pursuing their own interests unwittingly produce a broader order that benefits all.  It seems simple.  Yet this observation is so deep and rich with explanatory power that we might easily overlook it’s staggering implications.  Hayek’s work, among others, extended this insight and asked more questions about why and how unplanned order is superior to top-down dictates.

Today we see not only an extension of this idea in theory, but widespread application. Websites like Wikipedia were founded on this insight.  User-generated content and the network based framework of the web are live experiments in decentralized order.  The self-policing of blogs and forums and the customers reviews on Amazon and Yelp put the idea to test for all to see.  It’s increasingly difficult to be unaware of the “invisible hand”; it’s becoming more visible every day.

Many who are tapping the power of this insight don’t necessarily extend it to society at large.  As I said, most of the works referenced above are not full-fledged calls for libertarianism.  Still, the power of decentralization, the clunkiness of monopolistic bureaucracy, and the beauty of the unknown and emergent are more understood than ever.  Understanding breeds acceptance.

Seeing is believing.  So is doing.  A generation that believes in the power of voluntary cooperation because they take part in it every day is no less valuable than one that reads libertarian theory.  The future is open, unknown, and bright.

A Noble Library

We love to go to Barnes & Noble.  It’s one place everyone in the family enjoys.  There’s WiFi and coffee for me and my wife, there are books and toys for the kids, and it’s free!

It’s great to have a peaceful place full of books where you can go to read, think, browse and let the kids do the same.  Such places used to be called libraries.  Before we moved to South Carolina, there was a library closer to us than a large bookstore.  We would go from time to time for story hour or just to meander.  It was OK, but pales in comparison to B&N.

B&N charges no membership fee.  Nor to they do they take money coerced out of taxpayers.  They have Starbuck whereas the library doesn’t even want you to drink inside, besides the crusty drinking fountain.  There are toys for kids of all ages.  The architecture and lighting are fresher and newer, unlike the Societ-esque design of most public libraries.  You can browse books in both, but if you really like one at B&N, you can buy it too.  They have wonderful story times and special events for kids.  And it’s located close to other places we like to go, unlike suburban libraries which are often far from retail areas.

You can look at books for free or you can buy them, but you cannot borrow them.  This may be a major downside for some people, but I’ve never found it much of a problem.  For one thing, children’s books are usually so short that you can read it all to your kids in the store in one sitting.  As for myself, I try to read books that I think worth buying anyway, and I am increasingly moving to all eBooks.

Suburban libraries seem pretty silly now.  There are wonderful and spacious bookstores.  There are all kinds of non tax supported niche libraries at everything from local churches to the Polish American Club.  For people who use libraries to do serious research, there are a growing number of online solutions like JSTOR and others, and of course universities maintain their own, often much more extensive, libraries for such purposes.

All of this seems sufficient to at least propose an end to tax dollars flowing to libraries.  Some would certainly survive by charging higher membership fees, raising donations, or finding some other revenue model.  Some would disappear.  The adjustment doesn’t really seem that difficult given what’s available online and the kind of experience offered for free by large bookstores.

I am constantly reminded of just how amazing commerce is as a civilizing force.  Who could have imagined a business model where you let anyone off the street waltz in to your store and thumb through all of your merchandise as long as they like with no charge?  If I’d never seen it myself and you asked me whether a service like that could be provided on the market, I would have said no.  Entrepreneurs have shown time and again how things no one could imagine being done outside of a coercive monopoly can be done, and done better, through voluntary markets.

Keep an open mind and think about what else might be possible if legal barriers that prevent entrepreneurs from providing other services were removed.

Why Government Fails – Public Choice for Everyone

There are innumerable arguments about the legitimacy and morality of government and its proper scope, all of which are worth exploring.  Public Choice Theory examines an entirely different question than what government ought to do.  It asks what government actually does.

Public Choice is the study of the operations of government using the analytical tools of economics.  In short, the same assumptions about human interests and actions are applied to the political market as the market for economic goods.

The real power in this theory is its ability to reveal how poorly government works in practice.  It does not address lofty notions of the ideal state, or the right and wrong of state action, but rather examines the actual operations of states to see if they are effective at achieving their stated goals.

Public Choice theory by that name is relatively new among schools of economic thought, but the application of economic insights to political institutions is not new.

This is a basic overview of the core insights of Public Choice Theory.

Why government?

The need for government is typically justified by the claim that there are certain “public goods” which cannot be supplied by the voluntary forces of the market, but are nonetheless beneficial to all members of society.

The standard analysis describes goods like roads, for example, and spends a great deal of time analyzing the incentives in the market to explain why roads will not be sufficiently provided.  It is supposed that everyone would benefit from a road and it would be “non-excludable”.  That is, once constructed, it would be too costly to prevent members of society from using the road whether they paid for it or not.  Because of this non-excludability, rationally self-interested individuals would be unwilling to contribute to a voluntary fund for the maintenance of the road.  Each individual knows that their contribution is small relative to the entire road fund, and furthermore that without their contribution, they will still enjoy use of the road.  With these incentives facing everyone, no one will contribute and the road will decay.  It is in no one’s individual interest to pay for road maintenance, but everyone would be better off if each person contributed.

You may substitute any number of “public goods” for roads, but the standard analysis is the same.  It looks closely at the incentives in the market, deems them unfit to provide the good in question, and concludes that the good must be provided by the state.

Let’s grant, for the sake of argument, that the analysis of the market is correct.  (There is ample evidence to the contrary of course: Nearly any “public good” you can imagine has at some point been, or is even today, provided by the private sector, even though theorists sometimes fail to imagine how.)  If we accept the inability of the market to sufficiently provide the good, there’s still something missing in the standard story.

All the time is spent analyzing what would happen in a market of rationally self-interested individuals and what the incentive structure would produce.  When deemed insufficient, no time is spent analyzing what happens when government attempts to provide the good.  (This is what Art Carden has colorfully dubbed the political economy of the Underpants Gnomes.) What happens if we use the same assumptions and analytical rigor when examining government provision of public goods as we do for the market?

Political self-interest

In order for government to solve public goods problems it would require selfless politicians.  The political actors who use tax dollars to maintain the road would have to be counted on to discharge this duty rather than, say, spend the money on something else or give it to a subpar contractor who happens to be their friend.  But if we are consistent in our analysis, we must treat politicians as rationally self-interested people too.  They have every incentive to act to their own benefit at the expense of the taxpayer.

How can the self-interest of the political class be kept in check?  The textbook answer is democracy.

Democracy as a restraint

Does democracy ensure that the political class will pursue the interest of the public, rather than their own?  The answer is a resounding ‘no’.  The reason is because voters are also self-interested.

It is well known that, statistically, an individual vote in a state or national election is meaningless.  The odds of one vote changing the outcome of a national election are worse than the odds of winning the lottery.  The odds of getting in a car accident on the way to the polls are greater than the odds of an individual vote making a difference.  In other words, the possibility of an individual vote resulting in measurable benefits to that individual is almost nonexistent.

In order for democracy to keep the self-interest of politicians in check, voters need to have an understanding of what they’re voting on and what policies are good for the whole of society.  This would take a tremendous amount of time and effort.  A single bill may be several hundred pages of technical legalese, and most elected officials vote on hundreds of bills in each term.  For a citizen to be informed enough to know what policies are good for society vs. good only for the politicians is incredibly costly.  Yet the individual vote of a citizen has almost no chance of changing the outcome or conferring any benefit.  The rational response is to be ignorant of policies, because the cost of being informed is so much greater than the chance of benefiting from being informed.  A dedicated, informed voter has one vote that is cancelled out by just one ignorant voter.

The result is what economists call “rational ignorance”.  Voters are ignorant of policies and positions because to be otherwise is a burden with no reward.  But there are some people for whom knowledge of policies is beneficial; namely, the small groups that are directly affected by those policies.

A bill to give a $100 million subsidy to Acme co. is worth a great deal to that company.  They would not be foolish to spend $99 million lobbying for its passage, as they would still come out $1 million ahead.  Voters, on the other hand, have no incentive to lobby against the bill because spread out across taxpayers it might cost each just a few dollars, while active opposition – even just a letter to a Congressperson – might take hours of time that could be spent doing something worth more than a few dollars.  This is why democracy results in concentrated benefits and dispersed or diffused costs.  The rationale of politics is to provide benefits to concentrated interests and spread the costs as far and wide as possible – including into the future by way of borrowing or inflating to pay for it.

The obvious result is a myriad of special interests seeking benefits at the expense of the broader public.  In the end, everyone is worse off, but every group has the incentive to continue to seek privileges, if for no other reason than to offset the costs they are bearing for the privileges lavished on every other group.  This is why Frederic Bastiat described the state as, “That great fiction by which everyone tries to live at the expense of everyone else.”  It has been described elsewhere as a game where people stand in a circle and the state takes a penny from each person, then awards five pennies to one of them at the end of the round (the other five being kept by the state).  The game is repeated until each person has been the “winner” of five pennies at least once.  They all begrudge the loss of a single penny each round, but all eagerly expect to be the winner in another round, not realizing that at the end of the game every single person in the circle has less than they started with.

The incentives in a democratic system lead to special interests lobbying for and receiving privileges at the expense of society.  Far from keeping the self-interest of politicians in check, instead democracy promotes and rewards it, so long as those politicians also provide benefits to every imaginable minority and hand the majority the bill.

But let’s ignore all that…

Let’s assume away rational ignorance on the part of voters.  Let’s pretend that voters will expend every effort to become knowledgeable and constrain the self-interest of politicians.  Let’s say the “will of the voters” can keep officials in check.

But what is “the will of the voters”?  It is not an easy question to answer.  Let’s walk through the selection of a preferred policy through the democratic process.  The policy in question is what to do with troops in Iraq.

Option A: Keep troop levels the same

Option B: Increase troop levels

Option C: Remove all troops

Now let’s look at the preferences of three different voters.

Voter 1: A>B>C – Prefer to keep the same level of troops, but if any change is going to occur would rather increase troops and “get the job done” than to pull out.

Voter 2: B>C>A – Prefer to increase troops to “get the job done”, but if that’s not going to happen better to pull out entirely than keep the same level of troops.

Voter 3: C>A>B – Prefer to remove all troops, but short of that, better to leave the same number of troops there than to add more.

Whether or not you agree with the preferences of these voters, it is clear that each of them has a rational sequence of preferences among the given policy options.  You probably have met people who hold each of these views.  To determine the “will of the voters”, let’s put these options to a vote and see what policy the elected officials should follow…

In a vote between policy A and B, policy A would win.  Two of the voters prefer A to B.  If we put policy B and C to a vote, policy B would win.  Finally, if we put policy A and C to a vote, policy C would win.

So what is the will of the voters?  According to the votes, they prefer A>B, B>C, and C>A.  In practical terms, it means the “will of the voters” is to have the same level of troops instead of more, more troops instead of none, and no troops instead of the same number.  That would be like a person saying that, between Snickers, Baby Ruth and Heath bars, they prefer Snickers above all, followed by Baby Ruth, followed by Heath, which they prefer to Snickers.  This is a non-transitive set of preferences, and is one of the definitions of a mentally impaired person.  The will of the voters is a logical impossibility. This is called vote cycling, or Arrow’s Impossibility Theorem.

You can see how, based on the structure of the voting process, entirely different preferences can emerge.  This means that even if the voters were well informed, democracy would fail to provide a clear “will of the voters” for politicians to be accountable to.  Take this simple example of three clear policies and substitute a number of politicians each with positions on dozens of different policies and it is utterly impossible to know what the “will of the voters” is based on the results of elections.

Okay, let’s also ignore all that…

Let’s go a step further.  Let’s pretend that voters are not only informed, but that by some magic the “will of the voters” is clear as day and easily ascertainable through the democratic process.  If we grant these two monumental assumptions surely democracy will serve to protect the interest of the public at large from those of politicians and special interests…right?  Unfortunately for democracy, its problems are even greater than rational ignorance and the impossibility of a clear “will of the voters.”  The “will of the voters” may actually be for policies that are harmful to those voters themselves and the public at large.  This is what Brian Caplan has called “Rational irrationality”.

Voting is not the same as purchasing something in the market.  To vote is to express a preference, while to purchase something is to demonstrate a preference.  Voting, like filling out an anonymous survey, is “free”.  You can voice whatever preference you like without being held accountable for the result.  Imagine if a grocery store sent a survey to nearby residents and asked them to vote for what items they would like on the shelves.  It’s not hard to see what a disaster this would be for patrons of the store.  People may vote for bizarre items just to be funny.  People may vote for items they think they ought to buy, rather than items they actually do buy; or items they think their neighbors should like, rather than what they do like.

When people are asked whether they like it when companies outsource production to countries where labor is cheaper, most will say no.  Yet many of these same people purchase lower priced items produced overseas instead of more expensive domestically produced alternatives.  Their stated preference is for American made goods, but they demonstrate by their actions that they see foreign goods as more beneficial to their own well-being.  It is “free” to say you want to protect American manufacturing jobs, and it may feel better to voice that opinion, but if faced with the costs that result from the outcome of a protective tariff, people may choose otherwise.

Voting is a free way to indulge irrational biases.  Voters do not vote for policies that they themselves favor, but for policies that make them feel good to vote for.  They vote for the candidate who promises to stop immigration because it feels right on an emotional level, yet they hire the migrant worker to landscape their business because it benefits them more than the alternative.

Voting separates the voter from the results of his vote, and creates an incentive to use votes carelessly and in ways contrary to his actual interest.  Even if we grant the most generous assumptions imaginable – voters who are fully informed no matter the cost to them and the fact that they have no chance of benefiting from being informed, and a democratic process that can clearly express a single “will of the voters” across a complex range of issues – democracy still provides incentives for policies that harm the public by their own definition.

Public goods revisited

We began the exploration of how government works by assuming it was the solution to public goods problems.  Government was supposed to the solve those instances where it is in no individual’s interest to bear the cost of overcoming a problem, but where everyone would be better off if all would share the cost.  What Public Choice reveals is that, rather than solving public goods problems, democracy is the greatest public good of all.  It is in no individual’s interest to bear the cost of being informed and voting their true preferences, but in order for the system to work everyone would have to sacrifice their self-interest to the greater good.

Regardless of the moral standing of the state, the practical outcomes of government activity are inferior to what the market produces.  Even in cases of so-called “market failure”, it may be better for the government to take no action than to intervene and make things worse with the even greater “government failure” embedded in the incentives of the state.  In other words, whether or not government is an evil, it may be an unnecessary one.

Hope?

To reduce the harmful effects of the perverse incentives in government, it must be reduced to its smallest possible form.  The scope of activities taken on by the state must be narrowed as far as can be accomplished.  Many practitioners of Public Choice theory advocate constitutional checks, supermajorities and other adjustments to government procedures in the hope that these will change the incentives and create a more accountable government.  The flaw in this approach is that the parties responsible for making such changes are themselves part of the government apparatus and face all the same incentives they are hoping to overcome.

If followed to its logical conclusion, pure Public Choice theory would lead us to believe that the state would be all-encompassing even now.  The incentives are aligned, for example, so that there should be mandates on every facet of our lives in every industry and the sphere of freedom should be nonexistent.  Yet this is not the state of affairs in which we find ourselves.  Why, given the incentives in the system, has the state been restrained at all, little though the restraint may seem to us?

In the final analysis, it is the beliefs of the public that create the ultimate check on the state.  If the public has a firm belief that alcohol should be legal, the interests of bootleggers and Baptists will not be sufficient to bring prohibition back.  We cannot reasonably expect incentives to be overcome or people to act against their self-interest, but we can and do see incentives change as people’s view of what is in their self-interest changes.  Most people would not find it worth their while to attempt to stop the passage of a subsidy to Midwestern beet farmers; but a great number of people consider it worth their while to attempt to stop the passage of a new prohibition bill.

Only when it is widely believed that farm subsidies are as absurd as alcohol prohibition will the incentives change enough to produce a more restrained state.

Further reading

Public Choice, A Primer – Eamonn Butler

Beyond Politics – Randy T. Simmons

Government Failure – Gordon Tullock, Arthur Seldon, and Gordon L. Brady

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*I am indebted to Professor Benjamin Powell for the basic structure of the arguments in this article, which he presents in a lecture for the Foundation for Economic Education.

*I am indebted to Matthew Mitchell for the example of vote cycling.

*This was originally posted at LibertarianChristians.com.  I thought it prudent to repost here because there are so few basic intros to Public Choice and because many would-be readers who are not interested in Christianity or Libertarianism may overlook it at the original site.

Senseless Census Ads

I have a short article in the Freeman Online today about the stupid U.S. Census ads claiming they need data to make decisions about how many buses or hospital beds a community needs.  The two main points are:

1) In a market, you don’t need a census to tell you how many goods to provide.

2) Without a market, you won’t know how many goods to provide even with a census.  From the article,

“Has the grocer ever run ads claiming that without your household survey, he won’t know how much food to stock?”

And,

“They cannot know how many hospital beds or buses to provide without population data.  The dirty little secret is that they cannot know how many hospital beds or buses to provide with population data either.”

Read the rest here.