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A Tech-Econ Mashup with a Libertarian Flavor

Between-Class Reads

I’ve just started “Government Failure: A Primer in Public Choice” (Tullock, Seldon, Brady). I’ve been meaning to read up on public choice economics for some time now, and so far, this book is clear and accessible, with very little math jargon getting in the way. An excerpt from the first chapter:

To sum up, the difference between a public choice student and a nonstudent of this relatively new discipline in policy matters is very largely a difference in attitude that arises from the knowledge of public choice. Much traditional reasoning has turned on totally unrealistic ideas about the efficiency of government. The student of public choice will not think that government is systematically engaged in maximizing the public interest, but will assume its officials are attempting to maximize their own private interests.

Public choice is an extremely valuable branch of economics. Aside from offering the simple and elegant explanation for government failure (as opposed to market failure) printed above, it also presents a common ground on which the economically-minded and the politically-minded can at last communicate. In my own experience, any attempts to explain my position to a non-economics student using concepts like “efficient allocation of scarce resources,” “price as a rationing device,” or even the often-feared “supply and demand” have fallen far short of my goal of using cold, hard logic to quickly convince my audience to immediately adopt more libertarian economic views. (Perhaps I should just stick to three-word slogans: “God Bless America,” “Freedom isn’t Free,” or “Yes, We Can” all seem a bit more inspirational, no?)

I would go on with my reasoning for why public choice is a wonderful tool for explaining the inefficiencies (and oftentimes, ineptness) of government, but I think the legendary Milton Friedman demonstrated this in his ever-so-eloquent manner over twenty years ago: (Come on, click the Play button – it’s only 2:24)

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Filed under: Bookz, Economics, Politics, , , , , ,

3 Responses

  1. Paul F. says:

    Great that you are interested in Public Choice, it is slowly becoming a one of my personal favorites. Just couple of reccomendations (essays you might enjoy to complement your reading):
    1.-The Welfare Costs of Tariffs, Monopolies, and Theft- Gordon Tullock (His seminal paper, short, sweet and a priceless contribuition to economics)
    2.-The Economist as Preacher- George J. Stigler
    3.-Autocracy and Majority Rule – Mancur Olson (the light side, a bit more technical)

  2. Andy J. says:

    “Is there some society that doesn’t run on greed?” asks Milton Friedman.

    Yes. Bat populations exhibit altruistic behavior in sharing their meals with other members of the colony, on condition of expecting reciprocated generosity on days when their own hunting proves fruitless — essentially a social welfare program in their feedings.
    See “game theory”: self-interest is not synonymous with greed; the former may take a long-term view by exercising delayed gratification and cooperative altruism, whereas avarice is selfishly geared toward immediate gain, indifferent to the exclusion of others or long-term consequences.

    If Einstein’s work is lauded as a reward of free market innovation, then by that selfsame market mandate he must be considered economically short-sighted for publishing his work freely in science journals instead of selling it to the highest bidder or developing its nuclear physics derivations via private enterprise (which he should have foreseen, being employed in a patent office).

    Global disparity in distribution of wealth has less to do with market policy or social ingenuity than resulting from centuries of (mathematically speaking) “positive feedbacks” with respect to particular favoring geographical circumstances. — See: “Guns, Germs, and Steel”.
    PDF transcripts downloadable at:
    http://www.pbs.org/gunsgermssteel/

    There will always exist poverty for the simple reason that it doesn’t take six billion people to produce goods for six billion people. If a more equitable distribution of global wealth is the ultimate goal, then at some market saturation point where economic immobility is encountered, altruistic action — if offered — is going to have to be granted in the form of donations where no repayment is expected of the have-nots.

    China has recently been volunteering billions in unconditional aid to the rapid development of neighbouring Cambodia, partly because the two countries have shared friendly history and a shared border, but also because the Chinese recognize that having economically contented neighbours benefits its own security — ie., altruistic self-interest in practice.

    Instead of trying to maintain a costly patrol of the southern border, America should likewise invest more to improve Mexico’s infrastructure so that its citizens would not be in such a hurry to evacuate themselves north (not that I personally have any problem with it, but America seems to, if that border fence is any indication).

    From your blog posting:
    >> “efficient allocation of scarce resources,”

    The loophole in this noble platitude is that scarcity can be a subjective concept or fabricated by market perception. An example would be the wildly varying estimates in “Peak Oil” extraction dates in defining its scarcity; or SUV sales in China (see below).

    Meanwhile, when speaking of “efficiency”, finding favoring evidence largely depends on which aspects of the system receive emphasis as underlying goals for evaluation, such as whether your primary interest is localized or long-term (per altruism, above); market growth or projected sustainability; maintaining a desired pace of progress or protecting personal freedoms; whether your interest is in reducing market costs to the consumer or reducing their taxation, or reducing taxes of the corporate rich, etc. (Incidentally, these listed examples may not necessarily be mutually exclusive in all models.)

    The Wiki bullet points posted under “Government Failure” have analogs that are equally damning to market failure. Animosity to those items as pertaining to the former is basically reduced to the argument that because everything is paid for on someone else’s dime (taxpayers), government must naturally be more prone to exploitive waste. However, while the free market certainly has its own fiscal best interests in mind to protect against wasteful spending, it has lesser reason for concern over incidental social expenses which may be publicly incurred in the wake of its corporate activities, in fact seeking to optimize its own bottom line via “externalities” which are once again paid for on someone else’s dime. So is our tabulation of “efficiency” to be based on corporate earnings or on social costs?

    We might also reconsider the market definition of “wasteful spending” when CEOs are so disproportionally overpaid, and even rewarded for incompetent performance with bloated severance packages. Is concentrating the wealth in the hands of these few an “efficient” allocation of market resources?

    A few sample terms from wiki’s Government Failure grocery list:
    >> “Regulatory arbitrage is where a regulated institution takes advantage of the difference between its real (or economic) risk and the regulatory position.”

    …As if the free market guards against taking advantage of consumers. — Gasoline prices, anyone? OPEC? Energy privatization?
    Suppliers’ reply to discontented consumers: “Eat it.”

    A simple appeal to “supply and demand” actually fails to account for the fluctuating gas pricing of the last few months, more likely a product of speculator manipulations.
    Standard economic wisdom alleges that negative feedback from the supply/demand pricing relationship leads to a stable equilibrium point, but real-world examples instead illustrate that positive feedbacks in which the equilibria are unstable can paradoxically cause small changes to become amplified rather than dying out.

    See: “There’s more to volatility than volume”
    (Laszlo Gillemot, J. Doyne Farmer, and Fabrizio Lillo)
    http://www.santafe.edu/~jdf/papers/05-12-041.pdf

    >> “Regulatory capture – The co-opting of regulatory agencies by members of or the entire regulated industry.”

    How about corporate lobbyists co-opting political favors via campaign contributions? How about free market collusion resulting in potential price-fixing? What’s to stop it from occurring if there were no legal regulation in place? What’s the Public Choice response to anti-competitive bullying tactics by monopolies?

    >> “Rational ignorance – because there are monetary and time costs associated with gathering information, and the benefits to doing so is limited, voters will not necessarily obtain all of the information necessary to make an informed decision on a subject on which they may nonetheless cast a vote. This is true of both legislators and private citizens.”

    Corporations are just as prone to this failing — or worse, of intentional deceit and fraud if their research should find conclusions damaging to their own interests.
    eg., Tobacco industry shills; the buried inside reports of toxicological dangers with Monsanto’s bovine growth hormone; Pharma-industry cover-ups; Big Oil paid lackeys spreading disinformation alleging that global warming is a farce…
    — Don’t assume that better access to resources produces better quality/accuracy in reporting.

    From your blog again:
    >> “price as a rationing device”

    This doesn’t universally work. We can look to China for a recent example: they imposed a tax on purchases of SUVs (American imports) to attempt to direct Chinese car buyers toward other less gas-hungry vehicle choices. The surprising (irrational) result has been a massive surge of SUV purchases among Chinese consumers rushing to acquire those models, perhaps in anticipation that said buying option may soon be altogether denied — thus producing exactly the opposite effect expected from the new levy. (Of course, their government could always impose its own mandatory rationing device by removing that environmentally harming buying privilege from the marketplace.)

    Smacking of naive post-hoc argumentation, the GovFail label “unintended consequence” isn’t exclusive to any brand of public management policy, by the way. Like Pareto, I wouldn’t regard government bureaucracy as an entity wholly external to the market. To wit:

    “A glance at economic history shows that the economic structures of society shape the trust habits of their members in ways that affect their play of games isolated from any of those economies. Thus rule systems over time
    alter the habit structures of people, in ways that the rules can be designed to exploit. An important dynamical question is whether any self-referential cascade of government and markets can function without depending for most of its
    inputs on social norms that it does not in fact create.”
    — “Commodity money and the valuation of trade”
    (Eric Smith and Martin Shubik)
    http://www.santafe.edu/research/publications/wpabstract/200504010

    Citing an alternate example, segregated neighbourhoods can manifest of their own accord in the housing market purely as a function of buyers’ self-selected biases, even though no individual may actively seek to create a segregated neighbourhood from the onset. Hence, it’s not a question of whether a consequence is “unintended” but instead whether it’s “undesired”, and who decides what should be socially desirable.

    Corporate opinion regarding which course is preferable isn’t democratically elected and therefore has no reason to be accountable to, or representative of, public interests. The analogy of “voting with your dollars” to effect desired market change would afford a greater ‘voting’ voice to the wealthy, thus placing greater control in the hands of an elite few, contrary to democratic principle.

    From your quoted book:
    >> Much traditional reasoning has turned on totally unrealistic ideas about the efficiency of government.

    Straw-man argument #1: Who has ever claimed that government was efficient, much less that such a commending opinion is widespread enough to warrant the word “traditional”? This hypothetical generous critic obviously has never visited the ossifyingly slow service at the DMV, i suppose?

    I openly acknowledge that government is inefficient; I merely accept that this is a democratically necessary evil — that’s what happens when you have an ant hill of millions of free-thinking agents each pulling in his own self-interested direction: a mean average of oscillatory dynamics with sluggish progression.

    >> The student of public choice will not think that government is systematically engaged in maximizing the public interest, but will assume its officials are attempting to maximize their own private interests.

    Straw-man #2: No sensible PollyAnna suggests that government is “systematically engaged in maximizing the public interest”. A fuzzy consensus and foot-dragging support for the public interest is the best I dare to expect from elected officials: you can’t please all of the people all of the time, but trying to accommodate the disparate wishes of everyone in the country necessitates much compromise and double-padding.

    The entire free market is just the same looking out for “their own private interests”, certainly not in any capacity engaged in protecting the public interest, only in systematically maximizing their own. Corporations are in fact legally obliged to place the financial interests of their shareholders above all competing interests, even the “public good”, however that may be defined.

    I’d be skeptical of any ideological promises to “maximize” the governing process itself since these typically have the effect of minimizing freedoms and protections, marginalizing the disenfranchised.

    An assumption that failures — whether market or government — are always the result of “inefficiency” is also overreaching. Dynamical systems demonstrate an inherent susceptibility to occasioned catastrophic transitions arising naturally from (apolitical) competing stresses, which are analogous in social models to competing social interests.
    — See “Transformations: Mathematical Approaches to Cultural Change” (Zeeman, E.C.); or “The Dynamics of Collapse: A Systems Simulation of the Classic Maya Collapse” (Lowe, J.), or Google for similar catastrophe theory modeling of social collapse.

    If we wish to completely remove such chance catastrophic instabilities by implementing a more linearly working model for a society, then “…Hello, Authoritarianism.” The purported free market solutions seem to be leaning in that direction, except that instead of originating from government or voter will, all the authority (/”rights”) shall be privately owned, authored, and controlled by the corporate bullies within our ant colony. This only amounts to The Privatization Of Regulation, to which dissenting political voices will thereafter have no input other than “Viva la Revolution!”, corporately met with, “Eat it.” :p

    Moreover, I trust that reversing governing grievances is easier accomplished — through voting and public pressure — than reversing restrictive anti-consumer policy precedents once they take a legal foothold in the marketplace (like the idiocy of “corporate personhood”), from whence you end up with lone individuals fighting costly court battles against deep-pocketed corporate goliaths who are loathe to concede any ground. As someone once observed: “The trouble with economists is that they don’t know how to subtract.”

    My position here is not based on any political allegiances, but mathematically derived from dynamical modeling of social systems and findings in behavioral psychology.
    Contrary to Adam Smith’s oversimplified economics expectations based on a theory of “utility maximization”, human decision dynamics in the real world are only conditionally rational at best, instead exhibiting selective irrationality via “melioration”:

    “Melioration states that individuals consider the value obtained from a single choice of each alternative, and then shift choice to alternatives that provide a higher value.”
    ~ quoted from
    ftp://ftp.wipol.uni-bonn.de/pub/RePEc/bon/bonedp/bgse26_2001.pdf
    (…This paper contains a modest amount of math, ha.)

    The problem as stated is that in dynamical social systems, “value” is relative and mercurial, not an absolute quantity.
    More pointedly with respect to decision theory, see:

    “Imitation is a very common human behavior. One also speaks of ‘herding behavior’ [53], ‘bandwagon effect’, or ‘persuasion’ [54]. Avoidance behavior is sometimes called ‘defiance’ or ‘snobbish behavior’. It originates from the desire of humans to distinguish from people with different backgrounds. Note that ‘homo economicus’ should not show avoidance or imitation behavior at all, but decide on a rational basis. Nevertheless, there are good reasons for this behavior. In many situations, we do not have enough time to collect and evaluate the information for a rational decision (see Sec. 2.5). (Just imagine we would really try to compare all contracts of insurance companies.) Therefore, we rely on the experience of others. The wide spreading of imitation and avoidance behavior is due to the great success of learning by observation, which has its roots in evolution. It allows us to avoid painful experiences and helps to learn faster. Therefore, we tend to imitate (successful) decisions of people who are in a similar situation as we are. Some indicator for similarity is sympathy, as we tend to like people whose background is comparable. In contrast, we may show avoidance behavior with respect to people we dislike, because we expect their decisions to be counter-productive. That is, emotions are helpful in cases where we cannot complete our decisions. Altogether, the combination of individual assessment with imitation and avoidance behavior may be viewed as collective problem solving [1,55{57]. It allows us to cope with situations which one individual cannot handle on time due to the limited capacities of information collection and data processing.”
    — quoted from page 15,
    “Dynamic Decision Behavior and Optimal Guidance through Information Services: Models and Experiments” (Dirk Helbing)
    http://www.santafe.edu/research/publications/wpabstract/200310058
    (…The text in this paper is more accessible to the mathematically disinclined, but it weighs in at 48 pages, so I doubt you’ll find time to fully absorb it in “Between Class Reads”.)

    Tenets expressed in Public Choice theory assert (wrongly) that agents are uniformly rational, but then criticism is lobbed only at irrationalities in the voting process (re: Caplan), neglecting to consider that people are not strictly rational in their market decisions either. (…Did I mention the mortgage crisis?) Such inconsistent (ir-)rationality contributes to wild price swings and a lack of long-memory persistence in market predictability, for instance.

    Even if it is liberally conceded that voters are collectively lazy, willfully ignorant, easily swayed fools, how does Public Choice practically propose to direct affirmative reforms? Who is to be in charge if untrustworthy voter decisions are altogether abolished — unelected Economist Philosopher-Kings Who Know What’s Best For You? …Sounds like Platonic dualism redux. (I elect myself as Emperor.)

    On the subject of melioration…
    Your earlier posted blog entry is logically inconsistent:
    You evidently endorse — or at least defend — acts of cyberpiracy (re: Kazaa), yet you oppose IRL piracy (re: 85yo would-be robbery victim).
    — Are you pro or anti piracy?
    Or else you must regard copyrighted material as free for the taking. Following that reasoning, if supposing that said 85yo woman had earned her life’s fortune from intellectual creations, then a thief should be as much entitled to rob her IRL as via Kazaa. :p If the woman has a right to defend her property within the boundaries of law then so does the corporate proprietor marketing it.

    your fondest concubine,

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