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Using a specific example...let's say that the show Firefly was prematurely canceled. Resources were diverted away from the show even though there was sufficient demand. The problem was that the demand was "latent". It was only revealed after the show was canceled. Many people bought the DVD and campaigned on behalf of the show. As I've argued before...price theory is too narrow. There are certainly situations where we can correctly determine Hayek's "solution" without using prices. The producers of Firefly could have clarified the demand by creating a crowdfunding campaign. This would have allowed each and every fan of the show to decide for themselves exactly how much they were personally willing to contribute/sacrifice in order to keep the show alive. There wouldn't have been one price...there would have been a continuum of "prices". People would have been paying vastly different amounts for the same exact product. It's the same thing with the non-profit sector. Price theory, as it stands, is not a great prophylactic because it's got a giant hole in it. It doesn't account for the vast majority of situations where we sacrifice in order to try and keep something alive. A better theory would be something like "input theory"...or "positive feedback theory"...or some other better name. Maybe "flowcilitation theory"?
My comment ended up a bit too long. So I posted it on my blog...Follower Redistribution
Toggle Commented Feb 24, 2014 on valuation dilemmas at potlatch
Elizabeth Warren has more influence over resources than I do because she received more votes than I did. It seems pretty straightforward and fair. We can apply the same logic to the private sector. Jeff Bezos has more influence over resources than I do because he receives more dollar votes than I do. Both are systems of representation...but there are some significant differences. In the private sector we have a "division of representation"...
What's Steve Horwitz been up to lately? I miss our excellent discussions. Last time we had an excellent discussion on The Failure of Market Failure. I wanted to share with him a graph I recently created to illustrate government success/failure. Also, he's so skilled at keeping track of the first people to come up with analogies...Traffic Lights and the Interest Rate. I was wondering if he knows of anybody who's already used the siren / flashing light analogy... "If we limit/restrict Dave's ability to benefit from his effort/research/luck/insight/foresight, then we decentivize people to be where we need them most. It's the equivalent of removing sirens and flashing lights from emergency vehicles. If we don't know how valuable all the different uses of society's limited resources are...then it's impossible for resources to flow to where they create the most value. Without this essential information, it's a given that resources will flow the wrong directions and we will all be worse off." - The Essential Value of Incentives - For Kevin Vallier
We bring about the rebirth by promoting civic crowdfunding... "Crowdtilt is also in discussions with the San Francisco Parks and Recreation Department about new tax structures that let citizens dictate what projects their taxes fund." - Rebecca Grant, Crowdtilt unveils Crowdhoster to ‘infect the world’ with crowdfunding Civic crowdfunding would effectively solve the public sector's knowledge problem. Once libertarians stop threatening to throw the baby out with the bath water, the other side will become more receptive. Some on the other side already recognize the necessity of costless exit...Velazquez: Funding war should be taxpayers’ choice.
Thanks so much for sharing DeCanio's paper! It's really quite excellent. There are a few areas where I disagree with him, but I can't think of a better paper on the topic of dollar voting versus ballot voting. His paper really attacks the wide-spread assumption that the political process adequately conveys information about citizens' preferences. If anybody wants to help combat this misconception...
I call shenanigans on consumers being indifferent! Go buy some dates, remove the seeds, stick them in a blender with lemon juice and ice. You won't be indifferent once you try it! Heh. If I was Mr. Lemonade, that's what I'd tell Mr. Date. Mr. Date would try it and love it and have his friends and family try it as well. Of course they would love it too. So it doesn't take much foresight to see that this is a valuable use of dates. In other words, Mr. Date would not doubt the business model. And he would invest a percentage of his crop in my idea. When it was wildly successful...and consumers started giving me far more positive feedback (money) than they gave to my competitors...then I would pass a good portion of that positive feedback (money) onto Mr. Date. As a result, he'd plant more date trees to meet the increased demand for dates. Of course, unfortunately my competitors would soon enough follow my lead. And this would increase the demand for dates even more...and cut into my revenue. Just like McDonald's, Burger King, etc started offering fruit smoothies after Jamba Juice definitively proved that there is a sizable demand for fruit smoothies. I wonder how much it's cut into their profits. I also wonder how many people initially doubted the Jamba Juice business model. In both systems, there would be quite a bit of homework required. And in both systems, there's no guarantee that there's going to be 100,000 dates available. Knowing the price of dates doesn't change that. Would knowing the price of dates prevent Mr. Lemonade from taking unnecessary risks? Let's say Mr. Date did doubt the business model...and so did Mr. Date2 and Mr. Date3...then would Mr. Lemonade start his own date farm? On one hand you have to price your dates to maximize your revenue...and on the other hand you have to allocate your dates to maximize your revenue. But when you try and figure out whether to give any dates to Mr.'re gonna consider the opportunity cost. As such, resources would be efficiently allocated. Therefore, prices aren't necessary to efficiently allocate resources. We can switch the topic from dates (the fruit) to dates (the activity) and come to the same conclusion. Even if you could date Mr. Date at absolutely no cost, there would still be an opportunity cost. In a free-market you wouldn't have to date him if he didn't match your preferences. But in a planned economy we encounter the forced-rider problem. It doesn't matter whether or not you doubt the business still have to contribute. Pacifists have to pay for war regardless of their preferences. So I think it's a matter of really missing the point to say that command/planned economies fail because there aren't any prices. I get the feeling that many free-market economists fall into this trap...given the lack of interest/enthusiasm for pragmatarianism. If you get a chance you should read the passage by Derrida that I shared on this blog entry...Opportunity Cost Passages. That's a heck of a lot of economic calculation...all of which occurs in the complete absence of prices. It's just important that people have the freedom to decide for themselves what they value most...and allocate their resources accordingly.
Nicholas, whether Mr. Lemonade should have more dates depends on how well he is using them. How well he is using them would be determined by consumers and date farmers. Just like how much time I give you depends on how well you're spending my time. Why would I choose to give you my time if I perceived that you were wasting it? The fact that I continue to give you this amount of my time is an indication that I derive more value from this particular use of my time than I would from the alternative uses of my time. So should I give you more of my time? Sure, just write a book about tax choice. I'll give you more time than I give my gf! Deal or no deal? How many different ways can your time be used? Which uses are the most valuable? How many different ways can dates by used? Which uses are the most valuable? "Moreover, what is a resource today may cease to be one tomorrow, while what is a valueless object today may become valuable tomorrow. The resource status of material objects is therefore always problematical and depends to some extent on foresight. An object constitutes wealth only if it is a source of an income stream. The value of the object to the owner, actual or potential, reflects at any moment its expected income-yielding capacity. This, in its turn, will depend on the uses to which the object can be turned. The mere ownership of objects, therefore, does not necessarily confer wealth; it is their successful use which confers it. Not ownership but use of resources is the source of income and wealth." - Ludwig M. Lachmann, If Mr. Date has great foresight...then the uses to which he allocates his dates will yield significant amounts of positive feedback (money). Socialism doesn't fail because there aren't any fails because, as Bastiat noted, it destroys individual foresight. Regarding what I'm talking about. Yeah, it's a little confusing because I'm talking about two different, but closely related, things...pragma-socialism and pragmatarianism. Pragma-socialism is pragmatarianism with a 100% tax rate. You gotta spend all your money in the public sector...but every organization is in the public sector. Giving money to your favorite band would be paying taxes. Uh, but I'm not proposing pragma-socialism. I'm just using to try and illustrate a world without literal price tags. What I propose is pragmatarianism...which could lead us to pragma-socialism or anarcho-capitalism or anywhere in between. Where the tax rate would end up would indicate just how necessary/valuable prices are. Not sure if this counts as setting pragmatarianism out systematically...but you motivated me to finally write out a FAQ...
Nicholas, thanks for linking me to the paper...I did read the first two pages. Did you know that it takes 6 dates to equal one lemon? I'm not talking about exchange rates...I'm talking about lemonade. You can replace sugar with dates. That's innovation! But could we maximize societal value if the person in charge of a lemonade factory didn't know the prices of lemons, sugar, or dates? Once he had the idea to replace sugar with dates...then he would test it out on a small group of consumers. If the consumers preferred the taste...then he would try and get more dates. If he could get more dates then he would need less sugar. So the people in charge of the sugar factory would know that they had more sugar than they had before. Sugar would be freed up for more valuable uses. Didn't we just increase the value society derives from its limited resources without knowing the prices of anything? Hayek argued that prices embodied decentralized knowledge...but the person in charge of the date farm can't know more than he knows. He knows how many dates he's many dates are being demanded from him...and how much positive feedback (money) he's receiving. How can his date allocation decisions not incorporate his knowledge of the circumstances? Socialism doesn't fail for lack of fails for lack of individual valuation. In the world I described, because of consumer sovereignty, you would have the freedom to give more positive feedback (money) to the innovative lemonade producer...and he could give more positive feedback (money) to the date farmer...and so on. Although it's enjoyable to discuss, this is purely academic. There's really no need to prove that prices aren't necessary. We could just implement pragmatarianism using the current tax rate. If congress increased the tax rate...and taxpayers gave them more positive feedback (tax dollars)...then it would be because they were deriving more value from the public sector. The tax rate at which we ended up would represent the optimal division of labor between the public and private sectors.
Pete, thanks for sharing your thoughts! In most literature (including this blog entry) I take "price" to be used in the narrow sense (literal price tags) rather than in the broad sense (opportunity cost). Given that it's untrue that literal price tags are required in order for resources to be efficiently preference is to replace "price" with "opportunity cost". Doing so would really help broaden the scope of economics...which is essential for helping people to develop an economic point of view. For example, if somebody believes that literal price tags are required in order for resources to be efficiently allocated...then they won't readily grasp the value of allowing taxpayers to choose where their taxes go. Neither will they grasp that resources can be efficiently allocated in the non-profit sector. Yes, you are right that I was too hasty in my critique of free-market economists! Richard Wagner is pretty awesome...but here's something that he wrote with Giuseppe Eusepi that illustrates my issue... "Without prices, it is impossible to engage in economic calculation on anything other than the small scale associated with barter. Prices are necessary to guide economic activity in the presence of scarcity. What holds for action within a market economy holds for action within the state economy as well." Yes...but no. Opportunity costs, not literal price tags, are necessary to guide economic activity. I might just be trifling...but I don't think so. I have fairly thoroughly reviewed the literature on demand revealing processes... ...and am pretty certain that this is where our line of attack should be. But it seems like few of the people who make free-market economics accessible are going this route. For example, a Google search of "demand revelation" or "preference revelation" within the website didn't produce any results. Maybe someday you could write an entry on the topic!
Nicholas, but here I am, allocating my time (a limited resource) in the absence of prices. Does this mean that I can't efficiently allocate my time? No...I can still efficiently allocate my time because I have the freedom to choose whichever use of my time will provide me with the most value. This is applicable to any resource. If I use my time to produce hemp...then I wouldn't want my hemp to be wasted anymore than I'd want my time to be wasted. So, just like with my time, I would choose whichever use of my hemp would provide me with the most value. In other words, I'd give my hemp to whichever producers were doing the most with it. If I did a good job allocating my hemp...then I'd receive positive feedback (money) which would increase my influence over how society's limited resource were used. If I did a poor job allocating hemp...if I gave it to producers who wasted it...then I wouldn't receive as much money and I'd lose influence over how society's limited resources were used. So the market would still "guide and weed out"...but on the basis of opportunity cost and influence rather than prices and profit. Mises and Hayek and others were basically arguing that markets work because your influence does not exceed your benefit to society. So as long as consumers can choose who they give their money to...then prices and profits are superfluous. Free-market economists never realized this because they never imagined a system where taxpayers could choose where their taxes go. Once taxpayers can choose where their taxes go...then the public sector could determine the optimal supply of doctors, lawyers and milk as easily as it could determine the optimal supply of firemen, policemen and education.
Prices/profits aren't really necessary though. I've struggled with this one for a while. It was the topic of my second comment on your blog... Here was my second failed attempt... And here's my third attempt... I've finally managed to actually see a pragmatarian system with a 100% tax rate. No profit...but you can choose which organizations you give your money to. Resources would be efficiently allocated because consumers would still have the freedom to consider the alternative uses of their money. Am I wrong?
Xerographica added a favorite at Coordination Problem
Jul 30, 2013
Liberty4uk wrote: "Public choice doesn't address the Lenin question, 'what is to be done?'. Having comprehended political power, how do we respond to it. Without an alternative, begging and cajoling legislators and the executive to do the right thing (and explaining how doing the right thing might even work for them personally) is about all we can do. Which is exactly what Sumner is doing." The obstacle isn't convincing legislatures to do the right's convincing the general public that markets create more value than command economies. That's where the bottleneck is. If the general public could clearly "see" the value disparity...then tax choice wouldn't be such a hard sell... Mark Steckbeck wrote: "The difference we have to always keep in mind is that I can almost always choose to not participate in a market activity or outcome that I find detrimental to my (and others') well being, but I can almost never opt out of a government program that I believe it is detrimental to my (and others') well being. For that reason alone, government has a very limited role in bettering social welfare." This is pretty great! Except, what would happen to the government's role if taxpayers could choose where their taxes went? They would be able to say "no thanks" to all but the most beneficial government organization. Over time the least beneficial government organizations would lose resources while the most beneficial government organizations would gain resources. So would the government suddenly have an unlimited role in creating value? Guinevere Nell wrote: "The difference we have to always keep in mind is that I can almost always choose to not participate in a market activity, but can only choose to participate in it if I can afford it. Whereas I can almost never opt out of a government program, but it can be ensured that I might always be able to opt in, regardless of cost." Did you know that I created the Wikipedia entry for the Forced Rider Problem? Unfortunately, some idiots butchered it... ...and they changed the title to just "Forced rider"...but left the "problem" in the title of the "Free rider problem". And now I'm indefinitely banned from Wikipedia. You can't fire me...I quit! Errrr... I love Bastiat on exit and entry... "What do we want with a Socialist then, who, under pretence of organizing for us, comes despotically to break up our voluntary arrangements, to check the division of labour, to substitute isolated efforts for combined ones, and to send civilization back? Is association, as I describe it here, in itself less association, because every one enters and leaves it freely, chooses his place in it, judges and bargains for himself on his own responsibility, and brings with him the spring and warrant of personal interest? That it may deserve this name, is it necessary that a pretended reformer should come and impose upon us his plan and his will, and as it were, to concentrate mankind in himself?" How can Bastiat be so good? Clearly though, he wasn't good enough. His case for freedom did not avert two world we need to improve on him if we want to avoid a third world war. Therefore, I think exit, when it comes to funding war, is far more important than entry.
Hehe. It sounds like you have a theory! Why not share it? I'd really love to hear it. Does it reflect all the evidence? Here are the places where I've been banned from... Crooked Timber Liberals: EconLog: BHL: Wikipedia: Please don't pull any punches with your theory. I can handle criticism with the best of them. Does your theory explain why you and Boettke haven't banned me? Let me guess... "To be a libertarian is to love liberty first and foremost. The State is certainly the major obstacle to our freedom, but it is not the only one. The more we talk about loving liberty, the more we will recognize impediments to liberty in all of their forms, and the more likely we are to persuade others who claim to love liberty but perhaps don’t see all its implications." It's kinda funny because you actually "unbanned" me once. Remember? When Crooked Timber formally blocked me somehow I was automatically blocked from all Wordpress blogs. I thought that perhaps you guys had blocked me as well when my comment didn't show up on this entry... I continued the discussion in a thread that I started over at Mises. Unfortunately it appears that Mises nuked all its old forum discussions. Ugh. What a shame...that discussion was really quite excellent. Speaking of excellent discussions...did you ever read my discussion with John Holbo? That was certainly a productive exchange. What's interesting to note is that that discussion took place after I was informally banned from the Crooked Timber website. If I had heeded the request to "go away" then John Holbo and I never would have exchanged perspectives with each other. It was actually that exchange which prompted Crooked Timber to formally block me from commenting on their website. Progress certainly depends on facilitating, rather than limiting, exchanges. My theory is that precious few people grasp/appreciate/understand this fundamentally important concept. So what's your theory? Personally I'd much prefer to discuss the preference revelation problem...but if you want to exchange perspectives on why I've been banned from so many places...then that's also a pretty interesting topic! We'd certainly have to bring up J.S. Mill...he wrote the definitive book on the value of tolerance. We both love Mill so that should be pretty enjoyable.
It was pretty great...but there's room for improvement. For example, you could have mentioned the preference revelation problem... Here's my blog entry with numerous passages on the subject... You certainly described the problem in your essay...the cause (lack of information) and the effect (inefficient allocation)...but I think it would really have helped if you had actually used the term "preference revelation problem". Using the appropriate label gives readers something for them to google to learn more. I think every econ undergraduate is familiar with the free-rider problem...but how many are familiar with the preference revelation problem? Not enough. I only just recently created the Wikipedia entry for the preference revelation problem. On the other hand, the entry for the free-rider problem was created in 2002. Speaking of the free-rider problem...I also recently created the Wikipedia entry for the forced rider problem... ...but some idiots butchered it. They removed the content that discussed the preference revelation problem because they failed to see how the two concepts are related... Now I'm indefinitely banned from Wikipedia. Speaking of places that I'm banned from...since I'm banned from the Bleeding Heart Libertarian website I posted my argument against government marriage here... In a tax choice system you'd certainly have the opportunity to use your own taxes to help keep the government in the marriage business. The question much of your own taxes would you spend on government marriage? Ah yes, the preference revelation problem. Perhaps you would find that there were far more important public goods to spend your taxes on? Maybe not?
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Jan 10, 2013