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Archive for April, 2011

Decisions in Economics

New Economics Flowchart

  • Environment: Objective factors to economic decision making.  These are the “nouns” of economic action.
  • Incentives: Subjective evaluation of the expected outcomes attainable through action.
  • Behavior: The objective action taken by an individual, the “verb” of economic action.
  • Welfare: Subjective and reflective evaluation of the condition of the actor

The purpose of this article is to reformulate the abstract analysis paradigm that was needlessly complicated by introducing social norms, technology, feedbacks and potential government functions to the stream of economic decision making.  What started in Law and Economics as ΔL ->Δ I -> ΔB -> ΔP morphed into a hodge-podge of cooperating and conflicting forces that each influenced different levels of the stream in different ways.  This resulted in a conflict between schools of thought where no conflict is theoretically necessary.  Instead of social norms being a separate factor from law on the incentives of acting individuals, they are each interacting pieces of a larger extra-actor Environment.

To accommodate this conflict, and to address the a la carte feedback loops introduced to further analyze economic behavior, a new paradigm needed to be introduced to better conceptualize the decision making process.  Additionally I have replaced the nebulously defined “economic performance” terminus with a more clear term, welfare.  Economic performance, as an abstract label for the result of economic action, does not clearly define what is being measured.  Further, by using the word “performance,” it is unclear if the term relates to some action or some physical state of affairs.  Neither of these definitions truly capture the output of economic action however, as only the individual actor can evaluate whether his actions have benefited himself, and to what extent they have done so.  Thus I have substituted the term “welfare” into the former terminus to denote how the actor perceives his current (post action) economic performance.

Lastly I have formalized how each category of decision making relates to the others in a non-linear relationship to eliminate the feedback loops.  The original path is preserved in the new formulation below as the green arrows, but new arrows are introduced to exhaustively illustrate the other driving forces in economic decision making.  First, an actor’s behavior not only influences his subjective welfare, but also must affect the physical environment.  Second, changes in the Environment of an actor may directly affect his welfare without inducing any change in incentives or behavior of an actor (e.g. a neighbor to an individual trims a tree, allowing the latter individual better enjoyment of the sun while going about the same daily routine he otherwise would have undertaken).  Lastly it must be recognized that a change in an actor’s welfare will also cause a change in incentives for the actor.

Note also that none of these relationships run backward.  The change in the Environment of an actor never directly induces a change in Behavior of the actor.  If a tree fell on an individual and knocked him to the ground, no economic behavior was undertaken by the actor.  Instead the tree gave the actor a new set of incentives: if he wishes to continue with his previous plans he must then stand back up.  Movement and the physical activity of an actor are not themselves economic behaviors, only chosen actions can be called economic behaviors.  Likewise a change in the subjective welfare of an individual can not directly affect the Environment of the actor, it can only create incentives to induce a behavior in the actor to change the Environment.

Analysis of detention

In private actor jurisprudence it is typically only acceptable to use force commensurate with the level necessary to prevent a reasonably imminent threat to others. This includes detaining another actor against his or her will. Overstepping these bounds is generally a cause of action for unlawful arrest or, in the extreme cases, kidnapping. This power to detain derives from the individual’s right to self preservation, but it may be delegated to others so that the weak may enlist help to protect against the strong.

Currently detention in jails and prisons are typically for statutory crimes, and these typically render more force against the criminal than necessary to prevent them from harming others in society. In fact most incarcerated individuals never have posed any threat to the person or property of other individual. Instead these individuals have simply behaved in a way that the political power of a region does not approve, and has used the leveraged power of the state to solve their perceived problems.

While it is understandable that actors want to influence the society of which they are a part in order to ensure that those that are a part of their community are behaving according to a set of norms favorable to the actors, the means used to enforce these norms should not use unjust force. Instead of imparting fines, threatening incarceration, or imparting physical harm on those who act outside one’s acceptable range of behaviors, there are a number of non-aggressive techniques that could be used to deter these behaviors. For instance, an individual can abstain from interacting with those whom they perceive as “bad” actors.

This simple solution also has variants that could work to stratify certain non-harmful behaviors on a spectrum of least objectionable to most objectionable. The least objectionable behaviors to an actor may be simply overlooked, or the actor may choose to boycott the bad actor for a short amount of time, maybe just a single transaction, or until the bad actor agrees to stop the offending behavior. As the actor judges bad behavior more harshly this time period may be extended, or the scope of abstained interactions may grow to include various business transactions, social interactions, or any other interaction. The harshest judgment would entail a complete excommunication of the bad actor. In addition to time and scope, a boycott can also be conditional upon certain retribution being paid by the bad actor. A statement that the boycott will continue until the bad behavior stops and the bad actor agrees to pay a sum of money to the boycotter is still non aggressive, and can work to evaluate the extent to which the two parties wish to forbid behavior or continue behavior. A higher price might be accepted by the boycotter to reinstitute interactions while the perceived bad behavior is allowed to continue.

With these ranges of solutions, why then do states choose to issue fines under the threat of incarceration and incarceration itself to punish non-aggressive bad behavior? Jailors sometimes see the incarceration as punishment for the individuals who were bad actors, even though their behavior was not aggressive against other people. This is simply sadistic moralization, trying to punish others for what you think that their sins may be. But as long as other individuals are not threatened in their person or property by the behavior, only the “bad” actor can know for sure whether the behavior was detrimental to his well being, and this detriment is the appropriate punishment.

Even without appealing to the punishment theory of incarceration, some who judge others as having acted badly may see incarceration as being more economical than allowing the actor to remain free and imposing a boycott. To keep track of all other actors, their boycott and offense status, and to see them all in an open marketplace would be a heavy burden to bear by those enforcing the norms. It is much easier to physically expel the bad actor from the locality, or to physically restrain them from being able to interact with all other people in a community. Even if the jailor must bear a burden of giving the bad actor the basic essentials, these costs would be dwarfed by the administrative and communicative costs of allowing the bad actor to continue to be free, especially in a pre-modern economy, where the easiest solution would resemble the problems written about by Nathaniel Hawthorn in The Scarlett Letter. The benefits of incarceration are further exaggerated when there is a singular judging force in a society. When there are monopoly courts and policy enforcement, it is simpler to eject the bad actors from society than to mark them as being subject to any certain type of boycott.

If the judgment function is distributed, there is at least a force that would object to the complete segregation of certain people if the policy of group does not call for the complete boycott of an individual. But when there is a single arbiter, the arbiter can claim absolute power in determining and executing the enforcement of the norms. This power is evident in the broad equitable powers that are given to courts in the Anglo system, giving them complete personal jurisdiction over all persons in a territory. If there is a plurality of arbiters, however, economic competition will work to reward those arbiters which mete out the least possible sanctions that meet their goals. This is opposed to the single arbiter which masks the costs of enforcement in the obedience expected to be paid to the central authority, allowing a broader conception of which behaviors should be forbidden and harsher punishments for flouting such norms. Further, if there is only a single arbiter of these perceived bad behaviors, Quis custodiet ipsos custodies?

Thus to ensure that behaviors are appropriately policed, no incarceration should be ordered against non-threatening individuals, as there are non-aggressive alternatives that will more economically temper what one may perceive as bad behavior. Further, to protect against the development of abuses, no grant of monopoly status should be given to any agency that is enforcing these norms.