Exploring Society As Peacefully As Possible

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.

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.

Governor Charlie Crist of Florida recently vetoed a proposed new licensing law for nail salon workers and cosmetologists.  This has increased the costs to consumers, and has limited their options of providers.  The poorest communities will no longer have access to these services in reputable brick-and-mortar business, and will turn to people that “can only do it for a few friends,” or others who risk being caught practicing their trade without a license.  Lastly the new licenses required in business is simply an excuse for the regulating agency to take total observational control of a business.  If, as was the case in Alabama, a store is suspected of dealing flowers without a florist’s license, the SWAT team may show up to confiscate all the business’s documents, to use against you in any type of charges they can piece together after looking at the records.

So why not simply, as contract law does, differentiate between mundane service providers and those service providers who pose a reasonably imminent threat to their customers health or safety.  There are at least two problems with this approach.  First, where does the line get drawn?  Could dentists be excluded because most of their work is cosmetic, or at least not life-threatening?  Doctors couldn’t even be included without considering the types of work they actually do.  Podiatrists aren’t that dangerous, and  neither are general practitioners who would typically refer you to a specialist for anything beyond common illness. And of peculiar distinction is the lawyer, who of course will be endlessly arguing amongst its own profession as to whether the profession should be under state regulation, inevitably including lawyers in the state protection racket.

Second who says that state licensing actually helps protect the patrons of doctors, dentists, lawyers, plumbers, or whatever other profession that may actually do harm to its customers if done incorrectly?

The last objectionable feature of state licensing is its lack of natural authority.  The state does not own the property these people practice upon.  Nor does it own the wills of the provider and customer.  If a provider wished to become a doctor, set up a practice, and advertise that he was well trained, but unlicensed, where does the state gain authority to punish the doctor for doing so?  This further punishes potential customers who may not have been able to afford licensed care or did not agree with the licensing requirements (such as holistic medicine seekers may disagree with the focus on pharmaceuticals that state licensed doctors exhibit).

Certainly a state may wish to see the development of a “well regulated” market, but they offer no proof as to how their licensing scheme will work well currently or improve either its own requirements or the industry standards through time.  The only way to know is to allow all service providers to offer their services with whatever regulation they themselves find to be sufficient to avoid negative consequences, to let each individual allocate their resources to those regulatory services that economically protect their interests.  All people would value having perfect services provided to them, but no one is willing or able to pay for such a guarantee.  For some industries like the floral arrangement business there will likely result a first-order regulation scheme where simple producer-consumer relationships will drive bad arrangers out of the market.

Other industries do call for some requirements on their providers to prove competency prior to engaging in business, but these license granters must be neutral to the providers, and must have their own competition to keep them honest.  They should not be giving “favor” licenses to those who should not qualify for them, and they should not restrict the grant of a license to someone who exhibits his qualification; to do otherwise would give individuals the incentive to   This suggests that those industries where harm is a real possibility would develop a second order regulatory scheme, where providers will compete for customers not only through providing a better service at lower cost, but also by presenting the customer with the best third party certifications of quality.

These arrangements may become more complex, but they will always work to drive practices out of the marketplace while reducing the costs of provision of the service, benefiting all participants in the chain of production.  This is in direct contrast to state licensing that rids the system of particular known imperfections while reducing competition and raising prices and stagnating the industry.  New challenges are not met by different agencies trying to maximize their returns on physical efforts, but by the licensing board that very consciously is more worried about keeping wages high for those who have already been admitted than about serving the consumer.

So in the end, the best way for a state to develop industry and ensure that providers of dangerous services are acting in the interests of their patients is to allow free competition among providers, and among certification agencies.  State license schemes for any activity merely set the bar at an arbitrary level that is then insulated from any real market test.  The only reason the bar may be adjusted up or down is to serve the interests of those who are setting the height of the bar.  And in the state licensing scheme this is invariably a group of well-connected professionals who themselves had to be licensed, and thus have only the interests of a monopolist on their mind.  These interests are a minimum of quality and quantity at a maximum of price to the consumer.  The market mechanism seeks to expose the decision makers to the interest of all parties, licensed and unlicensed producers, the consumers, and even those who oppose consumption, and to do so at a minimum physical price to all parties.

Sources:

http://www.instituteforjustice.org/index.php?option=com_content&task=view&id=2057&Itemid=165

http://www.lewrockwell.com/blog/lewrw/archives/74412.html

Today I came across this link on mises.org, which is a response to an article by Brad DeLong, which is a hit-piece attacking Asteroid Defense and Libertarianism on volokh.com and was immediately reminded that I had divulged half a blog on the Volokh comments, so I went to check it out, recollect my thoughts and get on that post I had thought to write last month before I missed the bandwagon.

To my surprise, Sasha Volokh actually responded to my points, and offered further critique.

My comment:

I’ve independently concluded that taxation is still unjust in these “everybody dies” situations.

First, what to do about the people that believe that if an asteroid is going to hit, then it was meant to be, and they wish to die? Are you justified in forcing them to live?

Second, even if we agree that everyone does indeed share the same end or goal of avoiding the asteroid impact, how are the means of reaching that goal decided? What if I think that the best, cheapest, most sure method is to erect a solar sail on the object to pull it out of the way, while you think that an array of well placed nukes will cause the asteroid to break up and mostly deviate from its path of collision with the Earth? Each path should be explored by those who think it is going to be most effective, with their own resources. If you really do have the best method – you should not have any trouble raising funds voluntarily.

And “free-riding” should not at all be a factor; if your life is on the line, won’t you work to save yourself, even if others are saved with you? I might be able to buy the argument that people wouldn’t write novels if they couldn’t exclude people from reading them (I don’t), but it is ludicrous to suggest that externalities would prevent those wishing to save their own life from doing so because they might happen to benefit others.

Further, if you accept taxes in this asteroid hypothetical, is it world taxation? Does it imply a world government? How is the taxation scheduled? Do the rich and poor alike pay the same flat rate, because they all receive the benefit of life? Who decides, and how do we know that it is effective and efficient?

SV note:

I’m obviously with you in some sense. But I disagree with some of the arguments.

(1) If the Martians were planning to blow up the world and some people wished to die, I don’t need to consider those people’s views; I don’t mind forcing those guys to not die. Suicide is always available.

(2) Yes, there could be disagreements about what’s the most effective means, but again, there were disagreement over how to fight the Nazis in WW2, and I think it’s morally justifiable for the government to tax people and decide on a particular strategy. Here, too, it’s the idea of rights-violation that’s driving things.

(3) I suppose if there were a one-time asteroid with 100% certainty of hitting, then everyone might give everything they had. But even then, if I knew 100% of people were giving, so safety would be guaranteed, I could see myself free-riding. Moreover, what if these asteroids happen every once in a while, and we know, predictably, that we raise more than we need each time? I think free-riding would increase then. Moreover, if the probability of being saved increased continuously with the amount of money raised, I could see free-riding leading to an inefficiently low probability of being saved.

(4) Finally, questions of world taxation, flat rates, who decides, etc., are interesting, but not crucial to this philosophical discussion. Maybe WW2 wasn’t financed in the morally optimal way, but even the imperfect financing mechanism we had might have been preferable to doing nothing through government.

In turn, (1) the taxation is not just “forcing them not to die”, its forcing them to contribute to saving everyone else, too.  This sounds very Randian/Objectivistic, and seems to dehumanize those who have different goals. The issue isn’t that they want to commit suicide, but that they want this particular asteroid to kill them.

(2) Taxation for national defense is also immoral, unless you’re a “ends justify the means” type of person.  By all means start an effort to put an end to Hitler’s injustices, and let American defense companies offer their services to protect people in harm’s way, but please convince me to contribute, don’t force me. If I am being taxed to do so, then the goals that are being advanced are the tax-collector’s, and not my own.

(3) Boycott, social pressure, and reciprocal agreements are non-violent ways to solve free-rider problems.  Would it eliminate them? No.  But govt can’t either.  Instead there would be a natural tendency to align the Marginal Social Benefit with the Marginal Social Costs (subjectively determined by each actor) of asteroid defense.  If even after this, the market can’t muster the resources to avert disaster, then a govt could do no better with the same resources society has.

(4) World taxation is crucial to the discussion.  Why would the US be justified to do something the the UN would not be?  Why would different countries be okay free-riding off of the USA’s efforts?  Shouldn’t, if it is morally justifiable to tax within your nation, be just as justifiable to demand some proportionate tax from other nations and/or peoples? I was referring to the justification for such a tax implying that the tax would be justified against all inhabitants of the Earth. I was not trying to focus on procedural details to question the efficiency/justness of the taxation solution, but to show that there is no defense to calling for world taxation if you call for national taxation to prevent something that could harm the entire planet.

My last responsive point refers to the “taxation for WWII was better than doing nothing” coda. Govt action in WWII may have been better than doing nothing, but if you are going to “economize” rights by saying that actions are justified if they prevent more rights violations than they cause then you cannot compare the outcome of govt action on one hand to “doing nothing” on the other.  The “on other hand” situation is the opportunity cost of the action: namely those things that would have been done with the society’s resources had they not been spent on the govt’s chosen action.  Thus by Volokh’s own formulation of justice, the calculation that must be done to justify rights-violating-solutions is to calculate the net injustice of such a solution against a solution of voluntary action. This was partially covered in (2) above, and it’s a harder case to make that Hitler couldn’t have been stopped by voluntary alliances amongst individuals.  Indeed, even in the govt solution there wasn’t a “Allied Government” directing the resources of the allies, it was all by voluntary agreement at the international level.  Why wouldn’t voluntary agreement on the interpersonal/interinstitutional level work even better?  That is the burdensome question that must be answered to justify force, and the lack of an imagination to be able to prove one’s case does not excuse the burden.

(These measures of injustice are subjective themselves, and many people see them differently. Letting the institution with the power to tax/rule decide those situations that justify taxation/aggression is literally giving the fox the keys to the hen house.)

Finally, a point I’ve not found looking through these various blogs: there is no legal duty to rescue.  If I do not have a duty to act affirmatively to save one person, why do I have such a duty to save all of them by contributing my marginal share? This, of course, strays from analyzing the moral question, but last I checked taxation was carried out by a group that is infinitely more worried about what the law allows than what some bloggers consider moral.

Economics of Military Defense

In 4 minutes and 20 seconds, this conversation shows that a state can not provide defense in a manner that truly reflects how much people are willing to pay for their desired level of security.