Let’s add this to the curriculum

(HT: The Last Embassy)

I wish this video of the Tommy Lee Jones look-alike would have been part of the curriculum when I was in high school.

The Will of the People does not exist

As you get older, you learn things aren’t always what they seem. A magician isn’t magical, he’s just highly practiced at misdirection and concealing what’s really happening, for example.

The idea of the Will of the People is similar. We take for granted that majority rule is a fair way to decide things. If the majority wants it, it’s the will of the people and it’s fair. Rarely do we question that.

But, in this week’s EconTalk podcast, Rodden on the Geography of Voting, this idea is put to the test. Near the end, I found the conversation on majority rule and the will of the people very interesting (emphasis added):

[Host] Russ [Roberts]: I think a lot of people have a romance about majority rule. Certainly one way that small groups of people settle disputes is they say: Well, let’s take a vote. And whatever gets the most votes wins. And I think to a lot of people that’s obviously the fairest, best way to decide stuff. And so all of these things that we’ve been talking about that mitigate that–whether it’s the Electoral College, winner take all districts–a lot of people say that’s just not the right way to do things. Everything should be decided by a majority vote. And yet, as we know from work by Kenneth Arrow and others, majority vote in the normative sense, meaning leading to outcomes we like, isn’t so strong as it seems. On the surface, nothing could be fairer than majority rule. And yet when you look a little closer you start to see that majority rule’s got some very deep flaws in it.

Guest [Rodden]: Yeah. This is one of the things that when I teach courses to undergraduates on institutions, we do this in the first or second week. It’s a very easy thing you can do to have the students give their rank ordering of their preferences for what type of pizza that they would like; you have each student rank three and then you put them together. And it’s very easy to find groups of students who have what in the social choice literature is called cycling majorities, where you can show that there is no such thing as the majority will. If I set up the institutions in such a way that there’s first a round robin tournament of pepperoni versus vegetarian and then the winner of that is paired off against sausage, I can get a different outcome than if I do the initial pairings in another way. And so I can show that whoever controls the agenda controls what kind of pizza the students are having. It’s kind of something that we’ve known since Condorcet and Arrow, the classics of social choice theory: it’s simply nonsensical to say that the majority has some kind of will that we will then translate into policy. And so the students are always sort of surprised by this. We like to believe that there is such a thing as the collective will. And I think one of the basic lessons of politics and institutions is, unfortunately, it’s possible to aggregate those preferences in very different ways in different institutions and get different outcomes. So we should[n't] attribute so much importance to something that we believe was the outcome of some kind of majority choice. Often the truth is much more complicated. Agenda control and political power are often used in getting us to the outcomes we see. It leads us to think in a different way about how we interpret the decisions that are made by legislatures and what they actually mean.

Russ: The other problem I have with “will of the people” is majority election. Whether it’s 55-45, or 90-10, the loser obviously felt differently. So it’s not the will of the people. It’s will of those who won that election, whether it’s a majority or whether it’s proportional or whether it’s this weird system we have in the United States. We don’t have referenda on every item. It’s this weird thing called the Legislature, Congress, Senate; we have committees; all this baggage, this incredible superstructure and infrastructure around the way political outcomes are coming out of our preferences. It’s not just a majority rule referendum. But the most important thing to me is that we all have different preferences. And so once you put it into a political process you are basically saying: We are going to get one outcome, and you are stuck with it–because it was the result of a vote. And I don’t see that as necessarily fair at all.

Walter Williams wrote about this, from a different perspective, in his classic Conflict or Cooperation column.

Thomas Sowell also has some excellent thoughts on the topic here .

I like how Russ Roberts finishes the thought in the podcast:

Because political decisions will struggle to reflect anything remotely like the will of the people, I want as few decisions as possible put into that sandbox. I’d rather have the competition of free association and free choice make those decisions and allow for the diversity of outcomes that private markets and private decisions have rather than political decisions, which are inevitably coercive.

Update: Here’s another post relating to the topic: Politics is a group of people making a decision for you.

The iPad Tax

This Marginal Revolution blog post, linking to another post by Miles Kimball, who suggested we thank the top 100 tax payers, reminds me of this post of mine from 2010 where I — less eloquently than Mile — suggested that we thank the rich for the taxes they pay, rather than demonize them.

I thought the comment discussion to that Marginal Revolution post was lively. I was intrigued by a couple of comments. MPS wrote:

The richer you are, the more you benefit from government. It’s obvious from the standpoint of if you were born out in the jungle, you wouldn’t be so rich. In more proximate terms, your wealth derives from things like intellectual property protections and other safeguards of capital that allow people to extract large sums with little physical labor. This is all very well and good as part of a system of government intrusions designed to incentive behavior that increases overall wealth, but when you become wealthy it is through a channel created by government to reward your wealth-enhancing behavior, and not because you exerted so much physical labor to earn it at true competitive market rates.

Too many people share some sort of version of MPS’s sentiment on government, which explains why it has grown well beyond the too-much-of-a-good-thing level. These people vote for politicians who use government to solve problem any problem, instead of electing politicians willing to make tough and responsible choices like balancing the budget and cutting programs that should be outside the scope of government.

A I have few responses for MPS.

1. As I wrote in this post, government is overhead.

Our ancestors didn’t create government and then get wealthy. We got wealthy enough to afford government. How? Our hunter-gatherer ancestors weren’t wealthy enough for government. They spent most of their time scrounging up food. They didn’t have enough time to send folks off to govern. As they got better and applied innovations like cooking, preserving food and farming, they created wealth (i.e. some slack time). Eventually, they freed up enough of their calorie producing activity to go vote on bills and hob-knob with lobbyists. Government emerged from wealth.

2. As Sowell and  Boudreaux point out, rich folks already pay for whatever benefits MPS imagines they get more of. Why should they have to pay again?

3. As Boudreaux also pointed out, there are, or have been, private solutions for much of the infrastructure that MPS believes only government can provide.

4. But, for me, the most important point is that rich people who earned their success didn’t get rich by government incentive channels as MPS describes. They got rich by providing something that made the rest of us better off. They benefited because we benefited.

Those that earned their success took risks that would turn MPS’s stomach. They tried and failed at several things, shook it off and tried again, when most of us would’ve been afraid to try, and if we got up the courage to give it a go, would have stopped after our first failure.

We use to want to encourage these people because we knew it resulted in good things for us. We wanted folks to get wealthy, because we recognized that they owned their effort and ideas and its only fair that they get rewarded, but more importantly, we wanted more good things for us. We use to not be too stingy about sharing bridges with them. 

MPS doesn’t realize his belief that we got those good things from the incentives and channels that government laid out ensures he will get fewer good things.

Folks like MPS love the iPad. I wonder if he would be willing to give it up. When he uses “the rich benefit more” reasoning to support higher taxes on them, he is paying that tax by forgoing opportunities to buy future innovations.

What ‘earned success’ means

What ‘earned success’ means to a…

…libertarian: You take risks and with quite a bit of luck, persistence and hard work you discover something that creates value by improving other folks standard of living so much that they willingly trade some of the value they have created (or been given) for it. Folks earn their success by providing for the needs and wants of others.

…conservative: Smart people take risks and with persistence, laser-like focus, the right connections and hard work build an empire. Conservatives tend to gloss over parts about luck and providing for the needs and wants of others.

…moderate: You work hard and become successful.

…liberal: You win prestigious awards, you are viewed as humanitarian or anything else deemed praise-worthy, like designing a really cool phone or giving a heart-felt portrayal of a monster of history on the big screen.

…progressive: Being picked as a winner by a progressive government. If you do what the that government deems as worthy, you’ve earned it. If government is not controlled by progressives at the moment, look to the next most progressive government to see what they deem as worthy.

Hey Folks, Capitalism is a Good Guy!

Here’s a very good read on the virtues of capitalism in today’s Wall Street Journal from Charles Murray. A snippet:

From the dawn of history until the 18th century, every society in the world was impoverished, with only the thinnest film of wealth on top. Then came capitalism and the Industrial Revolution. Everywhere that capitalism subsequently took hold, national wealth began to increase and poverty began to fall. Everywhere that capitalism didn’t take hold, people remained impoverished. Everywhere that capitalism has been rejected since then, poverty has increased.

What happened to turn the mood of the country so far from our historic celebration of economic success?

Murray goes on to answer that question. First, he blames it on collusive capitalism — which he breaks into two parts: crony capitalism and government collusion.

He also assigns blame to those with earned success who are unwilling to defend themselves because they have a liberal mindset and seem embarrassed by their good fortune.

I’ll add to those thoughts.

People often mistake collusive capitalism for capitalism. They cannot separate the crony and collusive parts from capitalism itself. I think it would be clearer if we take the word capitalism out of the description and simply call it cronyism and collusion.

As Milton Friedman pointed out in this video, all societies have greed. Greed is not unique in capitalism. It is human nature. If all we had was capitalism and greed, we’d be okay. Capitalism directs greed into productive pursuits that benefit others. That results in earned success. As Murray points out, that is embodied by Steve Jobs, Thomas Edison and even Mitt Romney.

But greed also leads to cronyism and collusion. That is toxic. Rather than earned success, that leads to bending the rules (i.e. reducing the our freedoms) to gain unfair advantages. Those are embodied by the fat-cat, cigar-smoking, well-connected folks that feed our images of capitalism gone awry. This means that it was illegal for me to willingly assemble bikes for a local bike shop owner when I was a kid. I was underage and made less than minimum wage. The third parties who passed those laws might say that bike shop owner was evil, or that I was taking away job opportunities for others. But for those involved — myself, the bike shop owner and my parents — the arrangement worked out well.

But the key insight is that real capitalism is the best check against those rent-seekers, it’s not the cause. Neither is greed by itself. Cronyism and collusion are the causes.

Capitalism is the conjured, tabloid and propagandized evil. The way our society treats it reminds me of the fictional propaganda war waged against Harry Potter in the final book of J.K. Rowling’s popular series. The evil folks were in charge and spun everything they could to make Harry Potter look like the bad guy. They even had the media on their side, as the magic community newspaper, The Daily Prophet, wrote regular and unbalanced screeds against the evils of Potter. With J.K. Rowling’s brilliance, she made those screeds remarkably similar to the reporting we see here in the muggle world.

One Advantage of Non-Local Markets

Some localvores in my area are finding out that doesn’t play well in a drought.

Have you ever changed your mind?

I like this video clip (HT: Carpe Diem) of a discussion between economist Milton Friedman and talk show host Phil Donahue from Donahue’s old TV show for several reasons.

First, it reminds me of conversations between my brother (Donahue) and I (Milton Friedman). I’m not claiming to be close to Milton Friedman in his ability to articulate his positions, but I fall on the same side of the argument as he does. While Donahue sounds a lot like my brother.

I could think my brother and I have had this very conversation. It seems I’ve said to my brother exactly what Friedman says at 1:16. “Is there some society you know that doesn’t run on greed?” 

Humans will be humans, after all. Pick an organization of humans. No matter how they are organized, they are still run by humans. Businesses, churches, charities, neighborhood associations, trade associations, libraries, schools, police departments, the Department of Education — they are all run by humans that, as we find out over and over, are no more or less virtuous, infallible, self-interested and corruptible than the rest of us.

Second, I like that Donahue would have Milton Friedman on his show. This is a conversation that doesn’t often happen often in our society. When it is attempted, it goes down hill faster than a game of tag with 1st graders. Emotions take over and the discussion becomes wrought with straw men, ad hominem and other types of fallacies until one side gets frustrated and quits.

That’s one reason I started this blog, to try to carry out discussions without the fallacy and emotion.

Third, I can vaguely remember seeing the Friedman segments as a kid and not having a clue what he was saying (I was very young then), but I’m glad I understand it now.

Fourth, the video also demonstrates how difficult it is for people to change their minds. Milton Friedman was the best of the best at articulating the rationale for liberty in an understandable and non-threatening voice.

Yet, I don’t believe even this master changed Donahue’s mind about anything. Friedman seemed to sway a few people in the audience, but I’m guessing that Donahue held steadfast to his belief that there is just something inherently wrong about capitalism and freedom, even though the standard of living is best for everyone where there is some measure of capitalism and worst for everyone where there is not.

I could be wrong. If Donahue reads this, I’d love for him to answer these questions. If anyone out there knows Donahue, please forward him this link. Phil: Did Milton Friedman ever change your mind about anything? If so, what and why?

How about you? Have you changed your mind about anything? I have. But, I’m not sure if I’m just abnormal. I use to be on Donahue’s side of this conversation and transitioned to Friedman’s as I come to realize many of the exact things that Friedman says here.

How about you, after watching this video? If you already agree with Friedman, never mind. Send the video to someone you know who will disagree with him. Have them watch the video. Have them pause the video and write down every time they disagree with Friedman or when Friedman says something that makes them reconsider their position. I would love to see the comebacks.

The Knowledge Problem in Jim Manzi’s words

Just a paragraph later from the previous quote, Manzi writes:

These deep commonalities across activities such as science, markets, common law, and representative democracy at least indicate the plausibility of a common underlying structure. Each is a noncoercive system for human social organizations to increase material well-being in the face of a complex environment.

They are all methods for obtaining and exploiting practical knowledge through action, and all commingle abstract knowledge and action to various degrees; hence, so-called tacit knowledge. If the environment were simple–if determining the course of action were obvious and relatively static across time–then the complexity and waste of a scientific/market/judicial/democratic process of discovery would not be justified, and central authority would more efficiently impose a common answer.

Later, Manzi reminds us that we should be humble about our knowledge, even if we have what we think are foolproof models to help us predict what might happen (p. 67):

By (unverifiable) tradition, a Roman general who received a triumphant parade upon returning from a conquest had a slave stand just behind his shoulder, whispering over and over again into his ear, “Remember, you are mortal.” When using a probabilistic forecast, we should always hear a whisper in our ears remind us: The model is never the system.

I agree. I often tell my statistician buddies that to create a model that factors in everything in a complex system they would first need to create the universe.

I think the models they create are like the artist’s rendering of a subject. With a great artist, his or her rendering may be good to hang on the wall, but it tells us very little about the true workings of the subject’s world.

The rendering of a mountain landscape, for example, will not give us any information about how weather fronts move over those mountains or how universal forces combined to create the majestic landscape. The artist’s rendering is nothing more than well placed brush strokes on a canvas that merely represent the landscape from one particular point of view at one particular point in time. A statisticians model is much closer to that than it is a living model of the real world.

Of course, some folks entertain the thought that our universe is a simulation. Perhaps we live in a model of a statistician that took my advice to heart.

BINGO

I agree with Randall Holcombe on the JP Morgan loss (HT: Don Boudreaux of Cafe Hayek). He had me at:

The correct argument, which Krugman acknowledges, is that the loss was entirely borne by JPM and their shareholders. They took the risk; they took the loss. That’s how markets are supposed to work.

He goes on…

…to add that unless people take risks, economic progress will come to a halt. So the fact that people are willing to take risks is good for the economy, and the fact that in this case the bad outcome for the risk takers involved only their loss sends a signal to others to weigh carefully the risk against the return. The bottom line is that risk-taking is beneficial to the economy, and the incentives are correct in cases like this when losses are borne entirely by those who took on the risk.

As Milton Friedman said, capitalism is a system of profit and loss. Profits encourage risk-taking (and that’s risk-taking to find things that improve our lives, by the way). Losses encourage prudence.

A private company losing money because of a boneheaded decision that is entirely borne by the shareholders of that company should not be an example for more regulation. That is foolish because it will only lead to less prudence.

Toughen up

1. Milton Friedman’s comment, “Capitalism is a profit and loss system. Profit encourages risk-taking. Loss encourages prudence.”

2. Nassim Taleb, author of the Black Swan and Fooled by Randomness, released the prologue of his new book on Anti-Fragility online. In it, he expounds on Friedman’s point:

Which brings us to the largest fragilizer of society, and greatest generator of crises, absence of “skin in the game.” Some become antifragile at expense to others by getting the upside (or gains) from volatility, variations and disorder and exposing others to the downside risks of losses or harm from them.

In the housing crisis, losses were spread to other parties — investors in mortgages and ultimately to taxpayers — while the upside was retained by the bankers. This caused the bankers to exercise less prudence. How many lottery tickets would you buy if someone else was paying? Likely many more than you would buy on your own.

Then Taleb makes an even more important point:

And such antifragility-at-the-cost-of-fragility-of-others is hidden — given the blindness to antifragility by the Soviet-Harvard intellectual circles, this asymmetry is rarely identified and never taught.

Very few people see this. They even blame the problems on capitalism, never realizing that  spreading losses across taxpayers is not capitalism.

3. A blog post from the Wall Street Journal: Half of U.S. Lives in Household Getting [Federal Government] Benefits.  And, we’re not talking about benefits like driving on Federally-funded roads or sending a child to a public school that receives some Federal funds. No. We’re talking about getting a direct benefit from the government.

I’m guessing that Friedman and Taleb would suggest that this doesn’t end well.

Friedman might say that we are removing losses and therefore, removing prudence. Taleb might say that we are letting people gamble without having “skin in the game”.

Ultimately, this leads to folks taking risks they wouldn’t take if they had to pay the loss. This is dangerous itself. But, it also leads to something else that is even more dangerous. The loss of resilience, hardiness, grit and adaptability.