Public Choice and the expansion of the government

Why government expands is an important point of discussion in the public choice literature. (Public choice being the application of economic tools onto the realm of political theory and practice.) This question has often been asked by economists and occasionally there is an answer that makes sense, but rarely can we account for all of government growth through the use of a singular theory.

Donald Wittman claims to provide an overarching, mono-causal theory of government expansion: it’s because the people, the voters, want government to expand. An increase in the role government is the reflection of the will of the voters and this expansion supposedly leads to the lowering of transaction costs or opportunity costs of the constituency. Bryan Caplan, Wittman’s nemesis, says that this theory is wrong since we know that voters are absolutely underinformed; he claims that it is too costly for voters to gain information and that there is relatively little benefit to having that information. The logic of collective action is in full swing.

A second theory, purported by Robert Higgs, claims that government has grown during times of emergency and afterwards fails to shrink back down to its previous size. Higgs calls this his “ratchet-model” of government expansion. It can be seen through the lens of history: the US government rapidly expanded during the World Wars and after each of them were over, the size of the federal government shrunk somewhat but never back to the size it was before the onset of war. During each of these national “emergencies,” the government takes on extra roles and duties not previously delegated, only to refuse to relinquish them once the need for that role being filled is over. Whether the government should have occupied that set of duties in the first place is a different question. The ratchet model fails to take into account countries that have not experienced world wars or other national emergencies but have still grown nonetheless.

A third theory of government expansion has been cited by Tyler Cowen. His theory, unlike the previous two, is not mono-causal, but only relates a part of the story. Cowen claims that as technology has advanced, the cost of governing has decreased. This, in turn, has lead to an expansion of powers to places that were previously too costly to govern. Cars, highways, and air travel made far away places accessible within hours or days instead of weeks. Telephones and internet made communication instantaneous. Much of the technical innovation lowers the transaction costs of implementing policies. I am partial to this explanation of government expansion, though, it must be kept in mind that this is only a small part of the story.

Lately, I have been wondering about a more endogenous model of government expansion. Many of us who study public choice often look at the incentive structures of policy and the public realm, but sometimes we miss the forest for the trees. In a democracy, government might expand due to the opinion of the majority at the expense of the minority. Such a case has been theorized since Madison’s Federalist 51 and has been often repeated in various circles as outside threats arise. Madison says, “It is of great importance in a republic not only to guard the society against the oppression of its rulers, but to guard one part of the society against the injustice of the other part. Different interests necessarily exist in different classes of citizens. If a majority be united by a common interest, the rights of the minority will be insecure.”

I think it is improbable that a society can exist for long without having the majority take over large parts of governance without some minority bearing some cost. This is especially true when the minority can be seen as the outgroup. This has been a defining part of history. Many societies have increased the burden on the fringes and minorities of their civilization to prop up the rest or to simply keep the other group down. Medieval Europe, South Africa, Japan, China, the Aztec Empire, the United States, Ancient Greece, the Roman Empire, and the list goes on, have engaged in these kinds of actions. Not every policy action is a pareto improvement, so, someone is hurt, at least in the short run, each time a new policy comes out. What makes this viewpoint different is that entire groups pay the price instead of a small collection of individuals who have no connection other than interest.

The possibility from this kind of policy endeavor rises from the formation of large groups who can at any one time control the majority. Madison continues, “Whilst all authority in it will be derived from and dependent on the society, the society itself will be broken into so many parts, interests, and classes of citizens, that the rights of individuals, or of the minority, will be in little danger from interested combinations of the majority.” If there are not enough interests shared by enough groups and large bundles are instead monopolized under the umbrella of an uber Gruppen, we get a system that prioritizes the majority. In a duopoly, one group can claim to prioritize the wants of the minorities it supposedly represents, but given the a prior fractures among groups this will achieve little and may exacerbate the polarization and fracture of a society. This is especially true of democratic societies in which the median voter model holds true.

The Tale of Two Disciplines

Economics, as it is taught today, is split into two different disciplines. The first being economic theory, which is real science in that it attempts to explain the world as we know it. According to Einstein, theory should be a systematic description of the essential interrelations of reality. While the second being decision theory, uses mathematical or logical modes of operation to explain the end actions of individuals. In this mode of operation, the thing being studied can be via the usage of consistent axioms.

My Austrian friends have told me that the difference I am attempting to explain is that of praxeology and catallactics. The former being that study of purposeful human action and the latter being a study at how the market orders itself, how exchange happens. Robert Whately defined catallactics as the science of exchanges, which is something I am partial to. However, while these larger themes fit my prior complaints, much of the profession, including the material taught to students, does not use the heterodox methodology or terminology of Austrian economics. While I think heterodoxy is important, this leads to a different set of questions and not ones I will try to answer in this essay.

The broader point that I want to make is that the profession is split into two camps, and has been for a long time. The economic theorists have been left behind by the choice theorists. The science has lost its way in assuming that the logical nature of decision theory, which always ends in a binary variable of the choice is taken (1) or not taken (0). This is neither truly descriptive nor informative, minus what is the supposed outcome. Mind you, the outcome is only fictional until it happens in actuality. At that point, the supposed outcome and the actual may be different since each person, though they are subject to the law of demand, has a different set of constraints.

Our need for preference negation following the landmark paper, De gustibus non est disputandum, removes the source of variations via preferences from the field.  Stigler and Becker “show” that preferences do not matter. This has been a source of contention for many since, because surely any two given people will not act similarly in similar situations. If you remove what makes humanity, well, human, then what are we studying? Even more so, the current replication crisis in many fields shows that many studies are woefully underpowered or cannot be replicated. Why? What actions undertaken by a few people at a given time and place may not be the same actions undertaken by others in a similar experiment, albeit a different time and place. Economics is more complicated than choice theory.

Even when choice theory scales up into the macroeconomy, it cannot capture the complexity and vast amount of information necessary to be processed. The greatest tragedy of choice theory is that aggregates all of the actions taken by the individuals within the model. If you’ve ever seen the summation of utility curves, then you’re well aware of what I am talking about. Choice theorists don’t know how these utility measures came into being, they’ve assumed them into the model, nor can choice theorists tell you the magnitude of the utility. Not only that, but they assume that the summation works simply because preferences will cancel out. In a zero-sum world, there may be truth to that statement, but the world isn’t zero-sum, especially with the advent of zero-marginal cost technologies.

Janos Kornai said, “The ‘transplantation’ of the models of decision theory cannot, however, serve as a substitute for a scientific theory describing reality.” Choice theory won’t save the field, but it may keep us above water for a time. There is so much more to be explored, both the whys and the hows, but especially the patterns of entanglement.

Thus we are left with a void in economics, one that if filled would describe the reality of our world without reducing its inhabitants to a homo economicus.

Trash: Who’s to blame?

This essay is a response to NPR’s recent throughline podcast “The Litter Myth.”

The real question they want to ask is who is to blame, who is morally culpable for trash? At the same time, the cast of the podcast is engaging in the logic of collective action in that it’s costly for them to make any small impact, so they want to throw the cost of doing so on to corporations. Humans have been making refuse since time immemorial. Landfills and garbage pick-up have been a thing at least since Rome. Trash and refuse has been a huge problem in cities since then, especially since people often refuse to carry their trash out to the a known location; it was unsanitary conditions like these that contributed to the magnitude of the black death. Furthermore, the history of cities provides a context in which we know that humans often shirk in cleaning up after themselves: the logic of collective action. It’s nonsense to assume that trash started in the mid-20th century along with the rise of corporations. What is true is that modern recycling methods were started around that same time period. Everyone is individually responsible for their actions regarding the environment. A better argument for them might have been that since corporations produce more trash relative to consumers, the corporations should take the lion’s share in costs dealing with waste management. I know that back home, companies have to pay for their waste at a higher rate (per ton) than their residential counterparts. I imagine that’s true elsewhere.

The whole thing with the Keep America Beautiful campaign sounded like a “damned if you, damned if you don’t” statement. There might be a bootleggers and Baptists argument for the creation of KAB, but they don’t provide any evidence and charge ahead with hindsight bias. What is true is that KAB was very successful and was an important component in the environmental movement. (Though, their use of the noble savage trope was definitely racist and the whitewashed campaigns would be considered wrong by today’s standards.) This whole section seems to suggest that government regulation would have been the way out of the environmental struggles of that era, however, I must remind you that prior to the EPA, the USDA monitored pesticide use and Rachel Carson’s Silent Spring will give you a peak at just how costly that regulatory framework was on the environment.

Something I didn’t understand is the whole thing on consumables: if the corporations make things disposable, then people will buy more of them. 1) The backdrop of this argument is the use of non-refillable beer bottles in Vermont. Does making a bottle non-refillable encourage consumers to buy more from the company? 2) This statement implies that supply creates its own demand, which we know it doesn’t (What is the demand of t-shirts boasting a Super Bowl victory of the team who actually lost? Zero, yet many of these are pre-printed prior to the game.) Some things, like disposable plates and cups, do require people throw them away at each use, but it is still up to the end user to properly dispose of the product.

In the last section of the podcast, there’s a line that says something to the extent “imagine if that candy wrapper didn’t exist in the first place.” I think that’s a great idea to ponder, but one must consider the alternatives. Prior to plastic or foil wrapping, paper and cardboard were used, which are fine until you consider the food safety aspects. I’m not sure paper alone is good choice for the current supply chains. I have seen biodegradable wrappers recently and maybe that’s the way of the future, but we have to look at the costs and constraints of the now. Entrepreneurial discovery will pave the way for innovations.

What happens in this podcast is a mix of the logic of collective action and some cognitive dissonance to smooth over the rough edges of the arguments. They claim that corporations should hold the blame, while according to the corporations, it’s up to the end consumer. In reality, it is everyone’s responsibility to make sure that we properly dispose of our trash. Because once the producer or consumer purchases a product, they have assumed the property rights of that product. It is up to them to use, disuse, or transfer that good. The cleanliness of the environment is a public good, the producers of this show are looking for a way to free ride and remove their moral culpability from situation. It’s easy to blame something that is already disliked by your listeners, it’s far more difficult to find the middle path and accept responsibility for your own actions while still holding others accountable to theirs.

Instituting a Development

During this summer, and perhaps later on, a few colleagues and I working on another blog to help expand our thoughts on the topics of institutions and development.

My first post deals with the rationality of individuals when faced with group wants.

You see, groups don’t make decisions, individuals do. In some sense, there is no such thing as collective action, but merely as an aggregate of the multitude of individual actions made by it members. Even then, there are multitudes of actions that happen outside the the control of said group, and these can also be taken into account as affecting the structure and perseverance of the group because of the transfer of information amongst individuals. Back to our point: Group actions must be individually rational. This is important, if the actions are not individually rational, many actions that are considered undesirable (from the group’s point of view) are more likely to occur.

The link can be found here.

Gathering my thoughts 6/4/19

Early this morning, I had a chance to sit down with my (unofficial) dissertation advisor to talk about research going into my final six credits of coursework. I hope to propose next spring, having written the first two-thirds of my dissertation between now and the end of the fall semester. High hopes? Maybe, but I’ve found that I do well with deadlines and short-term goals.

In this discussion, we brought about a number of books I am intent on reading this fall and why they made it into my reading list. They are separated into two groups and are listed as follows:

Socio-Ecological Economics:

Evolutionary Economics:

Each of these revolves around specific interests within my thoughts on social systems. Ideas evolve much like genes do; though, ideas find iterations through time and interactions, unlike genes which require propagation through technology. I have written before on the necessity of trans-disciplinary work on social systems; it’s become more of a buzzword, but in practice much can be accomplished. At some point, I will share my notes with you on each of these books; not in their complete form but an abridged version.

Many interesting ideas abounded throughout our conversation; so many that I wish I could have recorded it, but observations are equivalent to interactions and that may have changed the course of our conversation. The first of which is that we should read works not to duplicate them, but as to alter or inform our way of thinking; another acceptable outlet is to apply what and how someone else tackled a problem and using that method, go about solving other problems in a similar light. After reading a new work, one has to ask themselves, “Has this work rearranged the furniture in my head, removed some furniture while replacing it with new items, or a mixture of both?” In my life, there have been a few books that have severely altered my train of thought and how I perceived the world, while many others have given me only a nuanced view of something very specific. In economics, Karl Menger’s Principles was a building block of my thoughts thereafter.

In some ways, new knowledge is frightening, it threatens our previously held world views and in place of those is something unknown. One can find examples of this throughout time, it’s not limited to the actions of the church during the Middle Ages and Renaissance. Modern societies are often faced with new information that threatens their identities. Even the movements that cause societies to tremble face new information that they want to dismiss or refuse to pursue. Revisions of history are often rejected for a variety of reasons; confirmation bias is a powerful thing.

The next things to came up were about agent-based modeling and social sciences. Many of those in the social sciences aim for the creation of a better society, but this is in some ways anathema to doing pure science. It is most likely impossible to separate the subjective person from the objective analysis in social sciences. We have to perceive our data through the lens of theories and our understandings. In almost all cases, data even in its raw form must have gone through at least one filter before a researcher looks at it. The first of which is what data is seen as valuable enough to collect.

This lens of social science is one that causes many researchers to see themselves outside the system they are observing and many theses are built on the want to solve certain problems or issues. First of all, every person is already inside the system; we cannot take ourselves out. It is wishful thinking to assume away our place inside the very systems which we observe. ABM scientists are perhaps the worst at trying to step outside since much of the time they are outside of their models looking in. What would the modeler do if she were in one of the systems she has created? Second, many problems in social systems are unsolvable. What is possible is the observation of both phenomena and patterns; there exists no one solution since every iteration of a system produces a multitude of them. I am not a fan of formal equilibrium theory outside the classroom. (I am picking up Janos Kornai’s Anti-Equilibrium from the library today; his intuition on economic systems is fascinating.)

The final thing is that I have to narrow down my topics for my dissertation. There are far too many things to learn and not enough time learn them all. This is going to be quite an adventure.

Complex Adaptive Systems: Primer 1/N

Over the past year, I have dedicated a large portion of my research to the study of complex systems. This started out as me being bored in an econometrics course and reading random Wikipedia pages during class without any specific goal in mind.

Protip 1: If you’re finding yourself bored in class and are desperate for an escape, use class time to teach yourself about things that interest you; this is a classic case of using opportunity costs wisely.

Protip 2: Diversify your portfolio; sometimes the best ideas come from reading things unrelated to your research interests.

Since then, my knowledge and understanding of complex systems have come into fruition to something greater and will probably form the basis of my dissertation. Without further ado, let’s start our journey into complexity:

Systems are considered complex if they meet the following criteria:

  1.  The system is composed of interacting agents.
  2.  The system exhibits emergent properties.

The second criterion is of utmost importance. If you think of a system of gears (the gears being interacting agents), like a manual transmission, there is nothing unexpected that can happen. In my Toyota Matrix, I go through the same procedure every time I find myself stopped at a stop sign: 1) Disengage clutch, 2) Shift into first, 3) Let out clutch until I can feel the friction point, 4) Engage accelerator gently, 5) When car begins moving, remove my foot from the clutch. If I have done everything correctly, I will be on my way towards my destination. If I don’t, the engine will die and I will have to start again. This is a binary outcome. The transmission only allows for these two outcomes; even though, my transmission allows for eight different parameters: six gears, reverse, and neutral. No other outcome or pattern can emerge from this set of parameter and inputs (throttle and clutch engagement); the gears cannot create new combinations of movement, nor can they decide to go in any new direction. The transmission is closed system. It is not complex because of the inability for it to create new modes or patterns of interaction between the agents comprising the system.

This is a far cry from social systems which allow for pattern formation and new types of interactions. Patterns in our systems exist everywhere: The American system of government is pattern formed through over 200 hundred years of social interactions piled on top of the initial foray in 1776. This and all other forms of governance did not exist prior to the system, but are instead outcomes of the system. Importantly, forms of governance, from that of the family to corporations to governments to international organizations are the result of the interactions of individuals. Every so often, we create new modes of interacting: language, Morse code, Bell’s telephone, radio signals, television, cellphones, internet, email, texting, social media, Snap Chat, etc.

Talking about social systems allows us to introduce an additional criterion:

3. The agents can change based on prior and current conditions/parameters endogenous to the system; at this point the system can be classified as a complex adaptive system.

Think of how individuals and groups adapt to changing conditions in a social system. In the 1980s, laws were passed requiring that only certified electricians be allowed to work on electrical wiring in residential/commercial properties. This subsequently increased the cost of hiring an electrician; in response, homeowners were more likely to work on their own residential electrical systems. This was the first adaptation. The 1980s saw a rise in residential electrocutions as under-qualified individuals attempted to repair their homes. A second adaptation would have been one of homeowners realizing the dangers and then preferring to hire qualified electricians instead of risking injury. This is just one slice of adaptations; it doesn’t capture all the schools who expanded their electrician programs, those who lost work because they lacked the new qualifications, and etc.

Interactions breed consequences (not necessarily a negative term) and adaptations.