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A common criticism of utilitarianism is the idea of a utility monster. Suppose you had some extra ice cream, and you decided to give it away, so as to maximize utility. You only have enough to give to one person, and there are only two people available for you to give it to: Alice and Bob. If Alice likes ice cream, and Bob does not, then obviously you should give your ice cream to Alice. Giving it to Bob wouldn't increase his utility. What if Bob did like ice cream, but Alice like it more? Then, you should still give your ice cream to Alice, because that maximizes utility. What if Alice likes everything more than Bob does? Then you should take Bob's stuff and give it to Alice, because that will maximize total utility.
On a separate note, utilitarianism and capitalism go really well together.
Utilitarianism says you should try to maximize utility. When you buy something, you do so because it will make you happier, or help you achieve your goals, in other words, increase your utility. And you're trying to get best deal, you don't want to pay any more money than you have to. So money works as a not too bad proxy for utility. Which is good, because it's hard enough to get people to agree what utility is, let alone measure it in any meaningful way.
Before, I talked about the spherical cows of economics, that is, the conditions under which the free market is maximally efficient. One of those spherical cows in economic equality. A rich person can outbid a poor person, not because they value what they're buying more, but simply because they have more money to spend.
But if money is a proxy for utility, then maybe the rich person really does value it more. Maybe the rich person, in fact, has a greater capacity to value things at all. In other words, maybe rich people are utility monsters.
Showing posts with label free market. Show all posts
Showing posts with label free market. Show all posts
Sunday, November 2, 2014
Sunday, August 3, 2014
A Defense of the Free Market
I've written before in defense of socialism, but that doesn't mean I'm opposed to the free market. Quite the opposite, in fact. The free market is a very powerful tool, and under the right conditions it's maximally efficient.
However, like any tool, it can be misused and abused. But that doesn't mean it should be completely banned, just that it should be used in a carefully controlled manner. There are those who think that regulating a market makes it non-free, but they're wrong. Regulations can help establish the conditions a free market needs to work efficiently.
One of the best uses for the free market is the production of luxuries, for example, video games. They're not a necessity, like medical care, so no will die if they can't afford them. They're not a natural monopoly, like electrical transmission, so lots of people can make them and drive competition. They don't have significant externalities, like pollution, so the costs and benefits are primarily borne by the buyers and sellers. And the free market environment is great for the spurring greater innovation and variety.
That is exactly the kind of thing for which the free market should be used.
However, like any tool, it can be misused and abused. But that doesn't mean it should be completely banned, just that it should be used in a carefully controlled manner. There are those who think that regulating a market makes it non-free, but they're wrong. Regulations can help establish the conditions a free market needs to work efficiently.
One of the best uses for the free market is the production of luxuries, for example, video games. They're not a necessity, like medical care, so no will die if they can't afford them. They're not a natural monopoly, like electrical transmission, so lots of people can make them and drive competition. They don't have significant externalities, like pollution, so the costs and benefits are primarily borne by the buyers and sellers. And the free market environment is great for the spurring greater innovation and variety.
That is exactly the kind of thing for which the free market should be used.
Friday, December 13, 2013
The Spherical Cows of Economics
Some conservative oppose all regulations by appealing to the free market. They say the free market is the best way of distributing goods, and any regulation makes it less free. Therefore regulations make the market less efficient, which is bad.
However, the free market is only efficient under certain conditions. For example, everyone involved has to have perfect information about the costs and benefits of their decisions. Another is that there must be no externalities, that is, all the costs and benefits of a decision must be borne by the people making the decision, not by third party bystanders.
The thing is, these conditions rarely, if ever, actually hold. They're the spherical cows of economics. And the free market is inefficient to the extent that these conditions are false.
But government regulations can help improve these conditions, and thus make the market more efficient. For example, by requiring drug manufacturers to disclose their drugs' side effects, they can help lessen information imbalance, allowing people to make more rational decisions. Further, they can use taxes and subsidies to internalize the costs and benefits of externalities.
So regulations do not make the free market less free. In fact, the free market needs regulations to be free.
However, the free market is only efficient under certain conditions. For example, everyone involved has to have perfect information about the costs and benefits of their decisions. Another is that there must be no externalities, that is, all the costs and benefits of a decision must be borne by the people making the decision, not by third party bystanders.
The thing is, these conditions rarely, if ever, actually hold. They're the spherical cows of economics. And the free market is inefficient to the extent that these conditions are false.
But government regulations can help improve these conditions, and thus make the market more efficient. For example, by requiring drug manufacturers to disclose their drugs' side effects, they can help lessen information imbalance, allowing people to make more rational decisions. Further, they can use taxes and subsidies to internalize the costs and benefits of externalities.
So regulations do not make the free market less free. In fact, the free market needs regulations to be free.
Friday, February 17, 2012
A Defense of Government
This is a summarization of an essay by my girlfriend.
According to the market model of society the efficient distribution of products and services is attained through the direct exchange between and response of self-interest driven individuals. Since individuals seek to maximize returns and minimize costs, exchanges occur only when mutually beneficial; therefore, the market inherently optimizes the societal good. For this to work, several conditions must be met: individuals must act independently and only try to maximize their own utility; there must be perfect information about, competition for, and free movement of goods; and all the costs and benefits must be known and contained to the exchange. There are situations where not all of these conditions are met, which prevents the market from working efficiently.
One such example is that of public goods, which breaks the condition of perfect competition. Public goods are things that no one can be excluded from, such as water quality or national defense. Since no one can be excluded from using it, there is no way for providers to get a return on its production, even if there is a demand for it so the demand will not be met. The government can correct this inefficiency by using taxes to provide the good.
Another example is when an exchange produces externalities, which are when costs or benefits affect other uninvolved parties. An example of a positive externality is vaccination, where even the unvaccinated are protected from disease by herd immunity. An example of a negative externality is pollution, where poor water and air quality affect everyone, not just the ones who make the pollution. Since the decision makers involved do not bear all the costs and benefits, they are not taken into account, and the market either produces too much of something (in the case of negative externalities) or too little (in the case of positive externalities). The government can create regulations which can impose a cost or benefit to internalize the externalities. For example, a tax can be imposed on polluters, or vaccinations can be subsidized.
Another case where there is not adequate competition is for natural monopolies, when goods are produced most efficiently by a single supplier. This gives an advantage to the first or largest supplier and with insufficient competition, the monopoly can charge more than the good is worth. The government can step in by running the monopoly as a public utility or by regulating the price, quality and quantity of the good.
An efficient market requires everyone have perfect knowledge of their potential options. There are many situations where the participants involved do not have accurate or equal amounts of information. There is usually some cost in obtaining information, and information can be deliberately withheld. The government can reduce the cost of information by funding research, and can reduce information asymmetries by making information public.
Even in a perfectly efficient economy, some people will be unable to compete for resources, such as the young, the old and the disabled. There is no economic incentive to provide care for those who can offer little or nothing in return. The government can provide welfare to establish a baseline minimum quality of life.
According to the market model of society the efficient distribution of products and services is attained through the direct exchange between and response of self-interest driven individuals. Since individuals seek to maximize returns and minimize costs, exchanges occur only when mutually beneficial; therefore, the market inherently optimizes the societal good. For this to work, several conditions must be met: individuals must act independently and only try to maximize their own utility; there must be perfect information about, competition for, and free movement of goods; and all the costs and benefits must be known and contained to the exchange. There are situations where not all of these conditions are met, which prevents the market from working efficiently.
One such example is that of public goods, which breaks the condition of perfect competition. Public goods are things that no one can be excluded from, such as water quality or national defense. Since no one can be excluded from using it, there is no way for providers to get a return on its production, even if there is a demand for it so the demand will not be met. The government can correct this inefficiency by using taxes to provide the good.
Another example is when an exchange produces externalities, which are when costs or benefits affect other uninvolved parties. An example of a positive externality is vaccination, where even the unvaccinated are protected from disease by herd immunity. An example of a negative externality is pollution, where poor water and air quality affect everyone, not just the ones who make the pollution. Since the decision makers involved do not bear all the costs and benefits, they are not taken into account, and the market either produces too much of something (in the case of negative externalities) or too little (in the case of positive externalities). The government can create regulations which can impose a cost or benefit to internalize the externalities. For example, a tax can be imposed on polluters, or vaccinations can be subsidized.
Another case where there is not adequate competition is for natural monopolies, when goods are produced most efficiently by a single supplier. This gives an advantage to the first or largest supplier and with insufficient competition, the monopoly can charge more than the good is worth. The government can step in by running the monopoly as a public utility or by regulating the price, quality and quantity of the good.
An efficient market requires everyone have perfect knowledge of their potential options. There are many situations where the participants involved do not have accurate or equal amounts of information. There is usually some cost in obtaining information, and information can be deliberately withheld. The government can reduce the cost of information by funding research, and can reduce information asymmetries by making information public.
Even in a perfectly efficient economy, some people will be unable to compete for resources, such as the young, the old and the disabled. There is no economic incentive to provide care for those who can offer little or nothing in return. The government can provide welfare to establish a baseline minimum quality of life.
Saturday, December 25, 2010
Capitalism Opposes Progress
No, not all progress. And it can be a very powerful engine for innovation. But there is progress it opposes. In particular, scarcity, or rather, the end of it.
Capitalism requires scarcity to work. If you have unlimited amounts of something, its supply is infinite, and its value is 0. No one would pay for something they can just effortlessly pick off of a tree. And because you can't make a profit off of it, capitalism will never attempt to end scarcity, and will oppose anyone who does.
And it has. Even though we don't have the technology to end physical scarcity (Well, not completely anyway. If it weren't for stupid political situations, we could easily feed every human on the planet.), there's no reason we can't end digital scarcity. Any kind of digital information is just a string of 1s and 0s and can be copied infinitely, for free. But capitalist forces such as the RIAA oppose that kind of thing tooth and nail.
The only reason that someone who wants it shouldn't be able to get it for free is that the person who made it couldn't get paid. I'm not saying that that person shouldn't get compensated for their effort, but the capitalist model clearly isn't be the most efficient way. And sometimes, people aren't looking for compensation. Look at the open source movement. People make programs and then give them away for free. Hell, that's what I did with AlDraw.
Although the end of physical scarcity seems like science fiction now, I don't see why it would be impossible, and technology like RepRap is gradually taking us in that direction. But if Star Trek style replicators were invented tomorrow, they'd encounter exactly the same resistance that digital copying does today.
Capitalism requires scarcity to work. If you have unlimited amounts of something, its supply is infinite, and its value is 0. No one would pay for something they can just effortlessly pick off of a tree. And because you can't make a profit off of it, capitalism will never attempt to end scarcity, and will oppose anyone who does.
And it has. Even though we don't have the technology to end physical scarcity (Well, not completely anyway. If it weren't for stupid political situations, we could easily feed every human on the planet.), there's no reason we can't end digital scarcity. Any kind of digital information is just a string of 1s and 0s and can be copied infinitely, for free. But capitalist forces such as the RIAA oppose that kind of thing tooth and nail.
The only reason that someone who wants it shouldn't be able to get it for free is that the person who made it couldn't get paid. I'm not saying that that person shouldn't get compensated for their effort, but the capitalist model clearly isn't be the most efficient way. And sometimes, people aren't looking for compensation. Look at the open source movement. People make programs and then give them away for free. Hell, that's what I did with AlDraw.
Although the end of physical scarcity seems like science fiction now, I don't see why it would be impossible, and technology like RepRap is gradually taking us in that direction. But if Star Trek style replicators were invented tomorrow, they'd encounter exactly the same resistance that digital copying does today.
Monday, March 29, 2010
The Efficiency of Captialism
Proponents of capitalism like to say that it's the most efficient economic system we have. I think it would be more accurate to say it's the least inefficient, similar to how democracy
Capitalism works well - very well - in certain controlled circumstances. When a resource is scarce, but not too scarce. When there are few barriers to entry. When there is strict regulation preventing monopolies from forming and other predatory business practices. When there's not too much unemployment, but not too little. When there's an increasing population. When income inequality is not too high, but also not too low.
If all these conditions, and others I haven't named, are met, capitalism is quite efficient. But too frequently, these conditions aren't all met. And when that's the case, capitalism kinda blows. Other forms of economy may blow even worse (though I'm sure other forms can outperform capitalism in certain circumstances), but that doesn't make capitalism good.
What brings this up is farmers destroying their crop, because they have too much. From a capitalist point of view, they're making the right decision. Reduce supply to increase price and profit. I can't see how any economic system rewards destroying a resource (especially one as valuable and necessary as food) more than distributing it could possibly be considered efficient. It seems to me to be an incredible failing of the system of capitalism.
is the worst form of government, except all those other forms that have been tried.
-Winston Churchill
Capitalism works well - very well - in certain controlled circumstances. When a resource is scarce, but not too scarce. When there are few barriers to entry. When there is strict regulation preventing monopolies from forming and other predatory business practices. When there's not too much unemployment, but not too little. When there's an increasing population. When income inequality is not too high, but also not too low.
If all these conditions, and others I haven't named, are met, capitalism is quite efficient. But too frequently, these conditions aren't all met. And when that's the case, capitalism kinda blows. Other forms of economy may blow even worse (though I'm sure other forms can outperform capitalism in certain circumstances), but that doesn't make capitalism good.
What brings this up is farmers destroying their crop, because they have too much. From a capitalist point of view, they're making the right decision. Reduce supply to increase price and profit. I can't see how any economic system rewards destroying a resource (especially one as valuable and necessary as food) more than distributing it could possibly be considered efficient. It seems to me to be an incredible failing of the system of capitalism.
Saturday, December 12, 2009
UnFairTax
So, apparently, some people at Purdue think the school newspaper, the Exponent, is just too damned liberal. So, they have their own paper, the Purdue Review. I happened to see some lying around, so I picked one up for a lark. Here's what was on the cover to give an idea of how "fair and balanced" they are.
Amidst the hilarity is an article about the "FairTax" and how wonderful it is. The idea of the FairTax is that it replaces federal income tax with federal sales tax. Apparently, this will fill the world with sunshine and roses, because sales taxes are perfect and wonderful and income taxes are mean and evil. ... Or something. According to the article, the FairTax will make taxes more simple, more transparent, be economically stimulating, and even be more progressive.
I'll admit that the FairTax as proposed is much simpler than the current tax code. But I see no reason it would stay that way. If it were to be accepted into law, it wouldn't be long before changes were made to it. Things would be added, exemptions would be included, etc. And I would say, rightly so. There's a reason the tax code is so complicated. The world is complicated, and there are a lot of ways that money can be spent, paid and otherwise exchanged. I would hope our tax code would consider those things instead of simply ignoring them.
They don't really justify how the FairTax will be more transparent, besides implying that people know how much they spend better than the size of their paycheck before taxes are taken out. That's true, but the FairTax plan obfuscates how much of what you're paying is going to the government. They deliberately use an inclusive tax system. An exclusive tax system is transparent; when you buy a $1.00 dollar candy bar, you know how much tax there is, because you pay $1.30. But with an inclusive tax system, it's not so obvious. You pay $1.00, but 23 cents go to the government, and the store gets 77.
It'll be economically stimulating, because it will take in the same amount of tax revenue as the current system, but leave citizens with more money left. Yes, you read that right. It will manage this amazing feat by taxing foreign visitors, illegal immigrants and drug lords. Um, yeah. I'm sure those people are spending just that much money.
And this is the best part. A sales tax will be more progressive. Sales taxes are regressive, practically by definition. People with less money have to spend a greater percentage of their money on necessities. There's really no way around that. Now, it does talk about a monthly rebate, that everyone would get money equal to the tax rate times the monthly poverty rate. Which makes it less regressive, sure, but it's still a sales tax, and there's really no way around that. Oh wait, no, "for reasons too technical to explain here, sales taxes are neither progressive nor regressive". Oh, now it all makes sense.
I'll admit that the FairTax as proposed is much simpler than the current tax code. But I see no reason it would stay that way. If it were to be accepted into law, it wouldn't be long before changes were made to it. Things would be added, exemptions would be included, etc. And I would say, rightly so. There's a reason the tax code is so complicated. The world is complicated, and there are a lot of ways that money can be spent, paid and otherwise exchanged. I would hope our tax code would consider those things instead of simply ignoring them.
They don't really justify how the FairTax will be more transparent, besides implying that people know how much they spend better than the size of their paycheck before taxes are taken out. That's true, but the FairTax plan obfuscates how much of what you're paying is going to the government. They deliberately use an inclusive tax system. An exclusive tax system is transparent; when you buy a $1.00 dollar candy bar, you know how much tax there is, because you pay $1.30. But with an inclusive tax system, it's not so obvious. You pay $1.00, but 23 cents go to the government, and the store gets 77.
It'll be economically stimulating, because it will take in the same amount of tax revenue as the current system, but leave citizens with more money left. Yes, you read that right. It will manage this amazing feat by taxing foreign visitors, illegal immigrants and drug lords. Um, yeah. I'm sure those people are spending just that much money.
And this is the best part. A sales tax will be more progressive. Sales taxes are regressive, practically by definition. People with less money have to spend a greater percentage of their money on necessities. There's really no way around that. Now, it does talk about a monthly rebate, that everyone would get money equal to the tax rate times the monthly poverty rate. Which makes it less regressive, sure, but it's still a sales tax, and there's really no way around that. Oh wait, no, "for reasons too technical to explain here, sales taxes are neither progressive nor regressive". Oh, now it all makes sense.
Sunday, November 8, 2009
Free market socialism
So, here's an idea I've had for a while now. I'm not sure why I've never heard anybody else espouse a similar idea. It's probably unworkable or infeasible for some reason or another, but that doesn't usually stop people from supporting an idea.
The fundamental idea is that the free market is the most efficient way to distribute goods that are scarce and luxuries. But it's not so good at distributing necessities it usually - it's vulnerable to price gouging and leaving people without the bare necessities. Socialism and welfare are good ways to ensure that people have what they need, but can stifle innovation.
So, my idea is a combination of the two. The government provides to all of its citizens the bare necessities of life. Things it already provides, education, police, firefighters, etc. And things it doesn't, like healthcare, simple food and housing and things like that.
Everything else - cars, computers, fancy food and housing, etc. - can be provided in a free market with little regulations, primarily for health and environmental concerns.
The fundamental idea is that the free market is the most efficient way to distribute goods that are scarce and luxuries. But it's not so good at distributing necessities it usually - it's vulnerable to price gouging and leaving people without the bare necessities. Socialism and welfare are good ways to ensure that people have what they need, but can stifle innovation.
So, my idea is a combination of the two. The government provides to all of its citizens the bare necessities of life. Things it already provides, education, police, firefighters, etc. And things it doesn't, like healthcare, simple food and housing and things like that.
Everything else - cars, computers, fancy food and housing, etc. - can be provided in a free market with little regulations, primarily for health and environmental concerns.
Tuesday, November 3, 2009
The Free Market, Rationality and the Prisoner's Dilemma
Something that free market ideologues like to talk about is rational self-interest. It's a simple concept; everyone will be better off if we look after our own best interests. On the face of it, it doesn't look too bad. If I have cows and you have chickens, and I want some chickens and you want some cows, then we can both benefit by working to satisfy our own wants.
Certainly there are cases where this works, but consider a thought experiment: the prisoner's dilemma. The setup goes like this.
Here it is in table form. It's written in terms of utility instead of disutility, and the numbers don't exactly match up, but it's only the relations that really matter.
Deciding which action to take using rational self-interest, the answer is to defect. This is because defecting dominates cooperation - no matter what the other prisoner does, you will always be better off (if only slightly) by defecting. If the other prisoner cooperates, you can get 9 utils by cooperating or 10 by defecting, and if the other prisoner defects, you can get 0 utils by cooperating or 1 by defecting.
But this results in a situation that is obviously not optimal. Both prisoners defect, and end up in the worst overall situation. The best outcome would be for both prisoners to cooperate, but they have no incentive to not defect.
This particular situation may seem contrived, but there are plenty of situations in real life that follow the same pattern. Wikipedia gives a lot of examples. This poses a problem to the initial premise that everyone looking after their own best interest will result in the best overall situation.
It seems to me that a better way to go about it is not to use rational self-interest, but rather rational pan-interest. Instead of comparing different actions by how the results affect you, compare them by how the results affect everyone together.
Of course, in the real world, this solution has problems: how do you know what's best for everyone else, how do you avoid getting deceived or tricked, etc. But I think ordinary rational self-interest has most of the same problems, in real life.
Certainly there are cases where this works, but consider a thought experiment: the prisoner's dilemma. The setup goes like this.
Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal. If one testifies (defects from the other) for the prosecution against the other and the other remains silent (cooperates with the other), the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both remain silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. How should the prisoners act?
Here it is in table form. It's written in terms of utility instead of disutility, and the numbers don't exactly match up, but it's only the relations that really matter.
| Cooperate | Defect | |
| Cooperate | 9 / 9 | 0 / 10 |
| Defect | 10 / 0 | 1 / 1 |
Deciding which action to take using rational self-interest, the answer is to defect. This is because defecting dominates cooperation - no matter what the other prisoner does, you will always be better off (if only slightly) by defecting. If the other prisoner cooperates, you can get 9 utils by cooperating or 10 by defecting, and if the other prisoner defects, you can get 0 utils by cooperating or 1 by defecting.
But this results in a situation that is obviously not optimal. Both prisoners defect, and end up in the worst overall situation. The best outcome would be for both prisoners to cooperate, but they have no incentive to not defect.
This particular situation may seem contrived, but there are plenty of situations in real life that follow the same pattern. Wikipedia gives a lot of examples. This poses a problem to the initial premise that everyone looking after their own best interest will result in the best overall situation.
It seems to me that a better way to go about it is not to use rational self-interest, but rather rational pan-interest. Instead of comparing different actions by how the results affect you, compare them by how the results affect everyone together.
Of course, in the real world, this solution has problems: how do you know what's best for everyone else, how do you avoid getting deceived or tricked, etc. But I think ordinary rational self-interest has most of the same problems, in real life.
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