A Persian Cafe, Edward Lord Weeks

Wednesday, 7 August 2013

Every Market Failure is a business idea

One accusations libertarians frequently face is that we are "utopian". I seek to demonstrate that the real problem is that non-libertarians are insufficiently imaginative.

To take an example: this is from Yvain's critique of libertarianism as a general approach towards the question of how much government there should be. (His position, as I understand it, is that each program should be evaluated on its own merits and according to its results; I disagree, considering morality to lie in procedure rather than outcome, but his is an understandable and eminently reasonable position).

2.3: How do coordination problems justify regulation of ethical business practices?The normal libertarian belief is that it is unnecessary for government to regulate ethical business practices. After all, if people object to something a business is doing, they will boycott that business, either incentivizing the business to change its ways, or driving them into well-deserved bankruptcy. And if people don't object, then there's no problem and the government shouldn't intervene.A close consideration of coordination problems demolishes this argument. Let's say Wanda's Widgets has one million customers. Each customer pays it $100 per year, for a total income of $100 million. Each customer prefers Wanda to her competitor Wayland, who charges $150 for widgets of equal quality. Now let's say Wanda's Widgets does some unspeakably horrible act which makes it $10 million per year, but offends every one of its million customers.There is no incentive for a single customer to boycott Wanda's Widgets. After all, that customer's boycott will cost the customer $50 (she will have to switch to Wayland) and make an insignificant difference to Wanda (who is still earning $99,999,900 of her original hundred million). The customer takes significant inconvenience, and Wanda neither cares nor stops doing her unspeakably horrible act (after all, it's giving her $10 million per year, and only losing her $100).The only reason it would be in a customer's interests to boycott is if she believed over a hundred thousand other customers would join her. In that case, the boycott would be costing Wanda more than the $10 million she gains from her unspeakably horrible act, and it's now in her self-interest to stop committing the act. However, unless each boycotter believes 99,999 others will join her, she is inconveniencing herself for no benefit.Furthermore, if a customer offended by Wanda's actions believes 100,000 others will boycott Wanda, then it's in the customer's self-interest to “defect” from the boycott and buy Wanda's products. After all, the customer will lose money if she buys Wayland's more expensive widgets, and this is unnecessary – the 100,000 other boycotters will change Wanda's mind with or without her participation.This suggests a “market failure” of boycotts, which seems confirmed by experience. We know that, despite many companies doing very controversial things, there have been very few successful boycotts. Indeed, few boycotts, successful or otherwise, ever make the news, and the number of successful boycotts seems much less than the amount of outrage expressed at companies' actions.
Upon reading this, my thought process was along the lines of: "OK, this seems like a reasonable model of the situation. Let's suppose I'm in that situation and there is no state. How would I go about solving it?"

Ultimately, the problem is lack of commitment from individuals. Talk is cheap, and the incentives and options available lead them to behaviour which fails to solve the problem. So clearly we want to change either the incentives or the options.

The first idea which came to me is that, since so many transactions are carried out by credit card, could one have one's credit card blocked from being used at certain stores? Then you would sign up to a campaign page which would work in a similar way to Kickstarter: you, and everyone else signing up, would enter your details and agree that upon the campaign reaching a certain, specified number of participants, some switch would be activated and none of you could use your credit cards at that particular store.

I won't claim this as a perfect solution: there would need to be more thought put into issues such as preventing the use of cash or alternate credit cards, and persuading people to trust the website with their details (though it should be noted that plenty of websites have managed to overcome this difficulty without any trouble). Perhaps these would turn out to be insurmountable and my idea wouldn't work. Fine then. Perhaps, with more and more websites moving online, there might be some kind of software that kept tabs on where you were shopping and would trumpet loudly that you had bought from someone you had pledged not to. The idea I am getting at is not that I have solutions - for all I know, these are both terrible ideas which could never possibly work - but that there do exist ways we can solve these problems without resorting to government.

Market failure exists, at least primarily, when individual rationality on the part of all actors leads to group irrationality. That is to say, any attempt by an individual to increase social welfare reduces their individual welfare. This creates a deadweight loss - it would be possible to make some (maybe even all) people better off without making anyone worse off. The classic solution is for the state to somehow mandate the behavioural changes which realise this increase in social welfare, but it seems to me that this model underestimates the ability of entrepreneurs to come up with new solutions.

What's more, technology is making these entrepreneurial solutions ever easier to realise. Perhaps 50 years ago, a stateless society would have had problems funding a road system. I don't know how it would have worked, but three ideas present themselves:
1) Roads are operated as a loss-leader by those selling cars and petrol. This seems unlikely, particularly in a competitive market system, partly because it is unclear that it would be worth the cost and partly because only a small portion of the increased revenue caused by a firm investing in roads would accrue to the firm making the actual investment.
2) Road users are charged a flat rate regardless of how much they use the roads. They would have to pay a fee for usage of a firm's roads, and would receive a windscreen sticker indicating a right to use that firm's roads; if caught by an agent of the firm using the roads without a sticker, they could be prosecuted. This is fairly similar if not identical to the statist system. and would have a number of problems - large economies of scale (in catching unauthorised users, logistics of road repair) leading to an uncompetetive market structure, poor incentives for road users, vast expenses for families driving on holiday.
3) Toll booths. These would also have problems - slowing down traffic, large economies of scale (because who really wants to pay twenty fares on the way to work) leading to an uncompetetive market structure.

There may well be other ways I have overlooked; I would guess that some combination of 2 and 3 would be most likely. (There might also have been a massive move towards public transport). However, the problem of funding would be ridiculously easy to solve nowadays. Something like the London congestion charge could operate, with cameras recording if you had been on a road, and if so then how often, and at the end of the month you would receive a bill. Alternatively, your car might automatically record where you went and send it to some agency.

This "failure of imagination", if you will, is common to many areas covered by the state. To take a quote from Clement Attlee (for non-UK readers, the UK Prime Minister 1945-51 and the chief founder of the modern British welfare state):
In a civilised community, although it may be composed of self-reliant individuals, there will be some persons who will be unable at some period of their lives to look after themselves, and the question of what is to happen to them may be solved in three ways – they may be neglected, they may be cared for by the organised community as of right, or they may be left to the goodwill of individuals in the community. The first way is intolerable, and as for the third: Charity is only possible without loss of dignity between equals. A right established by law, such as that to an old age pension, is less galling than an allowance made by a rich man to a poor one, dependent on his view of the recipient’s character, and terminable at his caprice.
Ultimately, the problem of supporting the unemployed falls into two categories: the short-term unemployed, and the long-term unemployed. It seems fair to assume here that Attlee refers purely to the short-term problem (which is just as well, for otherwise I should be lambasting him for his - ahem - uncharitable approach towards the issue of charity). For this problem, he completely overlooks the possibility of private insurance, most likely through a Friendly society although I see no reason in principle why it should not be done for profit. Indeed, given that at this time National Insurance was a genuine insurance scheme for workers, rather than the income tax by a different name which it has become, it seems odd that he failed to think of this possibility.

Ultimately, the best way to demonstrate that something is not a market failure is to find a market solution. Perhaps these market solutions do not always exist. But it does seem rare to find evidence that state advocates have tried to find those solutions before decreeing intervention.


A thought experiment:

Two communities meet for the very first time. The Gorblaxians have a strict social edict - not necessarily enforced by a state as such, but at the very least adhered to for fear of complete social rejection -that every member of the community must give one eighth of their income to help the poor. The Jemishes have an identical edict, save for the fact that in their case it is only one sixtieth they must give.

The Gorblaxians have a mathematical system in which the default is to use base eight. The Jemishes have a mathematical system in which the default is to use base sixty.

As a member of the Gorblaxian society, would/should you regard the Jemish community as uncharitable and/or morally inferior?

Tuesday, 6 August 2013

The Primary Challenge of Political Philosophy...

...should be less to explain why the governments of liberal democracies, primarily in Europe and North America, are legitimate and that why we must obey them, but rather to explain precisely why less enlightened states are not legitimate, why there is no duty to obey them.

It seems to me to be beneficial to view political obligation as a number of sets of actions. There exists a set of acts which are morally permissible for an individual within the state of nature, and a set of acts which are morally permissible for the same individual when under a state. This essay shall discuss the relationship between these two sets, which we shall label the Natural set (actions morally permissible within the state of nature) and the Statist set (actions morally permissible when under a state).

The basic claim of the philosophical anarchist is that there are no acts in the Natural set which are not also in the Statist set, i.e. that there are no political obligations. The basic claim of the political anarchist is that there are no acts in the Statist set which are not also in the Natural set, i.e. that being a representative of the state confers no special moral status.

One of the key claims made by defenders of the state is that the legitimacy of its laws is content-independent: that is, that we have the duty to obey the laws of a legitimate state regardless of what those laws are. I take it as a priori that it is impermissible to murder or imprison someone purely on the grounds of their religion. It is a simple fact that many states, from various medieval kingdoms to Nazi Germany and the USSR to a number of modern states in Africa and the Middle East, have not respected this and have instead murdered many people specifically because they were of a different religion to that of the state's leaders. From these premises, it is obvious that either (a) the obligation to obey a state's laws is not content-independent, or (b) the citizens of many states, including a number which exist today, have no obligation towards their states. Otherwise the persecuted minorities would be required to hand themselves in to be killed, and if they did not then other citizens would be obliged to point them out to be rounded up and slaughtered.

If conclusion (a) is accepted, then the question becomes: even if a state is legitimate, what distinguishes its legitimate commands, which I must obey, from those which I have no duty to obey? This is likely to depend upon the specific theory used to defend the state. The question from the beginning of this essay may be formulated as "Why is it that I must pay a given proportion of my income to the state of the UK, while Jews under Hitler in 1944 were under no obligation to reveal themselves?" (1) If one appeals to Christopher Heath Wellman's argument from a "Samaritan Duty of Rescue", then one has a duty to obey laws only in so far as they are necessary to rescue people from the state of nature, which seems fair enough. If one appeals to a theory of Democratic Fairness, then one runs into problems - the Nazis were democratically elected, which makes it far harder to argue that they were illegitimate but that our existing governments are legitimate.

If conclusion (b) is accepted, then the question is much the same. This has slightly less of a problem, in that it need not explain why a state taking 40% of my income is legitimate while an otherwise identical state taking 100% of my income is not. However, it still needs to explain precisely why I must obey David Cameron, but no Syrian need obey Bashar al-Assad.

I would regard it as a failure of a theory of political obligation if it held that all people must obey all laws of their local state.

(1) The obvious, flippant answer is "Because the Jews would have been killed, whereas you just wouldn't be able to afford that new computer or whatever. Duh!" While not entirely impossible, this raises the issue of what exactly it takes for our suffering to be permissible for the state to inflict. Suppose that a 40% income tax is legitimate, but a 100% income tax will cause me to starve and die and is therefore impermissible. Given that a rate of 90% would leave me wallowing in homelessness and poverty but would not kill me, is this permissible? A rate of 70% would allow me to survive and to just about pay rent, but would leave me no security in case I fell ill; would this be permissible? Moreover, this answer fails to provide a positive case as to why the state has a right to even 1%, let alone 40%, of my earnings. It gives no substantive answer as to why the state could legitimately take 40% of my income, but I could not legitimate take 40% of your income.

Guide to arguments for the state

This is intended as a brief presentation of various arguments for a duty to obey the state. I do not agree with any of them, and may rebut them at a later date, but this is intended as reference rather than discussion.

Consent Theory
We have consented to obey the state. This consent may be explicit, tacit (i.e. by failing to object appropriately we give our consent) implied (our actions imply that we consent, even if we do not explicitly say we do) or even hypothetical (under certain idealised conditions, we would explicitly consent). Therefore we must obey the state.

Benefit Theory
The state provides us with benefits (e.g. healthcare, education, security). Therefore we should express gratitude. The correct way to do this is by obeying its laws. Therefore we should obey the state.

Fair-play Theory
The state represents a co-operative of people who have banded together for mutual benefit. We benefit from this (e.g. by being protected from crime). Since we receive benefits from this, it would be unfair to free-ride upon the efforts of others; therefore we should obey the state.

Democratic Fairness
We have a duty to treat others as equals. By failing to obey a democratic state, we place our own judgement above that of our peers and thus fail to treat them as equals. Therefore we must obey the state.

Consequentialist Statism
The social consequences of obeying the state are on the whole preferable to those of disobeying the state. Therefore we must obey the state.

Samaritan Duty of Rescue
If we can rescue someone from peril at a reasonably low cost to ourselves, we have a duty to do so. The state is the only way of rescuing others from the peril that is the state of nature. Therefore, we must establish and obey a state.

Most people believe that we have a duty to obey the state. There is a positive correlation between people believing things and those things being true. Therefore, it is likely that we have a duty to obey the state.