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Thread: Voluntary Exchange Theory

  1. #1

    Voluntary Exchange Theory

    I'm blocked from editing Wikipedia...again. This time for two weeks. You know why? Because I said that some other editors "willfully ignore reliable sources". Evidently that is considered a "personal attack".

    Consider this exchange between two editors regarding the entry that I created for demonstrated preference...

    SPECIFICO: Hello Arthur Rubin. I see you've been looking at Demonstrated Preference. It appears to me that the entire article is SYNTH, OR, not written as an encyclopedia article, among other problems. I left a note for X on the talk page, but frankly I am afraid of sparking a futile edit war so I am holding back further activity there and would welcome any contribution you can make.

    Arthur Rubin: I admit to not being an economist, but there's no "there" there. It appears that revealed preference (assumed not to be a function of time) and demonstrated preference (assumed to be a function of time) are different (but related) concepts, but we don't have anything other than an unsourced definition, quotes, "See also", and readings (I wouldn't call them "references").

    SPECIFICO: Correct, so how can we get this corrected or possibly the article deleted without a pointless edit war with this user? On the substance the fact is that "preference" is a matter of interpretation and the whole revealed/demonstrated preference approach is full of problems and not widely accepted.
    Just before I was blocked...I posted this on the talk page of demonstrated preference...

    BEFORE you make a substantial edit to this article...in order for your edit to actually be constructive...you have to actually understand the concept. In order to actually understand the concept you have to read the debate between Buchanan and Samuelson as Maricano relates in this paper... Why markets do not fail. Buchanan on voluntary cooperation and externalities. Once you've read that...then please read Ginsburg's and Wright's paper...Behavioral Law and Economics: Its Origins, Fatal Flaws, and Implications for Liberty. Then, and only then, can we have a constructive discussion, based on RS, on how to improve this entry.
    Ok...now please bear with me. Here's my crappy attempt to summarize the theoretical basis of our current tax system. Around 100 years ago...a Swedish economist by the name of Knut Wicksell thought it would be a great idea if people could only pay taxes for the public goods that they benefited from. His "benefit principle" was further developed...not too long afterwards...by another Swedish economist...Erik Lindahl. You can read about his tax theory here...Lindahl Tax.

    The problem that other economists had with their work...was that there was an incentive for people to "lie" about their true preferences in order to pay less money for public goods. This is known as the preference revelation problem.

    The first major attack was launched by Richard Musgrave in his paper...The Voluntary Exchange Theory of Public Economy (PM me) which was published in 1939. Here are a few choice excerpts...

    Direct compulsion prevails in the legal enforcement of individual tax contributions, independently of the individual's willingness to share part of the burden. The very fact that such enforcement appears universally necessary indicates the absence of a general willingness to comply with the obligation to contribute.
    The theoretical problem of public economy interpreted in terms of economic planning is not identical with that of central planning in the socialist economy
    But the economist who is, by far, the most responsible for highlighting the preference revelation problem is the Keynesian economist Paul Samuelson. He did so in his 1954 paper...The Pure Theory of Public Expenditure...which has been cited over 5,000 times.

    Here are the important parts (where he critiques the benefit principle)...

    One could imagine every person in the community being indoctrinated to behave like a "parametric decentralized bureaucrat" who reveals his preferences by signalling in response to price parameters or Lagrangean multipliers, to questionnaires, or to other devices. But there is still this fundamental technical difference going to the heart of the whole problem of social economy: by departing from his indoctrinated rules, any one person can hope to snatch some selfish benefit in a way not possible under the self-policing competitive pricing of private goods; and the "external economies" or "jointness of demand" intrinsic to the very concept of collective goods and governmental activities makes it impossible for the grand ensemble of optimizing equations to have that special pattern of zeros which makes laissez-faire competition even theoretically possible as an analogue computer.
    How many times did you read that? That's not enough...read it five more times. Here he says pretty much the same thing...but a bit differently...

    However no decentralized pricing system can serve to determine optimally these levels of collective consumption. Other kinds of "voting" or "signalling" would have to be tried. But, and this is the point sensed by Wicksell but perhaps not fully appreciated by Lindahl, now it is in the selfish interest of each person to give false signals, to pretend to have less interest in a given collective consumption activity than he really has, etc. I must emphasize this: taxing according to a benefit theory of taxation can not at all solve the computational problem in the decentralized manner possible for the first category of "private" goods to which the ordinary market pricing applies and which do not have the "external effects" basic to the very notion of collective consumption goods.
    That right there is the definitive theoretical justification for our tax system. It's the theory that stands between you and freedom. Read it at least 10 times.

    Now, you might be wondering why I titled this thread "Voluntary Exchange Theory". Well...it's because "voluntary exchange theory" is pretty much the same thing as the "benefit principle". Or is it? Well...not quite...but I don't exactly know where one begins and the other ends.

    But I do know that most of you are barking up the wrong tree. How do I know this? Because I just created the Wikipedia entry for the benefit principle, the preference revelation problem and Buchanan's club theory (how public goods are privately provided). Just like with demonstrated preference...evidently nobody else thought that they were important...or significant enough...to warrant their own entries.

    The solution to the preference revelation problem is simple...tax choice. If people have to pay taxes anyways, but they could choose where their taxes go, then they would have absolutely no incentive to lie about their true preferences. So tax choice has all the benefits of the Lindahl Tax...but it's completely impervious to the preference revelation critique. Unfortunately, tax choice has been nominated for deletion.

    And maybe the entry that I created for demonstrated preference will be deleted as well. As some of you might remember...it was in this thread....Rothbard's Blind Spot...where I mentioned that I had just created that entry.

    Initially I thought that Rothbard deserved the credit for critiquing Samuelson's revealed preference concept. Errr...well...he certainly does deserve credit...but if you read through Maricano's paper...Why markets do not fail...you can read about Buchanan's exchanges with Samuelson which occurred around the same time that Rothbard published his paper...Toward a Reconstruction of Utility and Welfare Economics. How different was Buchanan's critique from Rothbard's? Did they read each other's critiques? How come Buchanan didn't mention individual earmarking (tax choice) to Samuelson? Why didn't Buchanan ever promote tax choice?

    Well...I'm always trying to point you guys in the "right" direction. I see so many threads that have absolutely nothing to do with anything relevant to the obstacles that stand between us and more freedom. Our lives are too short to spend barking up the wrong trees.

    Hopefully you'll read over some of this material. Hopefully you'll ask questions. Hopefully you'll start using the term "non sequitur economy" rather than "planned/command economy". Hopefully you'll join Wikipedia and we can collaborate on shedding light on important concepts that have been hidden from view. Hopefully you'll like tax choice on facebook (It's now up to FOUR likes!).

    And if you think that I'm barking up the wrong tree...then please point me to the important Wikipedia entries that I've missed!

    I'll leave you with a few "treasures" from Joel Waldfogel, the author of Scroogenomics (yes, I created that entry as well)...

    I’m not against spending, I’m just against spending done ignorantly by others.
    What I found is no surprise from the standpoint of economic theory: gifts - things that others buy you - are poorly matched with your preferences. As an institution for "allocating resources" (getting stuff to the right people), holiday giving is a complete loser.
    Consumers fare better [at identifying their own preferences] than all types of givers except significant others and possibly grandparents...it seems unlikely that an alternative chooser would do better than friends, siblings, and parents, all of whom have substantial amounts of information about the ultimate consumer's preferences.
    First of all, the economy consists of buyers and sellers. You think about why we spend in the first place. We spend in order to produce satisfaction for buyers. We don't spend in order to help sellers. It's fine if we do help sellers, but we're trying to produce satisfaction. If the spending we engage in doesn't produce any satisfaction, then it's hardly a measure of well-being. I'm not against the spending. But whatever amount of spending we do, we should get as much satisfaction out of it as we possibly can.



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  3. #2
    Does the government provide every single good possible? Because if I can't chose that my compulsory taxes are being spent on, let's say, flat screen TVs, because I prefer having a new flat screen TV over more wars, more police, more welfare, more parks and more of every other "public good" your proposal does absolutely not lead to Pareto optimal results.

    I have $2000, your tax takes away $500. My list of preferences looks as follows: I would want to spend my first $500 on food, then $200 on insurance from health to car and fire insurance, then $1000 on a new computer, then $200 on clothing, then $50 on security, then $500 on a vacation, and on and on. My list of wants is indefinite but ordered from the most important to the least. In a free market I would spend my money according to my preference list and therefore I would always end up with a Pareto efficient outcome.

    You however, want to take away $500, so that I can only allocate $1500 according ot my preferences. Yes I could choose were to spend those taxes on, but I guess there is a specific list of goods and services to choose from. If that is the case I could hope that some of those are among my top preferences. If I could spend all the $500 on goods and services that are on my prefrence list before my wealth is exceeded that would be the best case. And in the best case I'm exactly as well off as if there were no government at all. If I can not choose to spend my tax money on food, computers, clothing and vacation then I'm worse off due to taxation, in my example above.

    Edit: Also, would all government action be financed with your "tax choice"? Even the IRS? If nobody chooses to spend their money on the agency collecting those taxes, wouldn't your system fall apart?
    Last edited by Danan; 01-09-2013 at 03:22 PM.

  4. #3
    Quote Originally Posted by Danan View Post
    Does the government provide every single good possible? Because if I can't chose that my compulsory taxes are being spent on, let's say, flat screen TVs, because I prefer having a new flat screen TV over more wars, more police, more welfare, more parks and more of every other "public good" your proposal does absolutely not lead to Pareto optimal results.
    100 years ago...did the private sector provide every single good we have today? How many goods were available in China when Deng Xiaoping replaced Chairman Mao in 1978? How many good are available in China now?

    If we implemented a tax choice system...if we created a market in the public sector...what would happen to the quality/quantity of available public goods over time?

    I understand why it wouldn't be Pareto optimal...initially...but I don't understand why it wouldn't become more optimal over time. As Milton Friedman said...in a market system...losses are even more important than profits. Creating a market in the public sector would allow the least effective/efficient government organizations to suffer losses. A loss to a less beneficial organization is a gain to other more beneficial organizations. That's why markets constantly increase the total amount of benefit over time.

    Quote Originally Posted by Danan View Post
    Edit: Also, would all government action be financed with your "tax choice"? Even the IRS? If nobody chooses to spend their money on the agency collecting those taxes, wouldn't your system fall apart?
    Yes, it would be a market in the public sector...every government organization would depend on taxpayers for funding...even the IRS. If people didn't give their taxes to the IRS...the system wouldn't fall apart...it would just go from compulsory to voluntary.

    The thing is though...you're focusing on whether or not tax choice is Pareto optimal...rather than considering what impact it has on Samuelson's preference revelation problem. Based on my research...our tax system is based on his critique of the benefit principle. Every single thing I've read about the benefit principle says that it's limited by the preference revelation problem.

    I don't think it would only be a small step for mankind if we managed to force the opposition to seriously rethink their position. What leg would they have to stand on without their preference revelation problem? Why wouldn't we want to find out? We are letting them distract us with smoke and mirrors...they are more than happy to have us chasing our tails worrying about fiscal cliffs and platinum coins...rather than finding and attacking the heart of their argument. Why let them set the agenda?



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