The Political Philosophy of Pricing

Let’s get into a little bit of political philosophy. Here’s my logic flow that sets the context for this discussion. This is my first crack at laying this out, so I hope it is easy to follow:

  1. An efficient economy is desirable because it raises the general standard of living, which can help more people escape from the limiting effects of poverty.
  2. An efficient economy is one that enables resources to be put to the best use.
  3. Prices are central to helping resources be put to their best use. Only market-generated prices can accurately convey the true and current value of something, as explained by all the following points.
  4. The market-generated price of something is determined by (1) the cost of all the inputs and (2) people’s willingness to pay.
    1. The cost of all the inputs is determined by the price at which those inputs are being sold by suppliers. And those suppliers are setting their prices according to the same two factors (the cost of their inputs and people’s willingness to pay).
    2. People’s willingness to pay is an aggregation of the different potential buyers how much that input is worth to each of them, which depends on if there are substitutes and, if so, the relative price and quality of those substitutes for their specific use case.
  5. The numerous supplier-buyer diads, taken together, form a supply chain, and at each link in the chain there are prices being set in accordance with those same two factors.
  6. New uses for resources are constantly being developed, and the availability and procurement cost of resources are also constantly changing, all of which have ripple effects on the prices of all other resources in the economy as mediated by changes in those two factors that determine market-generated prices.

I’m sure that logic flow will need to be clarified and changed, but it is a start at least. And the conclusion of it, at least as it relates to administrative pricing, is that there is no way a group of experts could ever acquire enough information to accurately determine the proper efficient-economy price for a single product at any point in time, let alone constantly adjust that price over time to take into account the ever-changing factors in every locality.

The way Friedrich Hayek said it in his seminal paper, The Use of Knowledge in Society, is that “the knowledge of the circumstance of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.” And, therefore, “Prices can act to coordinate the separate actions of different people.”

He gives an example of this using the tin market, showing what would happen when suddenly there arises a new use for tin:

“All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all his without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.”

I do not think people argue that administrative pricing is as efficient as relying on market-generated prices. But from this it should be clear that those two prices are going to end up being wildly different from each other most of the time, and the challenge is to quantify the efficiency cost to the economy of that and then to weigh it against the estimated benefits of using administrative pricing.

Or, in cases where administrative pricing is being proposed in an attempt to curb our capitalistic society’s wealth inequalities, why not just use other methods to redistribute wealth and avoid administrative pricing’s efficiency costs on our economy altogether? This is what I’ve described in my examples of an optimal single-payer healthcare system and an optimal government-run healthcare system.

Socialism Leads to Totalitarianism?

Friedrich A. Hayek
Image credit: Mises Institute

If you haven’t noticed already, I have a strong interest in political philosophy. Isn’t thinking about the different ways government could be designed exciting? This is primarily a health policy blog, but political philosophy topics are closely enough related to what happens in healthcare that I write about them here as well.

I recently read (listened to) The Road to Serfdom by Friedrich Hayek. The interesting thing is that he seemed to be using my framework for categorizing governments. So I’d like to restate his main points in the context of my framework.

The book was written during WWII and published in 1944. At that time, he was living in the U.K., and he was seeing a movement there toward central planning, so he wrote this book to explain to the people involved in that movement how central planning starts a country down a road that leads to totalitarianism. He used Germany’s then-recent political history as the main case study to show how that process goes.

Let’s say the U.K.’s government looked something like this at that time:

And the “planners,” as Hayek calls them, wanted to do this:

There were different motivations for this. One was that, at the time, technology was seen as necessarily pushing industries toward monopolies, so they felt that government ownership would limit the tyrannies of monopolies. Another motivation that developed is a change in how freedom was conceptualized. “Before man could be truly free,” they said, “the despotism of physical want has to be broken.”

Notice that these are not totalitarian desires; they are desires for efficiency and an increase in freedom and opportunity for the poor. So how does Hayek say they lead to big leftward shifts on the other three spectra?

He doesn’t exactly provide a super explicit stepwise process, but here are some of his major checkpoints along that road:

  • Planning a society will involve areas with great agreement, but there will also be areas with great disagreement. In those areas of disagreement, people lose the freedom to conserve their preferences.
  • If a state owns half the economy, it necessarily controls most of the other half indirectly due to the interactions between industries, such as through shared inputs to those industries (like labor and resources). This means there is no part of society where people are completely free of government direction.
  • After a democracy votes in a planning government, they find that the democratic process is ill equipped to handle the plan’s requirement for rapid and unified-purpose decision making, so different parts are working at odds with the overall plan or are slow to change to fit better. For this reason, the laws they pass increasingly delegate decision-making power to unelected experts. Eventually, their legislative power becomes limited to making decisions about the plan’s overall goals, although in this area as well they find themselves inadequate because frequent shifts in goals (due to differences in factions’ priorities and politician turnover with each election cycle) undermine progress toward any ideal. Thus, they begin to concentrate the power to direct the overall goals (and coordinate the efforts of those many boards of experts) into a single individual who is not fettered by democratic and legislative processes.
  • This new powerful leader is occasionally confirmed via the democratic process, but the leader has the power to ensure, one way or another, that the votes go in his direction so he can continue working toward the ideal society.
  • A planned economy becomes the rule of man because so many of the decisions about people’s lives become arbitrary (whose interests to prioritize over whose). For example, do you increase wages of the working poor who are struggling to get by or do you decrease unemployment?
  • A planning government only sets out to control and improve the economic aspect of people’s lives, but by controlling the economic aspect they are indirectly controlling nearly every other aspect, such as where people live (you can’t move somewhere else if the government hasn’t decided there will be jobs available in that area) and what you do for fun (which luxury items and entertainment options are available and how they are priced).
  • People are dissatisfied when they are made to go along with another’s set of priorities and values, so the government creates indoctrination tools that will reduce the number of people resisting their goal for an ideal society.
  • The whole apparatus of information, including schools and print and audio and visual media, will be used not only in supporting the ends but also the means to achieve the ideal society, and speaking out against it becomes not just an opinion but treachery.
  • The leaders who tend to arise in such a system are those who are the strongest and most motivated to get things done, which means they are the most likely to be willing to ignore negative impacts on other people in pursuit of their singular focus (the means justify the ends).

So this is where the U.K. could have ended up if the planners had gotten their way, and remember this would all come from the planners’ initial desires to have the government help out with inefficient industries and to reduce the despotism of poverty:

There are so many other points made in the book that flesh out these ideas more fully, but I will forbear. Suffice it to say that end point of the the road is not just totalitarianism, but serfdom, which is due to the increasingly impossible task of a government trying to control an entire economy and, in the process, distorting every single worker’s incentives away from efficiency and innovation and redirecting resources away from their most profitable uses.

Reading this was quite an interesting experience because, with every point Hayek made, I could visualize which spectrum he was talking about and interpret his explanations in terms of which direction (and how far) a country would slide along that spectrum.

And the question it left me with is this: If Democrats’ policies tend to push toward more wealth redistribution and more government control over industries (e.g., Medicare for All), does this mean electing Democrats puts us on the road to serfdom?

My thought is that it doesn’t. Pushing for Medicare for All is not the same as endorsing a planned economy. One could argue that it’s one step closer to getting us on that road, but we have seen “social democracies” in Scandinavia not progress toward totalitarianism, so maybe that slope isn’t as slippery as Hayek makes it out to be. Exactly which factors would also need to be at play for us to truly get onto the road to serfdom? I don’t know. Any thoughts or ideas are welcome.

A Framework for Thinking About Welfare Policies

Image credit: texaswic.org

If you’ve read much of this blog, you already know that my brain makes sense of the world via exhaustive, mutually exclusive categorizations. And here is that applied to welfare.

Speaking specifically of financial situations, there are three categories of people . . .

  1. Self-sufficient: They currently don’t need external financial support
  2. Temporarily dependent: They need some degree of financial support now, but they have the potential to shift into the self-sufficient category
  3. Permanently dependent: They need some degree of financial support for life

I believe people want to be in the self-sufficient category. Being self-sufficient is fulfilling; it’s an achievement obtained through effort that leads to growth, and humans obtain fulfillment from personal growth.

But humans also want to get the most for the least amount of effort. If it’s unquestionably proven and everyone knows that you can get equally great-looking and strong abs with the Seven-Minute Abs workout or the Eight-Minute Abs workout, nobody would choose the latter unless they get some ancillary benefit from working out for an extra minute.

Welfare efforts, either private or public, need to take into account those two features of humans as they seek to achieve the goals of (1) helping people who are in the self-sufficient category to stay there, (2) financially supporting the people in the temporarily dependent category in a way that promotes their movement into the self-sufficient category, and (3) providing sufficiently for the permanently dependent in a way that preserves their dignity.

But this is only half of the discussion. Remember, there are two groups of people involved in welfare efforts: those to whom the wealth is being provided (the recipients) AND those from whom the wealth is coming (the benefactors). My simple framework above only deals with considerations about the recipients.

And what of the benefactors? Talking specifically about government welfare programs (forced giving “at the point of a gun,” as libertarians would put it), there are several impacts on them that should not be ignored. Forced giving takes away the increased societal cohesion and shared empathy that comes when a benefactor gives to a needy neighbour. Beneficiaries may give more of themselves when they do it voluntarily and when they have more control over how their donation is used (because they are giving in a way that they feel is most efficient and best for the recipients). And when high taxation is instituted for the sake of wealth redistribution (especially if it’s progressive), beneficiaries’ incentives change–their marginal willingness to work and create more jobs and wealth (which will probably end up being used by others rather than themselves if they are already wealthy) is diminished, although the macroeconomic impacts of that are unclear.

There are many other considerations and values that come into play when deciding how best to provide welfare in a society, and I will not try to go through them exhaustively. But I do have a couple other points to make on this topic.

First, it’s ok for people to have different values that lead to different decisions about how best to support those in need. I don’t feel like people generally come to their preferences about this topic based on bad motivations, of which probably the most common accusations are greed and selfishness–“liberals want free stuff from the rich,” and “conservatives don’t care about the poor.” On the contrary, they all seem to be trying to figure out what the right thing to do is, but there are multiple values at play, and it just depends on how you prioritize those values.

Second, people forget that there is a difference between inequality and poverty. The is especially relevant to my post last week about socialism. Is the goal to eliminate wealth disparities, or is it to eliminate poverty? There’s a huge difference. That same question, put a different way, might help clarify the distinction: Is a society morally objectionable if it has eliminated poverty but still allows for significant wealth inequality (assuming the society’s policies are such that it also supports people’s freedom of opportunity to move between classes)? Your answer depends on your core values and beliefs about the goals of a society.

And now you know a little more about why I said I’m torn about where I sit on the welfare spectrum.

What Is Socialism?

Image credit: Daria Kochetova

The term socialism has been a popular one this election season, but people are using it in many different ways. Some say most Democrats (including Joe Biden) are socialists. Others disagree and reserve that term for Bernie Sanders. And still others reserve the term for the policies more akin to Cuba and Venezuela. Then there’s the question of whether the Scandinavian countries are socialist, and even Canada gets thrown into the mix. (I have enjoyed reminding conservative friends lately that I grew up in a “socialist” country and that it was a great life!)

The difficulties people have in defining socialism arise, in large part, from not realizing that the they are entangling multiple distinct aspects of government into a single term. They need a framework to categorize the major aspects of government.

To elaborate on what I wrote in that linked post (which you should read first if you haven’t lately), socialism is strictly defined as a system where the “means of production” (i.e., the companies producing the goods and services) are owned socially. Social ownership could mean a few different things, but usually these days we interpret that to mean that the government owns them and runs them.

As an aside, this is where the term “socialized healthcare” comes from–the government owns and runs the health insurance industry, plus or minus the provider organizations as well. I guess if it only owns the health insurance side (e.g., Medicare for All), it can only be considered half-socialized healthcare. And if the government owns the provider organizations as well (like in the U.K.), then it’s fully socialized healthcare.

Anyway, based on that strict definition of socialism, the term only encompasses a single spectrum out of the five–the economic spectrum. It says that the locus of decision making about the use and distribution of resources/goods/services is closer to the centralized end of the spectrum.

But people don’t commonly use that strict definition, and that’s where things get messy.

When I studied socialism in social studies class in my Canadian public high school, the term was used a little bit more broadly to include government ownership of the means of production AND a great degree of wealth redistribution to ensure a relatively high minimum standard of living for all citizens. In other words, the term encompassed two spectra–the economic spectrum and the welfare spectrum.

Using that definition, we appropriately didn’t see Canada as a truly socialistic country: The Canadian and provincial governments only own a few industries’ means of production, and they provide generous but not expansive (socialism-level) welfare programs. That’s why we studied other countries’ governments to learn about socialism.

And now, with this talk of Cuba and Venezuela, people seem to be adding in a third spectrum to their definition: the liberty spectrum. This definition of socialism, then, includes government ownership of the means of production, extensive welfare programs, AND severely limited liberties (i.e., totalitarianism).

There’s no sense in arguing over which definition is correct. People are allowed to use whatever definition they want (thanks, First Amendment!), so debates over definitions of terms get us nowhere. Instead, people need to clarify the definitions of ambiguous terms they are using so the focus can remain on the substance of the conversation rather than the words being used to convey that substance.

So, is President-Elect Joe Biden a socialist?

Well, if your definition of a socialist is someone who will push our government toward more centralized economic decision making (via a mixture of policies that (1) regulate the free market and (2) increase government ownership over some aspects of the economy) and toward more wealth redistribution, then, YES, he is a socialist.

But if your definition of a socialist is someone who will enact extensive central planning, near-total wealth redistribution, and maybe some totalitarianism as well, then he’s nowhere near a socialist. Or, if you think his true policy preferences fit that description and that his policies are calculated to get us to that point, I guess you could say he’s a closet socialist, or maybe a progressive socialist.

Either way, define your terminology and then let’s move on to substantive discussions about the merits and limitations of his policies and alternatives to them.