Friday, March 7, 2014

Simple Evidence


NOTE: I found this post among my draft essays and realized I had not posted it, though I had intended to. Thus I am posting it now.

I have written repeatedly about subjective values and the lack of a single "right answer" in economic terms ("Absolute Values", "The Right Way", "The Inherent Disappointment of Authoritarianism", "The Danger Inherent in Banning "Bad Ideas"", "Liberalism, Its Origins and Consequences - Chapter 12 - I'm OK, You're A Mess"). but I am afraid I have still not conveyed my main point. From time to time I still see comments that seem to either miss my point, either arguing against moral and ethical relativism (which is not my point), or else agreeing with my basic premise while still smuggling in implicit absolute values through the back door. As the denial of subjective value is essential to not just liberalism ("Liberalism, Its Origins and Consequences - Chapter 3 - The Truth is Out There"), but all forms of intervention ("The Limits of "Scientific" Management") from technocracy ("A Thought on Technology and Technocrats", "Some Additional Thoughts on Technocrats") to protectionism ("Protectionism", "Protectionism Right and Left", "Fear of Trade",  "The Inevitable Corruption of Protectionism"), I feel the need to make this point yet again.

Fortunately, this time I have found a very simple example that I doubt anyone can misunderstand.

Anyone who has visited the IMDB recently has probably noticed the user lists posted along the left side of the screen, almost all of which are made up of lists of beautiful actresses, usually named something like "137 most beautiful women", "59 most beautiful unknowns" or "Jim Smith's 317 lovely ladies". Being a normal male, I am as inclined to look at attractive women as the next fellow, and so I have, from time to time, clicked on these links, especially when the picture displayed is an actress I find especially interesting, and looking through such lists demonstrates an interesting truth. No matter which list I view, there are inevitably at least a  few included with which I disagree, and others omitted I would have included.

And I am sure everyone else, if they bothered to look, would also have the same opinion. Were you to draw up a list of your N most attractive actresses, I bet the list would deviate, in at least a few places, from a similar list drawn up by me, or by anyone else. Even if our list included the same people, I doubt the ordering would be identical. And, even if, by some quirk of fate, two of us did produce identical lists, it is certain that there would be many others who produced lists which were in no way similar to our shared rankings.

Even more interesting, if I had you draw up such a list a year ago, or five, or ten, or even maybe a week ago, or a day, your list today would probably be somewhat different. Maybe only because new actresses had shown up you had not previously known, but also maybe because your tastes had changed, or the actresses' appearances had changed. Even if you picked the same actresses, you might rank them differently, or, if there were a way to measure such things, if they were ranked the same, the relative distances between them might have changed.* 

I mention all of this because such lists are perfect models of the way all our valuations work. Values -- in an economic, not moral, sense -- are ordinal, not cardinal. That is, we can say A is better than B, or at least we want A more than B, but we cannot put numbers to them. Much like our list of actresses, we can determine their relative positions, and even give some impression of the distance separating consecutive listings, but it is not a numeric value, capable of comparison the way we can compare weights or lengths.

In addition, these lists vary dramatically from person to person, and for a given person from moment to moment, and not for any single reason. Lists change because of the introduction of new information, of new discoveries, of changes in taste and alterations in existing items, and for countless other reasons. There is no single reason such lists change, but the one constant is that such lists change.

Moving from actresses to more prosaic matters, it is from such lists that prices are derived. While a given individual cannot put numeric values to the list of his values, he can use his subjective values to determine what trades he would make. Given his present values, he would trade two A for one B or three C for two B and so on. When we combine the preferences for each person in the economy, along with the amount of each good they control, we have created supply and demand curves which determine the relative prices of each good, setting them as close as possible to the point where all willing to pay market price can obtain as much as they wish, and where the values produce the maximum satisfaction for the economy as a whole.

The system is not perfect, it only tends toward the values which produce optimal results, it does not reach them, and for several reasons. First, because information is imperfect in the system, and so any change produces results sometime after the change occurs.Second, because individual preferences are constantly changing, the market is always producing results which were optimal given the preferences in effect at the time of the last transaction. New preferences cannot influence the market until they drive a new transaction. Fortunately,, changes are normally relatively small and slow, so the market usually reflects something close tot he optimum, when not impeded by outside interference, but there can be times when sudden changes in taste drive massive changes in the market, and it can take some time before the market approaches the optimal situation for the new reality.

However, the market, despite imperfections, is superior to all alternatives, as there really is no alternative, not if the well being of those participating in the market is your goal**. If we posit the system is best which produces the maximum satisfaction, we must recognize, because of the variation in individual desires, and the way such desires change, there is no way to produce results closer to the aggregate desires of society than the free market. However, I have made that point many times ("The Limits of "Scientific" Management", "The Limits of Econometrics"", "The Limits of Technocracy", "Greed Versus Evil", "The Basics", "Contradictory Beliefs and Practices"), so I will not pursue that now. 

Instead, let us return to my actress example to look at one alternative theory, that the market is to be rejected, or at least "fixed", because we should not pursue the maximum satisfaction for those participating int he market, but instead the "best" result, the "right" good and services in the "proper" quantities. ("The Most Misleading Word", "Luxury and Necessity")

Normally we think of such philosophy in terms of specific political theories, such as communism's insistence on producing necessities for the masses at the expense of "luxuries", or populist redistribution of wealth, even liberalism's insistence on producing universal health care at the expense of commercial output. However, in reality, any theory which rejects market valuations is effectively making this argument, be it the protectionists saying we should sacrifice cheap foreign goods for domestic jobs or social conservatives saying some goods should not be produced at all***, all are aspects of this same belief, that individual valuations do not matter, that there are better solutions.

The problem is twofold, that "better" is not defined and, better or not, any system still needs to function, in one sense or another, and the "better" solutions often fail by their own criteria.

Well, let us suppose that we return to our actresses, and ask what if someone were to tell you, your list is wrong, that Actress A is objectively the most beautiful woman possible. And, in addition, all actresses will be required to look as much like her as possible. What would be the result of this? If you find actress A the most attractive actress, then you might be over the moon, but for any who disagree, the result will be a reduction in total satisfaction. Even if they accept the argument that she is "objectively" the most beautiful, they cannot change their own preferences, and will still be less pleased than if an actress more attractive to them were favored.

And that is what brings about our second problem, the failure of systems designed to produce "better" outcomes. Whether or not you agree it is "better" to train scientists than mimes or produce textbooks than video games, those who want a video game or to watch a mime will be less happy than they were. And when people receive less satisfaction, they tend to put in less effort. In addition, those who are favored, who receive additional amounts of whatever they wish, will find the market glutted with their preferences (as they were produced in excess of demand), allowing them to obtain more at  lower price, resulting the need to produce less as well. And so, in general, the production of misallocated output will result in a general decline of productive impulses, both for those frustrated by the results and by those pleased with them. And, as few systems admit that their goal is to reduce production and overall satisfaction, this means the system fails by their own definition.

Of course, their definition is a problem as well. The problem being, what is "better"? How can we tell precisely how much food to make? Of what type? How many text books? What is the proper salary for a teacher? An actor? And so on, and so on. The fact is, there is no objective answer to such questions. Something is only better or worse in terms of a specific goal, and goals are based on individual valuations. Which means, any system claiming to produce "better" results, only does so in terms of some individual's own preferences.  In short, the system is simply imposing one set of preferences for the gamut of individual preferences, and, as we saw above with the lists of actresses, doing so does not improve anything, but simply disappoints everyone. ("The Inherent Disappointment of Authoritarianism", "Reforming Education")

And that, in the end, is the problem with any system based on anything other than free individual choice. The resulting system, regardless of its high sounding goals, amounts to little more than imposing the wishes of one individual upon another, reducing overall satisfaction, impairing production and generally dragging down the whole of he economic structure. 

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* This is hard to explain clearly in this context, but what I mean is that yesterday you may have thought actress A was much more attractive than actress B, while today you still think her more attractive, but think her only marginally so.

** Even if your goal is more selfish, say to produce your own maximum satisfaction, the market is still the best bet. The market drives each individual to his best output, and drives prices down and availability up, making it likely a free market will provide you with the best options available to you. Of course, if you are in the unusual situation of being able to impose your will on the entire economy, you may be better served by a non-market solution. But for most of us, limited in the scope of our powers to controlling only our own actions, the market is both the optimal selfish and altruistic solution.

*** I am not talking about persuading others to stop making such things, but instead talking about using the power of the state to coerce individuals to stop producing what they wish.

Originally posted in Random Notes on 2011/09/04.

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