There are two ways to think about government. By far the most common is to think of government as a force over and above the citizens which has always just been there, which provides for them, which they are inherently bound and subject to, and which can be petitioned as one petitions God or a child petitions its parents for whatever they want by appealing to its morality. This is a bad way to treat government and I’m sure my libertarian friends will agree. The correct way of thinking about government, at least government among free people, is as a contracting problem. Most people have trouble thinking of it this way because when they hear the word “contracting” they think of contracting in a legal sense. This type of contracting requires a third-party enforcer (a government) to enforce the contract. In the absence of a third-party enforcer, there is still the possibility for contracts but those contracts must be self-enforcing. Consider some examples.
Contract 1: I come to you and ask for a loan. You give me $100 today and I will give you $110 one year from today. This contract is not self-enforcing because 1 year from now there is no incentive for me to pay you back. I already got what I wanted out of it, why should I fulfill my end of the agreement? If there is a third-party enforcer, it is in my interest to uphold the contract because if I don’t, then the enforcer will come and punish me. But without a third-party enforcer, this contract will not be possible even if it would be mutually beneficial.
Contract 2: I am a farmer and you are a swineherd. We agree that every autumn I will give you a portion of my crop and you will provide me with meat throughout the year. This contract may be self-enforcing because the benefits to both parties are continuous. This will be the case as long as the benefits to both of us from continuing the agreement are always greater than the benefits from breaking it.
The last post was intended to establish a framework for thinking about morality and ethics in the context of government. The purpose of this post is to analyze the morality of a specific government action, namely taxation. [Editor: it actually goes a little beyond that...] In order to do this we must assume a few things. Here’s the scenario we will consider: A group of people come together who want to form a libertarian government. They believe it is immoral to initiate violence against another person. So I aim to evaluate certain functions of government through this moral lens. I’m not trying to argue that this morality is the one true correct morality but this post is intended for people who generally share my libertarian views. Read more…
This is a continuation of what I started in this post on morality and ethics. The position I am disputing is that government shouldn’t tax because taxation is theft and theft is immoral. Let me say up front, that a government which could accomplish its purpose without taxation would be ideal and I believe it’s possible that this could be achieved. If we could start a government from scratch with people who all believed as Thomas and I do, we might be able to fund the government with only voluntary payments (to be fair this is exactly the scenario he was dealing with in his original post). I won’t get into how that could be done but I’m not trying to prove that it’s impossible here. My issue is with the attitude that there is a universal morality which government must (or at least ought to) follow. And if we have any interest in fixing this thing before it gets so bad that we have to rebuild a society out of the ashes, we can’t have that approach. We are so far away from a national consensus that taxation is theft and should be outlawed altogether that if you adopt this position your only option is to wait for the collapse of society. The real important thing is that the government be prevented from using taxation to redistribute wealth and manage its distribution. This does not require a complete moratorium on taxation.
A government has no morals. It has no morals because it is not a creature. It is a tool created by people to perform some task. Tools do not have morals. A hammer can be used for building a house–a noble pursuit–or committing a murder–not so noble. If I am making a hammer, I cannot imbue the hammer with a moral objection to murder. There are however, some things I could do to make it more difficult to commit murder with my hammer. I could remove the forks on the back or perhaps put a layer of foam rubber around the whole head except for the face. If I really wanted to be sure, I could even cover most of the face leaving only a small hole in the foam rubber that would have to be lined up precisely with the nail on every strike in order to work. These things, while making it more difficult for someone to use my hammer for murder would also make it less useful for building houses. Read more…
I promised I would write a post explaining why taxation is ok following this exchange on The Compassionate Conservative.
Thomas H.: Government can be funded through voluntary donation only. A lottery and payment for the protection of contracts are one way this can be achieved. These methods of raising funds, as well as private donations, would be enough to provide funding for a righteous system. The U.S. Patent system stands as an example of how this can be done.
Free Radical: A lottery wouldn’t be very profitable without a government-enforced monopoly which I assume you wouldn’t support. In fact this would just be the government competing in a market activity for profit which is a very bad idea. It would be better to just have taxes you just need to keep them from being used to redistribute wealth which is not all that complicated.
Thomas H.: I agree with you about the lottery comment, but that doesn’t change the fact that taxation is theft by definition and theft is wrong.
But that ended up opening a big can of worms so I have to do a preliminary post establishing some things about morality. I begin with the proposition that the ends justify the means. However, most people who rely on this adage are not applying it correctly because they are not accounting for all of the ends. For instance, if a man wants to bring about world peace, and goes about this by conquering the world leaving a trail of death and destruction in his wake and then claims that the ends (world peace) justify the means (trail of death and destruction) he is mischaracterizing the latter. The trail of death and destruction is part of the ends. You may still claim that it’s worth it for world peace but you are weighing ends against ends. If you must lie to accomplish something and lying harms someone else or harms your reputation, these are all ends. Depending on your morals it may or may not be worth it, but again, it’s ends against ends.
If all of the ends of a certain course of action taken together are justified then the means are justified. In fact there is no other way of justifying any means but the ends. The thing that makes a hammer a good tool is the fact that it is a means of driving a nail (an end) that is relatively easy (another end) and inexpensive (another end). You take all of these ends, put them together and if they are good, then the means (the hammer) are justified. If you tried to drive a nail with a herring you would most likely find that, if you can manage to get the nail driven at all, it will be at a much higher cost than some alternative method, thus the herring is not a justified means of driving a nail.
Believe it or not, that’s basically economics, so let’s turn to ethics now. For the purpose of this post, allow me to put forth two definitions. These are not exactly the common definitions of these words but they highlight an important distinction for our purposes.
Morals: The sense someone has about what is right and wrong.
Ethics: A rule or set of rules a person uses to make decisions about their actions and behavior.
Morals are subjective and are beyond our control. They can change but we can’t choose to change them. If we had perfect information about all the ends which would result from a course of action, then we could evaluate the morality of them in relation to our own subjective morals and decide whether that course of action is “justified.” If this were the case (perfect information), we would have no need for ethics. But of course this is not the situation in which we find ourselves.
In reality the consequences of any course of action are usually numerous and either partially or entirely veiled in mystery. Because of this it would be impossible to actually evaluate our actions based on the ends. If someone were to take this approach to morality, they would almost certainly commit frequent moral transgressions out of pure ignorance. In addition, in the presence of this ignorance, there are many forms of bias which are likely to creep into their decision-making. For instance, they may tend to minimize the importance of potential but uncertain adverse effects on others and magnify more certain advantages to themselves, or they may favor current benefits over those which are far-off. The bottom line is that, by adopting certain ethical rules, they may force themselves to make decisions which add up to a better life than if they tried to address the morality of every situation independently. These ethics may not lead you to make the correct moral decision every time, it is enough that they cause you to err less often than you would without them.
For instance, take the boy who cried wolf. This is a story about a boy who does not understand all of the implications of his actions. He knows that lying causes amusing results in the short run but is entirely unaware of the long-term consequences for his reputation. This condition applies to most children and that is the reason for the fable. It is meant to teach children about this other consequence and ideally instill in them the ethic “thou shalt not lie.” It is clear to most parents that if their child were to adopt this ethic they would end up better off than without it. Of course if they could somehow grant their child complete knowledge of the consequences of every action they take, this would be even better, but in lieu of this, “thou shalt not lie” is a helpful rule of thumb.
Of course, the boy who is convinced to adopt the ethic “thou shalt not lie” may eventually get married and be asked by his wife whether or not she looks fat. Assuming she does in fact look fat, a man who approaches each decision independently is likely to conclude that this is a situation where a lie is justified by the ends. Alternatively, if he makes the decision based on an ethic against lying, he will not even attempt this calculation and will simply tell the truth. The consequences of this may add up to something undesirable in this case. However, if the cost in this case and other similar cases where he may make the “wrong” decision based on his ethic are less than the costs from the “wrong” decisions he would make our of ignorance when making decisions in the absence of the ethic, then the ethic is beneficial. Similarly, he may find himself in a situation where the fate of the entire universe depends on him telling a lie, but this scenario is probably so unlikely that it is worth the risk. (In practice, of course, reason may often overrule an ethic in situations where it is sufficiently obvious that the result of breaking it will be more desirable than following it).
Notice that the boy who cried wolf has no moral aversion to lying. If he did, then he would have no need for an ethic against it. This too is representative of most children. The things our morals relate to are all ends. Admittedly I am defining “ends” in such a way that this must be true, so if a child did have a natural moral aversion to lying (which is certainly possible since morals are subjective) then not lying would become an end in itself. But typically, we don’t have this moral naturally which means lying is a means to some other set of ends (known or unknown) which allow for some moral evaluation. If someone did have a moral aversion to lying, then the ethic may not be necessary (it’s possible that this moral may come into conflict with another moral and if, when this happens, the complete consequences are unknown and tend to favor not lying, then the ethic may still be beneficial). Indeed, the ethic often becomes a moral aversion to lying eventually and this is relevant to my ultimate point about government but you will have to wait for the next post to see what I mean.
It’s worth noticing that children, whose knowledge and reasoning capability are much less developed than those of an adult, rely most heavily on ethical rules. Ethics are a way of taking some widom about the world that someone may not be able to completely grasp and put it into a form that is easy to understand. It is not possible to explain to a child all of the possible consequences of lying, but it is possible to convince them that lying is bad. (I think the largest cause of casualties among the ranks of objectivist types who decry all systems of ethics is that they eventually have children) As we grow older and wiser we often relax some of our ethics because we become more comfortable with our ability to make decisions individually without that guidance. However, most of us still hold on to many of our ethics because our knowledge and reasoning ability always remain far short of perfection.
So to sum up, God (or nature or whatever you want to call this thing) has endowed us with some set of morals. In addition, we have been endowed with the ability to reason but this is imperfect and cannot always inform us of all the consequences of our actions before hand. This leaves a gap between where we stand at any moment and the ends which we ultimately wish to pursue or avoid. “Means” are the various ways in which we can bridge that gap. Our morals determine what we want to pursue or avoid but do not tell us how to get there. Approaching every situation with the pure force of our own reason is likely not the most effective way to approach life so we adopt certain ethics which are rules of thumb regarding means designed to lead us more often than not to the ends which we find morally desirable.
Obama escalated the war on congress today. He’s basically doing whatever he wants now and claiming an “obligation to act on behalf of the American people.” This is very troubling.
[H]ow is it that if savings equals investment and savings equals income minus consumption, that when you lower interest rates investment increases but consumption stays the same?
When I was reading Nick’s post, I couldn’t help but think about this and think how ridiculous Keynesian economics would seem to people if they explained what they were really doing in the same way I think about it in my mind. So naturally I figured I should take a stab at this.
As Nick explains, the model begins with two identities (assuming a closed economy and no government for simplicity): Y=C+I and S=Y-C. This gives you S=I as an identity. In other words, given the way we have defined the variables, this must be true. This is different from an equilibrium condition such as quantity supplied = quantity demanded which is true only in an equilibrium. So at this point no economics has been done.
In order to do some economics, you must assume some values of variables and some causal relationships which determine the values of the other variables. The way Keynesians go about this is to assume the following equations from Nick’s post (to simplify even further I will assume that autonomous spending, which is “a” in his model, is equal to 0)
8. Cd = b*Y (where a>0 and 0<b<1)
9. Id = Ibar
Where Cd and Id are desired consumption and investment respectively. Then if you assume that in equilibrium C=Cd and I=Id, you have a model (6 equations and 6 unknowns). But here is what we have done in plain english:
1. We have assumed that investment is equal to a certain value no matter what. This value is not explained in any way in this model and nothing in the model can change it.
2. We have assumed that consumers spend a certain proportion (b) of their income on consumption. This proportion is not explained in any way by the model and nothing in the model can change it.
3. Based on our definition of savings, savings must be the amount of income not consumed, which by assumption is (1-b)Y.
4. Since, by definition, savings is always equal to investment, we know that the amount of savings must be equal to the value we assumed for investment. (Ibar=(1-b)Y)
5. The only thing we haven’t assumed yet is Y (output) so that must be whatever value makes the proportion we assumed would be saved equal to the value we assumed for investment.
To make this even simpler consider a numerical example. Assume the following:
1. People consume half of their income and save the rest.
2. Investment is $100.
3. Savings equals investment.
Now it follows logically that Income is $200. Why is that? Well it’s simple, since savings equals investment and investment is $100, then savings must be $100. And since people save half of their income and savings is $100, then their income must be 2×100=$200. This does nothing to explain where income actually comes from! Now if, for some reason, people decide to save only 1/4 of their income, then, by assumption, investment doesn’t change so the amount of savings must still be $100. But since people are saving more, their income must be higher in order to generate this arbitrary amount of savings. Therefore, income must increase to $400 to bring the model into equilibrium. This is essentially how Keynesians arrive at the “paradox of thrift,” by assuming that savings will have to be a fixed amount so if people insist on saving a smaller proportion of their income, then income will have to get larger to make that smaller proportion equal to the presumed constant level of savings.
This model works mathematically but it is a terrible way to do economics. Proper economics assumes some scarcity fixed by nature and some purposeful economic agents which choose between different ways of dealing with that scarcity. In other words, the degree of scarcity is constant and the model determines what people do in the face of it. On the other hand, this Keynesian approach takes human behavior for granted and assumes that the degree of scarcity in the system adjusts to make an equilibrium given this behavior. It’s an economic paradigm custom-made for people who think that human nature is the source of all the world’s problems and if only we could get better at social engineering, everything would be great. But this is a mistaken view of reality, and it leads to a mistaken view of economics. Perhaps more troubling, is that the converse is also true. Tread carefully, “practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
Note: If I were a Keynesian I would probably be fuming at this post and I would point out that the Keynesian cross is only *part* of the Keynesian model, and that it is misleading to present this part as a complete model. For instance, in the larger model, investment is not fixed, it is determined by interest rates. However, it still enters the Keynesian cross part of the model independently of the other variables in that part. It is my belief that the same general criticism is valid with regard to the larger IS/LM model but my goal here was to make the case as simply as possible and it would be much more complicated to analyze that entire model in the same way. So, I will leave it to the interested reader to look into it further, but this should get you started seeing it for what it is.