Re: Highest Valued Use, and Consumption
Robert, Why should your analysis pertain to just consumption goods? A bored milionaire might make an offer to buy a small factory to entertain himself by piddling away at running a break-even business in his retirement years. In the process, he might outbid a less wealthy person who would like to own the factory and run the business in earnest. What you are getting at is a known problem within neoclassical welfare economics. In his book _Price Theory_, David Friedman discusses the issue here http://www.daviddfriedman.com/Academic/Price_Theory/PThy_Chapter_15/PThy_Chap_15.html . One response to the scenario you mention is that economic efficiency works well enough. Another is that the family with the kids values kids more than square feet and chooses to spend their money accordingly. My own opinion is that you are correct to observe that money is subjectively valued just as are all other goods. Consequently, if you want to argue for laissez faire, you should appeal to other types of arguments. James Robert A. Book wrote: I had a rather unsettling thought recently, and I'd like to run it by the ARMCHAIR group and see if any of you can tell me if this is (a) correct and well-known, even if I somehow missed it (citations please!), (b) completely wrongheaded (reasons please!), or (c) correct and actually new. Keep in mind as you read this that I'm a very free-market-oriented economist. Don't think, when you get to the fourth paragraph, that I'm advocating socialism. I'm not. Here goes: It's a basic teaching of economics that in a free-trade environment, resources will be used for their highest-values use. (The version of this that says "In the absence of transaction costs..." is known as the Coase Theorem.) In other words, if a particular piece of property produces more income (net of other inputs) as a farm than as a shopping center, it will be used as a farm rather than a shopping center regardless of who owns it initially, since a farmer will be willing to pay more for it than a shopping-center developer. This always holds, unless there is either some enforceable law preventing the highest-valued use, or if transaction costs of transfering it from it's current (or next-highest-valued) use to its highest-valued use exceed the incremental value of that use. My thought is: This is all fine when the resource concerned is used to make money, but what if it's used for direct consumption? For example, suppose there is a large four-bedroom house on a nice lot for sale in a nice neighborhood. A two-income couple with no kids may well be able to outbid outbid a one-income family with five kids (raised by the parent who would otherwise be able to earn another income), who may in turn be stuck in a three-bedroom cramped townhouse because of their lower household income. But, is that really a higher-valued use? Normally, we assume that the "value" of something is what somebody is ready, able, and willing to pay for it. The fact that the childless couple offers to pay more "proves" that the large house is worth more to society in their hands than in the hands of the large family. But if the two households were forced to trade houses -- putting the childless couple in the smaller house and the large family in the bigger house -- would total utility increase? If total utility is a monotonic function of per-capita square footage -- which "sounds" reasonable -- the answer is yes. If this is the case, it means the market is NOT allocating resources to the highest-values use. The normal way out of this situation is to appeal to the fact that we can't make inter-personal comparisons of utility. That is, a given consumer's utility function is good for ordering THAT consumer's preferences (you value this item more than that item), but it tells us nothing about one consumer's valuation compared to another consumer's (do you value this item more than the next guy? we can't know). This is not just a statement that utility functions are highly personal -- it's actually a necessary consequence of the axioms we think utility functions ought to satisfy (and assume they do satisfy). Those axioms imply that any monotonic transformation of a utility function is equivalent to the original utility function -- that is, you can't multiple your utility function by five and then claim you value everything five times higher than you used to. The problem with this appeal is that it doesn't really solve the problem. To the contrary, it basically says YOU CAN'T SOLVE THE PROBLEM. You can't say that the house is worth more to the larger family than the small one based on per-capita square footage (since you can't compare one family's valuation of square footage with the other's) -- but you ALSO can't say the the house is worth more to the small family than the large one based on willingness/ability to pay, (since you can't compare one family's valuation of money with the other's). In other words, if this is right, the Coase
Re: Dickens on the Laffer Curve
If you ever wondered which end of the ideological spectrum was a humorless lot... Stephen Miller wrote: It's not as funny when you explain it... On Apr 21, 2005, at 9:51 PM, James Wells wrote: That's the trouble with the empirical testing of Laffer effects. Your selected timeframe has an inverse relationship with the revenue maximizing rate of taxation. The tax policy that maximizes revenue over the next hour is to confiscate everything. The revenue maximizing tax policy over the next century is to tax at some lesser rate that anticipates the formation of capital to expand the tax base. Depending on the time frame you chose, you can conclude that t is currently on whatever side of t* you prefer so as to make the case for a tax cut or a tax hike. jlw Stephen Miller wrote: So it worked in the short run, and in the long run they were all dead! .
Re: Dickens on the Laffer Curve
That's the trouble with the empirical testing of Laffer effects. Your selected timeframe has an inverse relationship with the revenue maximizing rate of taxation. The tax policy that maximizes revenue over the next hour is to confiscate everything. The revenue maximizing tax policy over the next century is to tax at some lesser rate that anticipates the formation of capital to expand the tax base. Depending on the time frame you chose, you can conclude that t is currently on whatever side of t* you prefer so as to make the case for a tax cut or a tax hike. jlw Stephen Miller wrote: So it worked in the short run, and in the long run they were all dead! On Apr 21, 2005, at 5:10 PM, Bryan Caplan wrote: Yes, but ag collectivization in the USSR DID raise additional government revenue, at least in the short-run. The people starved, production fell, but Stalin got more grain to feed the cities and export. At least that's my recollection from Conquest. Of course, productivity growth in agriculture was very low afterwards, fitting my long-run Laffer curve story! -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] http://econlog.econlib.org "[M]uch of the advice from the parenting experts is flapdoodle. But surely the advice is grounded in research on children's development? Yes, from the many useless studies that show a correlation between the behavior of parents and the behavior of their biological children and conclude that parenting shapes the child, as if there were no such thing as heredity." --Steven Pinker, *The Blank Slate* "When a pitcher's throwing a spitball, don't worry and don't complain, just hit the dry side like I do." - Stan Musial .
Re: Laffer Curve
Jeffrey Rous wrote: I think the debate is over the tax rate where revenue is maximized. If it is near 25%, you can argue cutting taxes will raise revenue, if it is nearer to 60%, cutting taxes will cause revenue to fall. I am sure there has been research on this, but I do not know the consensus (last I heard, the peak was at about 75%-80%). I think it gets considerably more interesting when you think of how taxes and growth can be endogenous. It is possible that even on the near side of the Laffer curve, a tax cut could cause a large enough increase in investment that the DPV of future revenue could increase. As I understand it, this is one of the arguments Republicans make when arguing tax cuts. Of course, in the 1980s, the Reagan administration did argue the highest tax rates were on the far side of the Laffer Curve. -Jeff Jeff, I would suppose that the revenue maximizing tax rate depends on the time frame that one wants to maximize revenue over. If the federal government wanted to maximize tax revenue collected in one week, introducing a 500% national sales tax on all goods might be the way to go. Over a decade, a 500% national sales tax would probably be a net revenue reducer. One of the things I notice about the empirical arguments against Laffer motivated tax cuts is that they all suffer from a time frame bias. For example, if the national income tax were an hourly event, cutting taxes at 9:00 wouldn't show any measurable increase in revenues at 10:00 or 11:00, or even after a month. There just wouldn't be enough time for capital formation and subsequent growth to occur. Tax cut skeptics would point out that they have a sample of several hundred data points showing that the current tax levels were on the low side of the optimal point. Unfortunately, there are always more short terms than long terms in any perion for empirical researchers to work with. James
Re: Laffer Curve
Xianhang Zhang wrote: James Wells wrote: I've been reading about Laffer's idea that there is a tendency for revenues to increase with increased taxation up to a point where revenue is maximized. As one of the class notes on Caplan's site indicates, you can derive revenue as a function of the tax rate and assuming that the slopes of the supply and demand curves are constants not equal to zero, you can show that the Laffer effect exists. For example, from Pd = price paid by buyer Ps = price received by seller t = tax per unit = Pd - Ps. R = revenue = tQ Supply curve: Qs = a + bPs Demand curve: Qd = c - dPd You can derive R = t(bc + da - bdt)/(b + d) Still, a lot of people have said that the Laffer curve is bunk. Are there any Laffer detractors here? If so, what must the supply and demand curves for labor look like for R(t) to be an always increasing (or at least never decreasing) function? James I'm not sure exactly what people should be objecting to. Logically, at a tax rate of 0, revenue is 0, at a tax rate of 100, revenue is zero. There exists a positive revenue for tax rates in between that range so logically, a maxima must exists within that range. Xianhang Zhang . Yes, I understand and agree with the argument underlying the Laffer curve. What some people might object to is a misunderstanding of the Laffer curve, i.e. they object to the straw man that *any* tax cut will increase revenue. More frequently, the objection seems to be directed toward the motives of Laffer believers. At best, the objection seems to be that the revenue maximizing tax rate is much higher than curent rates. What I've never seen is an argument against the Laffer curve from a supply and demand framework. I'm just wondering if it is even possible for the supply and demand curves to be shaped shaped in such a way that the Laffer curve does not apply to some market. James
Laffer Curve
I've been reading about Laffer's idea that there is a tendency for revenues to increase with increased taxation up to a point where revenue is maximized. As one of the class notes on Caplan's site indicates, you can derive revenue as a function of the tax rate and assuming that the slopes of the supply and demand curves are constants not equal to zero, you can show that the Laffer effect exists. For example, from Pd = price paid by buyer Ps = price received by seller t = tax per unit = Pd - Ps. R = revenue = tQ Supply curve: Qs = a + bPs Demand curve: Qd = c - dPd You can derive R = t(bc + da - bdt)/(b + d) Still, a lot of people have said that the Laffer curve is bunk. Are there any Laffer detractors here? If so, what must the supply and demand curves for labor look like for R(t) to be an always increasing (or at least never decreasing) function? James
Re: libertarian paternalism
Edi, Perhaps start with a primitive conception of what makes something immoral. An action can't be immoral unless (1) there is some alternative course of action and (2) that alternative course of action is morally superior. Sure, there's more to morality than this, but these two at least provide a starting point and you've already covered the issue of use of force. Is there an alternative way of listing the options? Sure. Is one of the alternative listings morally superior? Maybe. If there is a morally superior way of listing the available options, then not to use it is, in my judgement, immoral. What the menu maker can't be faulted for (and this seems to be where you are thinking there is a problem) is that this influence over the menu readers exists, because there is no alternative in which such influence wouldn't be present. Even a random menu will still influence the decisions of the menu users, not to mention that providing a randomized menu will likely cost more and the menu users will be forced to bear those costs. Once the menu maker is aware that such an influence is present, this boils down to a question of whether or not one way of listing the options is morally superior to another. James Edi Grgeta wrote: Armchirees, I am trying to decide whether it is moral for a designer to impose his benevolent will through menu design by exploiting imperfections in how people choose. For example, if the designer thinks that option B is best, and people presented with options ABC (in that order) choose A, but presented with options BAC (in that order) choose B, then is it moral to select the options order BAC rather than ABC or a random menu? No freedom is lost. This differs from a benevolent dictatorship because it does not have jailers enforcing anything, although the fact that a choice has to be made can be a result of a larger dictatorship. One situation where this question comes up is in designing 401k plans. The inspiration for this was Thaler + Sunstein "Libertarian Paternalism" (AER, May 2003, mentioned on armchair before). They claim it is moral. I have worked with Thaler and am currently looking for quotes on the importance of (freedom of) choice for a book on the same topic (do you have any to share?) Thanks Edi Grgeta [EMAIL PROTECTED] 773-213-9072
