An Element of Ideology: Welfarism vs Paternalism

I edited a wikipedia entry on "demerit goods" recently, and for posterity I reproduce it here:

In economics, a demerit good is a good or service whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves. It is over-consumed if left to market forces. Examples of demerit goods include tobacco, alcoholic beverages, recreational drugs, gambling, junk food and prostitution. Because of the nature of these goods, governments often levy taxes on these goods (specifically, sin taxes), in some cases regulating or banning consumption or advertisement of these goods.

There is an important conceptual distinction between a demerit good and a negative externality. A negative externality occus when the consumption of a good has measurable negative consequences on others who do not consume the good themselves. Pollution (due, for example, to automobile use) is the canonical example of a negative externality. By contrast, a demerit good is viewed as undesirable because its consumption has negative effects upon the consumer him/herself.

Two fundamental views in welfare economics, welfarism and paternalism, differ in their conceptual treatment of 'demerit goods'. Simply, welfarism takes the individual's *own* perception of the utility of a good as the final judgement of the utility of the good for that person, and thereby disallows the concept of a 'demerit good' (while allowing the analysis of negative externalities). As an extreme example, if a heroin addict purchases heroin, they must have done so because heroin makes them better off, and this transaction is viewed as a net social positive (assuming that the addict does not commit any other crimes as the result of their addiction). Paternalism, on the other hand, judges that heroin "isn't good for you", and feels free to override the judgement of the addicts themselves (see 'Welfare Economics, Boadway and Bruce, Basil Blackwell 1984)

Trying to see through the fog with my blog

Here are a few of my favourite quotes, which illustrate the guiding principles behind this little project of mine.

A (frequently) debated subject is often a symptom, a surface manifestation, of a more basic underlying disagreement. Unless this area is explored - and unless some agreement is reached - the conflict will continue, while becoming repetitious and dull. The result is a kind of "intellectual atrophy", where the argument proceeds without significant progress, where no new material is introduced, and where the participants know beforehand that neither side will convince the other.
George H. Smith

The areas I'm interested in (politics, religion) are just those areas where the debate is never-ending. My aim is to explore the underlying disagreements.

I don't want to hurry it. That itself is a poisonous twentieth-century attitude. When you want to hurry something, that means you no longer care about it and want to get on to other things. I just want to get at it slowly, but carefully and thoroughly, with the same attitude I remember was present just before I found that sheared pin. It was that attitude that found it, nothing else.
Robert Pirsig, Zen and the Art of Motorcycle Maintenance

That's how I like to work too. It's unfortunately very difficult to find a workplace that lets you cultivate that attitude.... but my blog is my own and the time I spend on it is my own.

Perhaps someone may say "But surely, Socrates, after you have left us you can spend the rest of your life quitely minding your own business?" This is the hardest thing of all to make some of you understand. If I say I cannot "mind my own business," you will not believe that I am serious. If on the other hand I tell you that to let no day pass without discussing goodness and all the other subjects about which you hear me talking and that examining both myself and others is really the very best thing a man can do and that life without this sort of examination is not worth living, you will be even less inclined to believe me. Nevertheless, gentlemen, that is how it is. – Plato's Dialogues

Ahh, yes. That is indeed how it is.

The Music Industry: Downloading reconsidered

Astonishingly, a radio-ready record costs around $250,000 to record these days. I'm not sure how this can be when for $5k you can buy a Protools rig that is 1000 times better than what the Beatles used to record Abbey Road, but let's accept for the sake of argument that that's the way it is (one wonders why it is that way... are modern production values a substitute for good songs and performances? Are we looking for ear candy or music?).

How does a record contract work? The chart below shows the distribution of earnings for various levels of record sales, assuming a 500k advance to the band (recoupable out of the band's share of royalties), out of which the band must spend 250k to make the record. The royalties at $10/CD (wholesale) are split 85/15 between the record company and the band. This is a simplified picture: normally the record's producer would get a few percentage points as well (which would come out of the band's share), and the record company would incur additional costs (music videos, tour start-up costs), all of which would be recoupable as well.



The 85/15 split is meant to compensate the record company for their risk of potential losses. If the album goes platinum (a million copies), the record company does very well indeed... the band, not so much. In practice, given all the other recoupable record company expenditures, it is very unlikely that the band will see any money at all for the album beyond their advance, unless it is a truly colossal hit. But there are several thousand albums released per year in the U.S., and only about 30 of them go platinum. Most of them don't even earn back their advance, and disappear into the discount bins as money-losers for the record company.

Naturally, an established "big name" band is not going to accept an 85/15 split, as such a band is very likely to sell several hundred thousand copies even with an "off" record. The downside risk to the record label is near zero, and the split is adjusted accordingly.

What does all this have to do with downloading? First of all, the insistence of the record companies that they are just "defending the artists" by fighting downloading rings extremely hollow... they are defending *themselves*. Most artists earn the bulk of their income from touring and merchandise sales, where they get a much higher share of the proceeds. Only a handful of superstar recording acts are harmed by downloading - the rest are in the flat part of the blue curve and couldn't care less if their songs are downloaded or not - in fact they probably benefit from the increased exposure.

So, if downloading only hurts the big evil record companies, should we all start downloading with light hearts and clear consciences? I'm not sure. I'm beginning to think about the service that a record company still provides in an Internet world. We don't need them to manufacture and distribute a shiny disc for us anymore (and we don't need to pay Apple a 35 cent cut of a 99 cent song to ship us a few megabytes when bandwidth and disc space are too cheap to meter), but we DO (perhaps) need record companies for *filtering*. I live in a major city, and on any given weekend there are 100 bands plying their trade. The job of the record companies is to prowl these sweaty clubs, looking for the "good" bands and signing them to record contracts, fronting the money they need to make a professional-sounding record, and thereby increase the odds that this band will come to my attention. Even if I disregard all record company advertising, don't own a radio, and rely on word-of-mouth from my musically sophisicated peers to make musical discoveries, the chance that *they* will have heard of the band in the first place is greatly increased by the intervention of the record company. Is that worth something to me?

The reward the record companies get for this service are the windfall profits they get when they manage to hit it big with a new artist, and it is exactly those profits that are most threatened by downloading. No wonder they're pissed.

There are so many other interesting economic issues here, but that's enough for now.

An element of idelogy: the negative existence value of corruption

CBA analysis talks about 'existence value'.... the value (or negative value) that something has just by virtue of its existance. One of the things to which this could be applied is corruption... consider the Canadian sponsorship scandal.... the cost to an individual taxpayer is only a few dollars at most. So why get so upset? It's the *idea* of it, that's why!

An element of ideology: the moral limits of private property

I've read of a few cases recently where a company faced with unionization of its workers threatens to simply close its doors if the unionization proceeds. (I'm sure this is not a new phenomenon in labour relations).

Usually, the company claims that it will lose money if it must pay the benefits/wages/etc that unionization would entail. Now, this may be so (although this claim is seldom not believed when it is made), or it may not.

• If a company really will lose money under the new scheme, is it moral for them to close?
• If the company will NOT lose money under the new scheme (but will now make less money than they could in some new location with new, non-unionized workers), is it moral for them to close?
• What moral obligations does a company have to its workers?

What I love about Cost/Benefit Analysis

The neat thing about economic cost/benefit analysis, in my humble opinion, is the way it provides a means of parameterizing ideological debate.

Are you an environmentalist? Use a generous valuation of environmental items in your study. Do you believe that government should alleviate the suffering of the poor? Incorporate a high value for 'the basic needs externality' in your study. Are you jealous of the rich? Include something analogous to the basic needs externality (ie the "they-are-too-damn-rich negative externality).

And on and on and on it can go. In fact, the adjustable parameters of a cost/benefit study ARE, to a large extent, the "Elements of Ideology" that this website is trying to discuss and enumerate.

Cool!

The general mistrust of Cost/Benefit Analysis

It seems to me that Economic Cost/Benefit Analysis has gotten a bit of a bad name, especially among environmentalists and progressives in general. When an economist *says*: ".... we're going to perform a cost/benefit study....", what the public *hears* is something alone the lines of: "...we're going to write a document which systematically ignores every factor that is really important in life, so that we can provide justification for a project that our masters have already decided to proceed with."

I'm sure that's how Economic Cost/Benefit Analysis often *is*, but it needn't be that way. It *doesn't* have to be dishonest. It *doesn't* have to neglect everything that is good and important in life. The environment can be included. The effects on income distribution can be included. And so on.

Another element of ideology: the evaluation of very very long term environmental effects

In Economic Cost/Benefit Analysis, there is something called "the discount rate". Things that happen in the future are "discounted", or weighed less heavily than things that happen today. There are some pretty good common-sense justifications for this practice.

1. If we are talking about impacts that can be monetized (that is, treated as equivalent to flows of money - which is sometimes controversial in itself), there exist financial markets that allow you to save or borrow at a given rate of interest to obtain equivalent economic effects over time. Let's say that we have the choice to build a $100 million bridge today, that will deliver $2 million per year in "economic benefits" (time saved, expected number of lives saved, and so on) over the 100 year life of the bridge. Obviously, 100 years x $2 million per year = $200m, that's more than the $100m cost of the bridge, so we should build the bridge, right? Not so fast. We could simply stick the $100m in the bank, and we would wind up with *more* than $200 million after 100 years. (A lot more, in fact). Sticking the money in the bank is judged by cost benefit analysis to be "better" than building the bridge, even though we are comparing apples and oranges (that's what CBA does).
   
2. People are impatient, and they would rather have benefits today than benefits tomorrow.

The practice of discounting is pretty uncontroversial for the sort of 10-20 year projects that governments are likely to get involved in. Where it *really* starts to get problematic is in evaluating environmental regulations, where the costs are immediate but the benefits potentially stretch out over hundreds or thousands of years. Using the standard discount rates invoked in most public projects, any benefit that happens after 100 years or so is discounted right out of existence. What happens in the far future literally *doesn't count*. This really shows up in climate change projects. If you do a standard cost/benefit analysis of Kyoto or any other greenhouse gas initiative, it comes out terribly. The costs are now, the benefits are in 100 years... "don't do it". Stick the money in the bank instead.

Assuming that all costs and benefits can be monetized, do the results of Kyoto CBA imply that it would be better for future generations if we DIDN'T do anything about climate change, but simply "stuck the money in the bank". What does that mean? In other words, what does the discount rate even MEAN when the timescales are so long that the costs and benefits accrue to completely different generations?

Now, for a lot of environmentalists, all this talk of discounting is devil's talk. Sustainability is their mantra, and if environmental impacts can be monetized at all (many think they cannot be) then they should be discounted at rate zero.

Two more elements of ideology

1. Self-sufficiency. The idea that providing everything you need for yourself is somehow better or more satisfying in and of itself than providing some goods to the marketplace and trading for others. This idea underlies economic nationalism and "back-to-the-land" movements.

2. Interdependency of utility: standard economic models usually suppose a complete indifference to the choices and lifestyles of others: your utility is derived solely from your own consumption. But this neglects essential human emotions like compassion and envy. Sometimes our happiness depends on the happiness and well being of others (especially the poor, or our families). At other times, our sense of how well off we are depends not just on what we consume, but on what OTHER people are consuming. ("Keeping up with the Joneses"). We feel bad if we are lagging behind others, and we feel good if we have our "status goods". After all, do you ever wonder what kind of idiot would pay $10k for a Rolex watch? As time-keeping appliances they can't possibly be worth $10k, but as devices to communicate how rich and successful the wearer is relative to others, they are evidently worth every penny.

An element of ideology (the right to pollute versus the right to breathe)

One of the goals of this blog is to enumerate as completely as possible the differing principles which underlie the differences in political worldviews. In more or less random order, I shall attempt to capture as many of these fundamental sources of disagreement as I can.

Every economics student eventually encounters the Coase Theorem as one possible solution to the problem of externalities. (In layman's terms, an externality is something that someone else does that affects YOU, like pollution).

The Coase Theorem says that the "economically efficient" (that phrase again) outcome to a pollution problem can be reached if "property rights to pollute" can be bought and sold (and enforced).

That is, the people of the town might start with the "right" to breathe clean air, but they'd be willing to accept a certain amount of pollution in exchange for a $10,000 cash payment each, every year. If a factory owner is willing to make that payment, he can pollute (otherwise, the Environment Ministry swoops in and shuts him down).

Alternatively, the factory might start out with the "right" to pollute, but the people of the town would be willing to pay $1million to have the plant shut down. If that is more than the profits the factory owner makes, he'll take that offer and shut down the plant.

One of the "elements of ideology", then, is: "should the factory owner start with a 'right' to pollute, or should people with lungs start with a 'right to clean air'"?

To an environmentalist, this one is a no brainer.

Economic efficiency, part 1

At last, a post about economics! (There will be many more, I promise).

The stated goal of economic policy is often "economic efficiency". However, an exploration of what "economic efficiency" really means will reveal that "efficient" outcomes can look pretty perverse to anyone with a soul.

Imagine a little valley with an automated factory upstream from a small, poor hamlet. The factory makes $100k a year in profit for its owner, but discharges various kinds of nasty gunk into the stream, which makes the children of the village sick and makes it hard for the old ladies of the village to breathe.

Imagine an economist completely beholden to the concept of economic efficiency. Upon encountering this sad scene, he would ask the villagers "what would you be willing to pay the factory owner in order to be free of this nasty gunk". The answer, of course, will be "not much", since the poor villagers, while they love their kids, don't have all that much money. The economist nods in satisfaction, picks up his briefcase, and leaves the village whistling cheerfully. The current state of affairs yields a total surplus of $100k minus "not much", and is therefore more *efficient* than shutting down the factory.

However, the scene in the next valley is different. There is another automated factory, but *this* factory is upstream from a billionaire's mansion. The billionaire doesn't have any kids, in fact this is his scenic getaway that he doesn't use much, and he doesn't swim in the stream anyway, so he is not actually bothered that much by the gunk. But it does bother him a little. The economist asks the billionaire what he'd pay to have the factory stop producing gunk. The billionaire says "Smithers, what have we got in the petty cash box...? One hundred fifty thousand? That would do. It does get a little smelly some days, and I *do* so love this spot". The economist's eyes widen in horror. The total social surplus of the status quo is 100k for the factory and -150k for the billionaire. The social surplus is negative! Economic inefficiency! This outrage must be stopped!

The point: in the market, the preferences of rich people matter a whole lot more than the preferences of poor people. And at no point in any economics class is this idea ever discussed.

A post in honor of "World Aids Day"

I've read that the Bush administration (and other conservative groups) are very interested in promoting "abstinence only" education programs, instead of condom use. On one hand, conservatives are correct when they point out that "waiting until you're married" is a 100% defence against AIDS, and a pretty good defence against pregnancy out of wedlock (which most accidental pregnancies are). But just how well do conservatives expect "just say no" to work? Do they expect to be able to stand against the human sex drive?

Here's how an economist might analyze the problem of AIDS education.

The number of AIDS cases per year is, let's say, A = pC(NT + (1-N)F)
Where A is the number of new AIDS cases.
C is the number of casual sex encounters
p is the proportion of casual sex encounters where one person has AIDS and the other does not.
N is the percentage of these encounters where no condoms are used.
T is the transmission rate of AIDS if you don't have a condom.
F is the failure rate of Condoms. (ie the conditional probability you will AIDS from a casual sex encounter even WITH a condom).

This equation is very simplified (I haven't tried to capture how risky a particular casual sex act is, for example), but it's good enough for my purposes.

Liberals look at the above equation and are interested in only one thing: reducing the amount of suffering caused by AIDS. The "objective function" of the liberals is min(A).... the fewer AIDS cases the better. The number of casual sex encounters itself is not important.

There are various approaches to that goal. T and F are pretty much fixed, so not much you can do about those. If you want to reduce A, you can try to reduce C, or you can try to reduce N. (or try to do both, obviously).

Now, liberals think that C (the number of casual sex encounters) is pretty inelastic. Wagging a finger and saying "just say no" is unlikely to have much effect against the power of millions of years of human sexual evolution. So, since F is pretty low, liberals are usually strongly in favour of condom-based sex education. They don't care about C, they just want to get N as low as possible.

However, conservatives view the problem differently. They say that they believe the right approach to reducing A is by reducing C. But why would they be opposed to reducing N at the same time? They feel that promoting condom use works against their goal of reducing C, that you can't say "abstinence is best.... oh and by the way, here are some condoms." Conservatives feel that people are like children, or maybe like a flock of sheep that need to be guided by the wise shepard, whereas liberals feel that adults are, well, adults, and can make up their own mind on these matters if they have all the facts.

I think what the conservatives are after is a cultural shift. They imagine that there was a time in Western Civilization where "that sort of thing just wasn't done" (ie, nobody had casual sex or even wanted to), and they want to go back to that time.

Leaving for the sexual historians the question of whether there ever was such a time, it seems to me that trying to engineer a wholesale cultural shift against casual sex is much, much more difficult (and less likely to succeed) than a campaign to persuade everybody to use a condoms.

In other words, I think the liberal approach is more likely to be effective in reducing AIDS.

However, I think conservatives are more interested in the above mentioned cultural shift AS A GOAL IN ITSELF than they are in reducing AIDS. AIDS, to conservatives, is a secondary phenomenon of lesser importance. To some conservatives it might be of no importance at all. Jerry Falwell came right out and said as much back in the 1980's: AIDS is God's punishment for immoral behaviour. In fact, if abstinence only programs were to reduce casual sex and condom use, but *increase* AIDS as a result (because condom use dropped by more than casual sex did) I believe that would be OK with most conservatives.

It seems to me that conservatives are more worried about "immorality" than they are about human happiness.