Arnold Kling  

Of Human Design but not of Human Intent

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Christopher Howard writes,

Some of the largest tax expenditures today appeared as early as 1913...few people actually benefited...The original income tax applied only to the wealthiest 2 percent of Americans. By the late 1930's, only about 6 percent of Americans paid income tax. Most individuals could not benefit, for example, from the tax deductions available for home owners.

This is from p. 65 of The Welfare State Nobody Knows. Howard argues that the American welfare state is larger and less coherent than most people realize. He includes in it all sorts of redistribution measures, such as the mortgage interest deduction, the exemption of employer-paid health insurance, the earned income tax credit, and government regulation and guarantees of private pensions.

Howard is basically in favor of a welfare state, and he is not an economist. The book has some interesting facts and perspective, but there is much to dislike about it.

Hayekians describe spontaneous order as "of human intent but not of human design." Nobody designs market outcomes, but those outcomes reflect human intent.

The American welfare state is sort of the opposite. Each program was designed. But together they add up to something than no one would have intended--a hodgepodge of subsidies and credits that allow some poor people to fall through the cracks and provide many subsidies to the affluent. I think Howard and I would agree on that diagnosis, although we would differ in our prescriptions.

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COMMENTS (14 to date)
Bill Stepp writes:

The mortgage interest deduction is not a subsidy because it enables mortgage owning taxpayers to keep more of their money. It would only be a subsidy if it were the government's money to begin with, but it's not.
Furthermore, the mortgage deduction is capitalized in (higher) home prices, so the net cash inflow to a mortgage deduction taking taxpayer is only equal to the cash outflow he experiences over the life of a mortgage due to higher mortgage payments.

Of course it's the opposite of spontaneous order -- a spontaneous order is a bottom-up process. The welfare state is a top-down imposed process. This is something which works well in creating incredibly simple objects from incredibly simple materials -- like cars and computers -- but it is a disaster when it is applied to complex, self-organizing emergent systems like humans and the spontaneous orders we create, like free market economies, science, cultures, and democratic governments.

John Fast writes:

Bill: If one uses a flat tax (either income or sales) as the baseline, then any deduction (with the possible exception of a per capita personal deduction) is a subsidy.

This is an issue on which reasonable people can disagree, even if both of them are libertarians.

Troy: I completely agree with you. Bottom-up systems work better for most human interactions; the principal exceptions are on the extreme ends on either side, i.e. either very good ones such as genuinely voluntary groups with charismatic leadership (and even those often work better as bottom-up) or else evil ones such as prisons and armies of /s/l/a/v/e/-/s/o/l/d/i/e/r/s/ draftees (and studies have shown that militaries work better when there is bottom-up initiative, e.g. Israel vs. Arab armies, or the U.S. vs. the Iraqi military).

There are two reasons why bottom-up or "dispersed" systems work better. One is the fact that lower-level personnel usually have better information than those higher up. (When the higher-ups know better, it is *possible* to get the rare cases of top-down systems working better.)

The other reason is that, at least in government, there is a disconnection between authority and responsibility. As Heinlein pointed out, matching authority and responsibility is a necessary (and possibly sufficient) condition for any organization to work. The closest possible connection between authority and responsibility is individual private property, where (at least in theory) all decisions are made by the owner, who in turn suffers all the consequences.


1. I believe William F. Buckley, Jr. (God rest his soul!) coined the word "anfractuosity" to describe the disorganized, uncoordinated, and therefore self-defeating nature of the U.S. tax and welfare systems, and was one of the first to point out that it was possible to go up in gross income and yet lose so much welfare benefits that one goes down in net income.

2. I'm an incoming Ph.D. student at GMU, and one of the main topics we're studying in Macroeconomics is "emergent systems." I've read _Godel, Escher, Bach_ and enough science fiction and Jungian psychology to be familiar with the concept of the "gestalt entity" or hive mind or "collective consciousness" where the whole is greater than the sum of its parts, and I've read enough economics to relate it to the spontaneous order of the Invisible Hand.

I'd say that the welfare state is the opposite of an ant colony or other hive mind, in that it's a (w)hole that's actually less than the sum of its parts.

Kurbla writes:

Central plan is technology itself. It improves - but market also increase the complexity. The companies are small planned economies swimming in the sea of the market. If planned economy is never more efficient, companies would never form internal departments, instead they'd order all services on the market. Size of the currently largest capitalist companies, i.e. 10^5-10^6 employees and gr. rev. $ 10^11-10^12 is the measure of the development of the technology of the central plan in the current circumstances.

For original Bryan's remark, I do not think that welfare state as it is is not intent of the people. Surely there are the cracks, but hey, neither market is perfect. People frequently rant against both, but they still do not vote for communists or libertarians, meaning they are more less satisfied with both market and welfare state.

Bill Stepp writes:

John writes:

If one uses a flat tax (either income or sales) as the baseline, then any deduction (with the possible exception of a per capita personal deduction) is a subsidy.

A tax deduction is not a subsidy under a flat tax or any other type of tax. Gross income minus deductions, including the home mortgage deduction, equals adjusted gross income, which is what is taxed.

An example of a subsidy is the state of Virginia taxing Virginia's net tax payers and giving the proceeds to Virginia's net tax consumers, which presumably includes the GMU economics department.

John: I've been doing a lot of work recently on complex systems. I'm finishing up the final touches on a book on emergent systems and philosophy titled "Diaphysics," which will be published sometime early next year. I'm also preparing a paper on spontaneous orders and complex, emergent systems for a conference this November.

Kurbala: companies are not small planned economies. They are self-organizing systems. Over time they become more and more ordered, forming departments in order to keep information more local and contained, so that people can deal with them more easily. Complex systems all give the appearance of having been designed, but none of them truly are. Companies which are truly centrally planned and controlled collapse under the necessary weight of ignorance of the person at the top. I"m the President of The Emerson Institute for Freedom and Culture, Inc., and planning isn't something that is even possible. Which reminds me of an old saying, "When men make plans, God laughs." The more we learn about complex systems, emergence, bottom-up self-organization, and spontaneous orders, the more that saying makes sense.

mensarefugee writes:

I dont see why the affluent shouldnt get benefits.

I dont think they want to pay for the poor (who are mostly indolent). So they use their political muscle to have some of their own money redirected to themselves (seeing how they cannot do away with welfare altogether).

Its not perfect - but its fairer than a 'perfect' system that sends all the money to the 'poor'. The unfairness is not in the fact that the rich get benefits, but that someone is being forced to pay someone else, period.

Lord writes:

Actually it makes more sense then you think. Fundamentally each person is their own business and as a result need to be able to account for expenses undertaken to earn that income. One can eliminate these, but then it becomes not an income tax but a sales tax. Changing the system for individuals but not for businesses leads to reporting distortions and evasions.

Ajay writes:

John, I'd like to second the flat tax recommendation. As for Arnold's comparison of design and intent, I think that's a false dichotomy in this country, perhaps it would be true for a dictatorship or communist country but not for a federalist republic like ours. I agree with Kurbla that companies are designed, therefore markets have plenty of institutions that are designed in some form (though I would disagree that technology will help large corporations, I see a return to thousands of small companies over the horizon). A large company like microsoft that employs tens of thousands of employees is a smaller example of the kind of problems government has, though at a smaller scale and MS is still highly profitable.

Rather than design or intent, the differences between our government and market is in competition and incentives. While there is a fair amount of competition for political positions, term limits limit failure and the selection process is primarily a popularity contest. Compare this to an entrepreneur who can fail at any time and doesn't need much popular support at all, he can usually start a business at any time no matter what anybody else thinks. However, there's still a fair amount of competition in politics so that's not the primary reason for government problems. The primary reason is that the incentives are not aligned as they are in the market. In the market, you pay for something for yourself, that provides value to you. In politics, you buy or convince a political figure to funnel resources taken from the populace at large to your interest group. Usually the populace does not mobilize enough to fight this theft but this analysis also points toward the solution: you simply have to convince taxpayers that they need to stop the groups that take away a third of their income and dump it mostly down ratholes. There are agency problems too, with voters deciding on a politican's entire voting record rather than the individual issues, but I think technology will allow referenda to be much more common over the coming decades so that will be alleviated.

We are 70-90% there with the design of our fundamental institutions, free markets and a democratic republic, but we always need to gain more knowledge to create proper processes in those institutions and we need to destroy those who even work politically to actively subvert these two institutions, the socialists.

Kurbla writes:

Troy it appears that under "central plan" you assume that one person on top make all decisions. It is never meant or done that way, person on the top can physically make very few the most important decisions, and everything else he has to delegates to the lower level of hierarchy. It is same in the army, in the communist state and capitalist company.

I do not know your definition of "self organized", but if you write it here, I guess we'll find that both of these - cap. company and com. state satisfy that definition, or neither one does.

A communist state definitely does not fit that definition. It is top-down by any stretch of the imagination. But companies all start small and slowly self-organize into larger and larger companies. In communist countries, the bureaucracy is imposed form the top, but in a company, the company bureaucracy emerges over time. A company more closely resembles the evolution of animals from single-celled organisms to complex organisms with central nervous systems. Further, it may appear that a complex organism is controlled from the top, by the central nervous system, but that isn't true, either. No company was ever designed, but emerged out of a hodgepodge of good and bad decisions, good and bad fortune, good and bad people working for (and being fired from) the company over time. In the end a large corporation only appears in the most superficial way to a communist country -- but the way it is run, and the way it evolved and organized make all the difference in the world. Most people neither realize nor understand that, and so think that government can be run like a company. It can't. It's a different kind of entity altogether. A self-organized government wouldn't look at all like a company, as it has different goals and different forms of information creating it ( money for corporations, votes for democracy -- though each have partially infected the other, which creates problems). Believing a company is a top-down organization due to its structure and complexity is analogous to believing in creationism because you can't imagine or understand how complex organisms could have evolved.

Kurbla writes:

Troy, it appears that you believe that communist state economy is designed once and it doesn't change any more. It is not true, these economies also grow, and they also develop through trial and error. It was never meant different.

True, capitalist companies sometimes start very small, but it is not essential - some capitalist companies start big from the beginning. Depends on initial investment. Initially they grow by design, and later they also develop on the base of trial and error. Some capitalist companies are just privatized public company. So, they were never small. But, these are the capitalist companies just like any other.

Bureaucracy? By definition, bureaucrat is one who has power and who cannot be removed from the position by decision of the people who must obey his decisions. By that definition, whole ruling structure of the communist state and capitalist company are bureaucrats. Maybe you have some other definition of that notion.

Bob K writes:

We're stating something that we all know to be true... the question is, what is the political antidote?

Republicans got elected on the platform of "Smaller Government," but were unable to effect much permanent change.

Perhaps the new Republican platform should accept that government is big, but demand that it be better. Attack the bureaucracy not by attempting to dismantle it, but by demanding better results.

A stump speech along the lines of "America is the wealthiest nation in the world, and we spend more on social services than any other nation. Even so, our social service agencies serve themselves well and serve society poorly, if at all."

Such an message would appeal to a broad swath of the political center.

Yes, communist countries do change, but all change is directed from the top. I can't think of a single company that didn't start small, unless you want to count government-created "companies," which I wouldn't include as economic entities at all, but as government entities. A company develops in a bottom-up fashion, and then works in both top-down and bottom-up fashion. The feedback loops are incredibly complex in such a system. Under communism, there is almost no bottom-up feedback. All decisions are made at the top. They are imposed. Communism is thus not a natural system, like a company is. Finally, a bureaucrat is simply someone who is protected from being responsible for their actions by the rules of the entity for which they work. In government, this means you get treated as a number, and nobody actually cares at all about you or your problems. In the corporate world, this results in poorer customer service at times, but it also results in you being able to make exchanges much easier. It also results in things like nobody making certain business decisions, since everyone is just following procedure and taking care of their little part. Bureaucracy makes a business run more efficiently, but in a government it creates alienation between government and the voters, and thus undermines democracy.

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