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Russian Dolls

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Incentive structures are created within other incentive structures, and at the outermost edge is only the initial distribution of the capability for force.



Should fast food restaurants be allowed to sell food without posting calorie content? To market unhealthy food to children?

Should garbage cans be labeled “Landfill”?

Should manufacturers be allowed to sell caffeinated alcoholic beverages? To whom should alcoholic beverages be sold?

Should prostitution be legal? Drugs? Weapons? Nukes? Divorce?

What should the age of contractual capacity be? The age of sexual consent?

What should be the consequences of a breach of contract?

Are taxes the same as stealing?

A System of Incentives

The field of law & economics recognizes that a system of law is a system of incentives. We adjust human welfare by adjusting the incentive structures in which humans operate.

Any incentive structure, including but not limited to a legal system, helps people predict how they will be treated, and thus how to plan their actions. Any incentive structure will do, more or less, for this purpose. But some individuals will always be treated sub-optimally by any incentive structure. The only certainty is that some will live in misery – there is always plenty of misery to go around. But who should be miserable, and how miserable, and why?

By creating or adjusting incentive structures, planners assume that they know what is best for human flourishing. Creating and adjusting incentive structures is an inherently epistemically ungenerous activity. This, I think, is the main problem with Bryan Caplan’s take on behavioral economics, which I’ve previously summarized thus:

Bryan Caplan thinks that the solution [to the problem of men not wanting to work] is to not have soup kitchens. That is, to make everybody so miserable that they HAVE to work, or else.

Caplan (and his coauthor) “know” that it’s better for people to live as close to a “productive,” middle-class existence as possible; so they argue we should adjust the incentive structure to give the poor fewer choices so that they are forced to make the “right” choice.

The search for a just, ethically defensible incentive structure requires an attempt to get outside of any single individual or group’s notion of what is best – to do what’s best for everyone, not just the would-be incentivizer and his cronies.

The Russian Doll Problem

In some sense, incentive structures compete with each other (e.g., capitalism v. communism). But even competing incentive structures exist within a wider incentive structure. The governments of countries may be seen as competing incentive structures, existing within the wider incentive structure of the world. Organized crime and government are competing systems of incentive, and operate within the wider incentive structure of the natural world. This is true even if the background incentive structure is merely “might makes right” – which is probably the only possible top-level, ultimate incentive structure.

Creating and adjusting incentive structures is at best hubris, at worst tyranny.

Some (libertarians, the religious, and advocates of democracy, for example) ignore this problem by assuming a privileged status for some kind of incentive structure.

Privileged Incentive Structure: God Said So

Some of the most successful religions worldwide have a built-in legal system and/or incentive structure. For this reason, some religions function very well as technologies that promote trade. Sharia in Islam, Gemora in Judaism, and Canon law in Christianity are the most well-known examples.

Religions are not written texts. As my rather religious Jewish boyfriend puts it, the written text (e.g. Mishnah) is like a constitution – but a government is not its constitution. The United States has a tiny little constitution, but the system of incentives is largely given by the enormous system of courts and police that interpret and enforce the written text.

Adherents of these religions get around the Russian dolls problem of incentive structures by assuming a privileged status for their enshrined incentive structure on the basis that this incentive structure was ordained by God.

Privileged Incentive Structure: The Market Said So

Libertarians attribute a privileged status to the “free market.” However, a market exists within a context of a wider incentive structure (the initial distribution, human nature, scarcity). Markets are not ever really “free” – there must be a wider incentive structure to contain the market, even if this incentive structure is merely “might makes right.”

Privileged Incentive Structure: The People Said So

A novel solution to the Russian Dolls problem of incentive structures is: let the participants choose their own incentive structure. Various forms of democracy claim to embody this solution.

Ultimately, this is no more than creating a market to determine the rules for the market. “One person-one vote” is, ultimately, as arbitrary as “one dollar, one vote” (or “one bullet, one vote,” for that matter). Why is a person the proper unit of democracy? Why adults and not children? Why present people and not future people? What about the rights of those in the minority position on anything? Why is it fair for a majority to impose its will on a minority? Democracy is, at best, a caricature of consent.

Prior to garnering fame as an authoritarian parenting enthusiast, law and economics scholar Amy Chua wrote a book (World on Fire: How Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability) explaining some of the problems with “democracy-as-privileged-incentive-structure” – especially when combined with a purportedly free market. In the real world, economic advantage tends to not be spread equally among people – or randomly. Advantages, whether intellectual or material, tend to be clustered within identifiable groups of people, and these groups tend to attempt to manipulate the system of incentives to increase this clustering (that is, to promote inequality). Unfortunately, the red-in-tooth-and-claw nature of the background incentive structure is frequently revealed when “market-dominant minorities” are punished for their inequality-promoting success in often gruesome ways by the (ethnic) majority.

Is the “free market” right, in this case? Should market-dominant minorities, racial or otherwise, own and keep an ever-growing majority share of the world’s property? Or is “democracy” right? Should the majority be able to punish the market-dominant few? The conflict, rarely acknowledged, demonstrates that neither is an inherently good incentive structure.

The nature of our universe prevents an ethically sound incentive structure from existing.

It’s the initial distribution all the way down.


Misery, or suffering, might be defined as that of which there is negative scarcity. Not only is there an abundance, but there is an abundance and its consumption is not optional. I think it is more humane to think of economics in terms of a system for the distribution of misery, rather than the distribution of scarce, utility-promoting goods and services.

Written by Sister Y

March 8, 2011 at 9:00 pm

We Live In The Anarcho-Capitalist Utopia

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In my previous essay, “Markets Are Ungrounded,” I undertook to list some of the regulations that are necessary for a market to function. The idea of a “meta-market” is particularly tempting to those opposed to “government” regulation – the idea that we might not only choose our transactions, but choose the rules for our transactions. I think this is an impossible, incoherent fantasy.

In The Machinery of Freedom, David Friedman defines government as “an agency of legitimized coercion.” Friedman believes that government should not exist, and that the functions currently performed by government either should not exist or should be undertaken by private individuals and groups.

He says:

The special characteristic that distinguishes governments from other agencies of coercion (such as ordinary criminal gangs) is that most people accept government coercion as normal and proper. The same act that is regarded as coercive when done by a private individual seems legitimate if done by an agent of the government. (In “What is Anarchy? What is government?”)

Further, Friedman defines “coercion” as “the violation of what people in a
particular society believe to be the rights of individuals with respect to other individuals.”

So how would these private groups work to perform functions now performed by government – for instance, preventing and punishing crimes? Friedman imagines that this would all be done voluntarily – that is, by individuals subscribing to protection agencies that use force to protect citizens from violations of their rights (as defined by the private, competing protection agencies). These protection agencies would then patronize private courts who would compete for jurisdiction.

Here is my problem with the Friedman model: it’s exactly the system that exists today, and has always existed since the beginning of human kind.

At the deepest level, Friedman is not proposing any change to the current system(s) of government at work in the world today.

Friedman proposes not regulations for a market, but a system of markets and meta-markets, a system that resolves everything through voluntary transactions. However, this is an illusion. Ultimately, it can’t be “markets all the way down” (or up) – competing protection agencies use force, and the balance of force is what supposedly protects citizens. The “free market” is at the deepest level founded upon force.

This is exactly the situation that we have today.

For instance, our Federal and state governments today compete with various forms of organized crime, which fill the institutional vacuums created by the “legitimate” governments denying contract enforcement to some transactions. These are perfect examples of competing protection agencies under the David Friedman model.

Let me repeat Friedman’s definition of coercion: “the violation of what people in a
particular society believe to be the rights of individuals with respect to other individuals.”

Friedman wants to eliminate this “coercion” thing, at least by governments.

But the protection agencies themselves define what coercion is, for their subscribers. And they enforce their definitions by force.

How is that any different from . . . all of human history? Are not all anarcho-capitalist protection agencies “agencies of legitimized coercion”?

There is no way to protect oneself from coercion (whatever one’s definition of this is) without engaging in the coercion of others.

(In case it’s not clear, I’m happy to be straightened out here – I’d much rather understand the dimensions of the problem than be “right.”)

Written by Sister Y

January 24, 2011 at 5:16 pm