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My Hidden Extra Agenda

:Here are four ideas that, as soon as I first heard them, irrevocably changed my worldview. If you haven't heard them yet, then I hope that today they infect you the same way they did me.

In political space, Left-Right is a slice, not an axis.

Left-right is not a true 1-D spectrum, or even an axis of 2-D political space, but rather is a diagonal slice through 2-D political space:

Rivalry and Excludability define what goods the government should provide or manage.

Excludability is the ability of producers to detect and prevent uncompensated consumption of their products. Rivalry is the inability of multiple consumers to consume the same good.

A public good is a non-rival non-excludable good that benefits almost everyone in a polity. Because public goods are not excludable, they get under-produced. The pricing system cannot force consumers to reveal their demand for purely non-excludable goods, and so cannot force producers to meet that demand. Thus government should produce non-excludable goods that aren't supplied by nature -- namely, pure public goods. (Impure public goods are those that are partly excludable -- those for which producers can capture some but not all of the benefits that the goods provide. Examples are education, technology development, landscaping, broadcasting, and the arts. Impure public goods need not be produced by government.)

A natural resource is any rival non-excludable resource. Because natural resources are not excludable but still rival, they get over-consumed. Thus government should police the use of natural resources, preferably by taxing resource use by the amount that the use costs the rest of the polity.

A natural monopoly is any non-rival excludable good that benefits almost everyone in a polity. Because natural monopoly goods have high fixed costs and vanishing marginal costs, they cannot be produced efficiently through market competition. Thus government should regulate the provision of natural monopoly goods.

A private good is any rival excludable good. Markets are able to manage their production and allocate their consumption more efficiently than government can.

Private Goods
Efficiently produced and allocated by markets
  • agriculture, minerals, artifacts
  • labor, services
  • land parcels
  • rain and sunlight incident on land parcels
Natural Monopoly
High fixed costs, low marginal costs => inefficient competition
  • roads; water and sewage lines
  • wired telecom networks (not content)
  • power distribution (not generation)
  • aggression deterrance; fire protection service
Natural Resources
 Tragedy of the commons, negative externalities => overconsumption
  • atmosphere, bodies and streams of water, pollution sinks
  • sunlight, wind, fish, game
  • unowned land and space; orbits
  • electromagnetic spectrum; some namespaces
Public Goods
Free riders, positive externalities => underproduction
  • national defense
  • scientific knowledge
  • prevention of contagion, conflagration, flood
  • anti-poverty safety net (assuming most people favor charity)

All environmental problems are caused by Negative Externalities.

In economics, an externality is a cost imposed or benefit bestowed on a person other than those who agreed to the transaction that created the cost or benefit. Negative externalities are costs such as pollution or overconsumption of natural resources. (Positive externalities are benefits such as scientific discoveries and incremental technical advances.)

In Economic Instruments for Pollution Control and Prevention, Duncan Austin of the World Resources Institute explains how market forces can be used to correct for the market failure constituted by negative externalities:

Economic instruments, which aim to control pollution by harnessing the power of market incentives, offer a more cost-effective, flexible and dynamic form of regulation than conventional command-and-control measures.

The underlying premise for economic instruments is to correct negative externalities by placing a cost on the release of pollutants.This will internalize the externalities into the decision making process. Placing a charge, or a fee, on every unit of effluent transforms the manufacturer’s decisions regarding how much he will produce, and how he will produce it. Now, the manufacturer must minimize total production costs that consist not only of labor, material, machinery and energy inputs, but also of the effluent output. By adjusting the charge level, or the cost attached to effluent outputs, the regulator can induce a different degree of response from manufacturers, and hence control the overall level of pollution. By changing the charge level over time, the regulator has a relatively simple way of ratcheting up standards.

The key benefit of economic instruments is that they would allow a given pollution target to be met for lower overall cost than traditional regulations. Economic instruments grant firms and individuals greater autonomy in deciding how to meet targets; they create ongoing incentives for firms to design new and improved abatement technologies ensuring that pollution control becomes ever cheaper; they reduce the information burden on regulators; and they provide potential revenue sources for state or federal governments. In addition, economic instruments may provide greater flexibility in dealing with smaller and diffuse emissions sources which collectively contribute large amounts of pollution, but which until now have been largely ignored in favor of controlling the pollution from more obvious sources.

Economic instruments can create a system for pollution reduction that achieves the same level of environmental protection for a lower overall cost (or achieves more for the same cost). Under a command and control approach, industries invest to meet the standard and then stop. In contrast, placing a price on effluents creates a permanent incentive for environmental improvement. Because every emission, or effluent, effectively has a price attached to it, any profit-maximizing entity has an ongoing incentive to make further reductions over time.

Wages are determined by productivity, which is determined by capital.

Excerpts from Ten Principles of the Economics of Capital by the National Center for Policy Analysis:

Principle 1: Capital is the single most important determinant of real wages. In a very real sense, the amount of capital in our economy determines how much wage income we earn, even if we do not personally own any capital. Workers’ wages and the capital stock are inextricably linked. The only way that the real wages, and thus the well-being, of workers can rise is if there is more capital per worker.

Principle 2: More than 90 percent of the benefits of a larger capital stock go to wage earners rather than owners of capital. Many people believe that owners of capital get most of the benefits capital creates. This turns out not to be the case. One of the most surprising findings of the economics of capital is that the overwhelming bulk of the extra income generated by capital accumulation flows to people in their role as wage earners, rather than to the owners of capital.

These facts have dramatic public policy implications. In general, public policies that promote capital accumulation primarily benefit wage earners, while policies that discourage capital accumulation primarily penalize wage earners.

Principle 3: The amount of capital is determined by investment. The nation’s capital stock is the sum total of all of its capital goods. Because these goods lose value over time, some level of investment is necessary to maintain the capital stock at its current size. Beyond that level, additional investment will cause the capital stock to grow, whereas less investment will cause it to shrink. 

Principle 4: The amount of investment is determined by the real after-tax rate of return on capital. The amount of physical capital available in our economy depends on the willingness of people to invest in productive capital goods. In making these decisions, investors are guided by the return they will receive. The income to the investor must be adjusted for inflation, depreciation, taxes and the riskiness of the investment. After these adjustments are made, the investor can assess the after-tax real rate of return on the investment.

Principle 5: Because of changes in investment spending, the after-tax rate of return on capital tends to be constant. Suppose something happens to cause the rate of return on capital to rise above its historic average. There will be an increase in investment, adding to the current stock of capital. As the capital stock expands, the rate of return on capital will fall. Conversely, when the rate of return on capital is below its historical level, there will be a decrease in investment. As the capital stock shrinks, the rate of return on capital will rise. Over the past 37 years, the rate of return on capital in the U.S. economy has tended to be remarkably stable — averaging about 3.3 percent per year.

Traditional neoclassical economics teaches that the rate of return on capital must reflect people’s preference for future rather than current consumption. In other words, to be induced to save (forgo current consumption) and invest (with the expectation of greater, future consumption), people must receive a minimum rate of return on their investment. Because the time preferences of people are unlikely to change very much over time, the rate of return on capital will remain roughly constant.

Principle 6: Taxes on capital do not affect the after-tax rate of return on capital but instead affect the amount of capital available. 

Although an increase in a tax on capital causes a one-time reduction in wealth for owners of capital, it does not permanently affect the future after-tax rate of return on capital. After such an increase, the after-tax rate of return on capital will be below its historical average. Investors will respond by lowering their rate of investment. The capital stock will shrink (relative to what it would have been) until the rate of return reaches 3.3 percent. After the adjustment has taken place, the owners of capital will receive the same after-tax rate of return they received before the tax increase. This does not mean that owners of capital will be indifferent to taxes on capital. These taxes lower the after-tax future income stream on existing capital assets. Thus a tax on capital lowers the value of capital assets and makes current owners of capital less wealthy. For any new purchase of an asset, however, capitalists will and can expect the normal rate of return of 3.3 percent.