The Economics of Stupidity

Here’s Bryan Caplan:

I’m an IQ realist, all the way.  IQ tests aren’t perfect, but they’re an excellent proxy for what ordinary language calls “intelligence.”  A massive body of research confirms that IQ predicts not just educational success, but career success.  Contrary to critics, IQ tests are not culturally biased; they fairly measure genuine group differences in intelligence.

Yet I’ve got to admit: My fellow IQ realists are, on average, a scary bunch.  People who vocally defend the power of IQ are vastly more likely than normal people to advocate extreme human rights violations.  I’ve heard IQ realists advocate a One-Child Policy for people with low IQs.  I’ve heard IQ realists advocate a No-Child Policy for people with low IQs.  I’ve heard IQ realists advocate forced sterilization for people with low IQs.  I’ve heard IQ realists advocate forcible exile of people with low IQs – fellow citizens, not just immigrants.  I’ve heard IQ realists advocate murdering people with low IQs. 

When I say, “I’ve heard…” I’m not just talking about stuff I’ve read on the Internet.  I’m talking about what IQ realists have told me to my face.  In my experience, if a stranger brings up low IQ in Africa, there’s about a 50/50 chance he casually transitions to forced sterilization or mass murder of hundreds of millions of human beings as an intriguing response.  You can protest that they’re just trolling, but these folks seemed frighteningly sincere to me.

Don’t such policies flow logically from IQ realism?  No way.  If someone says, “I’m more intelligent than other people, so it’s acceptable for me to murder them,” the sensible response isn’t, “Intelligence is a myth.”  The sensible response is, “Are you mad?  That doesn’t justify murder.”  Advocating brutality in the name of your superior intellect is the mark of a super-villain, not a logician.

But don’t low-IQ people produce negative externalities – negative externalities that well-intentioned consequentialists will want to address?  I’m no consequentialist, but the consistent consequentialist position is: Not if the “solution” is worse than the problem!  And if your “solution” involves gross human rights violations, there’s every reason to think it is worse than the problem.  We should be especially wary of self-styled consequentialists who rush toward maximal brutality instead of patiently searching for cheap, humane ways to cope with the social costs of low IQ.

A couple of questions may arise from reading this:

  1. Where the hell does he meet these people? What are the negative externalities low-IQ people supposedly produce?
  2. If there are such negative externalities, what are the “cheap, humane ways” to cope with them.

What are the negative effects of having a low IQ? Well, people with low IQ are, on average, less productive than people with high IQ. That’s definitely a negative effect – but does it also constitute a negative externality? I.e. does it not only negatively affect the person with the low IQ but also third parties?

Under institutions of private property this is not the case.

The only negative effect of low productivity caused by low IQ (or laziness for that matter) is on the salary of the respective person. In a private-property society, salary – the amount for which a person can sell what he or she produces – corresponds closely to the real value of that product to the people who consume it. You get out what you put in. If you put less in, you get less out.

However, besides the sphere of private property there is yet another sphere: politics. And in the political sphere there is no comparable internalisation of the negative effects of stupidity as in the sphere of private property. When a government produces bad laws, everybody bears the costs, not just those who voted the politicians into office. So, in the political sphere low-IQ people can indeed produce a virtually unlimited amount of negative externalities.

Of course, due to, e.g., rational ignorance even a democracy consisting exclusively of high-IQ people would overproduce bad laws. However, adding stupidity to the mix certainly exacerbates the problem.

The solution proposed by some IQ realists is apparently to eliminate low-IQ people – either by straight out killing them or through “softer” methods such as a No-Child Policy for people with low IQs.

The thing is: this would not only be morally reprehensible but also (pardon the pun!) stupid: a waste of resources and also not very effective. Not eliminating stupids, but eliminating politics – the only sphere where stupids can, and do, cause significant social costs – is the smart solution.

Just because we are used to law being produced monopolistically by parliament doesn’t mean this is the best or even only possible way.

In a Polycentric Legal System law would be a private good produced on a private market. Different people in the same country could subscribe to different legal codes.

Now, when a low-IQ person buys bad law, this is, in principle, his/her problem. The negative effects of the bad legal code are internalised by the persons subscribing to that law – at least far more so than in a democratic system where I am no less subject to the costs of bad laws than the people voting for them. Of course, this internalisation is not complete because I may have to incur costs to have my good legal code applied in the case of a conflict with somebody subscribing to a bad legal code.

However, market forces can be expected to lead to rapid improvement in the quality of law in general.

In a democracy you buy nothing but promises. You may know how one party ran the country for the past four years, but not how the opposition party might have run it. In a Polycentric Legal System people can compare alternative brands – much like in the case of “normal” products. Information would be imperfect, as it is in making most decisions; people may make mistakes. Stupid people may make more mistakes. But at least alternatives exist; they are there to be looked at. You can talk with neighbors who subscribe to a different legal code and compare costs and benefits.

By turning law over to the private market, making a choice between different legal rules will be much like making a choice between different cars or different Internet providers. So we can expect the same positive effects of competition.

Remember that the sphere of private property is made up of the same people as the sphere of politics but the quality of the products in the former is infinitely better.

Achieving efficient law simply requires changing the way people choose legal rules, not changing the people who make the choice.

The Most Important Book For Every Libertarian To Read

I recently saw a list of Ten Books Every Libertarian Should Read on the website of the Adam Smith Institute, which did not include the one book I consider to be (by far) the most important for every libertarian to read.

I am talking about The Machinery of Freedom by David Friedman.

Machinery_Of_Freedom_Cover_Dave_Aiello

The book shows that libertarianism cannot be stated as a simple and convincing moral principle from which everything else follows. Instead, economic analysis is used to arrive at libertarian conclusions.

The obvious way to find out what the laws of a society ought to be is to start with general principles of justice and see what laws are necessary to implement them. David Friedman argues that that cannot be done and gives a long list of questions which cannot be answered using libertarian principles. For example, libertarian principles of justice provide no way of deciding what ought to be included in property rights, how they may legitimately be defended, or how violations ought to be punished.

Friedman argues that, while libertarian principles provide no answer to the relevant questions, they are all questions that can, at least in principle, be answered by using economic theory to discover what rules maximize human happiness.

Friedman shows that a system in which legal rules are generated by firms competing in a private market can be expected to produce efficient rules and goes on to use the tools of economic analysis to show under what circumstances such a legal system would or would not be stable.

The reason why, in my opinion, The Machinery of Freedom is the most important book to read for a libertarian is this application of economics to the field of law.

So, if you are a libertarian, go and read The Machinery of Freedom by David Friedman. And if you aren’t a libertarian, still read it. It’s stellar economics and a hell of a lot of fun to read.

Competitive Governance, Seasteading and Free Private Cities For Dummies

If you are interested in economics and/or political thought, you may have come across the following three terms:

  • Competitive Governance
  • Seasteading
  • Free Private Cities

The purpose of this post is to explain in a clear and concise manner the economic and political thought behind each of these terms. Of particular importance is to understand how these terms, respectively, the ideas behind them relate to each other.

The Market for Governance

In contrast to other markets, the market for governance has been producing meagre results. Products (the bundle of rules and public goods provided by governments) are low-quality, prices (taxes) are high and the customers (the citizens) are generally unsatisfied.

The reason for this is lack of competition. In a competitive market producers of bad products are weeded out by natural selection. In the governance industry, producers (governments) are not subject to this selection mechanism. Instead, the market for governance is dominated by a series of large geographic monopolies.

There are two reasons for the lack of competition in the governance industry:

On the supply-side there are high barriers of entry. Imagine you have a new idea that would revolutionise the governance industry. In any other industry you would have to convince some investors to give you the necessary capital. Then you could start producing and selling to customers. As things stand today, market entry into the governance industry would be significantly more difficult. You would have to win either an election or a revolution.

On the demand-side there are high barriers of switching. Switching your internet provider means something like having to send an email to customer service. Switching governance providers means either emigration or the election of a new government within your current jurisdiction.

Obtaining permission to immigrate into a country can take years. On top of that, since today’s governments often cover a whole language area, emigration may well entail having to learn a new language. The problem with elections, on the other hand, is that neither you nor anybody else has an incentive to put any effort in making a good choice – as illustrated by David D. Friedman in The Machinery of Freedom:

Imagine buying cars the way we buy governments. Ten thousand people would get together and agree to vote, each for the car he preferred. Whichever car won, each of the ten thousand would have to buy it. It would not pay any of us to make any serious effort to find out which car was best; whatever I decide, my car is being picked for me by other members of the group. Under such institutions, the quality of cars would quickly decline.

If high barriers of entry for producers and high barriers of switching for consumers are causes for the dysfunctionality observed in the market for governance, then it becomes clear that there cannot exist a solution that does not tackle at least one of these causes.

Competitive Governance

The idea underlying Competitive Governance is to minimise the cost of switching governance providers by switching between geographic jurisdictions.

This is to be achieved by geographically decentralizing political power, i.e. increasing the number (decreasing the size) of units of governance among which people could move. Low barriers of exit would mean higher competitive pressure for governments and therefore better governance.

Seasteading

While the focus of Competitive Governance is on the demand-side of the market for governance (the high barriers of switching faced by consumers), the focus of Seasteading is on the high barriers of entry, i.e. on the supply-side of the market for governance.

In contrast to the earth’s land, the ocean is largely unclaimed by states. Seasteaders want to develop the technology to create permanent, autonomous communities on the ocean, arguing that the creation of ocean platforms constitutes a much lower barrier to entry for forming a new government than winning an election or a revolution – or a war. And with technology advancing, the barriers of entry to the market of governance will decline year by year.

By opening up the vast space of the ocean for experimentation with new institutions, an evolutionary process will be started that will led to new and better products in the market for governance.

Proponents of Competitive Governance have argued for more competition in the governance industry, but traditionally they did not provide an explanation for how to effectuate this change. Seasteading can be considered as a a route for getting from here to there, i.e. as a proposal for implementing Competitive Governance.

Free Private Cities

Competitive Governance and Seasteading refer to the level of the governance industry and are agnostic with respect to the shape and form of the units of governance within the governance industry. Put differently: the question of how governance is to be provided is out of scope.

Titus Gebel’s proposal for the foundation of so-called Free Private Cities, on the other hand, provides one answer to this question. Gebel, a German entrepreneur, argues for private, for-profit companies to act as governance providers in defined territories (Free Private Cities) and he has started such a company: Free Private Cities Ltd.

Citizens/customers in a Free Private City would pay a fee for the governance services provided by the company. Each customer’s rights and duties would be laid down in a written agreement between the customer and the governance provider of the respective Free Private City.

Free Private Cities may be established within the territory of an existing state, whereby the parent state (hoping to reap benefits from a potential hub of growth and prosperity) grants the operator the right to set its own rules within a defined territory. Most likely though, the first Free Private City is going to be established via Seasteading on the ocean.