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Wednesday, August 20, 2003

Pooling Solutions

Both Charlotte Denny in the Guardian and Richard Morrison in the Times have commented on the Fabian Society pamphlet A Better Choice of Choice. Denny agrees with the authors in asserting that choice can be a chimera:

Private consumption is no guarantee of greater freedom, they argue, singling out the car as the most obvious example. It brought the freedom to travel that only the wealthiest had previously enjoyed. But when most households exercise that freedom the result is congestion, pollution and streets that are no longer safe for children to walk. A series of perfectly rational individual choices has led to an outcome nobody wants.

Transport is the clearest example of how some choices exclude others. "There is no such thing as a perfectly free choice," says [rpamphlet author Roger] Levett. "Every choice is constrained by the context in which it takes place."

Pointing at the externalities of an activity like driving is not, of itself, an argument for the restriction of choice; it is, rather, an argument for consumers to bear more of the costs of of those choices. Congestion charging, as in London, and other forms of road pricing are ways of doing this. more to the point, though, externalities are not the result of choice. There are social costs and gains in all human activity whether freely chosen or coerced; Denny and the Fabians have not made that distinction.

The analysis is also static. Looking at the issue of school choice, for instance, the Fabians set up a dichotomy, asking "[h]ow many parents would prefer to be able to send their children to the local schools, with no choice in the matter, knowing that the education on offer met a national standard of high quality, rather than plunge into the positional competition known as 'parental choice' which so often means 'parental fate' for those unable to move their children in reach of good schools?". Why are these the only two outcomes available? Could not choice (via, say, a system of vouchers) force change and innovation in all schools over time? Furthermore, not all parents want the same thing out of their children's education--the whole debate about vocational vs. academic qualifications is proof of this. Pooling, with a generic outcome, is not the solution that parents are seeking, otherwise they would not choose to exit the system to begin with.

Denny, though, maintains that choice in the provision of public services, in the UK at least, means the right to exit from a poor system, taking off from her assumption that parents all have the same preferences. She frames the issue accordingly:

Giving people a greater voice is a more democratic means of improving services than forcing them to quit a school or hospital in search of a better alternative. The argument that choice will bring greater diversity mistakes what we want from public services. Most parents want the same things from a school: a secure environment in which their children can develop their talents with motivated staff, not too far from home. (my italics)

The Fabian pamphlet is aimed at a British government task force on sustaiable development, with the intention of limiting "consumerism". In the Times Morrison shares some of the Fabian's outlook on contemporary society:

Conspicuous over-consumption is clearly a driving force — if so banal a pastime as shopping can be dignified thus — in the lives of many people. “Retail therapy” is seriously cited as a cure, or at least a panacea, for stress, overwork, family troubles, career setbacks. Status is largely measured by possessions.

Advertising is forever goading us to “trade up”, playing on our insecurities about our own value. “Because you’re worth it!” L’Oréal reassures us, while Cellnet tempts teenagers with the slogan: “Life’s got enough embarrassments — don’t let your mobile phone be one of them.”

Variants of this analysis of consumption have been aroung since Thorstein Veblen's Theory of the Leisure Class. The modern economic analysis of advertising, though, show that it aids choice by providing information to the prospective consumer, moving markets a litte closer to "perfection". What advertising does not do, on the other hand, is create preferences--they don't make people want things they did not already desire, or alter the items on which they already had a greater propensity to consume.

These pieces are based on an illiberal assumption--i.e. that people do not know what is best for themselves. Denny even mentions behavioural economics, to assert that people's choices are often irrational, making the restriction of choice more reasonable and justifiable. (This, more than anything, makes me suspicious of some possible implications of behavioural economics. Too many recently have held out hope that the sub-discipline is the future of economics, less for its actual insights than for the possibility that it would be able to justify the market interventions they have always favoured.)

The Fabians hope to make "sustainability" synonymous with "happiness", following the research of Richard Layard and others. In a recent article on "happiness research", the Economist describes one of the possible implications:

Conventional economic theory argues that taxation distorts the choice between leisure and income. Taxes reduce the incentive to work an extra hour rather than go home, or to put in extra effort in the hope of promotion. But Lord Layard's argument implies that people have a tendency to work too much. Far from being distortionary, taxes are therefore desirable. He suggests a marginal tax rate of 30% to deal with the “pollution” that one person's extra income inflicts on others, and the same again for habituation. The total of 60% is a typical European level of taxation (taking both direct and indirect taxes into account).

Morrison excoriates this, saying that "it perpetrates the same delusion that the Fabians rightly castigate in our present social set-up: a belief that you can increase people’s stock of happiness through the manipulation of goods and services. The only difference is that the Fabians think governments should control the process while the capitalists think “the market” should." Morrison may have a non-Hayekian view of markets, but here he points in the right direction.

As with electricity deregulation, much in the news since the blackout in the northeast US last week, much "expansion" of choice in recent decades has been hedged with so much regulation, qualifiers and restrictions to result in not much choice at all. The arguments made by the Fabians and their supporters is not just against choice but also for preference change and formation. The ethics of this are questionable, and the efficacy even more so. Europeans may appear to be happier by taking more time off work, for example; the question, though, is whether they have really chosen this, rather then have it chosen for them. This "debate" is just beginning; governments may well decide that their role is to maximise "happiness"/"sustainability", telling people what will make them feel good and making them consume it. There is another word for this: socialism.