The Danger of Marginal Thinking

Posted on July 28, 2017 by Loquitur Veritatem

The “marginal revolution” in economics, which occurred in the latter part of the 19th century, introduced marginalism,

a theory of economics that attempts to explain the discrepancy in the value of goods and services by reference to their secondary, or marginal, utility. The reason why the price of diamonds is higher than that of water, for example, owes to the greater additional satisfaction of the diamonds over the water. Thus, while the water has greater total utility, the diamond has greater marginal utility.

Although the central concept of marginalism is that of marginal utility, marginalists, following the lead of Alfred Marshall, drew upon the idea of marginal physical productivity in explanation of cost. The neoclassical tradition that emerged from British marginalism abandoned the concept of utility and gave marginal rates of substitution a more fundamental role in analysis. Marginalism is an integral part of mainstream economic theory.

But pure marginalism can be the road to ruin for a business if the average cost of a unit of output is greater than average revenue, that is, the price for which a unit is sold.

Marginalism is the road to ruin in law and politics. If a governmental act can be shown to have a positive effect “at the margin”, its broader consequences are usually ignored. This kind of marginalism is responsible for the slippery slope–ratchet effect enactment and perpetuation of one economically and socially destructive government program after another. Obamacare, same-sex “marriage”, and rampant transgenderism are the most notorious examples of recent years. Among the many examples of earlier years are the Pure Food and Drug Act, the Supreme Court’s holding in Wickard v. Filburn, the Social Security Act and its judicial vindication, the Civil Rights Act of 1964, and the various enactments related to “equal employment opportunity”, including the Americans with Disabilities Act.

Frédéric Bastiat’s wrote about it more than 160 years ago, in “What Is Seen and What Is Not Seen“:

[A] law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

The unseen effects — the theft of Americans’ liberty and prosperity — had been foreseen by some (e.g., Tocqueville and Hayek). But their wise words have been overwhelmed by power-lust, ignorance, and greed. Greed manifests itself in the interest-group paradox:

The interest-group paradox is a paradox of mass action….

…Pork-barrel legislation exemplifies the interest-group paradox in action, though the paradox encompasses much more than pork-barrel legislation. There are myriad government programs that — like pork-barrel projects — are intended to favor particular classes of individuals. Here is a minute sample:

Social Security, Medicare, and Medicaid, for the benefit of the elderly (including the indigent elderly)

Tax credits and deductions, for the benefit of low-income families, charitable and other non-profit institutions, and home buyers (with mortgages)

Progressive income-tax rates, for the benefit of persons in the mid-to-low income brackets

Subsidies for various kinds of “essential” or “distressed” industries, such as agriculture and automobile manufacturing

Import quotas, tariffs, and other restrictions on trade, for the benefit of particular industries and/or labor unions

Pro-union laws (in many States), for the benefit of unions and unionized workers

Non-smoking ordinances, for the benefit of bar and restaurant employees and non-smoking patrons.

What do each of these examples have in common? Answer: Each comes with costs. There are direct costs (e.g., higher taxes for some persons, higher prices for imported goods), which the intended beneficiaries and their proponents hope to impose on non-beneficiaries. Just as importantly, there are indirect costs of various kinds (e.g., disincentives to work and save, disincentives to make investments that spur economic growth)….

You may believe that a particular program is worth what it costs — given that you probably have little idea of its direct costs and no idea of its indirect costs. The problem is millions of your fellow Americans believe the same thing about each of their favorite programs. Because there are thousands of government programs (federal, State, and local), each intended to help a particular class of citizens at the expense of others, the net result is that almost no one in this fair land enjoys a “free lunch.” Even the relatively few persons who might seem to have obtained a “free lunch” — homeless persons taking advantage of a government-provided shelter — often are victims of the “free lunch” syndrome. Some homeless persons may be homeless because they have lost their jobs and can’t afford to own or rent housing. But they may have lost their jobs because of pro-union laws, minimum-wage laws, or progressive tax rates (which caused “the rich” to create fewer jobs through business start-ups and expansions).

The paradox that arises from the “free lunch” syndrome is…. like the paradox of panic, in that there is a crowd of interest groups rushing toward a goal — a “pot of gold” — and (figuratively) crushing each other in the attempt to snatch the pot of gold before another group is able to grasp it. The gold that any group happens to snatch is a kind of fool’s gold: It passes from one fool to another in a game of beggar-thy-neighbor, and as it passes much of it falls into the maw of bureaucracy.

As far as I know, only one agency of the federal government has been abolished in my lifetime, while dozens have been created and expanded willy-nilly at the behest of politicians, bureaucrats, and cronies. The one that was abolished — the Interstate Commerce Commission — still had “residual functions” that were transferred elsewhere. That’s the way it works in Washington, and in State capitals.

So one obvious danger of marginal thinking is that the nose of the camel under the edge of the tent is invariably followed by its neck, its humps, its tail, another camel’s nose, etc., etc. etc.

There’s a less obvious danger, which is typified by the penchant of faux-libertarians for dismissing objections to this and that “harmless” act. Economist Mark Perry, for example, regurgitates Milton Friedman’s 30-year-old plea for the decriminalization of drugs. Just because some behavior is “private” doesn’t mean that it’s harmless to others. Murder behind a closed door is still murder.

In the case of drugs, I turn to Theodore Dalrymple:

[I]t is not true that problems with drugs arise only when or because they are prohibited.

The relationship between crime and drug prohibition is also much more complex than the legalizers would have us believe. It is certainly true that gangs quickly form that try to control drug distribution in certain areas, and that conflict between the aspirant gangs leads to violence…. But here I would point out two things: first that the violence of such criminal gangs was largely confined to the subculture from which they emerged, so that other people were not much endangered by it; and second that, in my dealings with such people, I did not form the impression that, were it not for the illegality of drugs, they would otherwise be pursuing perfectly respectable careers. If my impression is correct, then the illegality of drugs might protect the rest of society from their criminality: the illegal drug trade being the occasion, but not the cause, of their violence.…

What about Prohibition, is the natural reply? It is true that the homicide rate in the United States fell dramatically in the wake of repeal. By the 1960s, however, when alcohol was not banned, it had climbed higher than during Prohibition…. Moreover, what is less often appreciated, the homicide rate in the United States rose faster in the thirteen years before than in the thirteen years during Prohibition. (In other respects, Prohibition was not as much of a failure as is often suggested: alcohol-related problems such as liver disease declined during it considerably. But no consequences by themselves can justify a policy, otherwise the amputation of thieves’ hands would be universal.) Al Capone was not a fine upstanding citizen before Prohibition turned him into a gangster. [“Ditching Drug Prohibition: A Dissent”, Library of Law and Liberty, July 23, 2015, and the second in a series; see also “The Simple Truth about J.S. Mill’s Simple Truth”, op. cit., July 20, 2015; “Myths and Realities of Drug Addiction, Consumption, and Crime”, op. cit., July 31, 2015; and “Closing Argument on the Drug Issue”, op. cit., August 4, 2015]

This reminds me of my post, “Prohibition, Abortion, and ‘Progressivism’”, in which I wrote about the Ken Burns series, Prohibition. Here’s some of it:

Although eugenics is not mentioned in Prohibition, it looms in the background. For eugenics — like prohibition of alcohol and, later, the near-prohibition of smoking — is symptomatic of the “progressive” mentality. That mentality is paternalistic, through and through. And “progressive” paternalism finds its way into the daily lives of Americans through the regulation of products and services — for our own good, of course. If you can think of a product or service that you use (or would like to use) that is not shaped by paternalistic regulation or taxes levied with regulatory intent, you must live in a cave.

However, the passing acknowledgement of “progressivism” as a force for the prohibition of alcohol is outweighed by the attention given to the role of “evangelicals” in the enactment of prohibition. I take this as a subtle swipe at anti-abortion stance of fundamentalist Protestants and adherents of the “traditional” strands of Catholicism and Judaism. Here is the “logic” of this implied attack on pro-lifers: Governmental interference in a personal choice is wrong with respect to the consumption of alcohol and similarly wrong with respect to abortion.

By that “logic,” it is wrong for government to interfere in or prosecute robbery, assault, rape, murder and other overtly harmful acts, which — after all — are merely the consequences of personal choices made by their perpetrators. Not even a “progressive” would claim that robbery, assault, etc., should go unpunished, though he would quail at effective punishment.

“Liberals” of both kinds (“progressive” fascists and faux-libertarian) just don’t know when to smack camels on the nose. Civilization depends on deep-seated and vigorously enforced social norms. They reflect eons of trial and error, and can’t be undone peremptorily without unraveling the social fabric — the observance of mores and morals that enable a people to coexist peacefully and beneficially because they are bound by mutual trust, mutual respect, and mutual forbearance.

A key function of those norms is to inculcate self-restraint. For it is the practice of self-restraint that underlies peaceful, beneficial coexistence: What goes around comes around.

The Stagnation Thesis

Posted on February 6, 2011 by Loquitur Veritatem

There’s a rather strange debate in progress about Tyler Cowen’s new book, The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better. I say “strange” because the debate seems to be about whether Americans (for the most part) are more prosperous, in real terms, now than in the early 1970s. The fact is that Americans (for the most part) are better off now, but not nearly as prosperous as they could be. The reason is that governmental interventions — spending and regulation — have stifled innovative activity by depriving it of funds, restricting its scope, and reducing its potential profitability. And it is innovative activity that drives economic growth.

Of the economist-bloggers I read, only Don Boudreaux seems to have cottoned to this fundamental fact. The others — including Cowen — seem to be arguing about trivialities and irrelevancies (e.g., here, here, here, here, here, here, here, here, and here). The entire discussion, beginning with Cowen’s thesis, diverts the reader’s attention from government’s economic destructiveness to the (futile) search for a price index that properly accounts for temporal changes in the kinds and quality of products and services.

My assessments of government’s destructiveness are given in these posts:

Economic Growth since WWII
The Price of Government
The Commandeered Economy
The Price of Government Redux
The Mega-Depression
The Real Burden of Government
Toward a Risk-Free Economy
The Rahn Curve at Work
The Illusion of Prosperity and Stability
Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth

The last four decades, of which Cowen writes, are simply a continuation of a government-caused Mega-Depression, which began in the early 1900s. Here’s the bottom line:

Politics and Prosperity

“Government is a disease masquerading as its own cure.”

Tag Archives: Marginal Revolution

The Stagnation Thesis

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