Collective Economics

I keep writing stuff but never posting it. I don't have the time in the evenings that I used to. But I have a collection of thoughts and ideas to post so I'll try to start posting them. Here's one I wrote last week:

They make sense. They sound right. They seem good... even Christian. But why are the ideas that “we’re all in this together” and “we can only make economic progress if we work together” wrong?

Isn’t working together supposed to help us be more efficient and successful? Well, this may be true in certain situations, but in social economics, the idea of too many cooks in the kitchen is more correct.

Take, as an example, a case presented by economist Russ Roberts of George Mason University. Suppose you are at a restaurant with 9 other businessmen that you don’t know. You take a look at the menu and you see the 9oz house steak for $15. It sounds pretty good, but you keep scanning the menu, and a little lower is a 12 oz prime rib for $25. The house steak sounded good, but the prime rib sounds amazing! Well, after re-reading the description of the prime rib a few times, you overcome the temptation and decide $25 is too much to spend on dinner, so you’ll go with the house steak. Now consider that the guys start talking, and you all decide to get whatever you want and split the bill evenly. Prime Rib it is!

What just happened here?

After determining that you were willing to pay $15 for a house steak, you then saw a better steak for $25. After some consideration, you determined that, while the prime rib was worth more to you than the house steak, it wasn’t quite worth $25 to you. Let’s say, for the argument, that you valued the prime rib at $20. So you wouldn’t spend $25, but you would have spent $20 for it. Well, with the new arrangement, the price to you all of a sudden came down. The $10 difference between steaks is split between all, thus it is only $1 to you. Now it is below your $20 threshold, so to you it’s a good deal.

The prime rib was worth $20 to you, but the group paid $25 so you could have it. The group has wasted $5.

Now consider that the case above implied an assumption that the remaining persons in the party order what they would have ordered if they were to pay for it all themselves. But, of course, all are now ordering the more expensive items. Of course, all are going to take advantage of the arrangement, for if they don’t take advantage of it, they are taken advantage of. So now the whole group has now spent much more than they would have been willing to by themselves.

The net effect is that demand is artificially inflated. They all got what they wanted at a higher price than they were really willing to pay. So the market is imbalanced, money is wasted, and economic progress is hampered. And ultimately they each had to pay more for their dishes individually than they wanted, which defeats the purpose of the idea in the first place.

This is exactly how universal health care works. We all pay for it, but now that we all have coverage, we all want more service than we would have if it we had to pay for it ourselves. Demand is inflated, prices soar, waiting lines grow, and the costs for these services becomes unsustainable.

Do not fall for the idea of collective economic improvement. Economic progress is produced by individual self-interest alone, for collective self-interest does not have the motivational influence for any individual, nor the frugality required for collective progress. “Working together” for economic progress works against the individual. And since we’re all a collection of individuals, ultimately it works against the collective.