Monday, January 18, 2016

Who Decides? Who Pays? Who Benefits?

(Note: This is a direct quote from Chapter 15 of my book, "Freedom or Serfdom?)

The Parable of the Pie
Polly's Pie Parlor has an unusual business model. You pick the pie you want, but Polly delivers it to the customer who comes in half an hour later. You get the pie someone ordered half an hour ago; I hope you like his taste. And you won't pay for either of those, instead you pay for the pie somebody ordered two hours ago. No trading of pies is allowed.

That is obviously a silly example – or is it? It is an instance of what is called third-party decision making. One person decides, someone else pays and yet a third person lives with the decision. Yes that happens, maybe not in pie parlors, but it does happen in business, and especially in government.

Government and Third-Party Decisions
Government decisions are inevitably third-party decisions, made by someone far from the scene and who neither pays the cost nor lives with the results. It is worth looking at the problems this causes.

For any decision we must consider: (1) who decides, (2) who pays, (3) who lives with the results, and (4) who has the most knowledge of the situation. The best decisions are made by someone who pays the price, lives with the results, and is knowledgeable about the issues to be decided.

A person who pays but does not live with the consequences will have an incentive to keep costs down. However, he may not even care about quality or any results that do not affect him.

Someone who lives with the results but does not pay has an incentive to get a good solution, but not to control costs. He may go for an expensive solution that is only marginally better than something much cheaper.

A decision-maker who neither pays nor lives with the solution has no incentive to either control costs or find a good solution to the problem. Note that most government decision makers are in this category. They neither pay the price nor live with the result.

With government decisions, the decision-makers are usually insulated from both expense and results. However they do have an incentive to appear successful, so they tend to be reluctant to change their decisions. A change would be an admission that they were wrong, not usually career-enhancing. A bad decision is likely to remain in effect, much as the fees on climbers of Mt St Helens and Mt Adams remain in effect.

A person who pays and who lives with the decision, and who gets to make that decision, will have an incentive to balance cost and results. That incentive is likely to lead to the best overall decision, especially if that person is knowledgeable. Third parties are unlikely to have the first-hand knowledge possessed by the people directly involved. Those third parties may be 2,000 miles away from the situation. Furthermore, they may impose a “one size fits all” solution, ignoring differences between places as diverse as a big city like Los Angeles and a rural village where a traffic jam might mean three cars at a stop sign.

Third-party decision makers often think of themselves as smarter and more knowledgeable than the average person. They may even be correct, but the third party tends to have a different type of knowledge than the people at the scene. That third party is likely to have a theoretical background rather than the knowledge that comes from hands-on experience. Meanwhile, the people directly involved draw on personal experience and on information from others who have such experience. And those who pay and live with the results have an incentive to get more information if they need it.

For example, a rancher in eastern Oregon may have employees who drive 50 miles from town each day, then 50 miles back after work. Employees soon tire of the drive and of the expense of gas and automobile maintenance. The rancher has a hard time keeping good people, so he decides to provide housing right on his ranch. Not so fast! Representatives from urban/suburban areas dominate the state legislature. They do not make that daily commute, they do not lose employees who hate the drive, and many probably don't even know the difference between a bull and a steer. Guess who gets to decide how to run that ranch? That's right, the legislators from urban districts, people who want to prohibit such housing. Land use restrictions require that “Minimum lot sizes in farm and forest zones range from 80 to 240 acres.”[1] That restricts the number of houses a rancher may have for himself and his employees.

Ironically, many of the people who support those limits also want to reduce driving, yet their rules force ranch employees to commute from town. That is an example of not only third-party decision making but of stage one thinking. The decision makers do not think beyond the initial objective.

As government acquires more power, we find third-parties making more and more of our decisions. The results are predictable. Our only advantage is that we can blame someone else for the mistakes.


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