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.

---

[1]      http://www.landwatch.org/pages/perspectives/accomplishments.htm

And the Facts Mean? (Part 1)

A while back my friend Randy loaned me a book. I returned it to him after reading only a couple of chapters. Can you guess why?

I suspect most will guess that I didn't like the book. Actually I did like it.

Your next guess is likely to be that he asked for it back, or I didn't have time to read it or something along those lines. All reasonable guesses that explain the facts – but again all wrong.

In fact I liked the book so much that I went out and bought my own copy.*

There are many other cases in our lives when the most obvious conclusion can be wrong, often flagrantly wrong. We seldom have perfect data, nor is our logic always flawless. That is just part of the human condition and we have to live with it. There are two basic ways of living with this imperfection: (1) We can recognize that we might be wrong and check our conclusions against new facts when we get them, or (2) we can assume that we are correct and refuse to consider evidence to the contrary.

Refusing to recognize the facts sets us up for major problems. What if the question is more important than why I returned the book to my friend? Maybe something like the wisdom of an investment you made? If information becomes available that the company you invested in now has unexpected problems, it would be wise to re-visit that decision. Most of us understand this and are willing to change our thinking if we get new information.

Unfortunately there are some whose intellectual arrogance causes them to stick with bad decisions, even when those decisions become costly. Worse, many of those people are third party decision-makers who do not pay the price for their mistakes. Instead their errors cause problems for others. Most of them are government employees who can impose the costs of their decisions on others. Since they do not themselves suffer the consequences of their bad decisions they have little incentive to correct their thinking.

For example, the Equal Employment Opportunity Commission charged Sears, Roebuck and Company with sex discrimination. The case dragged on for years, from 1973 to 1986. In the end an appeals court dismissed the suit, citing the “EEOC's failure to present testimony of any witnesses who claimed that they had been victims of discrimination by Sears.” In spite of not being able to find a single woman who thought she had been discriminated against, those government employees pursued a case against the innocent.

The EEOC had one fact, namely that there was a statistical disparity among Sears' employees. From that they jumped to the conclusion that Sears was discriminating. EEOC decision-makers failed to consider if there might be other reasons for that disparity. Discrimination was one possible explanation of the fact, but not the only one.

And who paid for that government action? First of course was Sears, its customers and stockholders. Those customers and stockholders were the sole source of the money needed for legal defense. Second, taxpayers had to pony up the money to prosecute the suit. Taxpayers, stockholders, and customers were all losers in that action, even though Sears “won” the case.

Perhaps a more important question is who did not pay for that action? The answer is the decision-makers who pursued a case on only statistical evidence (except insofar as they were taxpayers). Those bureaucrats continued to draw their salaries and receive their benefits, all tax paid. They were third-party decision-makers, suffering no consequences for the costs they inflicted on others.

There are of course many such cases in this country. The EEOC and others regard statistics alone as proof. In fact Alice Kessler-Harris, who testified for the EEOC in the Sears case, baldly states that she “did not agree that women's lack of 'interest' could absolve a company of charges of discrimination.” That even though she also “did think that there was some as yet undefined difference between men and women.” I find that an amazing position. She agrees that men and women are different and might have different interests. Yet she expects the statistics to show identity of outcome unless there is discrimination!

The EEOC and others have a severe form of intellectual arrogance that allows them to ignore facts and alternative explanations and assign any statistical difference to discrimination. A company in private business with such a distorted vision would soon fall prey to its competitors and probably go out of business. Unfortunately bureaucrats are insulated from reality and can continue to force their version of reality on the rest of us. That will not change until the voters demand that their government require real evidence, not just statistical differences, before charging companies with discrimination.

Next time I plan to discuss some of the reasons statistics alone can be a problem.

*The book was Vindicating the Founders by Thomas G. West.

If you like my blog, please tell others.
If you don't like it, please tell me.