Challenge To The Coffee Test

One of the key paradoxes faced by those who believe that wealth should be re-distributed to those in greater need is my coffee test.

An attempt to answer the coffee test objection appeared here:

http://www.tmmblog.co.uk/?p=2194

It fails, this is why:

Take the proposed availability heuristic. The same lack of instant awareness applies to the domestic poor and any of the other beneficiaries of the welfare state. People don’t give them money willingly it is taken by force via taxation.

If you think that the unseen poor are genuinely more deserving than the cup of coffee then the answer is simple, don’t let people hide behind their ignorance, tax them.

For any ethic to be worthy of the name it needs to be universally applicable. If need has a greater moral claim on the fruits of production than the producers do, then this must apply to all those in need, not just those in need in a politically designated geographic region.

If it is right to tax people to relieve need then logically we must all be taxed to near destitution until need around the world is relieved, i.e we are all as poor as each other, but the lowest level of poverty has been raised as high as possible for everyone.

Relative inequality does impact happiness (Its called envy). I am not happy that that my football skills are not equal to those of Wayne Rooney but thats life. (I do not propose we take away some of Mr Rooneys skill by crippling him in the name of sporting justice!)

Some people are better producers than others and some people are better singers, footballers, some are better looking and have richer social lives, some are more intelligent and haver richer cultural lives.

If unhappiness caused by inequality is a morally bad thing, why only focus on wealth ?
http://www.libertarianview.co.uk/the-importance-of-equality-questions-for-socialists/

We then move on to:

“The second point is that people use mental accounting. Whilst many economists insist that money can be used as a ubiquitous unit of measurement, that is not how people view it. A man does not weight the money he has saved for his children’s nest egg the same as his shopping budget, and similarly, he does not view the money he spends on coffee as money that he could have given to charity. In other words, money =/= money.”

This is of course quite right, it is the subjective theory of value at the heart of Austrian economics. If this were not true there would be no trade. People don’t trade £10 for an item costing £10 because they are valued the same, what would be the point!
They purchaser values the object more than he values the £10, the seller values the £10 more than he values the object. That is why the exchange takes place, it is mutually beneficial.

This is entirely my point, by trading the £2 for a Latte instead of trading the £2 for the child’s life in Africa, the purchaser has shown the order of values he prefers. He would rather trade the £2 for the coffee than the life (Because that is what he did!) therefore he must value the coffee more than the life. Which is not a problem unless it contradicts your professed values and makes you a hypocrite.

The final point is completely without substance:

“So say we considered giving as aid all the money that we now spend on the welfare state. (We’ll even assume that the aid is corruption free and is only spent on sustainable, helpful projects). We’d find ourselves with an uncomfortable question: should people in developed countries have to endure misery, high crime and whatever else so that people in developing countries do not starve (or do not starve quite as quickly)?”

Well yes questions of ethics and the just allocation of scarce economic resources are difficult!

“It’s not a question I claim to have an answer to, but neither should anybody else. The question is not one we need to ask; it is a symptom of the vacuity of the premises from which it was deducted.”

He doesn’t have an answer because he has not thought it through. The questions of fairness, social justice, taxation, etc do need to be answered because they exist and our lives are seriously linked to the answers our society imposes upon us. The only vacuity I can see is between the ears of the maker of the sentence above!

“People in poor countries need to be lifted out of poverty in line with their Western counterparts* organically.”

Hmm, the people in our country need to be lifted out of poverty by taking money via taxation from those better off, but those in poor countries should do it organically!

In what way are the category of poor people in one geographic area morally entitled to different solutions to those in another ?

“The size of the welfare state in rich countries has little relevance to those in poor countries, but is a valuable part of a well functioning society.”

If the choice is between giving the money to the relatively wealthy domestic poor, or giving it to the absolute poverty they endure then it is of huge relevance to them!

The paradox remains:

If you believe that forceful redistribution of wealth is morally justified because the marginal value of wealth to the rich is less than the marginal value of wealth to the poor then the only logical conclusion is that you should give away everything you own until you reach subsistence level.

Any proponent of welfare state redistribution using that justification who is not drinking water, walking to work and wearing second hand clothes is a hypocrite.

 
Words by Murray Rothbard

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  • You make some valid points, but my post was intended as a rebuttal of the claim that:

    “If you ever enjoy a cup of coffee (Or Tea) then you value the pleasure you get from a cup of coffee, more highly than you value saving the life of another human being”

    Saying that a man who buys coffee values it above a life is grossly unfair, because that is not how the human brain works. People do not make decisions like that and they
    shouldn’t be expected to. This is an example of economists mocking people for not behaving like homo economicus, which is not at all constructive. We are supposed to model the world as we find it, not preach to people that they have evolved wrong.

    I think you miss the point about mental accounting – I wasn’t talking about subjective values and mutually beneficial transactions. What I was saying is that he does not take his coffee and think “I could have spent this on an African child” – the average person keeps
    whatever charitable donations they make in a separate mental account. Doing this then supporting the welfare state may seem inconsistent when objectively evaluated, but they are just people operating within the confines of their own brains and cannot be blamed.

    If you think that the unseen poor are genuinely more deserving than the cup of coffee then the answer is simple, don’t let people hide behind their ignorance, tax them.

    I disagree with this premise. I never argued for taxing somebody as much as feasibly possible in the name of redistribution, domestic or foreign. Human beings are, after all,
    mostly self interested. Engineering policy directly against human nature is a bad way to go about things because it will just make people miserable. Some level of taxation is justified, but people are entitled to the fruits of their labour, so not any level.

    This was just a brief response to some specifics, I’ll post a more comprehensive defense of the welfare state tomorrow on the site.

    Btw, on a practical note I actually don’t think we [the developed world] currently give enough as aid, although on another practical note it appears that many aid programs are highly corrupted so maybe that’s not such a bad thing.

    • I see that we are coming at this from different angles, so let’s stick to your main criticism:

      “Saying that a man who buys coffee values it above a life is grossly unfair, because that is not how the human brain works. People do not make decisions like that and they shouldn’t be expected to. This is an example of economists mocking people for not behaving like homo economicus, which is not at all constructive. We are supposed to model the world as we find it, not preach to people that they have evolved wrong.”

      We need to be clear what we mean by values. I believe that people demonstrate their values by their actions. If you say that  people act inconsistently with their true values, then what is a value? What worth does it have if people ignore it ?

      If I say that I hate Fast Food, but eat it every day then my actions say I value fast food, but my words say otherwise. Which is my true value ? It has to be what I do. i.e. Actions speak louder than words.

      The mysteries of a man’s mind are knowable only to himself, but his actions in the world are visible to all.

      You appear to be saying that people act on their immediate stimuli only and make value judgements based only on these things, OR that their decisions do not reflect any value judgement at all.

      Both ideas are simply wrong.

      People clearly make decisions taking into account the future and things that are not immediate. e.g. They save for their retirement or they diet to avoid long term health risks, they spend money to educate themselves in the hope of future gain. People are very capable at  factoring in unseen and future consequences to their decision making.

      The nature of any decision is a choice between alternatives. People either make decisions randomly or they make decisions based on deciding which will give them the result they value most. Clearly decision making is not random and people do try to achieve the outcomes they most value.

      I accept that people do not consciously consider all the alternatives before making a decision. The shopper does not consciously weigh up the vitamin A content, Vitamin C content, Fat Grams, salt content, time to eat, calories, enjoyment intensity when deciding between a Big Mac and a Quarter Pounder with cheese. But when he makes his order he is still demonstrating which one he values more highly.

      The biology and philosophy of how decisions are made is complex. We can catch a cricket ball thrown to us without needing a mastery of the physics of projectiles or needing to mentally solve a set of differential equations. In the same way we make value judgement about what is important to us at any moment in time, the process is essentially unconscious but reflects our experiences, views and beliefs about the world and what is important to us.

      I am not mocking people, I think they really do value the coffee more than the life of a stranger in a far off land. This is demonstrated by their actions. They know people are starving in Africa, but they value the pleasure of a coffee more highly. 

      If you consciously prod them they may forgo the coffee and give to charity. 
      This does not show they really value charity more but had temporarily forgotten the fact. What you have actually shown is that people value not being made to feel selfish more than the coffee which they still value more than the African life! 
      As soon as the prod is removed and nobody is watching they will buy a coffee again.

      As an Austrian economist I don’t believe in homo economicus, I believe that individuals value things differently and act according to their own subjective values not a uniform monetary value.

      From an evolutionary perspective this sort of self interested behaviour makes sense.
      Those that pass on their genes survive, that is how evolution works. 

      To ensure the survival of your genes the lives that you need to be concerned with are, in descending order: Your own, (Because they contain your genes), your family (Because you share genes and you protect and support each other), your friends (Because they protect and support you) and your local community (Because they provide protection and the infrastructure for you to survive).

      We evolved in a period of scarcity, any caveman trying to give away some of the tribes food stores to the more needy tribe over the hill would not survive long and such “welfare state” genes would die out.

      I totally agree that we are supposed to model the world as we find it and not to preach to people that they have evolved wrongly.

      We evolved to look after those we care about by voluntary exchanges. 

      The idea that it is morally acceptable to forcibly take the fruits of one man’s production and give it to another that he does not know or care about is unjust philosophically and counter to our evolutionary biological nature.  

      That applies to those in far off lands and those in nearby cities.

  • I was thinking about it today and came to a similar conclusion: I think that we are confusing each others motives. I’ll start with my general response to your original post and then move on to your reply.

    My stated ethical aim is not to make everyone equal in wealth through income redistribution. I believe absolute poverty is unquestionably more important than relative poverty (although not that relative poverty is irrelevant). So if we make our stated aim to reduce absolute poverty as much as possible – regardless of the implications for relative poverty – then this does not mean taxing everybody to subsistence level because that would be counterproductive.

    Obviously we all know about the laffer curve – the maximum revenue we can raise is not the same as the highest level of tax. We also know that there is a curve for the optimum level of government spending to sustain the current level of wealth creation. I would wager that under normal circumstances, this is lower than the laffer curve (crowding out and so forth), so therefore the optimum amount we can sustainably give as aid is the difference between these two. However, I also believe there is another effect on top of these two. Let’s call it – creatively – the ‘spending effect’.

    People generally accept taxes because they see and feel the benefits around them – schools, roads and so forth. But if these benefits were to decrease without accompanying tax decreases, people would start to question it. This is partly motivated by self interest, as people have direct gains from government spending. But it is also motivated by the availability heuristic – even if they don’t feel gains themselves, but notice reductions in, say homelessness around them, they will feel more satisfied and motivated to pay the taxes.

    So the optimum percentage of national income to redistribute externally has decreased and decreased. Introspectively, I honestly can’t see it going past 5% before people started to feel disillusioned.

    So I still stand by my statement that “The size of the welfare state in rich countries has little
    relevance to those in poor countries”

    The welfare state does not suffer from the spending effect in the same way as aid, and because it would be counterproductive to spend the same money on aid past a certain point, we can evaluate the welfare state almost in isolation. The choice between internal and external redistribution is therefore a false dichotomy.

    Onto motives: I’m afraid I don’t accept your axiom that people’s motives can be deduced from their actions (or in other words, that they are somehow utility maximising). There are two main reasons for this:

    Firstly, peak-end evaluation. People tend to judge their past experiences in strange ways. For example, the psychologist Daniel Kahneman performed a colonoscopy, an uncomfortable medical procedure, on a number of patients. For half of them, he left the colonoscope inside them for an extra minute at the end, which was uncomfortable but not as bad as the worst of it. For the others, he did not. However, the patients who had it left inside them for longer rated the experience as less painful, even though on net it obviously wasn’t. This is because they were only thinking about the end of the experiment, rather than evaluating it objectively.

    Secondly, preference reversal. An experiment was done where people arrived to see a show, only to discover they had lost their ticket. They were offered the opportunity to buy another one, but declined. Others had not pre-bought a ticket, but discovered that they had lost the equivalent cost of the ticket, but in cash. When asked if they still wanted to purchase one, they accepted. This is the same decision, but people chose different options based on how it was framed.

    So I would ask: if people take different actions in the face of what is effectively the same situation, and are then unable to evaluate those actions objectively afterwards, how can they be utility maximising?

    I realise I have not defended the welfare state itself, but as I said I will probably do a post on this.

    • Your points about peak-end evaluation and preference reversal do not undermine the idea that values are expressed as actions. 

      You are falling into the homo economicus trap and trying to impose objective standards of value. Value judgements are subjective to the individual.

      Peak-end evaluation simply shows that subjectively people prefer a procedure that ends with minimal pain. Subjectively they value the end more than the total. 

      You may think this is irrational, but consider the following example. 

      Life 1 is a gifted genius who starts his life with wonderful success but turns to drugs , loses his way in his thirties and ends his life destitute and in misery. 

      Life 2 is a gifted genius born into poverty and hardship with little opportunity to express his talents, but who works slowly to achieve success and happiness and ends his life, rich and contented.

      Now assume the two lives contain equal total happiness. Isn’t it rational if given the choice to prefer life 2. Isn’t that a subjectively more attractive life ? Don’t we consider the first life  a tragedy and the second a triumph over adversity?

       Who is to say that the only valid choice is to value the total and not the end ?

      Preference reversal is part of the interesting field of behavioural economics. This refutes the idea of homo economicus but not the idea of subjective value. 

      In your example it simply shows that people who lose their ticket have a subjective value scale different from those who have not lost a ticket. Money does not equal value.

      Nothing here disputes the idea that people express their own subjective values through their actions. (They may of course look back with hindsight and wish they had made a different choice but at the point of acting, the choice affirms the highest value.)

      Utility maximizing is not the same as expressing subjective value choices. 

      If a terrorist believes that by exploding a suicide bomb, he will become a martyr and his highest value is becoming a martyr, then exploding the bomb is expressing his subjective value choice. 

      We may think it is a stupid value, his belief in the benefits of martyrdom are probably mistaken and it is certainly not utility maximizing, but the fact remains, his actions express his subjective value choice.

      If you are still not convinced give me an alternative explanation of what drives human actions if it is not the desire to satisfy wants and needs, or why people irrationally select less important (to them) needs over more important (to them) ones. 

      For an excellent explanation of this, try the first few chapters of Man, Economy & State by Murray Rothbard, the definitive work on Austrian economics.

    • “Obviously we all know about the laffer curve – the maximum revenue we can raise is not the same as the highest level of tax. We also know that there is a curve for the optimum level of government spending to sustain the current level of wealth creation. I would wager that under normal circumstances, this is lower than the laffer curve (crowding out and so forth), so therefore the optimum amount we can sustainably ‘have spare’ is the difference between these two. ”

      I accept the existence of the laffer curve. The relationship between government spending and wealth creation is different to what you assert. Any money spent by government has to come from wealth creating entities. (Or borrowed to be repaid from some future generations wealth creating entities).

      Government spending does not encourage wealth creation, it discourages it. Firstly it takes it’s money from proven wealth creators wastes a large amount of it on non wealth creating bureaucracy and distributes what is left to special interest groups that are generally not effective at creating wealth. (Or they wouldn’t need the government to give it to them!)

      Contrast a relatively low government spending economy like Hong Kong and compare its wealth with a high government spending economy like the former Soviet Union.

      The relationship is not a laffer shaped curve, it starts with zero government spending (Free Market Anarcho-Capitalism or even Randian Minarchism) and maximal wealth creation. Wealth creation drops linearly with government spending until total state control eliminates wealth creation altogether.