I was recently driving across the state of Virginia, and a trip that should have taken me about four hours via the highways actually took me about seven, due to heavy congestion. This is so beyond unacceptable for modern, civilized society. Such congestion is not inevitable.
Most road warriors I talk to about the problem of traffic seem to think the problem is intrinsic to our road system, which is simply not true. The existence of such horrible traffic frustrates me enormously, but each conversation with people who take it as a given compounds my frustration even more.
Just a little bit of basic economic theory points to an extremely obvious solution, but discussing such solutions triggers predictable political irrationality. A fee-for-service model is an obvious way to correct a commons problem, but for temperamental reasons, some individuals lack the ability to think systematically or partake in proper epistemic hygiene.
Congestion is not inevitable
I can’t stress enough that traffic congestion is not inevitable. Some common refrains include: “There are just too many cars on the road,” or “This is just rush hour traffic.” Such fatalism is unwarranted.
Even meta-political public choice fatalism usually reserved for the federal government is unwarranted, because policy changes only need to be passed through state and local municipalities. Local governments are subject to Tiebout competition.
While unexpected accidents can always cause traffic jams, we can completely eradicate cyclical “rush hour” traffic.
A commons problem
Congestion on highways is a clear instance of a tragedy of the commons. Without tolls, highways are open-access resources. Individual motorists using open-access highways aren’t paying for the full social cost of consuming the scarce resource at the point of service.
When a motorist takes a car onto an open-access public road, they enjoy the private benefit of using the road to travel to their destination, but they impose a public cost of increasing the probability of traffic congestion. The cost to any one individual motorist is low; no one car causes heavy congestion. When too many motorists add in their externalized costs onto the road, congestion results. It’s a giant prisoner’s dilemma, because no one motorist faces the incentives to limit their usage, and motorists have no way of cooperating with each other to ration out the resource in any logical way.
Tolls are a way of exacting the costs from each motorist adding one more car onto the road.
The efficiency gains come about from changing behavior
Unsophisticated opponents of tolls have argued that cars unequipped with E-ZPass have to stop at tolls to pay, and actually cause buildups.
Where have we seen this flawed mental model before? Marx theorized that the base unidirectionally influenced the superstructure. Marx would have argued that tolls, as technologies in the base, constrain motorists by extracting money out of them. Marxist analysis can’t account for motorists’ individual cognitions. Dialectical materialism fails.
It’s the sort of mistake a child makes before developing a theory of mind. In reality, different motorists have different preferences and resources, and don’t want or need to use roads at the same quantity.
With tolls in place, individual motorists can decide on the margin whether or not to bear the cost of adding one more car to the road.
In technical economic terms, a toll’s fare needs to be high enough to change the price elasticity of demand from being inelastic to elastic. Increases in fares need to rise so that the percentage change in quantity demanded is greater than the percentage change in the price. If the price of a toll isn’t high enough, then the price elasticity of demand would remain inelastic, and cyclical traffic would persist.
What about the poor?
Critics of tolls charge that the poor bear the costs of tolls disproportionately. Such a claim is incoherent.
It’s important to remember that the problem the poor have is that they don’t have enough money. If we’re concerned in society with redistributing from rich to poor, we should redistribute the most liquid resource available, which is money, in the form of a transfer as close as possible to a lump-sum subsidy. Redistribution does not justify social engineering via taxes and subsidies on specific goods, services, or behaviors.
It doesn’t make sense to justify the continued existence of a market inefficiency on the basis that it puts the poor on an “equal” footing with the rich. At first glance, it may seem more fair to keep the resource unpriced. The underlying narrative is that not even the rich would be able to bypass the traffic in an open-access resource, and that if the rich were able to pay to exit, they would leave the poor either stuck in traffic, or unable to afford the new price of the tolls.
The narrative is wrong because when externalities exist, Pareto improvements are available by internalizing such externalities.
Tolls would actually help the poor, because the poor, along with everyone else, would experience the roads without traffic. Time wasted in traffic has the opportunity cost of foregone wages, commissions from sales, visits to clients, or valuable leisure time. Traffic also wastes gasoline. Dissolving traffic would increase the amount of resources available to all motorists, including the poor.
With the roads clear of congestion, people could still choose to substitute money for time by deciding how much to work. It makes no sense to lock people into a system that precludes any deliberate tradeoff, and it makes no sense to lock people into a system that just wastefully and unidirectionally converts money into time.
We can model the market for a toll road as having two segments, rich, R, and poor, P. The rich’s price elasticity of demand for a toll road () might remain inelastic, while the poor’s price elasticity of demand () might turn elastic:
This is a feature, not a bug. Income is one of the factors that affects elasticity. By converting the price elasticities of some motorists from inelastic to elastic, we can reveal preferences. Without any sort of bureaucratic central planning, motorists would find creative solutions to use toll roads at the point where marginal costs equal marginal benefits. Some motorists would turn to carpooling or slugging. Some would choose to not use the road during rush hour, and instead use the road only when the fares are lower. Some employers would adjust employees’ schedules accordingly.
In the interest of fairness, don’t we need tolls installed everywhere, all at once?
Some critics charge that if tolls are only installed on a few key roads, the motorists who use the toll roads bear some cost, while the motorists of other open-access roads avoid such a cost. Such thinking is exactly backwards.
Money, for all its usefulness in fueling civilization, is still abstract enough to severely confuse people. The fact that money is exchanging hands doesn’t automatically mean that costs are higher. On the contrary, tolls internalize the externality of traffic, and thus, using a decongested toll road costs less than a clogged open-access road. A congested road has the high cost of wasted time; a decongested toll road has a lower cost that’s exactly reflected in the price of its fare.
An oft-forgotten period of history in England and the United States was the putting-out system. Cottage industries served as the precursors to the factories we associate with the Industrial Revolution.
Manufacturing didn’t begin in factories. It began when technological progress allowed people to manufacture raw materials right out of their homes. Eventually, when it became politically viable to do so, larger firms formed to minimize transaction costs.
What’s my point? In contrast to what you might hear from Marxist historical narratives, Western Europe didn’t morph from feudalism to capitalism. The Industrial Revolution wasn’t a transformation of feudalistic exploitation into capitalistic exploitation. It was a spontaneously ordered progression from empowered, decentralized manufacturers.
Bowles, Kirman, and Sethi have a new paper out in which they reconsider Hayek.
Bowles is an interesting neo-Marxist thinker. I was first introduced to his research a few years ago when he released a study claiming that inefficiencies result from inequality on a free market, because resources are wasted when they are channeled into the protection of private property. He calls this kind of waste “guard labor.”
In a certain sense his theory is sound; the protection of private property is a cost. If no one ever stole anything, we could devote more resources into productive enterprises, but as long as some are willing to steal, the cost of defense against theft is necessary. It would be far costlier to forgo effective protection of property rights. Without widespread adherence to property rights, there are too many externalities, and maintaining an advanced economy isn’t feasible.
Bowles makes a different argument though, that it would actually be more efficient to institutionalize redistribution instead of devoting as many resources as we currently do to protect against theft. This seems like pretty standard Marxist conflict theory. His radical empirical claims, that one in four are employed to guard the wealth of the rich, and that we could expand the production-possibility frontier by institutionalizing redistribution, are pretty suspicious. Won’t redistribution be plagued by the local knowledge problem?
The new paper on Hayek directly challenges the local knowledge problem, on three fronts:
- The instability of price adjustments
- Speculation, which erodes the integrity of the price signal’s information about consumer preferences, relative scarcity, etc.
- Hierarchical organizations failing to make decisions as individuals would
I’m glad that some leftists are taking Hayek seriously. Let’s break down each claim.
A contrived model
The paper elaborates on a glaringly contrived model of a simple economy. The model suggests:
- An economy of wine and bread producers who are perfectly specialized in their production, but consume both goods in fixed amounts, as perfectly complementary goods
- A wine producer, mistakenly expecting a weak bread harvest, lowers his wine prices to stock up on bread
- Bread producers mistake the lower wine prices as a signal for an increased wine supply, and increase their consumption of both wine and bread
- The bread producers’ increased bread consumption increases the scarcity of bread
- Wine producers are forced to lower prices even more to obtain bread for their complementary preferences
- The wine market collapses and the wine producers are left languishing in poverty while the bread producers gorge themselves
The patently absurd underlying assumptions of this model are:
- The original wine producer who was mistaken about the bread harvest can’t correct his mistake and adjust prices
- The economy consists only of perfect complementary goods
- Beliefs among bread producers about the abundance of wine are given only from the price
This model is so unbelievably disconnected from reality. Seriously, is there any person in the universe who would be convinced by this?
The paper concedes that at equilibrium, information coordinates resources quite efficiently, but questions how a price could be stable, and therefore useful, after being wildly disrupted, such as in the instance of Walrasian tatônnement. I don’t know what this means. Prices are sometimes volatile? Who cares? This just seems pedantic.
The paper explains that Hayek’s ideas about the price mechanism apply to fundamental analysis, but don’t apply to technical analysis. Maybe Hayek didn’t have technical analysis in mind, but perhaps given the right conditions, technical analysis could provide innovative and useful information. I don’t have a strong opinion on this.
In describing the 2008 financial crisis though, they seem unaware of the narrative that the central planning of governments obfuscated important signals, thereby preventing sustainable growth in the financial sector. Sure, the bubble was indeed a sort of “dark” spontaneous order, “the result of human action but not of human design,” but Hayek never asserted that the business cycle could be eliminated. The paper is attacking a straw man. Hayek was just wary that central planning could make business cycles much more painful.
The paper discusses how the local knowledge problem doesn’t just affect government on the societal level, but also affects management within an organization. Hayek was well aware of this as well. It’s a straw man to claim that he thought firms were perfectly rational. On the contrary, Hayek was concerned with human ignorance in all contexts.
The paper also touches on Coase’s insight that firms exist to minimize transaction costs, and Ostrom’s insight that social norms can function as a substitute for coordination when markets aren’t feasible, which are both good and important concepts that are complementary to Hayek’s corpus.