Economics for Political Moderates… Causal Economics

It’s hard to find anyone today that doesn’t think the political environment in the West is extremely polarized on ideological grounds. Healthy disagreement is a fundamental democratic freedom, but today there’s a big problem. With a proliferation of media, the ‘left’ and the ‘right’ sides of the political spectrum are usually talking to themselves in their own echo chambers and censoring out alternative views. Each ideology believes the other is completely wrong and almost no mutual dialogue occurs, so no common ground and practical way forward is typically found. Beyond the political influencers and activists that make all the noise, everyday citizens are usually more practical and moderate when it comes down to actual policies. What gets lost in all of this is the fact that the fundamental laws of economics aren’t subjective.

Far left and far right ‘interpretations’ of economics always fail in building and sustaining successful society. Neither pure command nor pure market systems work on their own—not in practice and not even in theory. Effective and sustainable societies are only possible when they value every individual’s freedom, equal opportunity, individual diversity and expect responsible citizenship. It’s time for moderates to take a look at Causal Economics. There’s good reason to see it as the way forward to achieve a more moderate, workable world for everyone—by focusing on proven economic principles that work, instead of political ideologies.

Not to put undue pressure on moderates, but if we don’t assert the accurate and proven economic principles that support political moderation, then we remain at the mercy of hard swings between warring left and right factions. Our societies deserve more than that.

Causal Economics

Causal economics is a stream of behavioral economics that centers on the principle of causal coupling. As a stream of behavioral economics it doesn’t rely on the assumption that decision makers are 100% rational and focussed only on financial prices and quantities. Instead, individuals also exhibit emotional, often irrational elements to their decision making. In Causal Economics everything is interpreted subjectively by the individual decision maker and evaluated against their personal beliefs.

Causal coupling models decisions as requiring upfront cost and effort in anticipation of future anticipated benefits—like the real world. This is very different from other mainstream decision models that unrealistically either assume complete rationality or allow for irrationality but characterize decisions as single period random outcomes. Causal coupling also implies that societal policies will be fair and sustainable to the extent that they couple cost and benefit across all stakeholders. It means that people are free AND accountable. Essentially, citizens reap the rewards of their contribution, contribute effort in order to benefit and pool significant risks to protect each other from catastrophic outcomes.

Causal coupling is so powerful because it directly implies the only way that comprehensive change results are ever achieved in business, government or any other part of life for that matter—setting targets, measuring results and tying a significant element of compensation to their achievement. Causal coupling with its focus on coupling cost and benefit aligns directly to this principle. Other approaches to economic decision making don’t centre on this principle. When causal coupling fails, results are almost ensured to be unfair and unsustainable.

A Moderate Approach to Markets

There are two fundamental elements that must be in place to ensure that the free market can deliver solutions acceptable to moderates. This means that people who contribute to economic success are rewarded and that these efforts don’t do involuntary damage to others.

1. Free interaction / exchange (markets)
2. Accountability for all externalities to transactions

 

Freedom: Free Markets

The free market, not just for products and services, but also for ideas and all kinds of free interaction between citizens, is the most powerful tool of causal coupling that exists. It directly allows people to decide what costs they are personally prepared to bear (financial and/or psychological) in order to increase their chances of greater future benefits.

The free market does lift the tide and more boats overall than any other economic system. History bears that out. No other economic system comes close to overall wealth generation across all sectors of society. However, left unfettered and not combined with any social safety nets, its inherent creative destruction can leave some citizens severely behind. The key is to ensure that every citizen has enough support to regroup and adapt while making basic ends meet.

Let’s be fully clear. Any economic approaches that do not put free interaction between fee citizens at their core, are by definition implying that government can decide better for individuals than the individuals can themselves. This is complete autocratic nonsense to moderates.

Accountability: Externalities

Free market transactions do not occur in a vacuum as some die hard right leaning people believe. Externalities can create real hardships in society, such as environmental damage, which transaction participants must pay to cover to ensure causal coupling. Moderates insist that these costs are borne by those involved, not passed off to others in society. Causal economics is strongly pro free market, but also strongly in support of owning up to responsibilities for externalities caused upon society.

Moderation in Government

There are six critical elements to ensuring that government is effective and sustainable—and hence the choice of moderates. These work together, so leaving any out of the mix undermines the success overall.

1. Constitution
2. Significant Direct Democracy
3. Legislation, not Bureaucracy
4. Compensation for Performance
5. Use Based Taxes
6. Social cost/risk sharing

 

Constitution

To moderates, the vision of society must come from the people as carefully laid out principles that uphold the most universal principles and keep at bay radical extremes that could influence government day to day. A codified constitution that reflects the will of the democratic majority is the most effective way of achieving this fundamental principle. The core principles of society should be fundamental in policy, not the trendy topics that buy off votes from interest groups. For solid moderate outcomes, the dog should wag the tail, not the other way around.

Significant Direct Democracy

In the vast majority of cases, individuals have their own interests at heart more than any government can. Even when well intentioned, government representatives—elected and bureaucratic—also have their own interests at heart. It’s natural. Governments aren’t inherently good or evil. They’re like any other intermediary group in society—they naturally look out for themselves first. Representative government puts a wedge between the democratic interests of citizens and creates a large, costly and self-propagating intermediary. It eventually encourages many voters to be disengaged and less informed due to their removal from impacting the issues.

The machinery of the government class with professional politicians and career bureaucrats, and the symbiotic lobby and media classes are self-perpetuating across the political spectrum. An engaged citizenship can better determine its own destiny. Most of the greatest innovations and achievements in history are from free thinkers following their passion. Direct democracy effectively weakens the distorting power of politicians and activists/lobbyists that don’t appeal to the democratic majority. It certainly eradicates the highly inefficient situation of a large coalition of different parties all working together to sustain their ruling positions—results being less of a concern. Moderates don’t want big, self-perpetuating government that just ‘governs’ without any results. Pure direct democracy can have major challenges as well, falling prey to uninformed angry masses that may not treat minority elements of society fairly. This is why a constitution is so important and why significant direct majority votes are required for major change. A lot can be learned from the modern system of government used in Switzerland as a good balancing act that incorporates elements of direct democracy.

The bottom line is that moderates believe in the core principle of the freedom to be who we are, regardless of how promising a government has positioned a policy. Moderates see value in their voice and don’t need someone to speak for them. And moderates see the importance of a solid and fair constitution that guides society with core principles.

Legislation, not Bureaucracy

To moderates, government plays a vital role in protecting the rights of individuals. That includes people in pursuit of their personal values, beliefs and goals as well as those that need some help due to tough times. To moderates, government exists in service to the people, not as a ‘wiser parent’ that knows better.

Causal coupling implies that the role of government should be to establish and enforce fair legislative frameworks that maximize the freedom of citizens, support the most vulnerable and ensure citizens can get on to the playing field, where all bear their share of costs to the extent that they can, and can enjoy opportunity. As governments spend other people’s money that’s automatically collected through taxes, they’re not efficient being in the business of ‘doing’. Government bureaucracies decouple cost and benefit across taxpayers and government intermediaries. Causal economics supports small governments and very clear and accessible legal/policing frameworks in their place. Even when it comes to large infrastructure projects, causal coupling suggests that government should establish a fair and appropriate framework in line with voter desires and collect specific funding via flat/user fee taxation. The actual service delivery should be through a competitive private contractor subject to the governing framework. These 3P (public private partnership) arrangements are the best way to meet the needs of citizens broadly in the most optimal sense possible, as they maximize coupling across all involved.

Compensation for Performance

Causal economics exposes the most universal of principles for making programs and policies effective. In all areas of life it rings true that “you get what you measure and what you compensate for”. In business this is par for the course, especially in sales. In government it’s extremely rare to see actual compensation tied to results. Moderates are happy to compensate government actors for results and not happy to compensate for ideological pitches in place of results. Non-moderates are happy to continually fund their ideologues to fight the fight at all costs hoping that one day all will see the world the way they do.

Some will argue that governments are held accountable by elections. This is not really true. Career politicians, bureaucrats, lobbyists and media all prosper regardless of whether it is their turn formally in power. Mediocre or even subpar performance in the government sector pays just as well as exceptional results. That doesn’t last long in the private sector because the people footing the bill can make direct changes. Today professional politicians can be become wealthy from the political system—which is a clear example of decoupled cost and benefit.

Without reward (compensation and reputation) explicitly tied to results (ultimate results and/or transitory milestones), government will remain a profession of ideologues preaching to their most emotional base to bring out the most likely to vote.  Moderates often get left out in the middle of the platforms on each side of the divide, because moderate policies don’t sound sexy—they deliver some benefits (not all)—cost money and effort—and take time. All things that don’t sound as great to voters. If a politician can get away with empty promises, then they’ll talk the talk—we’re all just human.

Compensation for performance cuts through the heated debate between public and private delivery of social services. Moderates understand that this is largely a moot debate. Either approach on their own is destructive—as the intermediary with the power—whether private corporations—or professional politicians/bureaucrats/public sector unions will use that power to extract as many benefits as possible for its constituents at a cost to others. That’s human nature. As discussed above, the power, obligations and rewards must be allocated across transparent and regulated 3P arrangements. Left only to private business with no taxation power, fixed government budgets will result in profits prevailing over services where needed. Left only to government, massive inefficient and costly bureaucracies will develop to reward all members of the machine, with little left for actual effective service delivery. Moderates understand that this debate is useless. The solution is 3P partnerships with clear regulatory frameworks that guide government and private partners and compensate them for results not election promises.

Use Based Taxes

In the majority of modern economies, taxes are typically collected every time certain economic activities occur such as earning or spending and or whenever assets such as property are held or bought and sold. These funds typically find their way into general government coffers and governments allocate them to spending. Such an approach is essentially source based taxation—taxes are collected automatically, separate of any defined program requirements, and then funds are allocated by a representative government.

Causal economics implies the optimality of use based taxation for some well-defined programs. Use based taxation reverses the flow of source based taxation, starting with broadly costed programs that governments get approved through direct democratic vote, which are then funded through an associated directly applied tax. Use based taxes are a powerful application of Causal Economic theory.

There are a number of potential benefits to use based taxation:

• More efficient government spending. Governments have to make a specific case to voters for the funds they want to collect. Coffers aren’t just automatically filled and then spent in order to ‘justify’ the need for the source taxes.
• Spending programs are tied directly to the desires of the democratic majority, not the preferences of career politicians within representative government.
• Fairer allocation of the tax bill across those that benefit from the program services while still providing support for those unable to carry their proportionate share of the cost.

 

 Social Cost/Risk Sharing

Civil societies in general recognize both individual exceptionalism and community contribution. Moderates are happy to hold in high regard those that prosper by driving forward society. They don’t value extreme greed nor resentment of economic success.

Moderates believe that advanced societies need a social safety net for citizens facing hard times in areas such as employment, health etc. This is essentially risk pooling. Most democratic majorities, and certainly those with a moderate mindset, support access to life-saving, necessary healthcare for all citizens with some financial support where needed.

Employment support should provide the necessities and an opportunity to contribute to society like those actively employed. Social safety nets should tie benefits to continued effort wherever possible to keep incentives aligned and minimize long-term dependence. This ensures that social support isn’t a negatively perceived ‘handout’ in the eyes of reasonable, moderate citizens. Support is nobly earned. Causal economics implies that to optimally couple benefits and costs, social safety net programs should prioritize workfare over traditional welfare programs. Additional support, such as childcare, may be required to enable work participation by low income parents. Tax relief social assistance may also be required for lower income citizens that can’t bear the cost of their flat tax allocations for some important societal goods/services.

Poverty holds unique challenges, in that social safety nets must provide the basics of survival and also assistance with the deep personal and social challenges that can come with poverty. Only on a secure foundation like this can access to successful mentors and greater access to opportunity resources then help over time. This approach maximizes coupling. Causal economics does not support universal basic income approaches, because income can only be tied to economic output, not involuntary government redistribution. When a social safety net is required it should be provided to those that truly need it, not others that can contribute to output and earn income.

Key Insights

The bottom line takeaway of this article is that far left and far right ‘interpretations’ of economics always fail in building and sustaining successful society. Effective and sustainable societies are only possible when they value individual freedom, equal opportunity to pursue that freedom, and individual diversity and also expect responsible citizenship. It’s time for moderates to take a look at Causal Economics. There’s good reason to see it as the way forward to achieve a more moderate, workable world for everyone—by focusing on proven economic principles that work, instead of political ideologies.

As mentioned earlier, not to put undue pressure on moderates, but if we don’t assert the accurate and proven economic principles that support political and economic moderation, then we remain at the mercy of hard swings between warring left and right factions. Our societies deserve more than that. We have to move beyond vague discussions and emotional arguments and evaluate our society and policies for consistency on the following eight principles for success.

1. Free interaction / exchange (markets)
2. Accountability for all externalities to transactions
3. Constitution that entrenches freedom and protection of rights for all citizens
4. Significant Direct Democracy
5. Legislation, not Bureaucracy
6. Compensation for Performance
7. Use Based Taxes
8. Social cost/risk sharing

 

If you or anyone else is proposing a policy, before you dig in, please evaluate it on these criteria. If it meets them then I suggest you may have a viable policy that meets the needs of moderates and the justifiable elements of the positions of non-moderates.