The Power of Choice: How Decentralization Unlocks Economic Freedom
- Jeff Hulett
- Oct 29, 2023
- 23 min read
Updated: 4 days ago
Why the Most Local Form of Government Reveals the Hidden Impact of Rules on Wealth and Freedom
The principle of free will is foundational to both American democracy and economic theory, emphasizing the importance of individual decision-making over centralized control. This article explores how governance structures influence economic efficiency, focusing on the tension between decentralized market competition and centralized planning. Drawing on the works of Adam Smith, F.A. Hayek, and James Buchanan, we examine how economic systems allocate resources most effectively when individuals retain control over their choices.
To analyze this dynamic, we introduce the “primacy of use” test, a framework for assessing whether laws or governance structures promote economic flexibility or restrictive centralization. As a case study, we consider Homeowners’ Associations (HOAs), the most local form of government, which serve as a powerful example of how rules tend to evolve toward increased control, reducing individual autonomy in property use and financial decision-making.
The findings suggest that HOAs often shift from decentralized decision-making to a more bureaucratic structure over time, mirroring the broader trend of creeping regulatory control in economic governance. By recognizing these patterns and applying structured decision-making tools such as Definitive Choice, individuals can navigate restrictive governance environments more effectively and preserve their economic freedom. This article contributes to the discussion on market efficiency, governance incentives, and the role of choice architecture in shaping long-term economic outcomes.
Table of Contents:
1) Introduction
2) A market economics historical perspective
3) Primacy of Use
4) An HOA Example
5) HOA Governance Incentives
6) Decision-making Resources
7) Notes
About the Author: Jeff Hulett leads Personal Finance Reimagined, a decision-making and financial education platform. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions.
Jeff is a career banker, data scientist, behavioral economist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM.
2) A market economics historical perspective
F.A. Hayek and Adam Smith [i] described the decentralized nature of capitalism as the most efficient approach for resource allocation. Adam Smith's groundbreaking work, "The Wealth Of Nations," significantly influenced America's founding generation when developing the U.S. government. First, let's unpack some key terms. Resource allocation is the outcome of individual economic choices. We have a certain amount of income for purchasing goods and services - also known as "resources" - in our lives. Allocating our income, generally via a series of utility-optimizing trade-off decisions, is necessary for making resource allocation decisions. The quality of our allocation choices maps to how resources are utilized among a group (or market) of people. Our choice environment, whether a decentralized competitive environment or a centrally planned environment, is indicative of how we allocate resources. As we alluded to in the introduction, our free will is tied to our choice environment. As a rule of thumb, free will-based individual choice is a) optimized in a decentralized competitive choice environment and b) more difficult to achieve in a centrally planned choice environment.
The degree to which a group of people can exercise their free will is directly tied to the quality of those choices sculpted by the choice environment - whether decentralized or centrally planned. Behavioral economists recognize our choice environment is a powerful influencer of our decisions. Richard Thaler is a Nobel-winning behavioral economist from the University of Chicago, Dr. Thaler said:
"People have a strong tendency to go along with the status quo or default option.... Just as no building lacks an architecture, so no choice lacks a context." [ii]
No one understands your choice context better than you. As such, no central body could possibly best allocate resources across ever-changing and very heterogeneous groups of people. Central government creates more standardized "one size fits all" policies. Whereas each person's needs are very different and dynamic. Another essential idea is that a successful decentralized competitive environment implements rules of law ex-ante. This means the rules are published in time to allow people to respond to them. This enables people to reserve their choice with full knowledge of government rules and penalties for violating those rules.
Smith's competitive model for resource allocation between buyers and sellers is known as the invisible hand. [iii] Smith believed the invisible hand works best when government rules are kept to an essential minimum to encourage trade consistent with our diverse needs. The challenge is maintaining the "essential minimum" legal environment. [iv]
Neither Hayek nor Smith disputes the need for some government guardrails, but they stress that these should be minimal and carefully constrained to preserve individual autonomy and decentralized decision-making. A well-functioning competitive process enables free will, allowing individuals to make their own choices rather than having them dictated by central authority.
The Declaration of Independence affirms this principle, declaring that all individuals are endowed with the unalienable rights of “Life, Liberty, and the pursuit of Happiness.” While this establishes free will as a fundamental right, it is the Tenth Amendment of the U.S. Constitution that operationalizes it, ensuring that powers not granted to the federal government are reserved for the states and the people. At the time of the Founders, states were viewed as the direct voice of the people, reinforcing decentralization as the governing default.
However, as governance habits have grown more centralized, the balance has shifted. Even states and more local governments may seek to centralize economic power and regulatory reach, raising concerns about creeping centralization at all levels of government. The Tenth Amendment sets decentralization as the baseline, meaning that the government should only restrict free will through essential guardrails, not unnecessary intervention. Free will is the starting point—any limitation should require clear justification that it serves the people rather than restricts them.
Hayek goes on to demonstrate how central planning is on the slippery slope leading to communism, fascism, and other forms of totalitarianism. Hayek showed how the natural incentive for central planners is to expand the bureaucracy and reduce individual choice. Hayek shows how central planning leads to arbitrary government as compared to the rule of law that leaves individuals free to pursue personal ends and desires. The rule of law is not for telling someone how to do something, but the rule of law should aspire to provide guardrails as to what is out of bounds in the pursuit of 'life, liberty, or the pursuit of happiness' individual goals. [v] Hayek was an Austrian-British economist who fought in World War I and emigrated to England. He lived in London during the rise of Nazism and the Battle of Britain. He readily admits capitalism is not perfect. However, Hayek concluded that the alternative of central planning is far worse than the imperfections of decentralized resource allocation. Essentially, based on Hayekian principles, while people may sometimes make dumb decisions, central planners will make far dumber decisions for those people. Especially because the definition of 'dumb' varies by people, time, and situation.
As found in today's modern world, how our free will-based decisions drive economic efficiency has changed substantially from the recent past. In the time of our founders -- inclusive of the times of Smith and Hayek -- and proceeding until the late 20th century, the world was generally characterized by information scarcity. In an information-scarce environment, the collection of a small amount of information was all that was available to make the most common decisions. The challenge was collecting the data. Once the limited data was assembled, the decision was generally straightforward. In earlier times, censorship was like the traditional "book-burning" zealotry learned from our history books. This early form of censorship was a direct and visible attempt to restrict the already scarce supply of information. These acts of suppression were powerful precisely because information was so rare and difficult to reproduce.
Today, the information world has changed by 180 degrees. We are now in an information-abundant world associated with the Information Age. In an information-abundant environment, data curation and decision structuring are paramount. It is more important to subtract unneeded or wrong information than to add new information. As pointed out by University of North Carolina Sociologist Zeynep Tufecki, information censorship has radically changed with the Information Age: "The most effective forms of censorship today involve meddling with trust and attention, not muzzling speech itself."
To summarize, people are diverse, both across different people and for the same person over time. You are different than your neighbor and even the future you will be different than the current you. How we process information to make utility-optimizing decisions has significantly changed in the information age. Free will is still very important. But how we go about exercising free will in a world drowning in data has dramatically changed. Rather than data-foraging, success in today's information-abundant world requires information curation and decision-process skills for making the best use of our free will. [vi] In the resource section, a technology is suggested to help you make the best, free-will-inspired decisions in today's information-abundant environment.
3) Primacy of Use
This article provides an evaluation framework for whether a rule or law enhances or restricts resource allocation efficiency. The framework seeks to identify whether rules emphasize decentralized decision-making or central planning. Along the way, we will show why decentralized decision-making is superior to central planning when the objective is to optimize aggregate utility across all members of society. The intent is to provide the reader with tools to make the best decisions about how they will be governed after a purchase decision is made. It examines governance at the most local level—the Homeowners' Association (HOA). We will show why the most local form of government has an outsized impact not only on the purchaser but also on the broader community.
Why the HOA Is a Powerful Example
The Homeowners’ Association (HOA) is a uniquely powerful example of how governance structures impact economic freedom because it operates at the most local level while having far-reaching consequences for society. Unlike state or federal laws, which can seem abstract or distant, HOA rules directly affect daily life—from how people use their property to who can access housing in a given community.
For many Americans, a home is the single largest wealth generator in their lifetime. The governance of an HOA not only shapes individual property values but also influences broader market dynamics, rental availability, and economic mobility. This combination—deep personal impact combined with structural market influence—makes the HOA an ideal case study in understanding how decentralization and governance shape economic outcomes.
At first glance, you may falsely believe, "I don’t live in an HOA-governed community, so this doesn’t affect me." But HOAs go far beyond the neighborhood's owners—they shape housing markets, rental availability, and even neighborhood policies that spill over into non-HOA areas. Whether you're renting an apartment, booking a vacation home, or simply looking for affordable housing, HOAs influence your choices—often in ways you don’t realize.
“Primacy of use” is the essential test for whether a law or rule falls into one of two categories:
a) Central planner-driven resource allocation, which tends to restrict choices.
b) Decentralized, competitive resource allocation, which allows individuals to shape their choices dynamically over time.
At its core, the true primacy of use test is not just about current preferences—it’s about the ability to change preferences over time. James Buchanan’s insights on "Natural and Artifactual Man" help explain why. Buchanan argued that human beings don’t just have fixed preferences; we actively seek to become different people in the future by making choices today that shape who we will be tomorrow [vi-a].
The extent to which a law or rule impacts choice regarding the primacy of use is the test for the degree to which the rule or law is likely to lead to optimal resource allocation. The choice environment, owing to the makeup of various rules of law, acts as a filter to our resource allocation and ultimate consumer benefit. The primacy of use starts by defining the use expected of the resource in question.
For the rest of the article, an HOA example is used to explore the primacy of use test to determine the optimal resource allocation approach. The primacy of use test may be used when evaluating the choice environment and evaluating choice alternatives. For example, if someone is looking to buy or rent a new home or condo, the primacy of use test will help you evaluate the HOA as part of your choice alternatives.
Let's say someone is considering the purchase of a condominium. The condo is located in a condo complex. The primacy of use is defined as how people optimize their use of the condo. Think of primacy of use as a broad objective, aggregated from a small number of weighted criteria, of how a buyer receives benefit from the purchase. The weighted criteria could include criteria such as:
Local school quality
Access to shopping or amenities
Quality of medical access
Distance from work
Others
The point is that people are more likely to share broad criteria objectives but are less likely to share the weighting of that criterion. Everyone's tradeoffs are different and dynamic, even though what is being traded off may be similar. The idea is NOT to try and collect only people that permanently share the same primacy of use - that is not possible. As Benjamin Franklin said, "...in this world, nothing is certain except death and taxes.”
The idea is to create an environment that enables people to adjust their resource allocation as their trade-offs evolve and new perspectives emerge. This recognizes that people are unique, diverse, and regularly change. This is why, even at the most local HOA level of government, central planning is generally ineffective. F.A. Hayek said:
"Central planning means that the economic problem is to be solved by the community instead of the individual; but this involves that it must also be the community, or rather its representatives, who must decide the relative importance of the different needs."
As such, in the "HOA Benefit" outcome shown at the bottom of the earlier "Finding your optimal value" model, central planning is shown on the low-benefit side. This is because overall consumer utility drops over time as consumer preferences evolve and the centralized environment restricts resource utilization adaptation for those evolving preferences.
As the next graphic shows with Liam and Mia, it is not possible for a central planner to have a single rule that meets both their weighted needs. It is best left to Liam and Mia to allocate their own resources based on their own weighted needs via a competitive, decentralized resource allocation framework. In section 4, the primacy of use test is shown as an approach to identify the rules most likely to render a decentralized resource allocation result.
Most condo complexes have HOAs that govern the complex. By definition, the HOA governing board makes and enforces rules and taxes homeowners via fee assessments.
HOA context: The U.S. has historically had 3 levels of government. Those levels are Federal, State, and Local. The government levels have taxing authority and make rules for people within the scope of the government level. For example, I live in the United States (Federal), the Commonwealth of Virginia (State), and Fairfax County (Local). Each level has rules (laws) and taxes. In general, the more local the government, the more the direct impact on my everyday choices.
In recent decades, the HOA (Homeowners' Association) has become the 4th level of government. This has coincided with an increase in zoning and land use restrictions. Like higher levels of government, the HOA has taxing authority (fee assessments or dues) and laws (HOA rules). Every HOA is different, but in more recent times, many HOAs have implemented increasingly stricter rules and have become more expensive from a taxation standpoint. Research shows that communities governed by HOAs are more racially segregated. HOA rule design is intended to protect the wealth of the homeowners. (Whether or not wealth protection actually occurs is debatable.) By HOA design, property appreciation rates are intended to be higher for those in the HOA as compared to those living outside the HOA. [vii] Thus, HOA impact may include social inequality.
The primary use (or benefit) of the condo is to allow people to live in it. As such, the stakeholders may be the owner or someone who rents the condo from the owner.
To illustrate this, let’s return to Liam and Mia. While a stretch, let us say that Liam and Mia initially prioritize the same factors—school quality, medical access, and proximity to work—when purchasing a condo. However, their deeper preference is the freedom to change their preferences as their life circumstances evolve. Liam may later prioritize a quieter neighborhood for family reasons, while Mia may value walkability as her work situation changes. The problem with HOA rules rooted in central planning is that they do not just dictate today’s conditions; they lock people into a specific framework that limits their ability to adapt over time.
Buchanan’s view aligns with the reality that people do not just seek to optimize static preferences—they actively engage in a process of self-transformation [vi-b]. A well-functioning market should allow for flexibility in decision-making rather than impose rigid, centrally planned constraints. Decentralized governance allows people to adjust their resource allocation as their preferences associated with the person they are becoming emerge.
Why HOA Rules May Violate Primacy of Use
Most condo complexes have HOAs that govern the complex. By definition, the HOA governing board makes and enforces rules and taxes homeowners via fee assessments. While these rules are often intended to maintain property values, they may restrict the ability of residents (owners or renter stakeholders) to evolve their preferences—such as limiting short-term rentals, regulating exterior modifications, or imposing other rigid constraints.
HOA restrictions limiting usage preferences over time—such as prohibiting flexible rental options—are fundamentally different from rules that simply maintain community order. They shift from enabling resource utilization to dictating long-term lifestyle constraints that undermine the natural evolution of personal choices. As Buchanan and Hayek both emphasized, centralized planning limits the ability of individuals to respond dynamically to their own evolving needs.
4) An HOA Example
Let's say a condo association and stakeholders wish to have a peaceful living environment, where sound and disturbance to the stakeholder occupants (whether homeowners or renters) are kept to a minimum. [viii] For this example, two rules are considered to govern this objective:
Rule scenario 1:
Rule: "Quiet Rule" - An HOA rule that “One must be quiet during certain hours” or “One must keep sound below some decibel level.”
Primacy of use situation: In this situation, the primacy of use challenge is low. Low sound levels generally will not keep people from using a condo. Most people can use a condo and keep loud, neighbor-disturbing sounds to a minimum.
Implications: This is a rule of law guardrail that still allows primacy of use. Also, the rule of law provides an enforcement mechanism. Overly loud people will be punished under the rule of law. As long as the rules are communicated and enforced, there will be no (or very little) primacy of use impact across the stakeholders.
Versus
Rule scenario 2:
Rule: "Time Rule" - An HOA rule that “One can only rent the condo to others for more than an X period.” This is an HOA rule like "a condo must be rented for no less than 1 month" or similar restrictions.
Primacy of use situation: In this situation, the primacy of use challenge is higher. This time period-based use rule is a rule of law discouraging primacy of use.
Implications: Renter stakeholders have limited periods when they may be able to use a condo. They may work out of town, they may have family needs, they may not have the financial resources to afford an extended stay, it may be something else. This impacts both the renters and the owners who wish to rent. Like rule scenario 1, rule scenario 2 does encourage the goal of reducing sound and disturbance. However, unlike rule scenario 1, having time usage restrictions impacts the primacy of use for the majority of the stakeholders. Please see the next graphic for a stylized description of the much higher primacy of use impact. [ix]
In other words, for most stakeholders, it is more achievable to keep your voice down and reduce disturbance while using a condo than adapting your life to use a condo only over some time period.
Keeping your voice down and reducing disturbance is more of a guardrail, but still allows the primacy of use. Restricting usage negatively impacts the primacy of use.
The former is acceptable for competitive resource allocation. The latter is a social planning approach to resource allocation. This social planning approach is what Hayek and Smith warned against.
To be fair, “primacy of use” is user-defined. The example of restricting the time available to rent is a more obvious primacy of use restriction for many renters and those homeowners who wish to rent their condo to a renter. However, some HOAs have pet, painting, parking, trash can, exterior structure, and other rules. Perhaps some people would claim one of these categories impacts their primacy of use. For example, let's say someone is a dog lover. They say: "I can't live without Fluffy. Any rule restricting pets in a rented condo impacts my primacy of use." The primacy of use test outcome is measured as the proportion and significance of the stakeholder universe impacted by the use restriction. It is also not just owners, it is all stakeholders, whether an owner or a potential renter. Thus, pet rules may have higher primacy of use impact if a significant proportion of the stakeholder universe finds the pet rule impedes them from achieving the condo's primacy of use.
When comparing primacy of use across typical HOA rules, a time restriction is assumed to be more restrictive to the primacy of use than a pet restriction. This is because a higher proportion of people's primacy of usage is impacted by the condo time restriction than the pet restriction. For example, it is easier to kennel a dog for a pet restriction than to change a job or increase personal wealth for a time rental restriction. However, given the growth of pets, this primacy of use assumption could be tested with a survey of the stakeholder universe.
Summary rules of thumb:
HOAs with rules designed to keep people out are more likely to violate primacy of use.
HOAs with rules designed to maintain living standards and in a manner achievable to the majority stakeholder community are less likely to violate primacy of use.
Primacy of use stakeholder perceptions is dynamic just as our culture is dynamic. That is, a rule that is "achievable to the majority stakeholder community" is subject to change as our culture changes.
The minority impacting the majority primacy of use leads to reduced choice and reduced resource allocation efficiency for the majority.
N.N. Taleb does a nice job exploring minority rule, symmetry, and asymmetry in human affairs. He introduces the concept of “minority rule." This is where a small, stubborn minority is responsible for changes that propagate across an entire population. The HOA minority rule model fits well within Taleb's framework. [x]
5) HOA Governance Incentives
Then, if higher primacy of use associated with decentralized governance is superior to lower primacy of use associated with centrally planned governance, why do we see as much centrally planned governance as we do? The simple answer is: Centrally planned governance is more aligned to the incentives of those governing. For those governing, it is easier to keep people out by "shutting the door" using centralized governance methods than to enforce the rules those allowed "through the door" using decentralized governance methods. Socialism is easier than democracy for those governing.
In general, those who govern HOAs do not think of themselves as central planning socialists, anti-competitive, or anti-choice. However, the reality is that HOAs are often resource-starved. HOA budgets are small and the governance is usually provided by a volunteer board. Not many wish to volunteer to be on the HOA governance board. At other levels of government, officials are paid. As such, someone who is willing to serve on an HOA governing board has incentives to make their work as easy as possible as a match to their remuneration. In the case of HOA governance, you get what you pay for. Or, as in this case, you get what you don't pay for.
As a forewarning to the challenge of the HOAs natural incentives, F.A. Hayek said:
"we shall all have to conform to the standards which the planning authority must fix in order to simplify its task. To make its task manageable, it will have to reduce the diversity of human capacities and diversities to a few categories...".
These incentives naturally attract HOA officials down a central planning-like path. Also, those serving on HOA governance boards are more subject to conflict of interest. Governance of the HOA will directly impact the HOA official as one of the governed. Thus, getting a rule changed that is good for the HOA official may be a high-impact incentive to be on the HOA board. That is, other than the feel-good camaraderie of volunteering for one's community. Yes - self-interests are complex - a combination of selfish and selfless motivations. [iii]
As such, given the two rule scenarios from the HOA example, the choice of the "High Primacy of Use" time usage restrictions may be most likely because of the HOA participation incentives. Perhaps it is not surprising that enforcing the rental time frame for a small number of homeowner stakeholders is a simpler task than enforcing sound and disturbance rules across a large and heterogeneous group of homeowners and renter stakeholders.
Also, since HOAs are usually made up of homeowners only, they only represent a subset of the total stakeholder group which includes renters. It is often up to the owners who wish to rent to represent the renter's interest. Since the renter-focused homeowners may not be on-site, this creates an "out of sight - out of mind" potential reduction of attention for the renter stakeholder representatives. To be fair, a progressive board would include representation from the renter community, such as shorter-term renters.
However, rules creating high primacy of use restrictions run the risk of inefficient resource allocation. Those renter stakeholders who would be willing to pay honest wages and follow the sound and disturbance rules are kept from doing so. This is the essence of economic inefficiency that concerned Hayek and Smith. This is also the basis for systemic biases encouraging social inequality and discrimination.
To take it to the extreme, if all neighborhoods implement high primacy of use impact rules, then those living outside HOA-governed communities will only be economically disadvantaged populations made so because of a lack of homeownership opportunity. In this extreme case, those living within the HOA-governed communities will have lower free will, lower economic efficiency, and reduced choice. In this extreme case, this creates a greater 'have and have-nots" social environment. To someone from poorer communities outside HOA-governed communities, the HOA governance may be perceived as patently totalitarian.
Ironically, this represents the ultimate lose-lose game outcome, where those within HOA-governed high primacy of use impact neighborhoods lose with lower free will. Those outside the HOA-governed neighborhoods lose with lower access to housing. It is like a race to the bottom.
HOA evolution
HOA rules tend to evolve in one direction—toward greater centralization and higher primacy of use impact. The natural incentives of governance structures make it far more likely that rules will become more restrictive over time rather than more flexible. This pattern aligns with Nassim Nicholas Taleb’s concept of minority rule and renormalization, where a small, entrenched minority can dictate outcomes for the majority.
Since a small subset of homeowners typically controls HOA boards—often those with a vested interest in maintaining control and minimizing their energy to maintain control—rule changes that promote decentralization and flexibility are unlikely to gain approval. Instead, rules that simplify governance by standardization and centralization are far more likely to pass. In this way, HOAs function like a bamboo finger trap—easy to insert your finger but difficult to escape. Once restrictive governance structures are in place, reversing them requires an overwhelming consensus, which is rarely achievable due to rule inertia and vested interests.
This reality makes evaluating an HOA’s governance approach before purchasing a condo critical. If an HOA already enforces low primacy of use rules that restrict flexibility, it is unlikely to improve over time—meaning buyers should assume the constraints will only tighten rather than loosen.
No one said capitalism, competition, and liberty were easy! The good news is, HOAs can achieve higher appreciation and decentralized free will by adhering to low primacy of use impact rules. Certainly, home buyers can choose communities with lower primacy of use restrictions.
It probably would not surprise the reader that I, the author, do not personally support HOA rules that reduce the broad stakeholder community's primacy of use-related benefits. In Fairfax County, I live in a nice neighborhood with no HOA. It works great. When needed, the homeowners come together, mostly to support the neighborhood's children with fun events. Every once in a while, a neighbor will not keep their yard quite as nice as perhaps is desired by others. A small cost offset by the benefit of liberty to pursue our higher homeownership primacy of use.
Higher primacy of use impact reduces the choice of the most for the benefit of the few. It could lead to systemic biases associated with discrimination - both economic and social. While some may not agree with the higher primacy of use impact rules, neighbors organizing however they see fit within the scope of the rule of law should certainly be encouraged. If there were any rule of law to govern HOAs, I would suggest:
Clear by-laws and rules, especially those allowing input from the broader community outside the homeowners.
Periodic rule resets, where all rules are set aside and new boards are able to reconstruct rules from scratch. This "purge and rebuild" approach will reduce the impact of inertia and enable HOAs to adapt to changing social norms. This is akin to zero-based budgeting associated with reducing the negative effects of government bureaucracy.
6) Decision-making Resources
Buying a condo is challenging. The HOA (or COA) is often an afterthought. The HOA should be prioritized in your decision process criteria. Start by weighing your benefit criteria to create your primacy of use model. Then, review the HOA rules. Armed with your primacy of use weighted model, you can quickly determine the primacy of use impact of the HOA's rules. The HOA rules are generally published on the neighborhood website. The general homebuying decision is a classically complex decision. Definitive Choice provides a homebuying template to help you buy the best condo decision for you. You can use Definitive Choice for both:
Determining the HOA's primacy of use impact, and
Weighing all your criteria, along with the HOA's primacy of use impact, to help you assess the many condo alternatives.
For more information on buying a home and other high-impact financial decisions, plus access to smartphone and web decision tools, please pick up a copy of the book: Making Choices, Making Mooney, Your Guide To Making Confident Financial Decision
7) Notes
[i] Smith, The Theory of Moral Sentiments, 1759 ("TOMS")
Hayek, The Road To Serfdom, 1944
[ii] Thaler, Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness, 2008
[iii] Hulett, Adam Smith and how choice architecture makes the invisible hand more visible!, The Curiosity Vine, 2023
In this article, we discuss the often misunderstood concept of self-interest as compared to the selfish or selfless motivations impacting self-interest.
Hulett, Market Failure - How Adam Smith would approach government and personal responsibility, The Curiosity Vine, 2023
Next is the introductory paragraphs of the market failure article:
The risk of market failure is a policy advocacy criticism for a decentralized and individual choice environment. A market failure is found in the free market setting and the competitive economic model context. The classic definition of market failure is "the economic situation defined by an inefficient resource allocation in the free market. In market failure, the individual incentives for rational behavior do not lead to rational outcomes for the group."
A standard example of a market failure is the climate crisis. Higher carbon emissions of the free market economies of the industrial age have left a world in a climate crisis. The question is, if the free market works so well, why did the climate crisis occur? Wouldn't an efficient market prevent this via its pricing mechanism? Adam Smith provides a framework to answer these questions in his book, The Theory of Moral Sentiments ("TOMS"). As we discuss next, Smith challenges the notion that "rationality," as used to define market failure, is a single point found on the aggregated spectrum of individual decisions. This means the 'lack of rationality' premise as a cause for market failure is not correct because rationality itself is misunderstood. The article concludes with a comparative debate between later students of Adam Smith - F.A. Hayek and J.M. Keynes. We explored Hayek's and Keynes' likely perspective on Smith's framework.
[iv] Here is an example of "essential minimum" guardrails. "The moderating convergence of self-interested market interactions - or, as Smith says, "bringing down our passion to that pitch" - is a signaling mechanism. The outcome signals the equilibrium market pricing and market quantity. Also, a legal system governs their market environment by which their preferences are reconciled. An important nuance is that the legal system provides guardrails to nurture signaling, not prescriptions for how to signal. Example guardrails usually include:
a) It is illegal for Billy to sell meat that would cause Connie to get sick.
b) It is illegal for Connie to steal meat from Billy."
Hulett, Adam Smith and how choice architecture makes the invisible hand more visible!, The Curiosity Vine, 2023
[v] "The distinction we have drawn before between the creation of a permanent framework of laws within which the productive activity is guided by individual decisions and the direction of economic activity by a central authority is thus really a particular case of the more general distinction between the Rule of Law and arbitrary government. Under the first the government confines itself to fixing rules determining the conditions under which the available resources may be used, leaving to the individuals the decision for what ends they are to be used. Under the second the government directs the use of the means of production to particular ends."
Hayek, The Road To Serfdom, 1944, Chapter 6
[vi] Hulett, Solving the Decision-making Crisis: Making the most of our free will, The Curiosity Vine, 2023
[vi-a] Buchanan, James M. “Natural and Artifactual Man.” Liberty Fund Seminar Paper, 1978.
Explores how human beings have a preference for changing their preferences and actively shape their future selves through decision-making.
[vi-b] Boudreaux, Don. EconTalk with Russ Roberts: Don Boudreaux on Buchanan, January 11, 2021.
Discusses Buchanan’s perspective that preferences are not static and that individuals act today in ways that will shape their future desires and needs.
[vii] Clarke, Freedman, The rise and effects of homeowners associations, Journal of Urban Economics, Volume 112, 2019, Pages 1-15, ISSN 0094-1190
[viii] Condo association motivations for restrictive rules generally relate to the belief that homeowners make better neighbors than renters. This belief is controversial and not substantiated. According to a Washington Post article:
"(HOAs)... believe that owner-occupied units tend to be better cared for and that owners tend to be better neighbors than renters. Also, renters tend to stay in units for shorter periods of time than homeowners and the turnover uses more resources. Some of these statements are true, but we've found many "bad" homeowners and great tenants. We've also seen tenants live in one place for much longer than owners. So it's not an exact science."
Glink, Tamkin, Rules on short-term vacation rentals can cause the most consternation in condo associations Washington Post, 2019
[ix] Hayek specifically seeks to avoid "time and place" government restrictions of individual freedom.
"The state should confine itself to establishing rules applying to general types of situations and should allow the individuals freedom in everything which depends on the circumstances of time and place, because only the individuals concerned in each instance can fully know these circumstances and adapt their actions to them" (emphasis added)
Hayek, The Road To Serfdom, 1944
[x] Taleb, Skin In The Game, 2018
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