[This rejoinder originally appeared in The Journal of Ayn Rand Studies 2(1), Fall 2000. Sechrest replied to it and I'm convinced by his reply that he did not make the distinction between ex ante and ex post in his original paper. So, he is able to show how markets would be able to not know ex ante time preferences, but would be able to reveal such information ex post. I hope I've absorbed this distinction in my review of Microfoundations and Macroeconomics: An Austrian Perspective.]
Larry J. Sechrest's "Rand, Anarchy, and Taxes" brings up several great points about anarchism – a view that this writer is sympathetic toward. Even so, there appears to be a minor flaw in his reasoning. What is this flaw?
It's that he claims the natural rate of interest and time preferences are "unobservable." (99) There are two problems with these claims. One is that they seem to contradict what he states elsewhere. The other is that they undercut his case against neutral taxation.
The contradiction lies in that Sechrest defines "time preference" as "one's preferred rate of spending relative to saving." (96) This would seem to be highly observable – even if there is a degree of error. After all, one could track a given person and see how much she spent versus how much she saved. If this is all time preference is, then it is hard to see how it would be unobservable.
He also states that the "interplay of all persons' individual time preferences" generate the natural rate of interest. (96) Now, if the former can be observed, given that one can measure, however imperfectly, individual time preferences, it would seem possible that one could also measure the natural rate of interest. It might be difficult or only approximate, but it does not follow that it's unobservable or, to be more precise, that it cannot be inferred from other data. (No claim is being made here that this is a simple relationship.)
If somehow Sechrest is granted his unobservable time preferences and natural rates of interest, then it does not follow that market prices somehow map onto these and track them accurately. Not only is there the problem of comparing the alleged unobservables to actual prices but time lags, imperfect information, and the like affect market prices as much as they affect taxes. If this is so, then this part of his argument cannot be used at all – whether to castigate government and non-profits or to differentiate market prices from taxation. To put it simply: if one cannot know time preferences or the natural rate of interest, then one cannot claim taxes violate them or prices demonstrate them.
This does not mean that his conclusions are wrong. We can observe market efficiencies as well as non-profit and governmental inefficiencies. Yet this would seem not be because the market somehow knows the unknowable or observes the unobservable, but because it is the means of transmitting such information.
Does this mean that taxes can be neutral? I doubt it and Sechrest presents many arguments why many different varieties of taxation distort the market. Proponents of neutral taxation will have to either give up or come up with more sophisticated means of taxation to achieve their goal. I maintain they won't succeed because taxation involves force and force goes against individual time preferences in a very observable way.