The Darwin Economy: Liberty, Competition, and the Common Good. Robert H. Frank. Princeton University Press 2011, pp.240, $26.95 Following the financial crisis of 2008 and the subsequent automobile and bank bailouts, which solidified already-increasing ties between the federal government and the private sector, intellectual interest in free market economics has increased. This is particularly true [...]
The Darwin Economy: Liberty, Competition, and the Common Good. Robert H. Frank. Princeton University Press 2011, pp.240, $26.95
Following the financial crisis of 2008 and the subsequent automobile and bank bailouts, which solidified already-increasing ties between the federal government and the private sector, intellectual interest in free market economics has increased. This is particularly true for those members of the Millennial Generation who are attracted to the libertarian message of free market competition and social tolerance. But what if competition does not always lead to prosperity, but instead leads to mutual disadvantage? What if the framework for understanding how competition works has been fundamentally misunderstood and has only exacerbated the dismal budgetary outlook for the United States?
In The Darwin Economy, Cornell economics professor and New York Times columnist Robert H. Frank argues that the current gridlock in Washington is not the result of “irreconcilable differences in values, but of a simple but profound misunderstanding about how competition works.” Reflecting the title of his academic monograph, Frank argues that the insights of Charles Darwin, rather than those of Adam Smith, are more applicable to an understanding of economics. “Darwin’s analysis revealed a systemic flaw in the dynamics of competition. The failures he identified resulted not from too little competition, but from the very logic of the process itself.”
Frank posits that collective action problems, wherein what is good for individuals within a group are not good for the group as whole, pose a challenge to the libertarian belief in unfettered free markets. As an example, Frank discusses bull elk and their antlers; in the competition for female mates among male bull elk, it is the relative size of antlers that matters. Those bull elk males with the largest antlers would clearly be victors in the quest for female elk; what is good for individual male elk, however, is not necessarily good for elk as a collective. “Although each mutation along this path enhanced individual reproductive fitness, the cumulative effect of those mutations was to make life more miserable for bull elk as a group. Large antlers compromise mobility in densely wooded areas, for example, making bulls more likely to be killed and eaten by wolves.”
Frank emphasizes the significance of Darwin’s observation that “much of life is graded on the curve” and that relative position very much matters. In other words, what constitutes a large house that confers social status on a family depends not on objective criteria for largeness, but upon a house’s size relative to other houses. Applying that insight to contemporary economic theory, Frank argues that, “no economic model can hope to capture how markets actually function unless it begins with the assumption that context shapes evaluation in significant ways.” Similarly, it is his belief that relative purchasing power matters when it comes to achieve many life goals.
This leads Frank to a larger political argument. If libertarians are wrong about competition, as he repeatedly suggests they are, the left is equally wrong about why there is a need for regulation. According to Frank, the political left’s claim “that regulation is necessary to protect us from exploitation by sellers and employers with market power” is off the mark. In his formulation, “the real reason we regulate is to protect ourselves from the consequences of excessive competition with one another.” Those who studied economics or environmental law will likely recall the tragedy of the commons problem wherein individual incentives in fishing are not aligned with group incentives, thus leading to overfishing; indeed, Frank devotes a portion of Chapter 10 to that incentive structure problem and analogizes the traditional tragedy of the commons formulation with the problem of too many elite university graduates seeking employment in the winner-take-all markets on Wall Street, leading to wasteful overcrowding.
Frank’s conceptualization of the nature of competition leads him to endorse certain policy proposals and to reject others, particularly when it comes to ameliorating America’s current deficit woes. He draws upon John Stuart Mill’s harm principle, the notion that “the government may legitimately restrict individual behavior to prevent undue harm to others” to make the case that, contrary to libertarians, the government can and should place limits on individual economic behavior.
In Frank’s formulation, however, tax policy, rather than an overly burdensome regulatory policy, should be utilized to restrict behavior that is harmful to others. “Taxing harmful activities,” writes Frank “is the best way to raise the revenue essential for reducing deficits.” He proposes that these “new taxes should be phased in only after the economy is back at full employment,” but fails to recognize that anything looking like full employment may not be in the cards for the foreseeable future. Furthermore, the nature of work itself is changing in such a way as to fundamentally challenge the conception of what it means to be employed, thus posing a challenge to Frank’s timeline for implementing the proposed taxes.
The biggest problem in imposing Pigouvian taxes – taxes on harmful activities – is in defining what constitutes harmful behavior. Taxes could also be disguised as fees. In addition, from a purely fiscal viewpoint, readers would have good reason to remain skeptical as to whether taxing harmful activities, however defined, would raise enough revenue to pay down our current debt. Reforming the tax code to reduce spending through tax expenditures would be a more sensible approach. It is also one that would not lead to what would most certainly be a contentious debate as to what particular individual behaviors are harmful to society as a whole.
Policy analysts with an interest in economic theory, cost-benefit analysis and the work of the Nobel Prize-winning economist Ronald Coase, would find much to appreciate, if not necessarily to agree with, in Frank’s new book. Frank writes in an engaging manner, successfully making complex theories accessible to a general audience. He also can also be pithy, as in his discussion of environmental regulation. “If someone insists that the optimal level of every pollutant in every environment is zero, ask him why he isn’t at home vacuuming his living room at this very moment.” In conclusion, The Darwin Economy is worth consideration, particularly by both those liberals and libertarians who are willing to have their assumptions about tax policy challenged.
Jon Lewis (c) 2011