The Darwin Economy

Liberty, Competition, and the Common Good

Robert H. Frank

• Publisher: Princeton University Press
• Year: 2012
• ISBN:
  9781400844982
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

What Charles Darwin can teach us about building a fairer society Who was the greater economist—Adam Smith or Charles Darwin? The question seems absurd. Darwin, after all, was a naturalist, not an economist. But Robert Frank, New York Times economics columnist and best-selling author of The Economic Naturalist, predicts that within the next century Darwin will unseat Smith as the intellectual founder of economics. The reason, Frank argues, is that Darwin's understanding of competition describes economic reality far more accurately than Smith's. And the consequences of this fact are profound. Indeed, the failure to recognize that we live in Darwin's world rather than Smith's is putting us all at risk by preventing us from seeing that competition alone will not solve our problems.Smith's theory of the invisible hand, which says that competition channels self-interest for the common good, is probably the most widely cited argument today in favor of unbridled competition—and against regulation, taxation, and even government itself. But what if Smith's idea was almost an exception to the general rule of competition? That's what Frank argues, resting his case on Darwin's insight that individual and group interests often diverge sharply. Far from creating a perfect world, economic competition often leads to "arms races, " encouraging behaviors that not only cause enormous harm to the group but also provide no lasting advantages for individuals, since any gains tend to be relative and mutually offsetting.The good news is that we have the ability to tame the Darwin economy. The best solution is not to prohibit harmful behaviors but to tax them. By doing so, we could make the economic pie larger, eliminate government debt, and provide better public services, all without requiring painful sacrifices from anyone. That's a bold claim, Frank concedes, but it follows directly from logic and evidence that most people already accept.In a new afterword, Frank further explores how the themes of inequality and competition are driving today's public debate on how much government we need.

ONE

Paralysis

PEOPLE OFTEN REMEMBER THE PAST with exaggerated fondness. Sometimes, however, important aspects of life really were better in the old days. During the three decades following World War II, for example, incomes were rising rapidly and at about the same rate—almost 3 percent a year—for people at all income levels. We had an economically vibrant middle class. Existing roads and bridges were well maintained, and impressive new infrastructure was being added each year. We cheered when President John F. Kennedy urged, “Ask not what your country can do for you, ask what you can do for your country.” We were sure we could win the race to put a man on the moon. We were optimistic.

No longer. The economy has grown much more slowly during the intervening decades, and only those at the top of the income ladder have enjoyed significant earnings gains. CEOs of large U.S. corporations, for example, saw their pay increase tenfold over this period, while the inflation-adjusted hourly wages of their workers actually fell. The middle class is awash in debt.

Proposals to build desperately needed new infrastructure, such as highspeed rail systems or a smart electric grid, consistently fail in Congress, and existing infrastructure has been steadily falling into disrepair. Rich and poor alike now endure crumbling roads and unsafe bridges. Water supply and sewage systems fail regularly. Countless schools are in shambles. Many Americans live in the shadow of poorly maintained dams that could collapse at any moment. Funding has been cut for programs to lock down poorly guarded nuclear materials in the former Soviet Union.

More troubling, our political system seems almost completely paralyzed, even in the face of these genuinely urgent problems. This paralysis often stems from a seemingly willful ignorance of the basic facts and logic that govern human behavior.

A case in point is our failure to deal with the stubborn unemployment spawned by the financial crisis of 2008. As John Maynard Keynes explained during the Great Depression, economies mired in deep downturns seldom recover quickly on their own.¹ Consumers won't lead the way, he argued, because they're burdened with debt and fearful of losing their jobs, if they haven't already lost them. Nor will business investment spark recovery, because most firms already have more than enough capacity to produce what people want to buy. Government, Keynes concluded, is the only actor with both the ability and the motive to stimulate spending sufficiently to put people back to work.

Each new day of widespread unemployment is like a plane that takes off with many empty seats. In each case, an opportunity to produce something of value is lost forever. There was no good reason for failing to take every possible step to avoid such waste. Yet critics of economic stimulus were quick to denounce government spending itself as wasteful, even as a host of useful projects cried out for attention. According to the Nevada State Department of Transportation, for example, a worn 10-mile stretch of Interstate 80 would cost $6 million to restore if the work were done today; but if we postpone action for just two years, weather and traffic will eat more deeply into the roadbed, and those same repairs will cost $30 million.²

During the depths of the downturn, the workers and equipment necessary to do the work were sitting idle. And with considerable slack in markets worldwide, the required materials were available at unusually low prices. Interest rates for the money to finance these projects were near record lows. These were tasks that should have been tackled immediately, quite independently of the need for additional economic stimulus. Yet because of the profound ignorance that strangles our current political conversation, government could not act.

Stimulus opponents cited fear of deficits as a reason for inaction, but deficits are a long-run problem. No one argued that we could put off maintaining our infrastructure forever. Doing it right away meant doing it more cheaply, which meant smaller deficits in the long run, not bigger ones. Deficits must be dealt with, yes, but the time for doing so is when the economy has fully recovered.

The same leaders who cite concerns over deficits to explain their opposition to additional economic stimulus also voted to cut the enforcement budget of the Internal Revenue Service. Yet credible evidence says that each dollar cut from that budget causes tax revenue to fall by $10, for a net increase in the deficit of $9! That such cuts could be approved by the House of Repreentatives suggests that we're becoming, in the coinage of one pundit, an ignoramitocracy—a country in which ignorance-driven political paralysis prevents us from grappling with even our most pressing problems.

The same leaders voted to cut nutritional support for low-income women with small children by more than $1 billion and to reduce the Clean Water State Revolving Fund by $700 million. Those programs exist not only to help people in need, but also to prevent costly problems down the road. Cutting them will make future deficits larger, not smaller.

The same leaders also failed even to mention their deficit concerns when they opposed the scheduled expiration of the George W. Bush tax cuts for the wealthiest Americans in 2010. Because many of the wealthy already have more money than they can spend in their lifetimes, extending those tax cuts provided little economic stimulus. Letting them expire would have freed up revenue that could have been used for far more effective stimulus measures—such as grants to the states that could have prevented massive layoffs of teachers, police, and firefighters. Yet, as senate minority leader Mitch McConnell said without apparent irony in a CNN interview, “Raising taxes in the middle of a recession is not a good idea.”³

A less immediate concern, but perhaps the most troubling one, is our political system's indifference, even hostility, to increasingly pessimistic scientific estimates of the pace of global warming. Climate change skeptics often base their case for inaction on the fact that the science underlying calls for change is so inexact. But our most distinguished scientists are themselves quick to acknowledge the uncertainty inherent in their projections. Temperature increases could of course be smaller than expected—but they could also be substantially larger, and quite possibly catastrophic. Given the range of possible temperature increases and their respective probabilities of occurring, uncertainty is actually the strongest possible case for action.

The most recent simulations by MIT's respected Integrated Global Systems Model, for example, estimate a 10 percent chance that the average global surface temperature will rise by more than 12°F by 2095.⁴ An increase of that magnitude would spell the end of life on Earth as we know it. That threat could be eliminated by simple policy measures like a steep tax on carbon dioxide emissions. If it were phased in gradually, we could adapt to such a tax without painful sacrifices.

Any rational political process would address this problem with dispatch. But House leaders in charge of energy policy stubbornly deny that there's even a problem. Seasoned congressional observers say there's virtually no chance that meaningful climate legislation could win passage in the U.S. Senate anytime soon. In an ignoramitocracy, such legislation is apparently politically unthinkable.

How Did We Get Here?

It's prudent to be skeptical of unitary explanations. Yet it would be a mistake to downplay the importance of a powerful meme that has become entrenched in the public mind during the past three decades—namely that government is the source of all ills. Libertarians, who have always been vigilant against the misuse of government power, have been among the major propagators of this meme. And although those with formal ties to the Libertarian Party remain small in number, their influence on public discourse has been large and growing.

That influence has stemmed in large part from the enormous sums of money they've spent to spread the message that government is the problem. In a widely cited ten-thousand-word article published in the New Yorker, for instance, Jane Mayer traced how the multibillionaire libertarians Charles and David Koch, owners of Koch Industries, have donated more than $100 million in recent years to far-right-wing think tanks, organizers of the Tea Party, and other groups whose mission is to promulgate that message.⁵

Notwithstanding its claim to be fair and balanced, Rupert Murdoch's Fox News Channel has also worked tirelessly to promote the same message. Predating these efforts were substantial grants in support of right-wing think tanks by the billionaire Richard Mellon Scaife, owner of the Pittsburgh Tribune-Review and an heir to the Mellon fortune. Earlier still, the John M. Olin Foundation had distributed almost $400 million to conservative think tanks, media outlets, and law and economics programs at leading universities, all with the aim of spreading the beliefs that government is the problem and unfettered markets are the solution.

In total, these investments have been extraordinarily effective in fostering an inchoate but pervasive sense of anger that has made it all but impossible for government to act. Libertarians are correct, of course, that waste in government has a long and troubling history. And we can be grateful for their vigilance against the erosion of personal liberties and misuse of public funds. But does the fact that government is imperfect mean that complete policy paralysis is what most Americans really want? Markets, after all, aren't perfect either, and there are many important tasks that only government is well suited to perform. National defense is an obvious example, as are the construction and maintenance of public infrastructure. The definition and enforcement of property rights are also the province of government.

Government plays a prominent role in the economic and social life of every successful society. Countries whose citizens have the most favorable opinions of their governments tend also to be ones with the best public goods and services, the lowest levels of perceived corruption, and the highest per-capita incomes. In contrast, those with the weakest governments—think Haiti, Somalia, or Sudan—typically have poorly functioning markets, extremely low per-capita incomes, high levels of crime and violence, and citizens who regard their governments as ineffectual and corrupt. If forced to choose, most Americans would prefer to live in New Zealand than in Haiti.Differences in the quality and scope of their respective governments are not the only reasons they'd make that choice. But they're important reasons.

The fact that many activities are best carried out collectively means that government must levy taxes to pay for them. Libertarians and other anti-government activists often decry mandatory taxation as theft, but no government could function if forced to rely exclusively on voluntary contributions. Without mandatory taxation, there could be no government. With no government, there would be no army, and without an army, your country would eventually be invaded by some other country that has an army. And when the dust settled, you'd be paying mandatory taxes to that country's government.

If there's no realistic alternative to living under a government with the power to levy mandatory taxes, our best option is to try to create one that will deliver the most value for our money. We must take seriously the question of how government institutions should be designed and monitored. We should have far-reaching conversations about what public services we want and how to pay for them. Yet we are doing none of those things at the moment.

This is clearly not how things should be in a resource-rich nation with the most educated and productive workforce on the planet. The good news is that it would actually be easy to move past our current gridlock. That's because it's the result not of irreconcilable differences in values but of a simple but profound misunderstanding about how competition works.

Why the Invisible Hand Often Breaks Down

Without question, Adam Smith's invisible hand was a genuinely groundbreaking insight. Producers rush to introduce improved product designs and cost-saving innovations for the sole purpose of capturing market share and profits from their rivals. In the short run, these steps work just as the producers had hoped. But rival firms are quick to mimic the innovations, and the resulting competition quickly causes prices to fall in line with the new, lower costs. In the end, Smith argued, consumers are the ultimate beneficiaries of all this churning.

But many of Smith's modern disciples believe he made the much bolder claim that markets always harness individual self-interest to produce the greatest good for society as a whole. Smith's own account, however, was far more circumspect. He wrote, for example, that the profit-seeking business owner “intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it [emphasis added].”⁶

Smith never believed that the invisible hand guaranteed good outcomes in all circumstances. His skepticism was on full display, for example, when he wrote, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”⁷ To him, what was remarkable was that self-interested actions often led to socially benign outcomes.⁸

Like Smith, modern progressive critics of the market system tend to attribute its failings to conspiracies to restrain competition. But competition was much more easily restrained in Smith's day than it is now. The real challenge to the invisible hand is rooted in the very logic of the competitive process itself.

Charles Darwin was one of the first to perceive the underlying problem clearly. One of his central insights was that natural selection favors traits and behaviors primarily according to their effect on individual organisms, not larger groups.⁹ Sometimes individual and group interests coincide, he recognized, and in such cases we often get invisible hand-like results. A mutation that codes for keener eyesight in one particular hawk, for example, serves the interests of that individual, but its inevitable spread also makes hawks as a species more successful.

In other cases, however, mutations that help the individual prove quite harmful to the larger group. This is in fact the expected result for mutations that confer advantage in head-to-head competition among members of the same species. Male body mass is a case in point. Most vertebrate species are polygynous, meaning that males take more than one mate if they can. The qualifier is important, because when some take multiple mates, others get none. The latter don't pass their genes along, making them the ultimate losers in Darwinian terms. So it's no surprise that males often battle furiously for access to mates. Size matters in those battles, and hence the evolutionary arms races that produce larger males.

Elephant seals are an extreme but instructive example.¹⁰ Bulls of the species often weigh almost six thousand pounds, more than five times as much as females and almost as much as a Lincoln Navigator SUV. During the mating season, pairs of mature bulls battle one another ferociously for hours on end, until one finally trudges off in defeat, bloodied and exhausted. The victor claims near-exclusive sexual access to a harem that may number as many as a hundred cows. But while being larger than his rival makes an individual bull more likely to prevail in such battles, prodigious size is a clear handicap for bulls as a group, making them far more vulnerable to sharks and other predators.

Given an opportunity to vote on a proposal to reduce every animal's weight by half, bulls would have every reason to favor it. Since it's relative size, not absolute size, that matters in battle, the change would not affect the outcome of any given head-to-head contest, but it would reduce each animal's risk of being eaten by sharks. There's no practical way, of course, that elephant seals could implement such a proposal. Nor could any bull solve this problem unilaterally, since a bull that weighed much less than others would never win a mate.

Similar conflicts pervade human interactions when individual rewards depend on relative performance. Their essence is nicely captured in a celebrated example by the economist Thomas Schelling.¹¹ Schelling noted that hockey players who are free to choose for themselves invariably skate without helmets, yet when they're permitted to vote on the matter, they support rules that require them. If helmets are so great, he wondered, why don't players just wear them? Why do they need a rule?

His answer began with the observation that skating without a helmet confers a small competitive edge—perhaps by enabling players to see or hear a little better, or perhaps by enabling them to intimidate their opponents. The immediate lure of gaining a competitive edge trumps more abstract concerns about the possibility of injury, so players eagerly embrace the additional risk. The rub, of course, is that when every player skates without a helmet, no one gains a competitive advantage—hence the attraction of the rule.

As Schelling's diagnosis makes clear, the problem confronting hockey pla...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication Page
• Contents
• Preface
• 1: Paralysis
• 2: Darwin's Wedge
• 3: No Cash on the Table
• 4: Starve the Beast—But Which One?
• 5: Putting the Positional Consumption Beast on a Diet
• 6: Perpetrators and Victims
• 7: Efficiency Rules
• 8: “It's Your Money…”
• 9: Success and Luck
• 10: The Great Trade-Off?
• 11: Taxing Harmful Activities
• 12: The Libertarian's Objections Reconsidered
• Afterword to the Paperback Edition
• Notes
• Index