The Darwin Economy: Liberty, Competition, and the Common Good
Professor Robert H. Frank at the LSE’s Old Theatre (10 November 2011)
The chair of this event was Paul Mason, and it was recorded for Analysis and broadcast as The Darwin Economy (available as podcast). (I missed out on tickets by a few hours, and so had to queue for returns, but we got in on the front row, at the feet of the great Mason!)
In 100 years time, Charles Darwin will be viewed as a better economist than Adam Smith, according to Robert Frank. In his new book The Darwin Economy: Liberty, Competition, and the Common Good, Frank argues that whilst Smith was correct to point out the benefits of competition, Darwin went further by showing how sometimes competition over rank could produce benefits to the individual at the expense of the group. This insight, believes Frank, applies to the economics of human societies as much as it does to the animal kingdom.
The mechanics of the recording was described by Paul Mason as moving from normal reality into broadcast reality, which were nested like Russian dolls. He did a normal introduction and then the formal one, which involved him reading his own name from a script on his iPad: “I’m Paul Mason…”
They began with the Darwinian story of the bull elk, which demonstrates how there can be a divergence of interests between the individual and the group, how situations can arise in which “individual rationality doesn’t coincide with collective rationality”.
Darwin’s insight was that sometimes an individual’s interests do coincide with the group’s interests, and sometimes they don’t, in which case the group suffers. The evolution of antlers is not so that the elk can compete against the environment but so that they can compete against their own kind. Similarly, much of the competition in the business world is against our own kind (e.g. between consumers). If there were nothing you could do about that, fine, we’d take the benefits of competition and put up with the downsides, but there are ways to avoid waste in competition.
PM: Investment bankers like to think that if they’re pursuing their own self-interest, they’re also contributing to the common good.
Frank suggested they use a lot of self-serving rhetoric. They sound like the social Darwinists of the 19th century. They think that anything that prospers in the marketplace is to be celebrated morally. Darwin was not a social Darwinist – he saw just how much suffering could be inflicted by competitive instincts. The alpha lion kills the cubs sired by his rival.
Too many of the best and brightest are lured by the rewards of finance, and yet there are only so many deals to be struck – they are fighting over bits of the pie, not creating a larger pie. “We’re not sending the right number to that industry.”
Frank attacks the libertarians on their own terms, although he doesn’t concede that participants in the economy are rational actors, quoting Amos Tversky, who liked to say, “My colleagues, they study artificial intelligence. Me? I study natural stupidity.” (Frank 2011, p. ix). This got a big laugh, although probably not from the libertarians in the audience.
“Rank matters, we’re not competing over absolute amounts, we’re competing over rankings… It’s not how fast you are, it’s whether you’re faster than the runner you’re competing against that matters.”
A zoning law is an example of sensible regulation to limit such wasteful competition.
If negotiations over safety involved only the parties involved, then they could agree to cut corners, but Frank insists that there’s a wider issue at stake, and more people are affected by individual decisions, e.g. those who are trying to get their kids into a good school by moving into a better area.
PM: You’re trying to get the American right to accept taxation and regulation on their own terms?
Frank has been surprised by the friendly response of some on the right, who are not used to being challenged in their own terms. In his book (p. 82) he tells how he got a warm letter from Milton Friedman, who “went on to add that if the government did need additional revenue, the progressive consumption tax would be far and away the best way to raise it.”
The key recommendation is to scrap the income tax altogether, in its place adopt a steeply progressive tax on consumption. This fiscal magic conjures new wealth out of thin air. The rich do respond to prices. It’s relative size that matters. Context matters. The rich build bigger mansions not because they’re bad people but because they’ve got more money and they have to keep up with their rich neighbours.
How the rich spend their money matters for society, because people further down the income scale are influenced and are also spending to maintain rank or climb relative to their neighbours. Americans are spending nearly three times as much now on weddings than a generation ago – to what end?
PM: The modern world doesn’t like tax. You’re fighting a losing battle.
The book is for grown ups. Adults know that taxes are necessary, despite people saying that all taxation is theft.
One questioner, a staunch libertarian, said he had published a book on the subject of taxation as theft, which made “many good points about the violent nature of both processes”.
Frank’s response was to point out the absurdity of voluntary taxation, and of no taxation at all, since any nation that didn’t raise taxes couldn’t afford an army and would soon be invaded and then subjected to mandatory taxation.
(When he was writing The Darwin Economy, he may not have been aware of Steven Pinker’s book The Better Angels of Our Nature, in which Pinker identifies the Pacification Process as the transition from anarchy to government. There was a fivefold decrease in rates of violent death (Pinker 2011, p. xxiv), and the downward trend of violence continued with the Civilizing Process, which again is only possible with some kind of government, and government is only possible with some kind of taxation.
PM: You make a plea for the importance of context in economics.
This is the big issue in the sociology of knowledge. The standard economic models completely ignore the role of context in shaping demand. It is supposed that the utility a consumer gets from his house depends only on the absolute qualities of the house. That’s transparently not true, and Frank described his time living in a rundown house in Nepal. Why are economists loath to incorporate context into their models of demand?
(This taste for the absolute is apparent in discussions of moral values, especially if someone is trying to defend the religious origin of these values.)
The moral emotions leave signs that can signal to others that I am a trustworthy person who won’t cheat you. Cheating is in an individual’s interests, but it’s not in the group’s interests.
Regulators need to be humble, because they cannot micromanage behaviour, and governments should not be coercive in this respect.
In response to a question about differences between arrangements in Germany and America, he talked about liquor stores opening on Sundays: once one is allowed to open, they’ve all got to open, and all that’s achieved is that workers lose a day to be with their families. (We should replace the religious reasons for Sunday closure with secular reasons.) Let different national systems experiment with ways of finding out what’s in the collective interest.
(After the talk, they had to redo certain bits, including Frank repeating “if you’re an elk”. He was an impressive speaker, clear and articulate, with a tremendous argument, and the recording was pretty much one-shot perfect. One or two things didn’t make the final broadcast, including Paul Mason’s suggestion that students were natural libertarians.)
See Frank (2011) and the LSE page. Below are a few relevant bit and pieces I came across.
Winston Churchill, politician and statesman (1874–1965), on rank:
The world looks with some awe upon a man who appears unconcernedly indifferent to home, money, comfort, rank, or even power and fame. The world feels not without a certain apprehension, that here is someone outside its jurisdiction; someone before whom its allurements may be spread in vain; someone strangely enfranchised, untamed, untrammelled by convention, moving independent of the ordinary currents of human action.
Importance of context in language (A.Word.A.Day–ravel):
But the truth is different. Words can be vague, they may have multiple shades of meanings, and even completely opposite senses. In my mother tongue, Hindi, for instance, the word “kal” can mean both “yesterday” and “tomorrow”. Is that a problem? Not at all. Context brings clarity. I have never seen anyone become confused by the use of the word – would this meeting take place tomorrow or do I need a time machine to go back to yesterday?
Ashley Cole in his book My Defence, relating when David Dein wouldn’t meet his £60,000-a-week pay demands at Arsenal (Quote of the Day, The Fiver 04.07.11):
When I heard Jonathan [Barnett, his agent] repeat the figure of £55,000. I nearly swerved off the road. ’He is taking the p1ss Jonathan!’ I yelled down the phone. I was so incensed. I was trembling with anger. I couldn’t believe what I’d heard.
Sid Lowe interviewed Xabi Alonso (accessed 20.11.11), who recognized that a team can be more than the sum of its parts:
It’s hard to judge England in South Africa but maybe they failed to gel despite having excellent players. Sometimes it seems the English don’t rate those who make the team work rather than standing out themselves. You shouldn’t necessarily pick the best players; you have to have a collective identity.
The Secret Footballer revealing just how rank and money are related on the football pitch (accessed 20.11.11):
My speciality has always been what cricketers call “sledging” and what footballers irritatingly refer to as “banter”. Over the years I have heard some fantastic acid drops that have cut players in half far more effectively than a crude tackle. Robbie Savage was a particular fan of what we in the trade call “cashing him off”, which involves one player telling another how much money he has and how little money they have in comparison. Not particularly classy but it seemed to work for Savage.
David Lacey recognizes the pernicious effects of cascading consumption (accessed 01.01.12):
For Roman Abramovich, Chelsea’s loaded owner, £50m may be small change but football as a whole feels the inflationary effect of these exorbitant transfers, not to mention the salaries that the players command.