Liberty, Competition, and the Common Good
Robert H. Frank
Princeton University Press, $26.95, 248 pp.
Robert H. Frank is a Cornell economist who is happy to rethink the axioms of his trade when they don’t square with real-world outcomes. To appreciate how refreshing that is, just consider the blindness of his profession to the tumorous swelling of the 2000s credit bubble. That phenomenon violated the prevailing economic doctrine, and consequently most economists ignored it.
Frank was among the early “behavioral” economists, mavericks who had noticed that real people frequently acted in ways that economists thought irrational. Consider the phenomenon of “inequity aversion.” A is given $100 that he must divide between himself and B. B can veto the division, but if he does, neither of them gets anything. Rationally, if A proposes a $99-$1 split, B should accept it, because that’s better than nothing. In thousands of experiments, however, B almost never accepts such a deal—better to get nothing than be a party to an outcome so obviously unfair.
Such behavior seems wired. If monkeys are trained to perform a task by being rewarded with cucumbers, they will go on strike if they see another group performing the same task for grapes, a more appetizing reward. To Frank, such behavior suggests that “nature marks on a curve.” Grapes and cucumbers are “positional” goods. Their value depends on what your neighbor has. Cucumbers are worth working for, unless your peers are being paid in grapes.
Charles Darwin was well acquainted with the works of the classical economists, but he went beyond them with the insight that the self-interest of the individual is often strikingly divergent from the interests of the species. Frank adds that it is usually the race for positional goods that causes the most damage.
Take the example of bull elks. The one with the biggest antlers usually wins the battle for insemination privileges with the herd’s cows, a positional good. But since oversized antlers get caught in trees, the evolutionary antler arms race makes all the bulls more vulnerable to woodland predators.
Top hedge-fund managers have amassed astonishing amounts of money, but their very success may be destroying the economy. Their antlers are too big. The top 1 percent of earners now collect nearly 24 percent of all taxable income, up from 9 percent in 1980. That upward shift of income has markedly depressed middle-class incomes, a fact temporarily masked by the credit bubble. Now with the bubble blown, the country struggles with bad debts, depressed purchasing power, and the flight of capital to the hope-filled pastures of emerging markets. To make matters worse, a big slice of our brightest and most technically trained graduates is engaged in wasteful schemings to skim yet more money from the core economy. In effect, a small number of bull elks have succeeded beyond previous imaginings, but the herd is in desperate shape.
The practical implications of Frank’s insight are quite broad. Most economic models are built on the assumption that the best outcome for any rational “representative agent” will also be the best outcome for the entire economy. Post-crash, that’s obviously false. But the profession clings to it still, in part for lack of an alternative—which Frank is attempting to supply.
The policy implications of “Darwin” economics are quite progressive. It makes a strong case for steep marginal tax rates for top earners—keeping bull elks’ antlers smaller for the good of the species. An additional benefit of high tax rates might be to shift some bright Wall Street engineers back to designing real things.
Frank’s arguments from his paradigm to his policies are occasionally a bit strained. One suspects that he favored the policies well before he found a tool to make them ineluctable. All conservative economists do the same thing, of course, and often get paid prodigious amounts for proving the desirability of whatever the financial lobbyists are selling. Frank’s recommendations, moreover, almost all lean against the insatiable acquisitiveness of our modern economic baronage.
My favorite of the Frank perennials is his “progressive consumption tax.” Conservatives like consumption taxes, for they prod toward greater investment and savings, which the United States badly needs. But there is no reason why they should be regressive. Choose a number representing some minimum family consumption—say $30,000—and add a rising tax on consumption spending beyond that amount. (The bookkeeping is fairly easy: income − savings = consumption.) The top bracket tax could be 100 percent or even higher. At the 100-percent rate, if the hedge fund guru Steve Schwarzman wants to give himself a $3-million birthday party, it will cost him an additional $3 million in taxes.
Frank manages to write breezily and with a minimum of jargon. His book deserves wide readership among people who suspect that something has gone drastically wrong with the modern economy.