1In The Darwin Economy: Liberty, Competition, and the Common Good Robert H. Frank practices what he preaches. Starting with just a handful of simple basic principles, he is not only able to shed an interesting new light on some of society’s most pressing problems, but also to propose (at least to some) contrarian solutions for them. Frank arrives at his analyses and his solutions not by exploring the properties of mathematical models but by cogent informal reasoning.
2This approach is exactly what he preached in another context. Frank is professor of economics at Cornell University. He is well-known for his use of micro-economic principles and tools to shed light on political-economic issues. This has resulted not only in several academic papers and books, but also in monthly Economic Scene columns in The New York Times. Frank also co-authored a textbook Principles of Economics with Ben S. Bernanke. In The Economic Naturalist (2007) Frank advocates a less-is-more approach to the teaching of economics. The idea is that instead of learning students the algebra and calculus they need to understand mathematical models in economics, the students learn to use just a few informally stated basic economic principles to understand phenomena in the real world. That way they acquire a deeper and more lasting understanding of how it is to think as an economist. Underlying this less-is-more approach is Frank’s belief that most of the insights produced by economic theory follow from the application of just a few basic principles. Formal models are not needed to see that (and also how) the insights follow from the principles.
3One can see this less-is-more approach in action in Frank’s latest book. The Darwin Economy is advertised as bringing home the message that eventually not Adam Smith but Charles Darwin will be hailed as the principal founding father of economics. But in fact most of the book is devoted to combating Tea Party-type of libertarians in the US, who see raising taxes as an intolerable infringement of basic individual rights. Frank sets out to show that their view is not only unproductive and paralyzing, but also fundamentally misguided. True to his advocacy of the less-is-more approach in economic teaching, it is remarkable to see how much leverage he gets from informal reasoning as an economist with just a few principles to start with.
4One such principle, perhaps the most central principle in the book, is that people tend to care more about their relative than absolute position. No matter how well people do in absolute terms, they will not be happy if their peers do better. People tend to orient themselves with respect to how they are doing relative to others. This tendency is particularly strong and wasteful in so-called winner-take-all markets. In winner-take-all markets the top seed person earns much more (not only in terms of material wealth, but also in terms of social status) than the numbers two and three who might be only slightly worse than the number one. Especially if a lot of prestige and wealth can be gained by becoming the number one in such a market, many in society will be dragged into the market to compete for the number one position. A lot of effort that will be put into this will be done in vain. No matter how much more effort all of them put into trying to be the number one, there will always be only one that attains the desired top position. The result is a wasteful arms race. Much waste could have been avoided if people had put their efforts into other activities and markets. Even if people see through this and realize that it would be in the interest of all to de-escalate, if they act alone they will not be in the position to curb this process. If they decrease their efforts, they can be certain that they won’t be the number one. For the rest nothing will change. Only by organizing some sort of coordinated or collective action the arms race can be de-escalated. The introduction of a substantive tax might do the trick, for example. Frank briefly repeats what he argued before, namely that a progressive income tax should be replaced by more steeply progressive consumption tax.
5All this will be familiar to readers who have also read earlier books by Frank, such as The Winner-Take-All Society (Frank and Cook 1995). What is new in The Darwin Economy is that he puts the following twist to this story. People in Winner-Take-All markets who devote all their energy and effort into becoming the number one inflict indirect harm on others (another way of putting this, as Frank notes, is that it creates negative externalities). They do not harm others directly by stealing from them or by committing violence to them, but indirectly by making it more costly for them to become the number one. Frank wants to convince others, notably libertarians, that such forms of indirect harm should be taken as seriously as direct forms of harm. Both forms of harm should be subject to Mill’s principle, Frank argues, which states that it is permissible to restrain an individual’s freedom of action only when there is no less intrusive way to prevent undue harm to others. As we just saw, the only way to prevent that undue indirect harm is done to others in winner-take-all markets is by committing all participants to collective action, for example in the form of introducing taxes. Thus, the concept of indirect harm, the argument that indirect harm can be as detrimental to people than direct harm, conjoined with Mill’s principle, already provides sufficient reason for Frank to plead for introducing taxes in winner-take-all markets. An additional reason for doing so (implying that it is possible here to kill two birds with one stone) is that the money earned generates the badly needed revenues for the government to reduce its budget deficit.
6Although Frank also has a few things to say to political leftists (e.g., that their insistence that the main source of market failures still is limited competitiveness in markets is mistaken), his main opponents in this book are libertarians. Frank is well aware that his plea will make libertarians shudder. Frank knows very well that libertarians will resist taking indirect harm as seriously as direct harm. Libertarians are likely to respond that it should be left to the discretion of people themselves whether they want to compete for the number one position in winner-take-all markets, how much effort they want to put into it and so on. Voluntary coordinated action to curb arms races is fine, but imposition of taxes by the state is totally unacceptable for them. To libertarians, the latter is tantamount to the infringement of individual rights, coercion, or even worse: outright theft. Frank thinks these views are bogus. A section called “A Mindless Slogan Contest” shows that he has little patience and respect for libertarian objections.
7Libertarians feel individuals who have earned their own money in a decent and honest way are entitled to keep all of it. Frank explains that this moral argument is based on a false premise, namely that the money people earn by hard working is a consequence of their own efforts alone. That is clearly not the case; it is also a consequence of infrastructure that was made possible because of investments made by others. Furthermore, Frank points out that success and failure depend much more on chance factors than people—especially the successful ones— like to think. And in winner-take-all markets with the newest technology, equally highly (or perhaps even more) talented people who have not made it to the absolute top earn much less than the number one. There is moreover absolutely no evidence that higher taxes on top incomes inhibit economic growth. To the contrary, higher taxes on hedge fund managers is likely to stimulate economic growth, for example, if only because the best brains would be attracted to other non-winner-take-all markets.
8Now Frank could have simply chosen to rest content with showing that the objections of libertarians are bogus. But Frank is more ambitious. He wants to persuade libertarians on their own terms. He is trying to convert the rational libertarian. A rational libertarian is someone who endorses basic libertarian principles—such as that the freedom and rights of individuals should be safeguarded, the only exception being situations in which the execution of the freedom and rights by one individual causes harm to others (Mill’s principle)—but who is open to revision of his anti-government sentiments if good arguments are provided. Frank believes the arguments he provides are good enough to make the rational libertarian revise his sentiments.
9I don’t think Frank is successful. Frank in effect assumes that a rational libertarian is willing to reconsider what rights and what freedoms to define, that in this process the rational libertarian is prepared to take on board consequentialist considerations and that in assessing the consequences the rational libertarian is prepared to understand costs more broadly than just the infringement of negative freedom and of property rights of individuals. These assumptions might be asking too much from a libertarian. Accepting these assumptions would turn rational libertarians into a rather mystical species that are quite remote from actual libertarians. As Frank recognizes, the frame of mind of a libertarian is deontological. A libertarian starts with the presupposition that individual persons have inalienable rights that should be respected no matter what. A libertarian understands Mill’s principle as saying that compromising the exercise of these rights is legitimate only if unlimited exercise of the individual violates the (exercise of) the rights by others. Recognizing other sorts of (indirect) harms or costs that could legitimize compromising the exercise of individual rights is simply not part of his mind set.
10That Frank might not be able to persuade libertarians does not imply that the arguments he puts on the table are not forceful. I think the arguments he puts forward are strong. What Frank really shows, I think, is the steep price we have to pay if we were to accept libertarian principles, and were not prepared to go beyond them. Frank points at various negative externalities that would result from this and shows that we can all be better off by relaxing libertarian principles. To Frank, the benefits of doing the latter clearly outweigh the costs. This shows that his frame of mind, not surprisingly for an economist, is clearly consequentialist.
11Frank relies heavily on Coase’s (1960) insight that negative externalities like noise or smoke are purely reciprocal phenomena. The farmer who complains about the smoke produced by the new-built factory next door has a point. But so has the factory owner when he complains about the extra costs he has to incur to reduce pollution. Coase’s ground-breaking insight was that it is not obvious that the factory-owner (as the “perpetrator”) would have to incur all costs. If the farmer and factory-owner would negotiate with each other, and if they could do this at negligible costs, they both have an incentive to agree on an efficient solution. Frank proposes to take Coase’s insight as a model for how a rational libertarian should ideally find out about what rights to define: libertarians should only treat outcomes that completely free people would have agreed to among themselves as rights. Frank makes clear that what should go into this hypothetical agreement are the integral costs and benefits the free people deem relevant. Apparently Frank believes that a rational libertarian should find this model fully congenial. I very much doubt this. Again the problem is that Coase’s framework is clearly consequentialist, whereas the libertarian’s framework surely is deontological. Frank might be right that libertarians often refer approvingly to Coase’s work. Frank’s hope is that a rational libertarian is willing to follow Coase’s reasoning to its logical end. I think it is more likely that a libertarian will stick to his guns, which basically means making basic freedoms and property rights sacrosanct, and will simply say: so much the worse for Coase.
12Frank’s discussion of Coase’s celebrated insight is excellent. Frank shows an acute awareness of the fact that Coase never believed that contracting costs (or transaction costs) are negligible in actual negotiations, for example. This is why “Coase’s theorem” is modeling an ideal hypothetical situation. Along the way (not surprisingly for an author who is so much concerned with the effective and proper teaching of economic principles) we are offered many insights stemming from pure economic reasoning. Frank simply cannot stop making us economically more literate. Here Frank is at his best. Thus he explains why a nonzero level of pollution could be optimal, why auctioning off seats in overbooked flights can be in the interest of all, and why, even though willingness to pay depends heavily on ability to pay, rational policy should be based on willingness to pay nonetheless. Consider auctioning off seats in overbooked flights, for example. One can complain this is immoral, for it favors the rich over the poor. It is true that the result of the auction might be that rich people, who can afford to pay a high price, continue their travel uninterrupted, while poor people, who cannot afford paying a high price, will be left waiting for the next flight. But Frank argues that we should not forget that no one forces poor people to accept the deal they are offered: to get some cash payment (or some other compensation) for relinquishing their seat instead of refusing this and remaining their seats. By accepting the deal poor people reveal that they apparently prefer serving other pressing needs over taking the flight. So both rich and poor people benefit from the auctioning arrangement. Frank adds to this that if it is the immorality or unfairness of the distributional consequences that we are concerned about, we can always choose to independently implement redistributions.
13Although the bulk of the book is about defending the introduction of more taxes against libertarians, the book is marketed as mainly advancing the claim that within the next century Charles Darwin will replace Adam Smith as the intellectual founder of economics. Frank predicts that the significance of wasteful arms races will come to supplant Adam Smith’s more rosy vision of the invisible hand in free markets. One can object that we do not need Darwin to recognize this. Economists and others have long (and independently of Darwin) realized that the pursuit of individual interests need not lead to socially optimal outcomes (Nash equilibria need not be Pareto efficient, for example) and that collective action might be required to prevent that from happening. One can also object that, although Darwin, with his notion of sexual selection, draws our attention to this, this is not Darwin’s main message. Perhaps Darwin’s greatest insight was similar to that of Smith’s: that a socially optimal order, which has all the appearances of being designed by a benevolent creator, can result from the blind force of natural selection. But these objections only detract from the fact that Frank uses Darwin also in other ways.
14Frank is careful not to argue that people care about relative position because relative performance is all that matters in natural selection. Or, to put it more precisely, Frank is careful enough not to suggest that from the fact that relative performance is all that matters in natural selection it would inevitably follow that all that people care about is relative rather than absolute position. Suggesting otherwise would mean mistaking ultimate causes for proximate ones. The fact that what ultimately counts as success in biological evolution for an individual is to pass more genes to the next generation than its competitors does not imply that an individual’s ultimate goal must be to pass more genes to the next generation than its competitors. Pursuing other, more mundane goals may be a better strategy to have superior reproductive success. Frank (1988) himself showed that people who are emotionally committed to cooperation might be reproductively more successful than opportunists. Nor does the necessity of having superior reproductive success imply that all the goods that people value are positional goods (i.e., goods for which relative position or performance is more important than absolute position). Thus leisure is not likely to be a positional good, Frank argues. The reason is that in ancient times, when the human nervous system evolved, famines were a recurrent phenomenon. Individuals that made additional investments to outperform others in terms of leisure were more likely to have starved than those that were more frugal in this respect. By contrast, individuals that made extra investments to achieve high rank in income distribution were likely to be reproductively more successful than others, as higher income meant a higher chance to be fed. Income is therefore more likely to be a positional good than leisure.
15What is interesting is that Darwinian thinking is used here to determine what sorts of goods are likely to be positional. The underlying presupposition here is that homo sapiens is an evolved species and that our evolutionary history left its traces in our current biological and behavioral characteristics. Note that this is an altogether different use of Darwin than in what is supposedly the main message of the book: individual pursuit of self-interest may lead to inefficient social outcomes (called “Darwin’s wedge”). Yet another use (albeit admittedly implicitly) of Darwinian thinking is made when Frank argues that regulations are data. Here he challenges libertarians to explain why regulation is such a widespread phenomenon over time and across cultures. If all regulation were bad, why is it so prevalent? Although he does not spell this out, Frank’s suggestion is clearly that there must be a good reason for something as ubiquitous as regulation, otherwise it wouldn’t have evolved in the first place. Frank himself links this with the Smithian “no-cash-on-the-table-principle”. Friedrich Hayek would have said that with his views on the spontaneous evolution of social order, Smith was a Darwinian-before-Darwin. This is indeed where Adam Smith’s invisible hand and one—if not the—central message of Darwin seem to converge.
16In closing, I want to add that my critical engagement with Frank’s arguments in this review is not meant to convey that I personally find many of Frank’s points dubious. On the contrary, I greatly admire the book and recommend it without reservation. My last remarks were meant primarily to testify to the richness of the book. Frank has written a book that is both rich in substance and content and simple in terms of the principles used and arguments developed. Even though Frank might not have succeeded in converting libertarians, he at least has given them a lot of food for thought.