Adam Smith’s invisible hand metaphor is one of the most powerful ideas in economics. Individual action, even in the pursuit of pure self-interest, can serve the interests of others. Charles Darwin’s evolution by natural selection is an even more powerful idea in the world of evolutionary biology. In Darwin’s world, individual actions can be at the expense of others, as competition for survival or mates can leave others out in the cold.
Robert Frank’s new book The Darwin Economy: Liberty, Competition, and the Common Good has at its core the fundamental insight that many aspects of the economy are Darwinian, not Smithian. Individual action can harm the interests of others, as per evolutionary competition, because outcomes are relative. People care about rank and many goods are positional. Only so many people can have beach views or send their children to an above average school.
A recurring example that Frank uses through the book is work safety regulation. In the neo-classical world, workers trade-off safety for wages and assort according to their preferences for safety and wages. Frank argues that this understanding is incorrect, as relative wages also matter. To send your children to the best schools, you need to live in the best neighbourhood, which means that you need to earn more than most other people. As a result, workers will compete away the safety they otherwise value to obtain the income to live in the best neighbourhood. The result is low or no safety protection provided by employers, increased house prices, and the workers are worse off than they were before.
A strong point of Frank’s argument is that he grounds markets and human motivation in evolution. People are products of evolution by natural selection, with reproductive success (and the factors underlying it) a relative concept. Those at the top of the pile were winners and are our ancestors. The motivation to have the highest status, wealth and power is still present in people today. The Darwinian framework is used by Frank to identify whether a good is positional. For example, who survives or not is governed more by relative income than leisure, so income should be more positional than leisure. There will be excessive competition for income.
While I appreciate this evolutionary foundation, I question whether Frank has gone far enough in his use of the Darwinian framework. In one sense, the economy must be Darwinian as humans are animals subject to natural selection. We are shaped by and continue to be shaped by it. Is economics just a branch of ecology? Yet Frank does not take this step.
Frank’s argument is a a strong critique of the neo-classical view of the market and unlike many liberal critiques, does not rely on arguments about market imperfections, dominant powers, information asymmetries or irrationality. In Frank’s world, people are acting rationally and markets are highly competitive, but there is a disparity between individual and collective interests. Frank takes his fight to libertarians (his bad guy of choice) on their own turf.
By doing away with many of the liberal critiques of markets, Frank also eschews some typical liberal solutions. Simple nudges won’t solve these problems, nor will providing more information. Each individual is acting rationally and further information or guidance will not change that fundamental self-interest. Stronger measures are required.
One primary policy suggestion is agreed restraint. If everyone agreed to certain minimum safety standards, which Frank suggests the majority of people support, you won’t get a race to the bottom and the excess wage earned that would be earned in the absence of safety is not simply frittered away in a competition for positional goods. While this argument has merit, Frank creates a libertarian straw man that he beats to death, instead of seriously confronting the libertarian arguments about safety regulation. Can government determine the right level of safety? Does it bend to interest groups and companies trying to create barriers to entry? Or does government simply lack the information required to make decisions?
Another leg of his policy recommendations is a progressive consumption tax, which he has advocated for some years now. By taxing consumption, competitive expenditure would be curtailed, with incentives to invest and save increased. Taxing consumption and not productive activities such as labour makes sense, although I don’t share Frank’s implicit concern that government is being starved of money. A consumption tax in place of income tax is preferable.
One of Frank’s more interesting arguments is that as high rank has a value in itself, rank is already implicitly priced in the labour market. More productive people generally do not get paid commensurate with their relative level of productivity compared to their workmates, which Frank suggests is because people are willing to be paid less if they have high rank. In other words, the labour market has implicit progressive taxation. But outside of the workplace, we compete with friends, family and neighbours, with no implicit market for rank. Frank suggests that as implicit progressive taxation is the market solution in the labour market, we should carry out progressive taxation of rank in the broader world. This is another benefit of a progressive consumption tax.
The latter two-thirds of the book are less focused on Frank’s Darwinian insight, but rather on some fundamental economic concepts. His chapters on efficiency and willingness to pay give excellent background on the topics for the non-economist. The chapter on Coase’s theorem might even teach something to economists. However, I might have preferred Frank to have used the space to discuss the potential critiques to his policy recommendations tailored for the Darwin economy. While I agree with his general insight, his straw man response to the libertarian position did not lay the framework needed to support his solutions.
Having said that, The Darwin Economy provides an important argument that must be addressed by any libertarian. As Adam Smith knew, competition does not always maximise the common good. Any coherent policy framework must deal with that fact.