Bookshelf

Liberty, without justice for all

on Robert Frank’s new book: The Darwin Economy

By Irene Kim

The Darwin Economy:
Liberty, competition, and the common good

Robert H. Frank, Henrietta Johnson Louis Professor of Management and Professor of Economics

“Liberty” is as American as Mom, Sousa, and apple pie. The word conjures up visions of unfettered freedom — freedom to roam wherever one wants, buy whatever one wants, build whatever one wants, and run the IRS off with a shotgun.

But what about the liberty to breathe carcinogen-free air, drive on pothole-free roads, buy affordable produce, and obtain good housing for your family without going into lifelong hock? The problem is, some people’s liberties impinge upon others’.

While individuals acting in their self-interest may believe that they hurt no one, they can force the whole community to change for the worse, says Robert H. Frank in The Darwin Economy. Consider a middleweight boxer who starves himself into welterweight class to gain a competitive edge. If his welterweight competitors don’t want to lose to him, they starve themselves into featherweight class. The result? A bunch of anorexic boxers.

In nature, Frank points out, this phenomenon — individuals’ efforts to outcompete each other resulting in an arms race detrimental to all — was described over a century ago by naturalist Charles Darwin. In order to win more mates than their peers, natural selection has resulted in male songbirds evolving to display dazzling colors and each generation of male ungulates growing successively outsized antlers. But, as a result, both pay the price in being easier to spot and get caught by predators.

Among people, a similar phenomenon occurs with "expenditure cascades." The ultra-rich build bigger mansions and throw $10-million Sweet Sixteen parties for their kids. That raises the housing and entertainment bar for the rich, who build bigger houses and throw $1-million kids’ parties. The middle class move from 3,000-square-foot houses to 4,000-square-foot ones and hire five-piece bands. No one really needed a bigger house or fancier parties; now everyone has spent a lot more than they can afford. (This theme appears in Frank’s earlier books, including Falling Behind and Luxury Fever.)

We as individuals are hard-pressed to liberate ourselves from these pressure-to-spend, consumption arms races (imagine your COO moving his family into a two-bedroom bungalow?). But the government can.

Who wants the government telling them what to do? It’s popular to cite economists, from John Stuart Mill to Ronald Coase, to argue against government intervention to right economic disparities, says Frank. But such arguments are usually fallacious. The Coase framework, for instance, is often misread to say that individuals and organizations at loggerheads will, of their own accord, arrive at the optimal solution for all. But, typically, there are complicating factors that tilt the outcome. So, the government plays a crucial role in leveling the playing field.

Amidst winner-take-all markets in which blue-chip CEOs earn 500 times as much as their average employee and hedge-fund managers are taxed only 15 percent on their commissions, says Frank, the government may be the best vehicle for equalizing resources among rich and poor. We already subsidize the poor through inefficient means such as rent and price controls. So, why not deliberately design income-transfer methods to be efficient?

The solution in today’s sinking economy, says Frank, is to tax spending. He advocates a progressive consumption tax, which would discourage reckless consumption and put a dent in the national debt.

For many, the word “tax” evokes visions of legislators bending taxpayers over a pork barrel. But while there certainly are wasteful government projects, starving the government solves nothing. Boondoggles should be stopped, but reducing the government’s revenues wholesale also starves programs for funding roads, libraries, and national security.

Without taxes, a country is unable to defend itself and is quickly conquered by another, stronger country - and ends up paying taxes to the conqueror’s government. “We have to tax something,” says Frank. “So why tax income, when we could tax consumption instead — in the process encouraging savings, growth, and job creation?”