The Darwin Economy: Liberty, Competition, and the Common Good

The Darwin Economy: Liberty, Competition, and the Common Good
by Robert H. Frank

Book Description
Publication Date: August 15, 2011

Who was the greater economist--Adam Smith or Charles Darwin? The question seems absurd. Darwin, after all, was a naturalist, not an economist. But Robert Frank, New York Times economics columnist and best-selling author of The Economic Naturalist, predicts that within the next century Darwin will unseat Smith as the intellectual founder of economics. The reason, Frank argues, is that Darwin's understanding of competition describes economic reality far more accurately than Smith's. And the consequences of this fact are profound. Indeed, the failure to recognize that we live in Darwin's world rather than Smith's is putting us all at risk by preventing us from seeing that competition alone will not solve our problems.

Smith's theory of the invisible hand, which says that competition channels self-interest for the common good, is probably the most widely cited argument today in favor of unbridled competition--and against regulation, taxation, and even government itself. But what if Smith's idea was almost an exception to the general rule of competition? That's what Frank argues, resting his case on Darwin's insight that individual and group interests often diverge sharply. Far from creating a perfect world, economic competition often leads to "arms races," encouraging behaviors that not only cause enormous harm to the group but also provide no lasting advantages for individuals, since any gains tend to be relative and mutually offsetting.

The good news is that we have the ability to tame the Darwin economy. The best solution is not to prohibit harmful behaviors but to tax them. By doing so, we could make the economic pie larger, eliminate government debt, and provide better public services, all without requiring painful sacrifices from anyone. That's a bold claim, Frank concedes, but it follows directly from logic and evidence that most people already accept.

SOME REVIEWS:

The premise of economist Adam Smith's 'invisible hand'--a tenet of market economics--is that competitive self-interest shunts benefits to the community. But that is the exception rather than the rule, argues writer Robert H. Frank. Charles Darwin's idea of natural selection is a more accurate reflection of how economic competition works . . . because individual and species benefits do not always coincide. Highlighting reasons for market failure and the need to cut waste, Frank argues that we can domesticate our wild economy by taxing higher-end spending and harmful industrial emissions. -- Nature

Frank makes a compelling argument against the libertarian view that government should not interfere with individual liberty by forcing us to buy safety or insurance, via taxation. . . . His book is a welcome addition to a field that is in need of more economists and political theorists who challenge the status quo and explore concepts of justice in the spirit of John Rawls and Michael Sandel.

"I've been reading Robert Frank's books for years, and he just gets better and better. I strongly recommend The Darwin Economy: it's clear, persuasive, and cleverly entertaining, and it provides a new and original insight about a central issue in economics. Read and enjoy."--Thomas C. Schelling, Nobel Laureate in Economics

"The Darwin Economy debunks popular nostrums of both left and right, and takes particular aim at the notion that a well-functioning competitive market system will necessarily produce socially optimal results. Frank suggests novel approaches to America's problems that go well beyond the tired ideas of the present debate."--Francis Fukuyama, author of The Origins of Political Order

"Robert Frank convincingly predicts that Darwin will eventually be recognized as the true intellectual father of economics. After you read The Darwin Economy, you'll want this prediction to come true as soon as possible."--David Sloan Wilson, author of Evolution for Everyone: How Darwin's Theory Can Change the Way We Think About Our Lives

READER REVIEWS:
By Jean Parmesan (Alameda, CA)

While our ideological sensibilities are not closely aligned, I find the ideas of Robert Frank to be novel, thought provoking and challenging. "The Darwin Economy" is no exception. The book is intended as a critique of libertarian ideas and he likes to drop the "libertarian evangelist" bomb throughout the book to describe those with whom he disagrees. However, he appears to have almost as much intolerance for some of the worst arguments of the progressive movement - sans the ad hominems - and does not hesitate to point them out.

In a basic sense, the book is about the rising inequality of the last 30 years and the resulting negative consequences. Without oversimplifying too much, his arguments can be summarized as follows:

1) The market economy articulated by Adam Smith has failures that many libertarians and those on the right fail to recognize or acknowledge. While self-interest can be channelled to serve the common good via compeition, it can often lead to results that diminish the overall economic pie. Frank refers to the latter as the Darwin Economy and provides some interesting examples from nature to demonstrate this. For example, while the beautiful feathers of an individual peacock might increase its reproductive success with peahens, overall the large feathers are a net detriment to the species as it makes peahens more vulnerable to predation. Likewise, the larger the antlers of an individual deer, the more likely it will successfully breed with females and pass its genes on to the next generation. However, other than individual reproductive competition within the species, antlers provide no other benefit and are a cumbersome genetic quirk.

2) In order to alleviate Darwinian failures in market contexts, we need more government regulations and income redistribution. The transaction costs, in a Coasean sense, are too high for individuals to correct these market failures without some larger intervening force. As an example, while each NHL hockey player has an advantage by not wearing a helmet versus those that do, overall the group is worse off without helmets due to the increased safety risks. Without top down regulations from the NHL, no reasonable means exists for each player to wear a helmet even though it is in everyone's overall self interest to use one.

3) Relative position matters and the wealthy produce significant Darwinian failures through the consumption of ever larger houses, more luxurious cars and ever larger galas. This consumption has increased over the past 30 years as a significant portion of the productivity gains have been concentrated in the upper tiers of society. The result is an expenditure cascade whereby those in lower classes feel the need to consume ever more resources to maintain a standard of living on par with the wealthy. Overall, this process leads to overconsumption and a decrease in overall welfare for each individual who finds himself in deeper debt and less satisfied with his well being.

4) The transaction costs are too high for each individual to decide to consume less. Keeping up with the Joneses is just too tempting. The least intrusive remedy is to transition from an income tax to a progressive consumption tax whereby tax liabilities are determined based on consumption and not income.

5) The result of a consumption tax would be a win-win. Individuals would have more incentive to save rather than to consume and the resulting increase in tax revenues could help to fund much needed infrastructure improvements and shore up shortfalls in social security and medicare.

6) If you disagree with Frank's conclusions, then you are probably a "libertarian evangelist."

I strongly agree with Frank that we tend to consume beyond our means, which leads us to be much less happy on net. Expenditure cascades and the introduction of Darwinian examples helps to explain our shortcomings in our quest for ever more goods and services. In addition, due to the transaction costs, this market deficiency is difficult to cure via individual action. However, one can accept these premises without agreeing with Frank's overall conclusion regarding a Piguvian consumption tax. Here is where I start to disagree:

1) Darwinian failures in government contexts. I would feel much more obligated to accept Frank's conclusions if voters were rational, government regulators were reasonably omniscient and politicians were honest. But they aren't. If we drop these assumptions and instead focus on what regulations or redistribution will be politically profitable to make, we begin to see a very large divergence between Frank's preferred remedies and the common good. I am reluctant to provide ever more powers to a government monopoly provider who tends to provide its services ineffectively and efficiently. Medicare, Freddie and Fannie Mac, and the decision to go to war in Iraq are just a couple of examples of government failures over the past 30+ years.

2) Is the beast starved? A central part of the book is the assumption that the government is starved for resources and is forced to manage a decaying infrastructure. I do not believe that this is accurate in either a microeconomic or macroeconomic sense. The government's share of GDP has increased, not decreased over the past 30 years. In addition, infrastructure spending as a percentage of GDP has remained relatively stable since the 1960s, a time period that Frank seems to remember with great fondness. Before I feel the obligation to send the government ever more tax funds, it would need to demonstrate its ability to do a better job with its current share of GDP.

3) Darwinian failures among the non-wealthy. In order to make Frank's arguments work, he would need to incorporate negative externalities produced by a significant portion of the poor. This would include the inability for many (but certainly not all) of the poor to produce labor that people find valuable, an inability to support themselves and a propensity to over produce offspring who have very little chance of providing a net benefit to the common good or themselves. Through welfare and public education, we are already providing a large portion of the social surplus to them. Do we really need to increase their social status relative to the wealthy in addition to the benefits already being provided? (I am not suggesting that these programs be cut)

At the end of the day, the most important aspect for me is whether the people who have lots of things have acquired them justly. I tend to believe that the negative externalities produced by the wealthy are much smaller than Frank assumes and that government solutions are not very likely to alleviate them once government failures are included in the mix. While Steve Jobs, Sam Walton and Jeff Bezos have become extremely wealthy, the spillover effects of better and cheaper consumer goods that they have produced for the average consumer like myself have been quite large and miraculous in a historical context.

I suppose that this makes me a "libertarian evangelist." What Frank does not seem to realize is that this probably makes him a "governmental evangelist" by extension.


By Ivan

Wow, this has to be one of the most interesting, well argued books I have read in a while. As you might have guessed from the brief description posted by Amazon above, in this book, Robert Frank, puts forth a set of arguments against libertarianism and the laissez faire approach to economics. This is an undoubtedly popular field for debate and there have been countless other books written on the topic. Most of these, however, attack libertarianism from a moral position. The problem with that approach of course is that it becomes very difficult to prove why one set of moral beliefs is superior to another and the end result becomes something of a stand-off between deontological vs. consequentialist viewpoints.

What really sets this book apart is that it gives libertarianism a huge benefit of the doubt in that all people are perfectly rational agents intent on maximizing their own gain. Frank then goes on to show that even with this key assumption at hand, the interest of the individual can often diverge from that of the group, resulting in adverse outcomes for all involved. He points out that this is because in most situations, it is the relative advantage and not an absolute one that matters. To illustrate this point Frank, uses a great example from the natural world: In the wild, male deer compete with one another over resources and access to females. So in order to persevere in a physical fight, it is obviously beneficial for each stag to have a competitive advantage in the size of the antlers over his opponent. After years of evolution, all that ends up happening is that the absolute size of antlers has grown dramatically, but the relative advantage between each individual remains the same. Now, the whole population of stags have to contend with oversized antlers that impede their movement in the forest and greatly increase their susceptibility to predation. If all the antlers in the population were reduced by 50%, the whole population would benefit, yet the hierarchy will remain the same, since it is the relative advantage that's important. It is really not hard to see how this example can apply to many issues in the human world, not the least of which are arms races.

I really don't want to give away too much of the book, or do an injustice to many of Frank's other brilliantly formulated arguments, so here is a short list of issues that are addressed using a similar methodology:

How to resolve social harm that results from positional externalities
Whether there should be a price that comes with higher rank in a society
Right to own the results of labor and the question of income redistribution
Emergence of winner-take-all markets
Extensive discussion on different forms of taxation

Despite the complex arguments in the book, it's perfectly accessible to all laymen readers. Frank makes a very solid effort to ensure that all his positions are very well explained and the points of debate are easy to follow. I definitely think this is a must read for anyone who has an interest in economics, philosophy or politics, especially given the role that libertarian ideology is playing in our current policy debate.
Robert Morris (Dallas, Texas)

Frankly, I expected this book to be about (for me) incomprehensible economics and dull. Wrong on both counts, although thoughtful consideration of conflicting economic principles and contentious issues is included. In fact, Robert Frank's purpose is to explain how and why "departures from rational choice" (with and without regret) have occurred and what to do about them. He does so with a rare combination of erudition, rigor, eloquence, and wit. As he explains, "From the beginning, most of the work in behavioral economics has focused on departures with regret - those caused by cognitive errors...From the beginning, however, I've believed that much bigger losses result from departures from ration choice without regret. That's because people generally have both the desire and the ability to remedy cognitive errors unilaterally once they become aware of them [and then, hopefully, not repeat them]. In contrast, we typically lack both the means and the motive to alter behaviors we don't regret, even when those behaviors generate large social costs." That, in the proverbial nutshell, is the focus of this lively and entertaining book: An explanation of how to accommodate the wishes and behavior of self-interested individuals with the wishes and behavior of self-interested groups.

Here are three of Frank's observations that caught my eye:

"Charles Darwin was among the first to perceive the underlying problem clearly [i.e. equating Adam Smith's concept of `the invisible hand' to competition]. One of his central insights was that natural selection favors traits and behaviors primarily according to their effect on individual organisms, not larger groups. Sometimes individual and group interests coincide, he recognized, and in such cases we often get invisible hand-like results." (Page 7)

"John Stuart Mill's harm principle must be understood as saying that the only legitimate reason for government to limit someone's freedom is to prevent [begin italics] undue [end italics] to others...For the harm principle to make any sense at all, it must be understood to mean that the legitimacy of a restriction must be decided by weighing its cost to those being restricted against the harm others would suffer if the behavior weren't restricted." (Page 85)

"The bottom line is that if society`s rules don't make the total economic pie as large as possible, they squander an opportunity to enhance the personal autonomy of every citizen. Again, when the economic pie is larger, it's always possible for everyone to have a larger slice than before, and that means having an option to do mire things." (Pages 209-210)

Frank does not cite nor even imply the relevance of Abraham Maslow's concept of a "hierarchy of human needs" but I think there is relevance nonetheless because people struggling to survive are wholly preoccupied with that; only when they are secure and confident they will remain so can they consider what Maslow characterizes as self-actualization. Sometimes an individual can fulfill all three needs; in other circumstances, these needs can only be achieved in collaboration with others in a society, with groups that range in size from a family or community to a city or state...or perhaps even to an entire nation.

If I understand Frank's ultimate objectives in this book (and I may not), he attempts to introduce more light and less heat to our understanding of the admittedly complicated relationships between a government and those governed, and, between an individual's rights and that individual's obligation to respect (and when necessary, protect) others' individual rights. I carefully selected the title of this review because I think he has much of great value to say about how and why "departures from rational choice" (with and without regret) have occurred and what to do about them. He comes across to me as a pragmatic idealist, calling upon "a new generation of libertarians who are willing to accept legitimate restraints on their own behavior, while continuing to battle ferociously to prevent government from intruding any more than necessary."

It is especially appropriate that Robert Frank concludes his book with this quotation from Miguel Cervantes, in words expressed by Don Quixote: "Too much sanity may be madness - and the maddest of all - to see life as it is, and not as it ought to be."