Frank’s argument within his model seems to me to be something like the following.
Failing to be as productive as he can be is bad for Smith not just for one reason that his absolute consumption will fall but also for a second reason that Jones and Robinson and Brown and Green will pass him in social status and access to many valuable goods.
If school quality and price are fixed over the long term, as it may well be for the government system we have now (in fact, prices always increase), then the total pie remains the same, and the social function of consumer competition in encouraging progress (both innovation and imitation) in the schooling technology and services is checked. People can alter only the relative shares of how much of this resource they consume, but this churning of the social hierarchy, the quarrel over who gets what, is socially wasteful.
Now if Smith relaxes, then it will be his neighbors who will buy houses in the better neighborhoods. In order to keep up with the Joneses (and Robinsons and Browns), Smith has to run the rat race, even if he’d rather pursue his life-long passion for growing flowers or honing his yoga skills. But Jones and Robinson cannot rest either, because if they do, then Smith will sense an opportunity to overtake them, which he values more than even the flowers, and take it.
Here is the model. Smith prefers (1) being on top of the hierarchy to (2) growing flowers while being in the middle to (3) the rat race in which he is also in the middle to (4) being at the bottom of the hierarchy, but though he is right now at (3), choice (2) is unavailable to him, because if he takes it, he’ll actually end up with (4).
The result is that everyone is working frenetically despite the fact that if everyone slowed down a bit, such that their relative positions are unchanged, everyone would benefit by switching to some extent from (3) to (2). The pace of life will slow down, and perhaps, people will have more time to lead “examined lives,” rather than thrashing about like crazy working 15 hours per day just in order not to fall behind their neighbors.
The argument is granted, but it is no accident then that Frank has picked schools as his foil. The fact is that normally, for the vast majority of goods, capitalism is mass production for the needs of the masses. But not only that, it is a process resulting in continuous improvement in the quantity, quality, and price of the goods and services that the masses can “afford.” For goods like schools which are scarcely goods at all but economic bads, such that most children would be better off homeschooled, the solution to restoring the long-term harmony of interests is to privatize the system altogether.
Again, if hours of work are shortened by government decree, then marginal productivity of labor rises relative to the marginal productivity of capital goods. Total production falls, so it is not at first glance clear whether workers benefit or lose. That they lose becomes obvious once it is realized that when capital equipment stays idle, and human capital, unused, it’s as if they have ceased to exist. It is not the case that moving from (3) to (2) via collective action for any individual worker is without costs: his absolute standard of living will fall not only because he himself works less, but because the economy as a whole is less productive.
In short, so far in the book, Frank has not made his case that as a rule, laissez-faire fails.