Category Archives: Darwin Economy

Entrepreneurial competition is not zero-sum.

Review: Darwin Economy: Conclusion

In sum, Robert H. Frank is stuck in the pre-capitalistic feudal age, where there is no such thing as mass production, and practically all goods beyond a few essentials are luxuries, accessible only to people high up in the social hierarchy.

With the coming of capitalism, things have turned 180°, and now almost no goods are permanent luxuries.

Not only love but also the market can level ranks, "and therefore..."

Even there, he would not be making much sense, because the hierarchy in those bygone days was much more stable than it is today, when mobility, both upward and downward, is the order of the day. Dukes would marry duchesses; and peasant boys, peasant girls. The caste or class one was born into was destiny. Hence, arms races were contained even under feudalism.

It may even be that the whole reason for rigid social hierarchies is to defuse arms races. But we have invented a way to channel human competitiveness into socially beneficial outlets. Frank's exceptions to this rule are too insignificant seriously to challenge modern economic thought.

I might recommend The Darwin Economy to a medieval scholar who wanted to know the causes of famines, pestilences, and wars; but it is a mere curiosity in the modern age.

Slippery Slopes

If the premise that the government ought to save people from themselves is admitted, then I have no objections to Frank's proposal to tax alcohol, tobacco, riding bikes without a helmet, even one of "the most controversial proposals," namely, to tax soft drinks.

When apprised of the slippery slope here, and our author quotes economist Greg Mankiw, "Taxing soda may encourage better nutrition and benefit our future selves. But so could taxing candy, ice cream, and fried foods. Subsidizing broccoli, gym memberships, and dental floss comes next. Taxing mindless television shows and subsidizing serious literature cannot be far behind," Frank counters that it's a "concern we can set to one side until we have traveled further down this particular slope." (193)

I'm afraid this won't do at all. The meaning of "slippery slope" is that once you start sliding, it is difficult to stop actually, because it is impossible to stop intellectually. But Frank is an intellectual. He of all people should have an especially deep appreciation of the danger.

Now once we have slid down to an extent, presumably, we'll need to open a discussion whether to keep at it. But this will be worth doing only if in addition to the general argument that the people are ignorant and stupid, always hurting themselves, there is a particular argument stating the reasons for going this far and no farther. If it turns out that there is no such argument, then we must either slide down all the way or go back up. But going down is generally much easier than stopping in midstream, condemning the previous direction, and reversing course and going back up. It is more efficient to decide whether to slide and if so, then how far, and to record the exact reasons for both decisions beforehand.

Taxing Alcohol

According to Frank, 5% of all drinkers consume more than 40% of all alcohol consumed. A tax on alcohol would barely affect the vast majority who drink responsibly, because alcohol for them is like salt: "People often ignore increases in the prices of goods that account for only a small share of their total expenditures. If the price of salt were to double, for example, most people would consume the same amount of it as before." (186)

So, people who drink rarely wouldn't feel any pain; alcoholism and its consequent ills like traffic accidents would be discouraged without anything resembling the Prohibition; the government would enjoy some extra cash which it might spend even on lowering income taxes, thereby benefitting the great majority of moderate and light drinkers.

The only people who will lose are those heavy drinkers who will refuse to quit in the face of the higher prices. They'll both be harming themselves and paying more. The alcohol tax then commences an income transfer from these stubborn drunkards to the rest of the populace. What justifies this? I think for Frank and those who agree with him, to imitate Godfather, "They're animals anyway, so let them lose their [money]."

An “Arms Race”: SUVs

People may have an incentive to participate in vicious arms races for heavier vehicles. Frank explains: "Other things equal, when two vehicles collide head on, occupants of the heavier vehicle are more likely to survive. In a head-on collision between a 7,200-pound Ford Excursion and a 2,500-pound Honda Civic, for example, you definitely want to be in the Ford." (183)

However, SUVs are inherently less safe in themselves (due to poorer handling, rollovers, etc.); and in addition, when two SUVs collide, the results are worse than when two cars collide.

So, the arms race is not merely wasteful, insofar as no social benefits are obtained by buying the more expensive SUVs, but downright destructive of life and happiness.

Frank's solution is to tax vehicles by weight. I just paid $55 to the BMV to register my car for another year; perhaps, my neighbor should pay quite a bit more for his SUV. This may generate additional revenue while discouraging the arms race.

Obviously, taxing harmful activities is a policy at war with itself: the more the activity is discouraged, the less revenue flows to the treasury. But some criteria for an optimal tax rate can probably be discovered and balanced in each case.

This is an infrequent case where I agree with Frank 100%.

On the Non-Positionality of Most Goods

In an popular article Thomas Woods describes a "thought experiment" proposed by Donald Boudreaux: "suppose an ancestor from the year 1700 could be shown a typical day in the life of Bill Gates. He would doubtless be impressed by some of what makes Bill Gates's life unique, but"

a good guess is that the features of Gates's life that would make the deepest impression are that

he and his family never worry about starving to death;

that they bathe daily;

that they have several changes of clean clothes;

that they have clean and healthy teeth;

that diseases such as smallpox, polio, diphtheria, tuberculosis, tetanus, and pertussis present no substantial risks;

that Melinda Gates's chances of dying during childbirth are about one-sixtieth what they would have been in 1700;

that each child born to the Gateses is about 40 times more likely than a pre-industrial child to survive infancy;

that the Gateses have a household refrigerator and freezer (not to mention microwave oven, dishwasher, and radios and televisions);

that the Gateses's work week is only five days and that the family takes several weeks of vacation each year;

that each of the Gates children will receive more than a decade of formal schooling;

that the Gateses routinely travel through the air to distant lands in a matter of hours;

that they effortlessly converse with people miles or oceans away;

that they frequently enjoy the world's greatest actors' and actresses' stunning performances;

that the Gateses can, whenever and wherever they please, listen to a Beethoven piano sonata, a Puccini opera, or a Frank Sinatra ballad.

Woods concludes: "In other words, what would most impress our visitor are the aspects of Gates's life that the software giant shares with ordinary Americans. When you consider the differences that characterized rich and poor prior to the Industrial Revolution, on the other hand, the 'capitalism-promotes-inequality' myth is further exposed as the ignorant canard that it is." In short, that Gates can afford a private island and most of us cannot is too trivial an annoyance to write a book about.

A Status Society

It is an important condition for long-term harmony of human interests that labor is much more scarce relative to land. It's a great big world out there, and that's very good.

The reason is that land cannot be produced. We can erect tall buildings, but in their case, the taller the building is, the higher the cost per each floor. Physical limits do not permits skyscrapers in most locations. Unless we learn to raise islands from the bottom of oceans or travel to distant Earth-like planets, the supply curve for land is vertical.

If land begins to become scarcer, then society will change in mood. In particular, it will tend toward a status society, in which one's relative "rank" in relation to other people will matter more. One may prefer to be a big fish in a small pond to being even a bigger fish but in a much bigger pond, because it is one's relative bigness that will determine who will live in the best locations. This is because competition among consumers will not cause any additional supply of land to come into existence.

This is similar to how we assumed, following Frank, in the previous posts that the quality and price of schooling are fixed forever.

This may skew economic logic toward strange avenues, like, as Frank theorizes, voluntary contractually entered into "progressive taxation" in which people trade off their absolute positions for relative positions and vice versa.

Fortunately, however, land is and will remain for the near future almost a super-abundant good. Therefore, Frank's conclusion that high-ranked positions cannot be occupied "free of charge" and are privileges does not follow. There are too few genuinely positional goods for anyone to worry about. And under laissez-faire, a "high-ranked position" can only be obtained via superior service to the consumers which by definition consists in the production of nonpositional goods. If the result of Bill Gates' genius is that he also claims some few and far between positional goods, then I say, so be it.

For notice that the existence in a free society of a positional good whose supply is extremely inelastic even in the long-term only means that no resources will be spent on producing this good. If there are only so many habitable tropical islands out there, it may well be that a private island will always remain a luxury, never becoming a necessity. Unfortunate though this is, one result is that there is no economic problem associated with islands other than the problem of distribution. All the economic laws hold true for the rest of the nonpositional economy. And even in regard to distribution of islands, the market will still produce the best results as compared with potential rivals.

Here is my own thought experiment: suppose that all goods are positional. They are scarce and cannot be produced. It is obvious that everyone will have an incentive to kill all of his rivals, becoming a single human being in the world or at least on a territory he can successfully defend. What can we expect but a savage battle for resources followed by mutual autarky? There can be, or we can expect there to be, only one. The last men standing will enjoy the few berries and nuts and mushrooms they will be able to gather and die either quickly if those mushrooms turn out to be poisonous or eventually. Then the world's economic problem will be solved for good.

So, Frank proves too much, namely, that economics as it has been developed by its ablest practitioners is mostly false. But we see that this claim is empirically and self-evidently false, and if it were true, then there would be no need for economics at all.

Finally, let me suggest that the idea that the world's tax systems have been set up (as if themselves by an invisible hand, in an unplanned manner but still promoting economic efficiency) to get the top achievers pay a price for their high rank is not only false but a bit naïve.

In Defense of Unequal Taxation

I have always thought that unequal taxation was robbery; progressive taxation was aggravated robbery; and head taxation was simply uneconomic.

Frank presents an argument that inverts this understanding for public goods.

Consider a public good P generally thought desirable and intended to be supplied by the government. "People's willingness to pay for public goods generally increase with their income. The wealthy tend to assign greater value to public goods than the poor do, not because the wealthy have different tastes, but because they have more money." (123) Unfortunately, this particular way of putting the issue seems to evoke a hearty WTF. Why bother being rich, if you have to pay more for all your goods? What's the point of having income that's twice as high, if all prices double, as well?

Let me rephrase. Just as in the case of many private goods, P may be a certain luxury. If it costs $700, then rich people may buy it, and poor people would not. They prefer to spend their money on something less extravagant. If all the richer folks in the community pitch in by each giving $700, the good will be produced. But because of its public nature (e.g., clean air), it's non-excludable. The poorer people, too, will enjoy it yet pay nothing for it.

Why should the rich tolerate this state of affairs? Far cleverer of them to conspire to levy a head tax on everyone, such that the cost to each individual falls to, say, $400. But the poor would naturally resist this, insofar as even $400 is too much. This tax proposal will fail to be approved by the voters. Very well, say the rich, let's institute instead of a head tax, a flat tax or, they even concede, a progressive tax. This way, the rich pay $600, and the poor pay $200. P is worth these prices to everyone. And the rich are stuck with a smaller bill.

Seen this way, progressive taxation is a means by which the rich ensure that the poor also pay their fair share.

Note that the argument applies to public goods, producing which privately has been deemed impractical, and the acceptable prices for which to each citizen have been assessed reasonably correctly. Unequal taxation remains robbery, if the aim is for the poorer majority to obtain private goods for themselves at the expense of the richer fellows which unfortunately is how it works most of the time.

No Natural Rights?

Frank wields two arguments against one's natural right to justly acquired property.

First, "the high incomes of people in modern industrial democracies are not a consequence of their efforts alone. They're in large measure the result of vast current and past public investment in infrastructure, education, and institutions for defining and enforcing property rights."

In short, you're driving on government roads and were educated in government schools. It is hypocritical of you to claim that the money you earn is your own.

Two responses. First, a reductio. Mises point out:

As soon as the economic freedom which the market economy grants to its members is removed, all political liberties and bills of rights become humbug.

Habeas corpus and trial by jury are a sham if, under the pretext of economic expediency, the authority has full power to relegate every citizen it dislikes to the arctic or to a desert and to assign him "hard labor" for life.

Freedom of the press is a mere blind if the authority controls all printing offices and paper plants.

And so are all the other rights of men.

Thus, a dissident living in the Soviet Union could be told by a member of the Politburo: "We could starve you to death simply by refusing to sell you food, all of which is government-owned. How dare you then pine for freedom? Instead, you should love the Big Brother as the source of your very life." I hope Frank would not endorse a line of reasoning like this.

Second, the essence of hypocrisy is not practicing what one preaches. Suppose I were a beneficiary of government roads and schools. I am a bad person; I'm ashamed of myself (though not much, because what choice did I have?). That does not mean that my libertarian preaching that there ought not to be any government roads and schools is wrong.

Frank's second argument is that "this is my money" is not merely wrong but meaningless. What is "my" money is defined by the legal system in all its considerable complexity.

Notice, however, what this entails. It is the government that writes laws. Therefore, "your money" is simply what the government chooses to leave in your hands. All money and therefore, all the resources this money can buy belong to the state, which then decides on its own whether to give anything to you and if so, then how much.

The only reason we are under the illusion that we own anything independent of the will of the Congress or Obama is that we are instinctively beholden to the (fallacious) idea of natural rights. When exposed for the sham that they are, the result is... total state, socialism.

Needless to say, that is a controversial idea, and I don't think it is wise for Frank to build his case against libertarian political philosophy on it.

Making the Best of Theft

Frank argues that in a democracy, the poor will inevitably want to plunder the rich. Lamentable as that may be, we can minimize the harm by giving the "redistribution" the form of pure income transfers. But because conservatives and libertarians are opposed to such transfers on principle, the poor end up looting the rich in much less efficient ways.

Thus, a tax on gas coupled with a payroll tax reduction is superior to price controls. (Well, you know, anything is superior to price controls.)

Giving the poor people money directly via the Earned Income Tax Credit, i.e., redistributing income via the tax system, is more efficient than rent controls.

Again, we'd be better off transferring income to struggling farmers than enforcing "price supports for agricultural products." And so on.

I have two responses to this.

First, the more efficient the non-rich are at robbing the rich, i.e., the smoother and less painful the redistribution is, the more will be stolen, i.e., the more money the non-rich will "transfer" to themselves. In the end, the damage to society from the plunder will be the same whether the government uses efficient or costly ways of stealing.

Caligula famously wished that whole Roman people had only one head, that he might cut it off at a single stroke. That undoubtedly would have been efficient but probably a bad thing.

Second, theft is indeed inevitable in a democracy somewhat by definition, as opposed to in a commonwealth, if we use this Aristotelian distinction. To quote from my book,

Aristotle considered democracy to be a corruption of "commonwealth" which is presumably a society imbued with brotherly feelings and eschewing parasitism and exploitation of minorities by majorities as a way of governing. (1241b30) Otherwise, without goodwill, democracy is, indeed, two wolves and a sheep deciding what to have for dinner.

The democratic status quo is not sacred, and perhaps instead of giving up, we should strive to impart into the masses with some moral and economic sense.

Coase and Interracial Handholding

It used to be in the South of America that a lot of whites took offense at seeing interracial couples together, especially holding hands. This was a kind of conflict that could be resolved via Coase-style negotiations. Frank puts some meat on the argument:

If the city's 100 interracial couples were each willing to pay $100 a week for the right to hold hands in public, then the combined benefit to them of being able to do so would total $10,000 per week, and if a million of the city's whites would be willing to pay $1 a week to avoid the sight of interracial handholding, the weekly cost of granting that right would be $1,000,000.

If it were possible for the two groups to negotiate, each of the million whites could chip in, say, $0.10 a week, for a total of $100,000 which would finance a payment of $1,000 a week to each interracial couple that was prevented from holding hands. (95-6)

And everybody would be better off after the settlement than before.

Now the Coase's insights have been discussed very extensively, e.g., his paper "The Problem of Social Cost" "quickly became and remains the most widely cited economics paper ever published." So, let me just offer a few quick criticisms. If negotiation is possible, then it "does not matter" in terms of the solution negotiated how the judge resolves the dispute. If it is not possible, then the judge's decision should mimic the way the negotiation would proceed if it could. But of course, that's a counterfactual and those are notoriously difficult to evaluate. Judges would seem powerless in both cases, yet the whole law and economics movement is intent on converting judges to its arbitration methodology.

Another problem is that judicial precedents would offer no guidelines to future judges and therefore to the disputants how property rights are to be delineated. Everything depends on the particulars of the case, such as the exact dollar amounts attached to each course of action. But presumably, it would be helpful if people could know their rights beforehand rather than having them depend on the cost-benefit analysis unique to each situation.

Another difficulty is that the utility of money can differ for the parties to the dispute. A judge might rule in favor of Smith, because it would cost Jones $5K to muffle the noise from his factory, but it would cost Smith $10K to move away from the factory (to escape the noise). However, perhaps Jones values the lesser amount more than Smith values the greater amount. In such a case, the judge's Coase-inspired decision would be a mistake.

But these are by the way. Franks is uneasy with the result that outlawing interracial handholding seems to be recommended by Coasean reasoning. His way out is to claim that it was "completely predictable" that the whites would eventually get used to interracial couples and suffer less from seeing them hold hands.

Of course, that's a very bad solution. A judge cannot wait until people become "better"; he has to decide now. In 20 years, it may well be that a new lawsuit will be brought, and the judge may then decide differently, overturning his previous ruling, but for now he must take into account the present valuations of the disputants.

Even if it is predictable how the personalities of whites would evolve, it need not be that they would evolve the in the direction Frank prefers. If Southerners could be expected to grow still more intolerant, then Frank could no longer appeal to this argument.

What Frank probably wants to say is that racism is morally wrong. It's not nice for people to suffer from expressions of love between people of different races. Well, that's a pretty deep ethical judgment. It's out of line for Frank to advise people on matters of such intimacy.

Fear not, however; there is a way to put our intuitions into precise terms. First, let us not weaken the Coasean prescription. Cost-benefit analysis does output prohibiting handholding. But there are other considerations that incline us to the opposite conclusion. If we want to be more poetic, we can say with Mises that:

The propensity of our contemporaries to demand authoritarian prohibition as soon as something does not please them, and their readiness to submit to such prohibitions even when what is prohibited is quite agreeable to them shows how deeply ingrained the spirit of servility still remains within them. It will require many long years of self-education until the subject can turn himself into the citizen. A free man must be able to endure it when his fellow men act and live otherwise than he considers proper. He must free himself from the habit, just as soon as something does not please him, of calling for the police.

In short, people ought to teach themselves not to be concerned with other folks' choices of lovers and spouses. This is a moral change, too, but more limited than one demanded by Frank. Mises would only argue that people ought to allow interracial couples to hold hands in public, but he does not command them to like it. They should respect others' rights even if they think (correctly or not) that what those people are doing is disgusting or bad or sinful.

If we want to be more precise, we can argue with Rothbard that each person owns his body including his hands, and if he wants to hold hands with another person who also owns her hands, then he has a natural right to do just that. Moreover, not being offended is not a piece of property one can own. It's not land, consumer good, capital good, or even intellectual property. There can be no property right in the mental state of non-offendedness. Hence, the government cannot be called on to protect this right.

A Consumption Tax?

Frank goes on to argue that for many luxury goods, the rich people who buy them do so only in order not to be left behind in the competition. Thus, Bill Gates' house is 66K square feet; while one of Larry Ellison's properties is, say, 40K square feet. This is just a monstrous arms race which makes no one happier despite both men's spending many millions of dollars on these goods. It's almost scandalous that such a thing occurs.

That consumption at high amounts should be taxed becomes a value-free argument and enables Frank to avoid sounding moralistic. If the maximum house size were limited to 10K square feet, then Gates and Ellison could both have what they wanted absolutely but in addition would agree to a cease-fire relatively. If the difference between the cost of a 66K ft2 and 10K ft2 house were taxed away, then (1) no happiness of either Gates or Ellison would be lost; (2) on the contrary, they might come to enjoy some inner peace; and (3) desperately needed public funds would be generated. It's allegedly a win-win for everyone.

I have four responses to this.

First, no one is determined to treat any good as positional. For example, Warren Buffett, unlike Gates and Ellison (this trio are the three richest men in the world), lives very modestly. His house is worth less than a million. Perhaps, psychological counseling could curb other more ambitious billionaires' enthusiasm to participate in arms races.

Second, perhaps the race itself is a pleasure. Why do people climb mountains? Not to get to the top; that they could do by flying there in a helicopter. No, they do it for the journey; it's a rush, a thrill, an adventure for them. The arms race quickens the heart, makes one come alive, strengthens the will to live and fight. Adam Smith points out,

It is in the progressive state, while society is advancing to the further acquisition, rather than when it has acquired its full complement of riches, that the condition of the laboring poor, of the great body of people, seems to be happiest and the most comfortable.

It is hard in the stationary, and miserable in the declining state.

The progressive state is really the cheerful and hearty state of all the different orders of society. The stationary is dull; the declining melancholy.

The "inner peace" that the government tries to impose on you may feel dull, indeed.

Improving, even if it is motivated and spurred on by the presence and actions of other people, is an end in itself and can give meaning to life. And that is no insignificant effect.

Third, not all luxuries are positional. Coffee has been called "the world's most affordable luxury," and it is 100% nonpositional. In having my morning cup, I am not thinking about how or whether other people consume it at all. Which brings us to the most important argument.

Fourth, today's luxuries are tomorrow's necessities. This adage and the process by which it is fulfilled should be familiar to any economist. If the rich cannot conduct their experiments in living, then the eventual mass production of former luxuries (now of higher quality and lower price) will never come to pass. This is regardless of whether the luxuries are positional or not. But, and here is the crucial point: even if they are positional as luxuries, they will be nonpositional as necessities. When the vast majority of people can afford big yachts, yachts will no longer be status symbols but simply objects of pleasure.

Thus, the positional aspect of luxuries is a mere temporary stage, perhaps imperfect but also indispensable, in the everlasting economic progress and genuine improvement in human welfare.

And with this, Frank's thesis falls apart.

Positional vs. Nonpositional Goods

Frank draws a distinction between a positional good for which the buyer's rank relative to other people matters to him and a nonpositional good where the significance of absolute position predominates.

He presents a thought experiment, asking the reader to choose between living in

world A, where "you live in a neighborhood with 6,000-square-foot houses, others in neighborhoods with 8,000-square-foot houses,"


world B, where "you live in a neighborhood with 4,000-square-foot houses, others in neighborhoods with 5,000-square-foot houses."

According to his experience, most people would choose B, apparently defying economic logic.

Here is one way to interpret this scenario. A person living in A would prefer to convert it to B. This means that he'd be willing to hurt himself, so long as his neighbors hurt even more.

There are two reasons for such a horror. First, the economic reason of access to better schools. I have nothing to add to the analysis I've already offered: the remedy is privatize, privatize, privatize.

Second, the moral reason of envy. A version of envy might be Ok in certain situations, such as a boxing match. Smith would agree to be punched once, if that meant that he would punch his opponent Jones twice. But: (1) Boxing is simply entertainment, a spectator sport embedded within the market economy. It is as far from government interference with private lives as you can get. (2) Life is not, generally speaking, a race. Envy is not for nothing called a mortal sin. The remedy for immorality is striving to become a better person, in particular to learn to rejoice at the happiness of others, something that the imposition of Frankian taxes will certainly not bring about.

Frank's example of a non-positional good is the probability of dying on the job. People seem to prefer to lower that probability even if the "price" of this is that their neighbors lower it still more.

May I suggest that even on Frank's own terms, the nonpositional goods comprise the vast majority of all goods? Here, I see a UPS truck outside. Would you prefer to get your deliveries (a) in 2 days if others got them in 1 day or (b) in 4 days if others got them in 8? I'd pick (a) right away. (To be sure, (a) seems to entail that I am some sort of unique loser, which will hurt my self-esteem, but come on, this is just a didactic thought experiment.)

Could the choice of world B in the first scenario be a "cognitive error," an irrationality that would be dispelled with a clearer head and more righteous heart?

Starve Which Beast?

Frank makes a definitive value judgment: "when the pressure to trim budgets starts turning asphalt roads into gravel ones, that's a credible signal that cuts have gone too far."

He calculates that "potholes and other road-surface irregularities cause an average of more than $100 in damage each year to every car and truck on the road, not to mention many needless deaths and serious injuries. When road maintenance is postponed by even two or three years, the cost of repairs more than doubles." An investment into roads yields "a rate of return of more than 18% a year."

The reason why so much cash is left on the table is the anti-tax ideology that has paralyzed governments.

Now 18% seems very high, but there are two issues here that Frank neglects to point out.

First, economists suggest ways to economize. If Smith judges the sacrifice of his private enjoyments that he would be required to make to pay the tax to be too great relative to the benefits, then he will be harmed from the tax hike. It's not economic for him to be subject to the tax.

Second, in the free market people choose their consumption bundles freely, voluntarily. On the other hand, if I and Frank unite to outvote Smith 2:1 to increase the tax to fund the highways, then Smith is forced to pay up. It's not worth it to him, and he would not agree to surrender the cash if he were not afraid of the IRS. He is robbed, placed under duress, coerced.

The difference between tax-supported and free market projects is that the latter discriminate between those to whom the project is worth the money and those to whom it is not, and these latter will spend their money on something else. Taxing people does not discriminate: the authorities demand payment from both the happy and unhappy customers alike.

Frank quotes a voter, Bob, who rejected a road tax proposal in his county as follows: "I'd rather my kids drive on a gravel road than stick them with a big tax bill." I think Frank wants to dismiss Bob's preferences as vicious, as morally perverse, as we dismiss the preferences of murderers and, as Frank himself points out, of sadists. Frank is free to do so, of course, but there is a price for it: he ceases to be an economist and becomes a philosopher, and that is not his area of expertise. At any rate, I know of no philosopher who has defended the idea of the alleged transcendent value of good highways.

Frank can again point out that taxation is a convenient revenue generating mechanism. But there are all sorts of convenient things we can do yet refrain from doing, because doing them would be wrong. It may be convenient for me to kill my aunt for inheritance money, but I do not do this. It is convenient for me to rack up a huge debt and then disappear. I don't do that either. Frank can reply, "What else are we supposed to do?" This plea suggests that he has run out of solutions. Perhaps, if taxation were more disreputable, intelligent people would have a greater motivation to succeed where Frank has failed.

As a last resort, Frank can invoke the principle "America (or California), love it or leave it." If I don't like paying taxes to the US government, why don't I go back to Russia? I don't see why he should insist on beating me on the head with this ultimatum. The costs of leaving the US for me would be considerable. I can't help it if most other countries are even worse than the US. In fact, this argument has force only on the local, such as city, level. It is reasonable to say, "If you don't like the way Akron is run, then move to Canton." Or, "If you don't like this condominium, then sell your property and relocate elsewhere." It is not reasonable to give me a faux choice to leave the country as a whole.

Frank's argument is that the money for the government can come from taxing socially wasteful activities. He believes that private waste far exceeds public waste. Therefore, Smith does not, in fact, have to be coerced into paying for highways; all we need are "relatively simple, unintrusive changes in [government] incentives." I'm eager to see what he proposes.

An “Arms Race”: Schools, 2

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.

Why There Are Few Labor-Managed Firms

Frank's demolition of spurious ideas of why cooperatives and other labor-managed businesses are not prevalent and in fact comprise only a trivial portion of all firms (31-35) is beautiful and superb, precisely what I would expect from any decent economist. Ideological fanatics who fancied themselves economists expected them to prosper and blamed various features of capitalism for their failing to do so. Frank systematically dismantles a slew of such arguments. This example of economic logic is certainly worth attending to.

An “Arms Race”: Schools

On pp. 25-6 Frank mentions the schools race once again. He must be serious. "Parents who want to send their children to good schools must outbid other parents for houses in good school districts. Their ability to do so depends almost entirely on relative income. Here, too, we see the logic of musical chairs: no matter how much money people earn, only half of all children can attend schools in the top half."

First of all, this is not necessarily true on its own terms. If all schools were private, then there may be a very large and successful chain of schools, call it Walschool, such that 3/4 of all children would attend it and so be equal in the quality they receive.

Second, why limit this reasoning to schools? Only half of all people can get the top half most expensive tablet computers. Or pianos. Or safari adventures. So what?

Third, Frank is again playing a game with silly assumptions. The consumers' interest in the quality of the children's education would, under laissez-faire, cause competitive pressures on schools to improve. Improvement could take a vast variety of forms: novel teaching techniques, stricter certifications for teachers, ingenious incentives for students, adoption of new technologies, better safety and security, customized curricula, individual tutoring, and a hundred others that I lack the imagination to invent.

The situation with schools illustrates precisely the opposite of Frank's theory. Whatever the relative position of individual schools, consumer incentives cause each set of schools and the company that owns it to seek constantly to create a better and cheaper service. Society straightforwardly benefits from this competition.

Now Frank can argue that schools are government-run enterprises, tax-financed, and so do not improve. Well, some considerably weakened competition does exist, insofar as there are "good" and "bad" school districts, and voters in bad districts may demand changes. But he cannot attack libertarians for affirming individual freedom to travel or move to whatever location one prefers (limited only by his neighbors' private property rights), including for the sake of better public schools, on the grounds that the school system is statist. Let's abolish government schooling, and the wasteful "arms race" will go away.

Some libertarians, myself including, recommend free and unrestricted immigration. It may be a somewhat unrealistic ideal due to the welfare state and the billion Chinese half of which may want to move to the US right away causing severe political problems, but economically and morally, that's what we should aspire to. The world cannot be knitted together -- out of many (individuals), one (free market) -- as long as nation-states exist.

Finally, to finish off Frank's argument, even if there is an arms race for better schools, society does benefit when a worker acquires new skills and gets a raise or moves to a better job, because he becomes to that extent more productive. Again, if everyone does that, then no one benefits as a producer, but everyone benefits as consumers. An individual worker's quest for higher wages blesses, via his accumulation of human capital, those around him.

Rich Government, Poor Government

Frank notes:

Countries whose citizens have the most favorable opinions of their governments tend also to be ones with the best public goods and services, the lowest levels of perceived corruption, and the highest per-capita incomes.

In contrast, those with the weakest governments -- think Haiti, Somalia, or Sudan -- typically have poorly functioning markets, extremely low per-capita incomes, high levels of crime and violence, and citizens who regard their governments as ineffectual and corrupt.

Here is the sequence of events. In the beginning, the government of Waldavia is extremely limited according to the Constitution and public opinion. Free markets are unleashed which encourages rapid growth in the standard of living. Over decades and centuries of laissez-faire, a massive amount of wealth is created in Waldavia.

Then two developments take place, one OK, the other bad. First, certain luxury communal goods, provided almost always locally and often privately, such as nature preserves, very well-maintained cities roads, improvements in the quality of tap water, and suchlike, become "affordable." Commonly owned spaces approach in their beauty those kept privately.

Staggering growth in private wealth is what causes good "public goods and services" in Waldavia.

The other, bad development, is an ideological change toward statism. People forget their economics. There is moral as well as intellectual decay, such that "legal plunder" becomes the order of the day. This decline is facilitated precisely by a high level of economic development: the more wealth there is out there, the more there is for the government to steal.

It is true that the government, having at length grown huge and powerful, now provides numerous "services." But those services only drag the economy down. Despite this, economic progress still occurs. It is greatly slowed down, but the perception of the speed of improvement is hard to put into precise terms or compare inter-generationally. Moreover, where before incorruptibility of public officials was a boon, now the market wriggles through loopholes in the law: "But for the inefficiency of the law-givers and the laxity, carelessness, and corruption of many of the functionaries, the last vestiges of the market economy would have long since disappeared," says Mises.

Perverse money and banking regime causes panics and financial crises one after another. Decent neighborhoods are wiped out after becoming the HUD's "projects." Disabled people can't get jobs. Public education ruins the children's minds and in fact is explicitly designed to do just that, for the sake of "equality," and since everyone cannot be made equally sharp as tacks, it is much more feasible to make everyone equally dumb as doorknobs.

Now Haiti and Sudan are somewhat free from these ills, but only because the first step of extremely limited government lasting for centuries which allowed considerable capital accumulation never happened for them in the first place. Their people's ideology has always been bad; while Waldavia has not always labored under interventionism and taxism.

We now have Waldavia, a husk, a mere shadow of its former glory, but still greatly exceeding Third World countries in material wealth thanks to what Mises called its "reserve fund."

Finally, out pops Frank and announces that the Waldavian Third Way between capitalism and socialism is the best thing that can ever be. He fails to see the progress that could have but did not occur because of Waldavia's long and ugly experiment with big government.

Social Engineering

Frank faults libertarians for "denouncing [taxes on harmful activities] as 'social engineering' -- attempts to 'control our behavior, steer our choices, and change the way we live our lives.' Gasoline taxes aimed at discouraging dependence on foreign oil, for example, invariably elicit this accusation." An argument phrased like that elicits from Frank a ready response. "But it's a vacuous complaint, because virtually every law and regulation constitutes social engineering. Laws against homicide and theft? ... they're social engineering. So are noise ordinances, speed limits, even stop signs and traffic lights."

So then, there are two kinds of taxes. One kind is meant to raise revenue for the government; that people change their behavior in response to them causes such taxes to be non-market-neutral, produce deadweight loss, and is an undesirable side effect. The other kind is the exact opposite: it is meant to alter behavior; any revenues indicate only that the offending behavior has in some part persisted, and it is this that's an undesirable side effect. Some taxes then are meant to be paid; others, entirely avoided.

It is true that all laws can be construed very widely as social engineering. But notice the difference. A law ordering the government to punish theft (thereby deterring it) is a general rule. The government laws permeate society as a whole ordering the entire people. A law is a general incentive that, when enforced, allows the consumers within the free market thereby secured to present to the businessmen the particular incentives by their buying and abstention from buying which products to output, in what quantities, and at what prices.

But consider the following passage from my book:

For an example of vicious thinking regarding full employment, I direct your attention to H.R. 2847, "Hiring Incentives to Restore Employment (HIRE) Act" passed by the US Congress on March 18, 2010. Among other things, the bill establishes a payroll tax holiday for employers who hire "qualifying workers" -- individuals who have not worked more than 40 hours during the last 60 days. It is a bill like any other in the sense that the government considers the people to be trained monkeys who dance to the regulators' both clumsy and highly intricate behavior modification tune of financial incentives and disincentives. It legislates a tax cut, in that the employers are freed from the necessity to pay their portion of Social Security for a period of time for those people they hire who have not worked for a while. ... (I, 7)

You can read the reasoning following this passage in the book. The point is, as soon as the government starts building regulatory mazes for entrepreneurs to navigate, it redirects production away from the course that is most agreeable to the consumers. It substitutes government sovereignty for consumer sovereignty. In general, such conduct is uneconomic, deviating from the market's tendency to create the greatest good for the greatest number.

It is still open to Frank to argue that regulations negate some subtle harms to third parties, negative externalities. This is fine, although I think the amount of attention that economists pay to these "market failures" is grossly out of whack with their real-world significance. Again, Frank can say that training monkeys to dance creates some group goods. But he cannot deny that consumers privately suffer.

It is true that noise ordinances can be used to control externalities, but they do so locally. In stark contrast, in proposing his remedies, Frank imagines himself king of the world.

Speed limits, etc. exist, because the government owns the roads. What is its property, it needs to manage. The people have no direct say in how the government manages the roads. Even if highways are privatized, rules for their use would exist and might even be stricter than the present government ones. So, this is no counter-argument.

Presumably, however, the government does not own businesses. Manipulating and micromanaging them seems like slouching toward socialism of the "German pattern," as Mises puts it, whereby property is nominally private, but actual control of it belongs to the state. In such a situation, business owners are mere agents of the state. I suppose the difference is that American regulations mostly say, "If you do this, you will be punished," while the German planners said, "If you don't do this, you will be punished." This is a trenchant objection, even if I do say so myself. But as the amounts of regulations pile up, and they do, the distinctions between the two systems become increasingly less vivid.

I hope Frank is not in favor of that.

Unsafe at Any School?

Frank proceeds to make a strange argument:

.. the invisible hand might not automatically lead to the best possible levels of safety in the workplace. ... riskier jobs tend to pay more, for two reasons. Because of the money employers save by not installing additional safety equipment, they can pay more; and because workers like safety, they will choose safer jobs unless riskier jobs do, in fact, pay more.

Most parents... want to send their children to the best possible schools. Some workers might thus decide to accept a riskier job at a higher wage because that would enable them to meet the monthly payments on a house in a better school district. But other workers are in the same boat, and school quality is an inherently relative concept. So if other workers also traded safety for higher wages, the ultimate outcome would be merely to bid up the prices of houses in better school districts. Everyone would end up with less safety, yet no one would achieve the goal that made that trade seem acceptable in the first place.

1. School quality is said to be relative, because (I speculate) schools prepare students to compete for jobs in the marketplace and so affect only the relative positions of the workers. But of course, that's not true. If all workers became better trained or smarter by the same "amount," then the same people might end up winners and losers, but society as a whole, i.e., the consumers, would benefit from their higher efficiency, ingenuity, creativity, etc. I thought the whole point of Frank's book was to highlight the distinction and occasional divergence between individual and social benefits!

In other words, each child benefits from better education; the children as a group in their capacity as producers and wage earners, indeed, might not benefit from the "arms race"; but the same children in their capacity as consumers do benefit. Frank has simply not looked far enough.

Moreover, what about higher education that trains scientists and scholars? They cooperate more than they compete. Surely, we'd all benefit from better economists!

2. It should go without saying that in the long run, that is, closer to equilibrium, employers would be "indifferent" between installing safety equipment and paying more to workers. There is a standard yin-yang push and pull here: the more entrepreneurs "save" by not investing in safety, the cheaper it is for others to do the opposite: install safety equipment and reap the benefits of cheaper workers; and vice versa.

As a result, both kinds of firms would exist, thereby providing people with employment choices, precisely the wonderful thing at which the market excels. Novel lines of production would sometimes call for more worker safety; other times, for less; consequently, efficiency is promoted still further by these options.

3. From the point of view of the workers, some would specialize in higher-risk jobs, for example, construction of tall buildings, such as by staying physically very fit and agile; and others would instead agree to be paid less but not worry about safety and focus more on the job instead (as opposed to on avoiding falling). Again, the market fosters choice, only this time for business firms through specialization of workers. The consumers, most of whom are the workers themselves, are the beneficiaries.

Update. Since I'm writing this as I am reading the book, Frank makes an extended argument of exactly this sort on pp. 35-9. His aim is to dehomogenize the arguments for market failure, i.e., refute those he thinks are unpersuasive and present his own.

4. The bidding up on the houses argument is bizarre. A lot of people also want to eat better food, drive more comfortable cars, and own faster computers. If the wages of such people increase, then the prices of these goods may increase, temporarily. So what?

Under sound money, for example, if risk-preferring workers are paid more, then the manufacturers of safety equipment and their factors including workers will be paid less. Demand for consumer goods will shift around due to the reshuffling of net worth of workers with different preferences, but overall, no predictable effect will occur, including anything so definite as "bidding up the prices of houses in better school districts."

5. Finally, there's the idea of "best possible" "levels of safety in the workplace." Best possible according to who? The market is not a simple game whose parameters an economist controls. It's an enormously complex massively parallel process of innovation and imitation. What is "best" is determined by the outcome of market forces; no economist can substitute his own notions of the good for those of the market actors. For goodness' sake, have some humility, Frank. You are not a socialist central planner; you barely survived a tennis game, and you think you are competent to pronounce what is "best possible" in a global market, the forces affecting which are without number? Get real.

Taking into Consideration Sunk Costs

Frank offers the following scenario:

Suppose you're about to depart for a sporting event or concert at an arena 50 miles away when an unexpected heavy snowstorm begins. If your ticket is nonrefundable, your decision whether or not to drive to the event should not be influenced by the amount you paid for it.

Yet a fan who paid $100 for his ticket is significantly more likely to make the dangerous drive than an equally avid fan who happened to receive his ticket for free.

The first fan is probably guilty of a cognitive error.

Now Frank defines behavioral economics as an "intersection of economics and psychology." Well, let us psychologize a bit. Why would one be tempted to drive? I suggest that if he failed to drive, then he'd have to issue a judgment of himself as a loser. He is a dupe, a sucker, a sap who was so imprudent that he failed to do something so simple as to check the weather forecast. The worst part is not that he lost $100 but that he was stupid enough to do this. The self-condemnation is what stings.

Furthermore, driving in a snowstorm entails only a heightened probability of an accident. A risk preferrer may have the temperament of an impulsive and confident Artisan and decide to go anyway. The assumption of temperamental equality has to be made in addition to the assumption of equal enjoyment of the event.

I agree, however, that considering the sunk cost is an error. To continue with our psychology, a person who decided to drive may after a few minutes be thinking to himself: "I can't see a thing! The road is awful. If I get there alive, it'll be a miracle. I'm so dumb, I should've stayed home; forget this stupid ticket." It is true that he may regret the decision.