Monday, October 24, 2011

Economics and Darwin

Robert Frank (Econ prof at Cornell) has an interesting opinion piece in a recent LA Times. There are several parallels with this line of reasoning and the article I linked to in the last post. I'm not a fan of the political turn that Frank takes in the last two sentences. As you know, I think that our job as economists is to be as apolitical as possible, but I wanted you to read this.

Frank's article is based on his recent book "The Darwin Economy". John Whitfield of Slate reviews the book and provides another perspective (part critique, part agreement) on the issue.


Marcus Partlow said...

I guess I'm a little confused with the Darwinian example of the bull elk, if they all have 4 foot antlers wouldn't they be very capable of repelling predators? Also, I am trying to think of any real world market examples similar to the bull elk example but am having some trouble...can anyone think of something that at first benefits the individual but then ultimately hurts the entire market?

Ryan McKnight said...

It is certainly an interesting concept. As Marcus hinted at, though, there weren't many MKT based examples in the article. I'm hoping to go to R. Frank's talk here at LSE in November. I'll try to post again if he provides any specific examples.

As far as the last few statements go -- at least he is making his normative assumptions and biases explicit.

** side note: Although this is not really a problem with the article's argument, I was under the impression that the economist Bernard Mandeville discussed the notion of the "invisible hand" 70yrs prior to Smith in his poem, "The Fable of the Bees." (the poem also talks about division of labour, paradox of thrift, etc.)

Dr. Peter Schuhmann said...

Hey Ryan. Hope you're doing well. Please do give us an update after his talk. I think any tragedy of the commons example (e.g. over-fishing) would be a market situation where the individual gains but society is worse off.

Ryan McKnight said...

Here's my quick overview of the lecture. It was quite interesting and controversial (at least for Americans). However, many of the Brits didn't understand how the arguments were all that applicable to the UK. They thought Frank's argument about "being more progressive" and "fighting the ghost of Ayn Rand" was something needed on "the other side of the Atlantic". After all, the tax system in the UK is already quite a bit more progressive than in America.

1) In the words of the program questioner, Frank is "trying to get the Americans to accept taxation and regulation on its own terms"
2) Frank is refuting libertarianism while accepting the basic principles of Smith and Ayn Rand
3) Frank is challenging "the right" on their own terms (as opposed to a "leftist" argument)

Frank starts with the assumptions that people are generally rational and MKTs are competitive. At the same time, he acknowledges that these assumptions are not strictly true, giving a nod to behavioral economists.

Starting from these premises, Frank argues that "rank matters". That is, we [society] are competing over relative rather than absolute gains.

Example: Merchants battle with bigger and bigger signs for their products. Absolute size does not matter to the merchants. The sign just has to be larger than the competitors. This cycle continues until the government imposes zoning laws constraining the activity.

Frank argues this cycle can be found in the housing MKT, the education sector (think tuition increases), and even in regard to the ever increasing prices of weddings. Unlike in the case of the merchant, however, there are few if any regulations in place that stop these other consumption cycles from driving prices up and up and up (while wages increase at a much slower rate).

Frank's solution to these problems is to scrap the income tax all together and adopt a steeply progressive tax on expenditures (tax what people spend out of their salaries). The rich would scale back consumption. New smaller additions to our mansions would serve us just as well as large ones. Relative size matters more than absolute. Beyond some point, it’s relative size that matters.

Another interesting point made by Frank...
Many business people today sound like the Social Darwinists of the 19th century: anything that survives and thrives in the MKT place should be praise. However, Darwin wasn’t a Social Darwinist. He acknowledged that competition leads animals to do very brutal things. Darwin also noted the conflict between individual and group – in some cases, there is a bigger cost to the group when individuals pursue their own self-interest.