Robert Frank, the brilliant Cornell economist who has done so much to clarify the winner-take-all nature of our economy, has a new book out, The Darwin Economy, in which he seeks to use Darwinian theory to understand why things have gone so wrong in our economy.
Frank’s main point is that Darwin was right, and Smith was wrong, in their judgements of how pursuit of individual interest affects society as a whole. For Smith — at least in the now common received view, with as much Ayn Rand as Smith — pursuit of individual interest is all good. It not only leads individuals to do their best, but the joint product of competition among individuals seeking their interest is that the “invisible hand” produces maximally efficient outcomes and so rising prosperity. Market failures can exist, of course, but to Smithians they are the exception, not the rule. Indeed, many Smithians would argue that the preponderance of ‘good outcomes’ from markets is so much greater than the costs of market failures that it is better to keep government out of markets altogether than risk government interference aiming to correct ‘market failures’ from growing to the point that the benefits of markets are lost.
However, Frank asserts, competition more often follows a Darwinian logic in which the success of more competitively gifted individuals leads either to undeserved misery for the losers, or in many cases to dysfunctional outcomes that damage society as whole.
Frank gives the example of elk antlers as a dysfunctional outcome. Elks compete for females using their antlers, so competition leads to elks having bigger and bigger antlers. But those antlers are, for every male, a weighty and metabolically expensive investment. All males would be better if they all agreed to forgo huge antlers, and just competed with a smaller, standard set.
Of course, elk can’t reach such agreements — but people can. So it would be wiser if we recognized that in many areas of economic life, competition, if unchecked, leads to dangerous and costly excess. Having 100 room mansions and $500,000 cars has no function in terms of utility that can’t be met at far less cost — but competition leads people to seek and acquire these goods to show they have ‘succeeded’ better than anyone else. These goods are like huge ‘elk antlers’ that we carry around to show we can compete, but that are in fact wasteful uses of resources from the standpoint of society as a whole.
Morever, Darwinian competitive urges lead people to seek to over-leverage, over-acquire, and take risks to ‘win,’ when as we saw in the 2008 crash, everyone would have been better off if leverage had been limited and ‘winning’ was confined to better regulated channels.
I think Frank has a point — unbounded individual competition often produces outcomes that are NOT good for society as a whole. But Smith’s genius was not to applaud greed (Smith was a moral philosopher who cared deeply about people’s ability to be sympathetic and altruistic), or even to argue that unbounded competition is good. That is the ”Ayn Rand” extrapolation of Smith. Rather, Smith’s goal was to show how the right institutions can channel greed into behavior that leads to positive outcomes.
Read in that way, Smith’s inspiration to economics should be to find institutions that shape markets to create positive outcomes, NOT to rely on markets to achieve those outcomes on their own (indeed Smith was rather more worried about monopolies and the rich conspiring to shield their wealth from market discipline than most modern economists).
Frank’s book is valuable in pointing out how often we need regulation, law, and other institutions to lead markets to work in the way Smith saw was possible, to reward work that is socially beneficial. Government may not have to provide for us directly, but government has to ensure that markets are not captured by those who are supposed to be disciplined by market competition, and that information and justice are fairly and evenly dispensed.
Darwin — who while he had much to say about competition had nothing to say about institutions — is thus not as useful a guide to the economy as Smith. However, neither Darwin nor Smith is helpful if we fail to get their message right. Economists who deify either Darwinian competition or Smithian markets are missing the message; the genius of human beings is that we CAN regulate our behavior by means of institutions, and that has been the secret of our success. Of course, instititutions DO act to limit what some individuals can attain at the expense of others and of society as a whole, so there will always be those pushing back to limit and undermine those institutions.
That is exactly what we are seeing today, of course, with the insistence on ‘no new taxes’ and ‘no new regulation.’ But listening to those voices is wrong, and not just for the reason that Frank gives, that unbounded competition leads to inefficient outcomes. Smith would have found those voices disturbing too, for the reason that they represent a conspiracy of the rich to preserve their wealth from real competition (tax capital gains, which overwhelmingly accrue to the rich, at 15% and tax earned income at 25-35%, and how do you expect wage-earners to compete with the rich in accumulating wealth?).
I welcome Frank’s work in pointing out the flaws of a blind faith in markets to produce ideal social outcomes. They don’t. But the response is not to turn away from Smith, but to heed his message to build institutions that ensure market competition is effective in rewarding those activities that create real value rather than just those activities that concentrate wealth.