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.
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Jack, My last comment sounded more negative than I intended, for which I apologise. I agree with you that a severely unequal society is undesirable in itself, all other things being equal.
Also, I hate to return to quibbling but it is stretching ordinary language to refer to “capitalist medieval England”. Whilst you can make a case that some features of what we now regard as a capitalist economy were present by the late middle ages, there had been hereditary aristocracies throughout Europe since at least the end of the Roman Empire. Whatever it was that gave medieval aristocracies their impetus, it wasn’t capitalism.
Two responses to that.
The first is that the first sentence in your comment is simply wrong. Even people whose desire for fast cars, jewellery, etc. is motivated only or primarily by sex (I’d be prepared to grant for the sake of argument that this is most people, but I’m not sure that’s correct) don’t think in any simple way that these things will get them more sex. If anything, you could say they are motivated by the belief that these things will get them sex with more attractive partners – which leads you back into subjectivity: who is a more attractive partner? What do you find attractive? Is it just the partner? Would you be happy if the partner were attractive to you but not recognised as attractive by anybody else? In fact, is the fact that the partner is attractive to others part of what makes them attractive to you? (So is status about sex or is sex about status?)
Second, your conclusion goes back to the sort of language you used in the original post. “The outcome we desire”? There isn’t such a thing as “the outcome we desire” – we desire all sorts of things in this context, some of them identifiable as possible “outcomes” (and quite possibly mutually inconsistent – e.g. rich people pay more tax than poor people, capital gets invested), but many of them just features of the process that leads to the “outcome”. This leads back to the elks: a world where all male elks had small, identically sized antlers just isn’t better than the world we actually live in. And I don’t want to live in a world governed by bureaucrats who can’t see that – let alone somebody who thinks that something as weird and wonderful as elk with large antlers is a “dysfunctional outcome”.
Laurence, I agree with you on two counts. First, a world where all elks had smaller, bureaucratically-limited-size-antlers, is not a world I want either. That is what flows from Frank’s argument, not mine. Where I would draw the line is that (1) a world where the elks with larger antlers are free to bully everyone as they pleased (no citizenship rights and legal protections) is not what I expect from a civilized, human society; and (2) a world where the top 1% of elks have antlers so much, much more powerful than anyone else, and they can pass those advantages to their offspring, is not a world that I want either. That, in fact, was the medieval world of hereditary aristocrats and serfs; and that is what we hope to have left behind by creating a democratic republic. That doesn’t mean we expect equal outcomes, but it does mean we try to limit the impact of diverse outcomes on economic and political power so as to avoid creating an effective hereditary aristocracy of great power and wealth that leaves everyone else unable to hold government accountable, or unable to enforce equal treatment under the law. (That is rather like Russia today, too). So my argument is the difference between capitalist Russia or capitalist medieval England and capitalist America today is that the latter was founded on institutions designed to limit government but also to preserve individual rights and equality under the law, and that the latter goal is endangered when market power gets as concentrated as it is becoming today.
You may disagree of course, and some people feel the achievements of those who succeed in creating wealth are so important that rewarding those people outweighs all else. But then we have to agree to disagree.
“All males would be better if they all agreed to forgo huge antlers, and just competed with a smaller, standard set.”
Is this true? My understanding (though I’m no zoologist) is that most animals use their antlers/horns as signals: if male A has better antlers or horns than male B, male B gives in and nobody gets hurt. It’s only if they are equal that they have to fight – often with disastrous consequences. For that matter, what if lady elk just like gentlemen elk with big, handsome antlers?
I’m not being wholly facetious. People want different things for different reasons, or even for no reason. There’s no such thing as an “ideal social outcome”. This doesn’t lead to Ayn Rand-ism of the kind described, but it does lead to skepticism about any attempt to legislate on the basis of a view as to what constitutes “real value”.
Of course, our consumer economy is built on the idea that if you drive the right fancy car, give a woman the right jewelry (expensive), wear the right cologne and the right clothes (designer, for men and women), live in an expensive home, etc., you will have more sex. That IS Darwin and probably built-in. But in some cases (Frank would say many cases) that competition through acquisition of objects leads to spending that is socially wasteful and serves no good purpose. That doesn’t mean government should decide what is real value or legislate outcomes; it just means that we have to consider whether this competition has the result of driving more and more income and wealth to fewer and fewer people, and ask ourselves if that is the outcome we desire.
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