Under Construction

In an essay in the Sept. 17, 2011 NY Times, Darwin, the Market Whiz, based on his book, "The Darwin Economy: Liberty, Competition, and the Common Good", Robert H Frank an economics professor at the Johnson Graduate School of Management at Cornell University claims that Darwins theories describe economic reality better than Adam Smiths.

He writes,
"Smith is renowned for his 'invisible hand' theory. According to his modern disciples, it holds that unbridled market forces harness self-interest to serve the common good. Darwin understood that individual and group interests sometimes coincide, as in Smith's framework. But Darwin also saw that interests at the two levels often conflict sharply. In those cases, he said, individual interests trump.
He gives an example from nature where bull elk have large (4 ft across) antlers to fight off other elks in the individual battle for females. These large antlers have a disadvantage as a group because they hinder escape from wolves in the dense forest.

POLITICAL gridlock in Washington has many causes. A seldom-discussed one is that the current rhetoric often rests on basic misunderstandings of how markets work.

On one side, advocates of minimal government invoke Smith's invisible hand to argue that we could make the economy more efficient by pushing government aside and letting markets work their magic. Liberals counter that markets aren't truly competitive. We need extensive government regulation, they say, because powerful elites would otherwise exploit workers and consumers.

Close reading of Smith's work shows that his position was very similar to the modern liberal's. He thought it remarkable that self-interest often promoted the common good, but he never claimed it always did. Like modern liberals, he saw market failure as rooted in insufficient competition."

"The apparent paradox is resolved once we recognize that market failure stems from the very logic of competition itself. As Darwin knew, when individual and group interests diverge, competition not only fails to promote the common good, it also actively undermines it."

He gives another example in our modern economy.
People bid up house prices in communities with goog schools, because they want their kids to get into good colleges, which only increases the cost of houses since the number of openings in good schools is fixed.

Frank proposes a progressive consumption tax as a solution. He says,
"The tax would be based on 'taxable consumption' -- the difference between income and annual savings, less a standard deduction of, say, $30,000 for a family of four. Rates on additional expenditures would start low and rise gradually with taxable consumption.

Because savings would be tax-exempt, the biggest spenders would save more and spend less on luxury goods, leading to greater investment and economic growth, without any need for government to micromanage anyone's behavior.

In 1997, shortly after publishing an article advocating this kind of tax, I received a warm letter from Milton Friedman, widely hailed as the patron saint of small-government conservatism.

He questioned my claim that additional tax revenue could be put to productive uses in the public sphere. But he added that if the government did need additional revenue, the progressive consumption tax would be by far the best way to raise it. Attached to his letter was a reprint of his article published in the 1943 American Economic Review in which he advocated the progressive consumption tax as the best way to pay for the World War II effort."

IN the current climate (2011), it's not likely that this tax will become law soon. That's actually a good thing, since we wouldn't want to discourage consumption during a deep economic downturn. But if the tax were passed now and phased in once the economy returned to full employment, it would kill two birds with one stone. It would reassure deficit hawks that we're committed to putting our fiscal house in order, and it would encourage an immediate burst of private spending by people eager to avoid the tax.

Darwin, the Market Whiz - NYTimes.com Sept. 17, 2011
"The Darwin Economy: Liberty, Competition, and the Common Good", by Robert H. Frank

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last updated 10 Oct 2011