Robert Frank on Competition, Government, and Darwin 09/12/2011

Collective-action problems like helmet safety can be solved not only by rules but also by evolving cultural norms (à la Ostrom's solutions to the tragedy of the commons), as shown by how bike helmets and child car-seat use became near-universal through shifting norms of good parenting rather than purely through law.

“there's two ways to get to that which is culture and Elinor Ostrom work in the tragedy the Commons is it shows different ways that culture and norms evolve to solve these problems of externalities”

Safety is inherently a cost-benefit question rather than a binary 'safe/unsafe' state, demonstrated by the fact that no rational person checks their brakes every day; the wise approach reduces risk to a prudent level and spends the savings on other valued things.

“did you get your break checks brakes checked on the way to work this morning most people will say no... no rational person would say yes to both both of those questions”

Demonstrating that the market equilibrium is suboptimal is not sufficient to justify intervention; one must show the proposed government remedy will actually do better than doing nothing, assuming government is also imperfect and its intervention might be worse.

“you're not done when they've merely succeeded in demonstrating that the current equilibrium might not be socially optimal that doesn't mean that any old intervention is going to make matters better”

Adam Smith never claimed markets always produce good results; he was circumspect, noting that actors with market power inevitably conspire to defraud workers and customers, thus requiring government to rein in exploitation—reservations that map onto modern left-wing critiques.

“he wrote actors with lots of market power whenever they got together their conversations would inevitably turn to conspiracies to defraud or bilk their workers and customers and so you needed to have government to rein them in”

The synthesis between left and right is to use the price system to solve problems—as the right's tradition teaches—while accepting the right's blind spot that unfettered individual interest does not always produce group-optimal outcomes (the Darwinian insight); SO2 tradable permits and congestion pricing are success stories of this approach.

“you want to use the price system to solve problems when you can not detailed prescriptive bureaucratic regulation I think the the right has a rich set of insights along those lines that the left can learn from but the right needs to learn to that individual interest expressed in unfettered markets doesn't always produce outcomes that are best from the perspective of the group”

Milton Friedman endorsed an expenditure (consumption) tax as the ideal way to raise revenue when government needs it, having proposed it in a 1943 American Economic Review article as the best way to fund the World War II effort—indicating common ground between left and right on using consumption taxation.

“he enclosed in his envelope with the letter a reprint of his article from the 1943 volume of the American Economic Review where he had proposed an expenditure tax as the best way to pay for the World War 2 effort”

Competition favors individual actors, and while this sometimes benefits the larger group (mimicking the invisible hand), in many cases it works against the group's interest by driving wasteful arms races.

“competition favors individual actors that's that's what it does correct sometimes in the process it helps the larger group but there are lots and lots of instances in which competition actually works against the interests of the larger group”

The income tax should be scrapped entirely and replaced with a steeply progressive consumption tax (income minus documented savings), which would stop penalizing savings and, by taxing high-end consumption heavily, reduce wasteful positional spending arms races without making people less happy because the social standard shifts accordingly.

“The the main policy intervention I I push in the book is to scrap the income tax altogether... raise the revenue you need from a steeply progressive consumption tax”

Workers value extra income not only for absolute consumption but for relative (positional) consumption; since any worker can take a riskier, higher-paying job to bid up in the school-district hierarchy, the equilibrium has everyone selling more safety than they would in isolation, only to bid up house prices—leaving them with less safety and no positional gain, which justifies considering safety regulation.

“the equilibrium in that game is one in which all workers sell more safety than they would as individuals and the extra money goes into a bidding war houses and the better school districts and when the dust settles... they're stuck with less safety”

In polygynous species, competition among males for mates selects for ever-larger body mass (e.g., 6,000-pound bull elephant seals) far beyond what is optimal for males as a group, producing a runaway arms race they would collectively prefer to escape but cannot.

“the bull elephant seal weighs 6,000 pounds they fight with one other four or five hours on the beach... you get this runaway arms race that makes males too big from the perspective of males as a group they'd be much much better off if they could push a button and be one-third their current body mass”

Gazelle speed is a Darwinian trait that mimics the invisible hand: a mutation making an individual gazelle faster benefits both that gazelle and the population as it spreads—analogous to a cost-saving market innovation that diffuses and ultimately benefits consumers as competition drives prices down.

“a mutation that makes the individual gazelle faster that's good for that gazelle but it's also good for the gazelles as a group as it spreads throughout their population”

Workplace safety has improved steadily for over a century—long before OSHA's creation in 1970—because safety is a normal good people demand more of as they grow richer, and even within dangerous occupations like mining conditions became safer before regulation, showing Smithian forces remain powerful.

“there's a long steady fall in... mortality and fatalities and injuries the workplace gotten safer and safer in the United States long before the government got involved long before OSHA was involved in 1970”

Alan Greenspan was not a genuine free-market ideologue: although he used free-market rhetoric to oppose regulating derivatives, he repeatedly socialized losses by orchestrating bailouts of creditors (Mexican bailout, Long-Term Capital Management), thereby keeping government's hand in the market.

“he wasn't much of a free-market ideologue when it came to bail out banks he was a cheerleader so I don't view him as much of a free marketer he used free-market rhetoric often”

The housing bubble unfolded as a positional arms race: relaxed credit terms let people bid more for houses, and because good schools are concentrated in expensive neighborhoods, parents had to borrow imprudently just to hold their relative position in the school-quality hierarchy, not because of greed for granite countertops.

“that's the way the housing bubble unfolded you know wasn't people just with visions of sugarplums dancing in front of them vaulted ceilings and granite countertops it was people trying to keep up with what others were spending so they wouldn't fall behind in terms of where their kids went to school”

The left's argument that employers would force dangerous conditions without regulation fails the 'no cash on the table' test: if a safety device worth $100/week to a worker costs only $50/week, the employer profits by installing it and cutting wages, or a rival employer could cherry-pick workers by offering it—so market forces install all cost-justified safety devices.

“if the employers were doing what the left says they're doing there'd be cash on the table some other employer could come in and cherry-pick the best workers of dangerous factory just by installing safety devices that were worth more to the workers than their cost”

A century from now economists will name Charles Darwin, not Adam Smith, as the intellectual founder of the discipline, because Darwin's vision of the competitive process is more accurate and descriptive than Smith's (as channeled by neoclassical economics).

“I predict that if we were to pull professional economists a century from now about who was the intellectual founder of the discipline I say we get a majority responding by naming Charles Darwin not Adam Smith”

The financial services industry channels the smartest graduates into zero-sum competition to predict price moves microseconds faster than rivals, which produces private gain but no social product—evidenced by 45% of Princeton's pre-crash graduating class entering finance.

“45% of Princeton's graduating class takes a job in the financial services industry the last year we have data from before the crash those those are really smart people who could be doing something that you and I would benefit from”

Before expanding government's role, advocates must convince skeptics it can do more effectively, because government's track record shows much spending (e.g., ever-rising infrastructure spending over 25 years) rewards politically powerful actors rather than achieving its stated goals.

“government spending on infrastructure has been rising for the last 25 years... for some reason spending of ever-increasing amount of GDP has failed to do it effectively”

Much of what government actually does is not protecting people from harming each other but cronyism—hurting some to benefit others—and it is this rent-seeking that motivates anti-government sentiment among free-market advocates.

“a lot of what government does isn't to keep us from hurting each other it's to hurt one of us at the expense to benefit somebody else and it's that cronyism part of government”

The root of political money problems is government's ability to hand out goodies without constitutional constraint, so limiting contributions would not remove the influence; influence also takes subtler non-monetary forms, like the Fed awarding money to financial institutions through its policies.

“I think the root of the problem is the ability of the government to hand out goodies without a constitutional constraint so the the current system is awash in money”

Tying good schools to expensive neighborhoods is a horrible public policy; abolishing the public-school-to-neighborhood link and the mortgage interest deduction would reduce the positional housing arms race—though severing the link entirely may be hard because advantaged families demand to secede.

“I think it's absurd in a horrible form of public policy that if you want a good school you have to buy a house in the neighborhood at that school and I'd get rid of the public school system”