Monday, 5 December 2011

The Darwin Economy

Robert H. Frank, professor of Economics at Cornell university has written a very interesting book called the Darwin Economy. The central Idea is that Humans are prone to decision-making which is optimal for the individual, but damaging to the Group, in a manner similar to the evolutionary Arms race which sees Bull Elk producing enormous antlers every year. Such adornments are costly, not only in the resources of calcium and protein, but also in the difficulty of moving in forests with such ungainly headgear, leading to predation by wolves.

Thus spending on such display items as cars and houses is excessive and sub-optimal. Humans being status-conscious beings, we feel it necessary to keep up with the Joneses, leading to an arms-race of consumption cascading from the super rich all the way down to the very poor.

This is market failure, but not in the way the left thinks, as is explained at some length in the book. Instead Professor Frank suggests it is a failure in the basis of taxation. Why do we tax things that are good, like income or jobs which we need more of? Why not tax things like status consumption or use of scarce resources, in which the effect of the tax is beneficial (lower mileage driven, fewer resources consumed, less excessive status arms-race) over and above the tax raised?

This isn't to say that tax doesn't take out of the productive economy, of course it does. But that the blow would be softened if IN ADDITION to the tax raised, there was some compensating behaviour change which made some people a bit happier. No-one benefits from a payroll tax like National Insurance in the UK. Many people benefit from lower congestion as a result of high fuel duty, not least the people paying it who would otherwise find traffic much more problematic than they do now were taxes less than 65% of the cost of their fuel. Perhaps a brand-new BMW (which as everyone knows will immediately turn you into a sociopathic tail-gating arsehole) should be taxed at a higher rate than a more utiliarian vehicle?

It's an interesting idea, but is perhaps over-argued. I'm not sure I appreciate the endless repetition of the zero-regulation, zero-tax Libertarian caricature in the book, which has me screaming "STRAW MAN" in almost every chapter. Most libertarians, on this side of the pond at least, accept the need for some regulation, especially in competition. Zero tax isn't a realistic propostion either and I am convinced by the Rahm Curve, with a peak at around 20%. Many Libertarians (including this one) even accept the need for some redistribution of income, to compensate people for the extent to which people's station in life is defined by luck (a lot more than most people think). Finally, redistribution is an important guarantor of social cohesion, preventing, in final analysis, the rich ending up swinging from a gibbet.

Where the book is strongest is in its defence of free markets. Many leftists think "market failure" is the observation that the rich have more options than the poor. It isn't. I would urge my left-wing friends to read it simply to hear a cogent and well-thought out explanation of how markets benefit ESECIALLY the poor. It is also why cash transfers are better at increasing utility, especially for the poor, than "free" top-down administered services, all areas which had me nodding in agreement.

I am not wholly convinced that the steeply progressive consumption tax Professor Frank advocates, should be the proper basis for Government revenue, but it certainly got me thinking. Certainly a properly constructed negative income tax or citizens' basic income fulfils many of the benefits of the free market that Professor Frank supports, in that they give the poor agency in how they spend the resourses available to them, rather than ceding all that agency to well-meaning bureaucratic agencies. Where I disagree with Professor Frank is the extent to which status displays and positional goods (especially access to education) hurt the poor. The mansion-extension example which crops up though the book may lead to bigger houses further down the income distribution, but I am not convinced this is a wholly bad thing. Maybe amongst vulgar americans, where relative size is everything (over here, of course, we pay up for age, which is um... better or something). And the benefits felt by tradesmen who will build the mansion extension appears to be completely ignored.

Everyone engages in status displays amongst those either side of them, and by and large, aren't that fussed by the lives of the rich & famous with whom they're not competing, however much media bien pensants think they shoud be. A progressive handicap system to status displays, as proposed, won't really change that desire to compete in status display. To decry as fundamental a human desire as competition as "waste" seems like social engineering and I'm not convinced by Prof Frank's explanation. Even Guardianista's eschewal of status displays can become competitive, as parodied in Viz's Modern Parents. The evidence appears to be that the demographic most upset by high GINI coefficients appears to be relatively wealthy lefties who frot themselves into a state of deep mailaise over the statisitics. If there is one group of people for whom I have zero sympathy, it's Hampstead sociailists. I like much of Professor Frank's analysis, but I remain a flat-taxer.



4 comments:

SimonF said...

If you go to BBC R4 Analysis website there is an interview with him that you can download as a podcast.

I'm not convinced about the mechanics of the consumption tax, but he has some good ideas.Some interesting thoughts

Simon Jester said...

"This is market failure"

Errrrm... no.

"Why not tax things like..." [fill in the blanks]

Because tax is theft, pure and simple.

"...in which the effect of the tax is beneficial..."

Because you are asking the state to pick winners ... which it is crap at.

"But that the blow would be softened"

It wouldn't.

"if IN ADDITION to the tax raised, there was some compensating behaviour change which made some people a bit happier."

Welllll... the extermination of the Jewish race would make certain sections of the Guardian readership happier. I take it this is not what you meant?

"a brand-new BMW (which as everyone knows will immediately turn you into a sociopathic tail-gating arsehole)"

No argument there (although Renault drivers are worse, IME).

"should be taxed at a higher rate than a more utiliarian vehicle?"

Arrrgh. Asking the state to pick winners, again.

'the zero-regulation, zero-tax Libertarian caricature' ... 'which has me screaming "STRAW MAN"'

Thanks, Jackart. You're a Tory stooge.

"Most libertarians, on this side of the pond at least, accept the need for some regulation, especially in competition."

Ummm, what? (Other than restrictions on the depradations of the statists?)

"Zero tax isn't a realistic propostion" It is if you shoot the statists. (OK, OK...)

"Many Libertarians ... even accept the need for some redistribution of income"

Voluntary? Hell, yes. Involuntary? Hell, no.

"Finally, redistribution is an important guarantor of social cohesion, preventing, in final analysis, the rich ending up swinging from a gibbet."

No. See Pareto.

"Everyone engages in status displays amongst those either side of them"

**Every**one? Seriously?

"If there is one group of people for whom I have zero sympathy, it's Hampstead sociailists."

Woo-hoo! An issue where we find agreement!

Single acts of tyranny said...

Two things

"Finally, redistribution is an important guarantor of social cohesion, preventing, in final analysis, the rich ending up swinging from a gibbet"

I see it as the irritant which drives it apart. And if you are only paying to stop violence, rthen really the argument comes down to blackmail.

"a brand-new BMW (which as everyone knows will immediately turn you into a sociopathic tail-gating arsehole)"

As a former driver of one, I can confirm the owners manual says this is okay, but seriously, the biggest fuckwits on the roads are those who drive the Toyota Prius. It's the holier-than-thou smug, self-satisfaction on their sickly-grinning vegetarian faces. A shit car, bought for bogus reasons, by people who work in local authorities.

Anonymous said...

Ever heard that less is more? I wonder how much time you spend of your life on this. Are you a bletherer in real life? lol

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