In his latest book, The Darwin Economy: Liberty, Competition, and the Common Good, Frank further lays out his case for such a tax in an explicit attempt to persuade what he calls “reasonable libertarians” as opposed to “movement libertarians.” He comes closer to making a successful case than I would have expected, given his past work, much of which I’ve found largely unpersuasive (see my critical review, “Robert Frank’s Strange Case for Taxing ‘The Rich’,” Cato Policy Report, November/December 2007). Ultimately, though, I find his case unconvincing. Moreover, his own reasoning leads to conclusions that even he finds distasteful, and he has yet to find a way out of those unfortunate conclusions. Frank often misstates the libertarian viewpoint, sometimes in ways that matter for his argument. Along the way he does make points—mainly tangential to his main argument—that are quite eloquently and logically argued. At the same time, he stumbles on a number of issues where he goes beyond his own expertise.
Ruinous competition? | Frank starts with a major prediction: “[E]conomists a hundred years from now will be more likely to name Charles Darwin than Adam Smith as the intellectual founder of their discipline.” Frank errs slightly in attributing to Smith a belief in perfect competition; the concept of perfect competition didn’t come along until about 150 years after Smith wrote The Wealth of Nations. But this misattribution causes no major problem for Frank’s argument. Frank agrees with Smith that firms competing against each other produce goods and services that consumers want and, because they compete, the prices that consumers pay are lower than they would be without competition. Smith, caring mainly about consumers, saw this as being good. But Frank, drawing on Darwin, sees a big downside to competition. Darwin argued that animals compete for mates by being more powerful, flashier, etc. Frank makes the same argument about humans. Some kinds of competition among humans, he argues, cause them to make systematically bad decisions.
During the mating season, bulls battle ferociously for “near-exclusive sexual access to a harem that may number as many as a hundred cows.” Being larger than other bulls gives a particular bull an advantage in this competition, but being large also makes him more vulnerable to predators such as sharks. If bulls could vote, writes Frank, they would vote to reduce each bull’s weight by half, making them less vulnerable to predators while not changing the pecking order among bulls.
What human behavior is analogous to competition by bulls? The first of many examples Frank gives is the decision not to use hockey helmets. Players, if not constrained by league rules, tend to play without helmets because doing so gives them a competitive edge—without a helmet, they can see and hear better. The downside is the risk of head injuries. But, argues Frank, it could be in all players’ interests to have a rule requiring helmets because, although such a rule would stop one player from getting a competitive edge, it would stop his opponent from getting an edge also—and make everyone safer.
I find this argument convincing. If the National Hockey League and other hockey leagues enforce helmet rules, as they do, that is simply an exercise of freedom of association. Those who don’t want to play under those rules don’t have to. Imagine my surprise, then, to read Frank’s statement, “What about the libertarian’s complaint that helmet rules deprive individuals of the right to choose?” I, a libertarian, have never made that complaint and I’ve never heard other libertarians make that complaint. It’s odd that someone who expresses passionately his interest in persuading libertarians does not understand one of the most basic beliefs libertarians hold, the belief in freedom of association (in this case, association with a hockey league that requires helmets).
I wondered if Frank had simply slipped and was going to characterize libertarians more accurately later in the book. But he doesn’t. Frank says positive things about salary caps in sports, spending limits in soap-box derbies, and engine-size limits in auto racing, and then writes, “Libertarians apart, there don’t seem to be many people who view such steps as deeply troubling violations of individual rights.” Why “libertarians apart?” I’m a libertarian who sees no rights violation either. One wonders how carefully Frank has read the libertarian literature or talked to actual libertarians.
Improving one’s position | One of Frank’s main arguments, which he also made in his 1999 book, Luxury Fever, is that Darwinian competition among humans causes them to overspend on goods such as housing. He reports data from surveys in which people are given a hypothetical choice between living in World A, where one is in a neighborhood with 6,000-square-foot houses while others live in neighborhoods with 8,000-square-foot houses, or in World B, where one is in a neighborhood with 4,000-square-foot houses while others live in neighborhoods with 3,000-square-foot houses. Most people surveyed, writes Frank, would choose World B. He concludes that people care about the relative size of their house, not the absolute size. Housing, he writes, is what the late economist Fred Hirsch called a “positional good.” Frank had earlier argued that positional goods are also “things in fixed supply.” I pointed out in my 2007 critique that houses are not in fixed supply and Frank, to his credit, has not repeated that error.
What follows from this competition for positional goods? For Frank, it is a “progressive consumption tax”—that is, a tax on all income consumed with higher tax rates for higher amounts of consumption. Frank argues, as he did in earlier work, that such a tax would require “no real sacrifice” from wealthy people because they would maintain their relative positions and that’s what matters to them. I find it implausible that the wealthy would not care about being made poorer, but there’s an easy test, one I proposed in my 2007 article: let wealthy people, and only wealthy people, vote on the proposal to tax them more. If Frank is right that there is “no real sacrifice,” then he would have to predict that well over 90 percent of wealthy people would vote for higher taxes on themselves. Yet Frank nowhere has proposed such a vote. It’s strange that someone who even thinks about having elephant seals vote, understanding that—for obvious reasons—they can’t, doesn’t even consider letting people vote even though they can. Is it possible that Frank has real doubts about his own theory?
One reason people want nicer houses, writes Frank, is that such houses are in districts with better schools. Why do people have to buy nice houses to get nice schools? It’s because government provides schools. Governments insist, with few exceptions, that the only people allowed to attend schools in a school district are the children who live in that district. Private schools, by contrast, rarely discriminate geographically. A straightforward way to get around this wasteful competition for houses in nice school districts is to get government out of the business of providing schools. But Frank does not consider that option.
Frank states that “school quality is an inherently relative concept.” In other words, what matters to parents, according to Frank, is not the absolute quality of the school, but how good it is relative to other schools. But if that’s so, then one obvious way to save resources, so that people can have more non-positional goods, is for the government to spend less on schools. Just as a progressive consumption tax would, in Frank’s view, make no rich people worse off, a 50 percent cut in school funding should make no students worse off. Yet Frank never considers cutting government spending on schools.
Dark conception of human nature | Frank does present a new argument for his progressive consumption tax, an argument in which he draws heavily on the Coase Theorem. Frank’s exposition of the theorem is about the best I’ve seen—and I’ve seen many.
How does he get from Coase to his argument for high tax rates on high-consuming people? The Coase Theorem says that if transaction costs are zero, then, when one person’s actions impose costs on another, the two parties will negotiate and reach an optimal solution. When transaction costs are prohibitive, on the other hand, the optimal solution is not necessarily achieved and the courts should assign the burden of adjusting to, in Frank’s words, “the party for whom that burden would be least costly.” Many economists accept a role for government to use taxes or liability rules to handle issues like pollution because high transaction costs make it hard or impossible for polluters to get together with those who suffer from pollution. Frank argues that, similarly, when people compete for “positional goods,” they impose costs on others. Because transaction costs are too high to let people get together to agree to compete less for these positional goods, Frank sees a role for government, with the earlier-noted progressive consumption tax, to cut down on the competition.
But if people care a lot about their relative income, there are two ways for them to have higher relative income. The way Frank focuses on is to seek more income. But Santa Clara University professor David D. Friedman, in a May 5, 2010 post entitled “Robert Frank, Status, and Income Redistribution” on his “Ideas” blog, (daviddfriedman.blogspot.com), points out another obvious way: make everyone else poorer. Friedman points out that if Frank is right, “The rich ought to be in favor of grinding down the poor, the poor ought to be in favor of pulling down the rich, and the people in the middle ought to be in favor of both.” Friedman writes, “I do not think that that describes the policies that Robert Frank, who is a nice man as well as an able and original economist, wants.” Frank, in replying to Friedman (“Robert Frank’s Reply,” May 10, 2010) stated, “These remarks betray a curiously dark conception of human nature.” That was exactly Friedman’s point, but it’s not Friedman’s conception; it’s Frank’s. Frank completely misses that.
In his reply to Friedman, Frank covers important new ground that I could not find in his book. He writes, “All available evidence suggests that positional concerns are largely local in nature.” But if that’s so, then, even within Frank’s own framework in which relative position matters a lot, the solutions ought to be local, not nationwide. Oops, there goes the federal progressive consumption tax.
Other weaknesses | Frank often lays out great insights clearly. For example, in defending cost/benefit analysis from the charge that it gives too much weight to the wealthy, Frank shows that weighting all people’s preferences equally to tilt against the wealthy would make poor people worse off than if straight cost/benefit analysis were applied along with side payments to the poor. He also points out how taxes to discourage behavior are typically much more efficient than “prescriptive regulations.” Because he discusses this in the context of energy use, it would have been nice to see him call for abolishing the Corporate Average Fuel Economy laws that have been shown to be much more expensive and inefficient than a stiff increase in the gasoline tax. Unfortunately, he doesn’t.
On other issues he discusses that are outside his expertise, Frank makes an unpersuasive case. In discussing the Occupational Safety and Health Administration’s worker safety regulations, for example, he writes, “[T]here’s little doubt that workplace safety levels are higher because of them.” In fact, there’s a great deal of doubt, as economist W. Kip Viscusi has shown in his book, Risk by Choice. Worker safety did improve after OSHA was formed in 1970. But worker safety was trending upward in the decades before OSHA was formed. And, although Frank correctly points out how dependent politicians are on campaign contributions, he seems unaware that the Federal Election Campaign Act of 1974 made the problem worse by limiting individual contributions to $1,000 and, thereby, giving an advantage to corporate Political Action Committees (PACs) that bundle such contributions. Before 1974, people could make unlimited contributions to federal candidates. That allowed mavericks such as Democratic senator Eugene McCarthy to run for president in 1968 on an anti-war platform. McCarthy got huge funding from just six people. One, Stewart Mott, gave about $210,000. In today’s dollars, that would be over $1.3 million.
Finally, in discussing the idea of Ricardian equivalence—the view that when government increases its deficit, people increase their saving to be able to pay future taxes—Frank completely ignores the extensive empirical literature on this topic and settles for ridiculing those economists who take Ricardian equivalence seriously.
Is the book worth reading? I think so. Robert Frank is emerging as one of the leading critics of economic freedom and many other leading academics, as the book cover shows, pay a great deal of attention to his thoughts. So defenders of economic freedom had better do so also.
