Wednesday, October 19, 2011

Virtually there

Zocalo Public Square, a website devoted to "connecting people to ideas and each other" that also has actual, in-the-flesh public events, usually in Los Angeles, is having a session today on economist Robert Frank's new book, The Darwin Economy: Liberty, Competition, and the Common Good.

On to the personal plug for a moment, then back to the more substantial topic of Frank and his new book. In connection with this session, Zocalo has posted 4 short sets of comments on the topic "Taxes Hurt So Good: Levies Can Be Painful, But the Right Ones Bring Big Gains." The question for discussion was whether taxes can promote good behavior. Available here. As you may have guessed by now, I am one of the commentators; the others are Daniel Markovits, Timothy Hackenberg, and Annette Nellen.

Bob Frank, in his book, "argues that the man who best understood how economics works was not an economist at all [such as Adam Smith with his theory of the invisible hand], but renowned naturalist Charles Darwin. Darwin's understanding of competition held that favored traits were the ones that best served the individual, whether they benefited the group or not -- a theory Frank says explains the modern system much better than Smith's [invisible hand theory]."

To my mind, it risks being a bit cute to deploy Darwin as actually an economist. But Frank's basic point is quite sound. Smith's invisible hand theory derives a lot of powerful results from the fact that, under certain conditions, the possibility of mutual gain through trade can cause people to have interests in common and to behave cooperatively. But - as Smith certainly recognized but perhaps downplayed a bit - when these conditions don't hold, there is no general reason to expect cooperative rather than socially damaging beggar-your-neighbor behavior.

In this regard, evolution at least provides an analogy, and perhaps can even be described as directly operative in economic behavior (although people's battles over wealth, success, and power play out in arenas not limited to gene transmission). Cooperative group behavior has to pay off at the individual level (which depends on the specific environment and the odds it presents for various things) in order to be sustainable. And there is certainly no reason to assume that compatible incentives and cooperative behavior are the dominant features in a modern economy, any more than it makes sense to assume that "nature red in tooth and claw" is the dominant model in biological evolution. "Cooperation or competition - which prevails?" is a silly question, to which the only good answers are "both," "it depends," and "they're likely to be complexly intertwined."

I am definitely a fan of Bob Frank, who, through his work on positional goods and status competition, has made a very important contribution to modern thinking about GDP, technological progress, tradeoffs between equity and efficiency, and yes, tax policy. As it happens, he was a speaker at the NYU Tax Policy Colloquium many years ago. Our main criticism (I was still doing the colloquium with David Bradford at the time) was that his important insights didn't necessarily translate into thinking about income versus consumption taxation as he thought they did, since the two are arguably the same insofar as the points of interest to him are concerned. (Income and consumption taxation differ in how they treat present versus future consumption, either of which one might want to tax-discourage on the ground that people are competing over positional goods, and thus imposing disutility on others, to a greater extent when they choose work and thus present or future market consumption, than when they choose leisure.)

Frank was also a very pleasant guest and speaker at the colloquium. In person, he turned out (I had worried about this) to have no objection whatsoever to such things as having a nice dinner and accompanying it with a nice bottle of wine.

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