Challenging the Libertarian Mind

May 24, 2012 | | Oeconomia |

In The Darwin Economy: Liberty, Competition, and the Common Good Robert H. Frank practices what he preaches. Starting with just a handful of simple basic principles, he is not only able to offer new insights on some of society’s most pressing problems, but also to propose (at least to some) contrarian solutions for them. Frank arrives at his analyses and his solutions not by exploring the properties of mathematical models but by cogent informal reasoning.

A professor of economics at Cornell University, Frank is well-known for his use of micro-economic principles and tools to shed light on political-economic issues. This has resulted not only in several academic papers and books, but also in monthly “Economic Scene” columns in The New York Times. Frank also co-authored a textbook Principles of Economics with Ben S. Bernanke. In The Economic Naturalist (2007) Frank advocated a “less-is-more” approach to the teaching of economics. Instead of the algebra and calculus needed to understand mathematical models in economics, students were encouraged learn to use just a few informally stated and basic economic principles to understand phenomena in the real world. The goal was to acquire a deeper and more lasting understanding of what it is to think like an economist. Underlying this “less-is-more” approach is Frank’s belief that most of the insights produced by economic theory follow from the application of just a few basic principles, and that formal models are not needed to see that (and how) the insights follow from the principles.

Another example of this “less-is-more” approach, Frank’s latest book. The Darwin Economy, has been advertised as bringing home the message that eventually not Adam Smith but Charles Darwin will be hailed as the principal founding father of economics. Most of the book is in fact devoted to combating Tea Party-type U.S. libertarians, who see raising taxes as an intolerable infringement upon basic individual rights. Frank sets out to show that their view is not only unproductive and paralyzing, but also fundamentally misguided. In true “less-is-more” fashion, he does so through a remarkable use of informal economic reasoning, with just a few principles to start with.

A Wasteful Arms Race

One such principle, perhaps the most central in the book, is that people tend to care more about their relative than absolute position. No matter how well they do in absolute terms, people are not happy if their peers do better. This tendency to orient oneself with respect to how one is doing relative to others is particularly strong and wasteful in so-called winner-take-all markets. In such markets the top seed person earns much more (in terms of material wealth, but also of social status) than the numbers two and three, who might be only slightly worse than the number one. Many are tempted to join the market and compete for the number one position, especially if it entails considerable prestige and wealth, but a lot of energy is expanded in vain: no matter how hard they strive to be number one, only one attains the desired top position. Much waste could be avoided if people put their efforts into other activities and markets. But even if people see through this and realize that it would be in the interest of all to de-escalate, they will not be in a position to curb this process if they act alone. If they decrease their efforts, they can be certain that they will not be the number one; other than that, nothing will change. Only by organizing some sort of coordinated or collective action can the arms race be de-escalated. The introduction of a substantive tax might do the trick, for example. Here, Frank briefly repeats what he argued elsewhere (for example in The Winner-Take-All Society, 1995), namely that a progressive income tax should be replaced by more steeply progressive consumption tax.

The Darwin Economy introduces a new spin on this approach. People in winner-take-all markets who devote all their energy and effort to becoming the number one inflict indirect harm on others (another way of putting it, as noted by Frank, is to say that it creates negative externalities). They do not harm others directly by stealing from them or by committing violence to them, but indirectly by making it more costly for them to become the number one. Frank wants to convince others, notably libertarians, that such forms of indirect harm should be taken as seriously as direct forms. Both forms should be subject to Mill’s principle, Frank argues, which states that it is permissible to restrain an individual’s freedom of action only when there is no less intrusive way to prevent undue harm to others. As we just saw, the only way to prevent undue indirect harm from being done to others in winner-take-all markets is to commit all participants to collective action, for example in the form of taxes. Conjoined with Mill’s principle, the concept of indirect harm (the argument that indirect harm can be as detrimental to people as direct harm) provides sufficient reason for Frank to plead for introducing taxes in winner-take-all markets. An additional reason for doing so (implying that it is possible here to kill two birds with one stone) is that the money thus generated represents badly needed revenues for governments looking to reduce deficits.

Although Frank also has a few things to say to political leftists (e.g., about their mistaken assumption that the main source of market failures is limited competitiveness), his main opponents in this book are libertarians. Frank is well aware that his plea will make them shudder, and that they will particularly resist taking indirect harm as seriously as direct harm. Libertarians are likely to respond that it should be left to the discretion of people themselves whether they want to compete for the number one position in winner-take-all markets, or how much effort they want to put into it. Voluntary coordinated action to curb arms races is fine; but imposition of taxes by the state is unacceptable: to libertarians, it is tantamount to an infringement upon individual rights, coercion, or even outright theft.

In the section called “A Mindless Slogan Contest” Frank shows how little patience he has for libertarian objections. Libertarians feel individuals who have earned their own money in a decent and honest way are entitled to keep all of it. Frank explains that this moral argument is based on a false premise, namely that the money people earn through hard work is a consequence of their efforts alone. That is clearly not the case: it is also a consequence of an infrastructure made possible by made by others. Frank also points out that success and failure depend much more on chance factors than people like to think¬¬—especially when they are successful. Additionally, in winner-take-all markets using the latest technology, equally highly (or perhaps even more) talented people who have not made it to the absolute top earn much less than the number one. Finally, there is absolutely no evidence that higher taxes on top incomes inhibit economic growth. To the contrary, higher taxes on hedge fund managers are likely to stimulate economic growth, for example, if only because the best brains would be attracted to other non-winner-take-all markets.