The Darwin Economy – Liberty, Competition, and the Common Good (Anglais) Relié – 16 août 2011
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Who was the greater economist--Adam Smith or Charles Darwin? The question seems absurd. Darwin, after all, was a naturalist, not an economist. But Robert Frank, New York Times economics columnist and best-selling author of The Economic Naturalist, predicts that within the next century Darwin will unseat Smith as the intellectual founder of economics. The reason, Frank argues, is that Darwin's understanding of competition describes economic reality far more accurately than Smith's. And the consequences of this fact are profound. Indeed, the failure to recognize that we live in Darwin's world rather than Smith's is putting us all at risk by preventing us from seeing that competition alone will not solve our problems.
Smith's theory of the invisible hand, which says that competition channels self-interest for the common good, is probably the most widely cited argument today in favor of unbridled competition--and against regulation, taxation, and even government itself. But what if Smith's idea was almost an exception to the general rule of competition? That's what Frank argues, resting his case on Darwin's insight that individual and group interests often diverge sharply. Far from creating a perfect world, economic competition often leads to "arms races," encouraging behaviors that not only cause enormous harm to the group but also provide no lasting advantages for individuals, since any gains tend to be relative and mutually offsetting.
The good news is that we have the ability to tame the Darwin economy. The best solution is not to prohibit harmful behaviors but to tax them. By doing so, we could make the economic pie larger, eliminate government debt, and provide better public services, all without requiring painful sacrifices from anyone. That's a bold claim, Frank concedes, but it follows directly from logic and evidence that most people already accept.
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This failure of individual selection happens when individuals compete, not to achieve an absolute standard of success, but success relative to others. Such a competition, as in an arms race, knows no bounds unless some force, such as an agreement or regulation intervenes to dampen the competition, to prevent a dangerous or wasteful use of resources. Since mainstream economics is based on the thesis that encouraging individual self interest ends up maximizing group welfare, Frank is mounting a direct challenge to economic orthodoxy.
So he develops several simple examples to illustrate how the overall welfare of two parties can be improved when each subjugates his or her immediate self-interest to process that involves rewards, or taxes, or cash transfers. A well known example is when an airline offers increasing compensation to passengers to wait for another flight when their flight is overbooked: a poorer passenger is well compensated for waiting and so does not resent richer passengers for getting the contested seats. In the same way the poorer members of society may be compensated by the provision of governments serviced financed by taxes on the richer members. Moreover Frank shows that this instinct for justice is well-founded: unequal societies simply do not function as well, either economically or socially, and the extravagant wealth of some in a winner-take-all society comes more from luck than superior talent or harder work.
A classical example of how taxes may outperform rigid regulation is Prohibition - better to tax and control liquor sales than totally outlaw them. In fact Frank has a strong preference for sin taxes of all sorts, as better than heavy handed ways to reduce harm, which puts him squarely in the camp of the rational libertarian. For Frank this includes not just hard liquor but also green house gas emissions. He would also institute a progressive tax on consumption (= income minus savings), noting that excessive luxury is harmful to society, as it diverts resources away from the many and toward the few. Better of course to define consumption as income minus charitable donations and investment, broadly conceived, and to add on a substantial estate tax. Yet this scheme is still troubling because vast fortunes could still be accummulated and these fortunes would likely be invested in activities that yield short term profits more than in activities that develop the long term welfare of society. This is another Darwinian example where individual self interest may not promote the overall welfare of the group, especially of future generations, who in today's world are already facing limits-to-growth and possible ecological overshoot and collapse.
Frank also misses the boat by citing with approval Adam Smith's mistaken claim that modern wealth is due to division of labor. Actually division of labor is natural to humanity, practiced even by the most primitive tribes, such as gender roles, and more so in all large-scale endeavors. What are more fundamental are the combinations of resources, especially energy, available to a society, the resilience of the ecosystems, and the technology and social structures that have been developed to exploit those resources in that environment. Without cheap fossil fuel energy there would have been no industrial revolution. Factory-like division of labor is just a social structure that works efficiently with the kind of reliable and high capacity supply and distribution networks that fossil fuels can support.
Another point: Most progressives would be as startled as I was by Frank's claim (p. 11) that "Critics on the left attribute market failure to insufficient competition". Actually today's progressives correctly point to inadequate regulation as a key cause of market failure, not competition. It was the deregulation of the financial industry that led directly and predictably to the financial meltdown of 2008. Without good regulation monopolists or swindlers soon take over, so regulation comes first. And a progressive would agree whole heartedly that a wasteful arms races or social competition should be constrained by good regulation, whether it be an international arms control agreement or higher taxes on expensive homes or other luxuries.
Overall an insightful book, yet with some gaps due to a lack of a comprehensive understanding of some key fundamentals. And most libertarians, who themselves lack such an understanding, will not be able to evaluate how well academic arguments apply to a very complicated world. Some on the left and in the middle may learn more from this book.
But many of Smith's modern disciples believe he made the much bolder claim that markets alwaysharness individual self-interest to produce the greatest good for society as a whole. Smith's own account, however, was far more circumspect. He wrote, for example, that the profit -seeking business owner "intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it [emphasis added].
Smith never believed that the invisible hand guaranteed good outcomes in all circumstances. His skepticism was on full display, for example, when he wrote, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. To him, what was remarkable was that self-interested actions often led to socially benign outcomes.
Like Smith, modern progressive critics of the market system tend to attribute its failings to conspiracies to restrain competition. But competition was much more easily restrained in Smith's day than it is now. The real challenge to the invisible hand is rooted in the very logic of the competitive process itself.
Charles Darwin was one of the first to perceive the underlying problem clearly. One of his central insights was that natural selection favors traits and behaviors primarily according to their effect on individual organisms, not larger groups.
Sometimes individual and group interests coincide, he recognized, and in such cases we often get invisible hand-like results. A mutation that codes for keener eyesight in one particular hawk, for example, serves the interests of that individual, but its inevitable spread also makes hawks as a species more successful. In other cases, however, mutations that help the individual prove quite harmful to the larger group.
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