Back in 2007, we had a lively debate around a series of excerpts that Cornell economist Robert Frank contributed to the Freakonomics blog. We’re hoping an excerpt from his latest book, The Darwin Economy: Liberty, Competition, and the Common Good, will spawn a similar conversation.
In it, Frank makes a rather bold prediction: within the next century, Charles Darwin, the naturalist, will unseat Adam Smith as the intellectual founder of economics. Frank believes Darwin’s insights into the nature of competition describe our current economic reality far better than Smith’s invisible hand. Frank argues that we live in a world where competition doesn’t channel self-interest for the common good, but rather into unbridled “arms races” where relative position is pursued above all else: who has the biggest bank? The biggest house? These races rarely benefit group interests. In fact, Frank argues, they have done enormous harm to our economy and provided no lasting advantages or benefits, since gains tend to be relative and offsetting.
Below, you’ll find an essay that Frank has adapted from the book expounding on this theme and offering what he sees as a prescription. He has also very kindly agreed to answer your questions on the ideas he puts forward. So, you know the drill: fire away with your questions in the comments section and, as always, we’ll post Frank’s responses in due course.
Charles Darwin: Fiscal Alchemist?
By Robert H. Frank.
We’re justifiably skeptical of alchemists who claim they can transform lead into gold. And we’d be similarly skeptical of someone claiming that a simple change in the tax code could liberate several trillion dollars annually without requiring painful sacrifices from anyone. But that’s my claim, and it rests on logic and evidence that almost everyone already accepts. I won’t convince you of that in the 800 words the Freakonomics editors have given me. But I hope I can persuade you that my claim merits a look at the more detailed case I present for it in my just-published book, The Darwin Economy.
That case rests on Charles Darwin’s observation that competition favors traits and behaviors only when they promote individual success. Darwin recognized that, as in Adam Smith’s invisible hand theory, individual interests often coincide with those of larger groups. But not always. And when interests at the two levels conflict, individual interests generally trump, often resulting in wasteful arms races. My claim is that simple, unintrusive changes in tax policy can mitigate such arms races, producing enormous gains for everyone.
(iStockphoto)
The massive antlers of bull elk illustrate Darwin’s point. Like males in most vertebrate species, bull elk take more than one mate if they can. Because relative antler size was often decisive in their battles for mates, mutations that coded for larger antlers spread quickly. The resulting arms race eventually stabilized. But although the modern bull’s huge antlers—which can span four feet and weigh forty pounds—promote individual reproductive success, they are an enormous handicap from the perspective of bulls as a group. When chased into densely wooded areas, they are easily surrounded and killed by predators.
Bulls would fare better if each animal’s antlers were smaller by half. Every fight would be resolved as before, and each animal would enjoy greater mobility. Yet any individual with relatively small antlers wouldn’t leave any offspring.
Similar conflicts spawn wasteful arms races in the marketplace. Consider a middle-income family whose goal is to send its children to a good school. Because the best schools are generally those in more expensive neighborhoods, this family must outbid at least 50 percent of all families with the same goal, or else be forced to send its children to a below-average school.
Rising income inequality has spawned expenditure cascades that have exacerbated the resulting bidding war. The median new house now has more than 2300 square feet—50 percent larger than its counterpart in 1980—even though median real wages scarcely rose in the interim. Yet despite the larger outlays, half of all children still attend bottom-half schools. Families have succeeded only in bidding up house prices in better school districts.
The easiest way to curb this waste would be to replace the current income tax with a much more steeply progressive tax on consumption. Households would report their income as under current law, and also how much they’d saved during the year, as many now do for tax-exempt retirement accounts. The difference—income minus savings—less a large standard deduction (say, $30,000 for a family of four) would be the household’s taxable consumption. Rates would start low, then rise steeply as consumption rises. Low- and middle-income families would pay no more than under the current system, but high marginal rates at the top would constitute a compelling incentive for wealthy households to alter current spending patterns.
Evidence from New York and other cities with expensive real estate confirms that even such households respond to price incentives. Under a steeply progressive consumption tax, a family that currently spends several million dollars a year and is considering an addition to its mansion would face a powerful incentive to scale back. The magic of the tax lies in the fact that if they and their peers scaled back in tandem, the smaller additions would serve just as well as the larger ones would have. As with antlers, it’s only relative mansion size that matters beyond some point.
Similar savings would occur in other domains. There’s no evidence, for example, that participants in American weddings, whose average cost now exceeds $28,000, are any happier than their counterparts in 1980, when real outlays were roughly a third as much.
We could kill three birds with one stone by enacting a progressive consumption tax now and scheduling it for gradual phase-in once the economy returned to full employment. Families that planned additions to their mansions or other large projects in coming years would rush to complete them before the tax took effect, so we’d get hundreds of billions of dollars of desperately needed economic stimulus without a penny of additional government spending. The move would also reassure deficit hawks that we’re committed to putting our fiscal house in order. And in the long run, a progressive consumption tax would stimulate much needed investment.
What’s not to like?
and 
. You can also watch it on 
“…half of all children still attend bottom-half schools”. Won’t this always be the case approximately?
“…compelling incentive for wealthy households to alter current spending patterns”. What would you expect them to spend their money on? Most people want to consume and so may choose to consume abroad wouldn’t they? Or are you proposing a consumption tax on property related things only?
“…the smaller additions would serve just as well”. Would they? Wouldn’t they be a room or two smaller? And the “better half” houses would still be too expensive for the poorer half.
“…it’s only relative mansion size that matters beyond some point”. I would have thought this oneupmanship applies to a very small percentage of people.
“And in the long run, a progressive consumption tax would stimulate much needed investment.” Would it? I thought it was supposed to “scale the peers back”?
Or have I missed the point? Andy (3 bed house) Moore… I will read the book with interest! Thanks.
That half the children will always go to bottom half schools is the point. You put more and more in, but you get the same out. That is, the costs go up monotonically, but the benefits remain constant.
Sounds interesting. I wonder have you observed the same kinds of consumption arms race in other developed countries? Does house size bloat everywhere? I ask because I’d like to know if this is a universal human tendency, or if there are cultural factors at play too. (I can imagine, say, a reverse snobbery culture where wealthy people deliberately spend LESS in conspicuous consumption, where a humble lifestyle is considered admirable.)
Also, has your suggested consumption tax been tried elsewhere?
I’m a fan of the FairTax and so have no problem with taxing consumption in place of income. The problem I have with progressivity is curtailing the big $$ spent on the high end of the spectrum–if consumption drives our economy, and these high end dollars represent a significant portion of overall consumption, then it appears that it could have a damaging effect on the economy. How much different would it be to have a higher standard deduction and a single flat rate? Also, how does this compare with Herman Cain’s 9% consumption tax from the 9-9-9 plan, which he claims only taxes services and new goods–how would your proposal reward people for buying used cars and used houses (which you would seem to agree is a good thing)?
I don’t understand how a progressive consumption tax could possibly work. Unless we’re talking about saving forever and never spending, all income will eventually be taxed.
Because the tax is progressive, the more you spread out your purchases, the less tax you pay. Saving up your earnings over 10 years for a big purchases suddenly becomes a terrible idea.
Also, how would a home mortgage work? Would the entire purchase be counted the year you signed the paperwork or would you just be taxed for your monthly payment? If it’s the former, most home buyers couldn’t afford the lump sum tax. If it’s the latter, then the government is discouraging paying up front – essentially subsidizing home loans even more than they do already.
I find the bull elk example unconvincing. I’m not certain how the link is made between the large antlers and not being good for the group. Maybe I just don’t have enough information.
Is the elk population in decline? If so, is it due to these large antlers?
In his answer to Seth, Mr. Frank also responds to Mr. Whitfield’s review, concluding that Mr. Whitfield should have entitled his review “What John Whitfield Gets Wrong About What The Darwin Economy Gets Wrong About Evolution.” Perhaps the review should simply be entitled “The Dangers of Imputing Your Desires to the Group.”
If Mr. Frank was a bull elk, he may prefer to live to a long age, but I don’t think it is at all clear that that is what all bull elk would want. Some may want to impregnate lots of female elk and die young, while others may want to live old age (and forgo sexual benefits). Mr. Frank may respond that it would be best to impregnate many females AND live to old age, but that seems to be an elk utopia, perhaps like wanting the best medical care and schools, the largest houses, the fastest cars, etc. for free for everyone would be a similar, human utopia.
Regardless, bull elk do not have a choice in choosing antler size or their life v. sex desires. Perhaps that is a problem with evolution (although I am apt to accept Mr. Whitfield’s explanations about equilibrium in evolution over Mr. Frank’s explanations). However, humans do have those choices. We can choose to buy certain things over other things. And while I am glad that Mr. Frank would choose tax policy over prohibition, I still don’t know why Mr. Frank’s preferences should be society’s (or my) preferences. If the answer is because Mr. Frank, as an expert, can better predict how these choices will effect society, please kindly see the excellent Freakonomics posts describing how expert predictions are a different kind of bull.
I wonder if that would be the “little or no benefit” that is the automated clothes washing machine, or perhaps the automated dishwasher. Or perhaps in house refrigeration.
These were all created by people trying to compete for that “higher position” by providing a better product. They free many, many hours of time and almost every american has ready access to at least two of the three.
These technologies all also started as something only the “rich” could afford, that may never have gotten traction under your progressive tax.
The same is true of the personal computer.
Yes, let’s create a world like that and end all this evil competition.
It’s pretty obvious that something that saves you many hours every day is not of “little or no benefit.” Replacing your 2 year old fridge with a side-by-side because you don’t like the top-bottom set up would be of little or no benefit, and is just pointless consumerism for the sake of consumerism. You’re trying to twist his argument into something it is not just to satisfy your partisan desires.
Competition is good when it leads to real improvements, but most of the consumption in America serves no purpose, and, as stated above, we end up paying 3-4 times as much for a product or service that gives us no comparative advantage.
“most of the consumption in America serves no purpose”
Huh? I don’t know what this means.
Personally, ALL of my consumption serves a purpose. My purpose.
Cars, computers, air planes, cell phones….inventions can start off as novelties and be transformed into practical devices. And people already pay sales tax, so I’m not sure how this new tax would benifit. besides, what would the money collected be used for?
Way to go on this essay, hlpeed a ton.
[WORDPRESS HASHCASH] The poster sent us ’0 which is not a hashcash value.
I have bought your book and look forward to reading it. How do you address this common question: rich people’s money is their own, and they should be able to spend it as they choose, and that if you tax rich people proportionately more that’s a) unfair and b) encouraging them to work less or move elsewhere?
I’m a sole proprietor and do not like the idea of having to deal with federal tax paperwork. Companies large enough to have finance departments could adapt, but this would really eat into my time. Also, selling a luxury item in a down economy, I don’t like the idea of all my products suddenly becoming X% more expensive. Yes, I know that in theory my customers’ paychecks would be larger, but suddenly having tngshi cost so much more cannot help my business or anyone’s business, and consumer spending is still the base of our economy.
Is this an attempt to find a new way of making sense of the world according to a preconceived political view of the world now that Keynes has proved less influential to today’s economic realities?