Cornell economist Robert Frank is highly respected within his profession and well known to the general public though his books such as The Winner Take All Society and Luxury Fever. In his latest book The Darwin Economy, he predicts that 100 years from now Charles Darwin, and not Adam Smith, will be regarded as the father of economics. I interviewed Bob in his office on August 20, 2015. I began by asking him to explain his prediction and we ended by discussing how to cut 100 years to 10 years.
DSW: Bob Frank, welcome to This View of Life.
RF: Nice to be back with you!
DSW: You have said that in 100 years, Charles Darwin and not Adam Smith will be considered the father of economics. Can you explain what you mean by that?
RF: Well, that was just a cheap marketing tactic. It was a claim I knew I wouldn’t be embarrassed to have made if it turned out to be wrong, because 100 years from now nobody will remember anything about it. But, it was a claim I thought I could defend if I had to. You know the famous association in the public mind between Adam Smith and the invisible hand theorem; the notion that if you just turn selfish people loose in the marketplace and have them seek their own narrow interests, you’ll get good results for society as a whole. Smith’s view was a little less pointed on that subject than his modern disciples’ view of what he said. They seem to think that he believed you would always get good results. He was far more circumspect. It was interesting to him that you often got good results when people pursued their own interest. I think it was Darwin who saw much more clearly the general relationship between the pursuit of individual advantage and the welfare of groups. In his theory of natural selection the emphasis is on how a trait or behavior helps the individual. If it promotes survival and reproduction of the individual that bears the trait, then generally it will be selected for. Often these traits are also good for the group, but not necessarily. So keen eyesight in the hawk—great for the individual animal, great for hawks generally.
Other traits, particularly those involved in sexual selection arms races, are typically harmful, for groups at least if not for the entire species. One of the vivid examples is the outsized rack of antlers on the bull elk. They span four feet, they weigh forty pounds, they are a horrible encumbrance. If a bull is chased into the woods by wolves he is easily surrounded and killed. He can’t maneuver. But those antlers are indispensible, since elk are a polygynous species, like most vertebrates. The bulls fight with each other for access to females and many of them don’t get any mates at all, which is the ultimate loser position in the Darwinian scheme. So having bigger antlers than your rivals was a huge advantage. That arms race doesn’t go on forever. We see four-foot antlers, not forty-foot antlers. They weigh 40, not 400 pounds. It’s true that natural selection imposes limits on the arms races, but the important point is that there is no presumption whatsoever that they are best from the perspective of the bulls involved. If they could each cut their antlers back by half, that would be a compellingly good deal for them. All fights would be decided as before, and all bulls would be less vulnerable to predators.
When we look at the marketplace, there are so many situations that are exactly analogous to arms races that led to big antlers in the bull elk. I think in time we will come to recognize—those who haven’t already—that there shouldn’t be any presumption at all that competition leads in general to good results for the group.
DSW: Let me generalize that. You’ve given a sexual selection example and I know from your book The Darwin Economy that there are many human counterparts to that—various forms of arms races. But another thing that Darwin discovered, I think somewhat to his dismay, is that if you look at all the traits associated with morality—what we do to benefit our group—those typically are not selectively advantageous within groups. So it’s not just a matter of striving for mates or striving to be top dog. Just about any behavior that is for the good of the group is going to cost time, energy, and risk for the individual, which places the solid citizen at a selective disadvantage within groups. So the problem is even worse than you say when you point to the bull elk example.
RF: Yes. I think that Smith and his modern disciples all recognize well enough that many people cheat and lie and steal when they think they can get away with it, and that’s not good for the system at a whole. I saw my contribution as pointing out that there is a whole suite of voluntary, legal, freely engaged in behaviors that have bad consequences for groups, even though individuals have no reason to second-guess themselves for engaging in them.
RF: The businessmen who built big signs along Route 13 driving south out of Ithaca haven’t created that unbelievably ugly corridor because they had bad taste. For a sign to be effective they knew that it had to stand out relative to the other signs in close proximity. That means it must be taller, stick out farther, have brighter lights. Given that it’s the relative visibility of the sign that counts, of course you’re going to get an explosive outpouring of ugly signs when the dust settles. The only way that you don’t get that is to pass regulations that limit the size and shape and composition of signs, which many communities obviously do.
DSW: At the heart of this is that word relative. When I summarize what The Darwin Economy means compared to standard economic thinking, it is relative fitness vs. absolute fitness. In evolution, what evolves is that which does better than anything else. It’s always relative and can be relative at a number of scales; within groups, between groups, and so on. But economic theory, especially formal economic theory, appears to be founded on a concept of absolute utility. First let me check with you that I’m correct and second let me ask why economics developed that way and never saw anything wrong with it. Why did it take someone like you to point out that so many social processes are based on relative advantage, not absolute utilities?
RF: First of all, you are correct to say that the formal theoretical apparatus of economics today completely ignores the link between context and evaluation. Is my car OK? Is my suit OK? Is my house OK? According to standard economic theory, the answers to those questions all depend only on the absolute qualities of the things involved. It’s going to be a very strange thing 100 years from now, I think, when economists and others look back on the state of discourse in economics in our day. “Why weren’t they taking context into account?” will be the first question people will ask. I’ve thought about that question for decades. I have some tentative thoughts about it, but I’m still left with the feeling that I don’t fully know what the answer is. But on the question “Does context matter?” I think even economists, if you pressed them, wouldn’t argue that it doesn’t. So you want to look good when you go for your interview. What does that mean? Looking good is a quintessentially relative concept. It means looking better than other people who want the same investment banking job that you want. If the other canditates are wearing $500 dollar suits and you go in wearing a custom tailored $2000 suit, you’re still not going to get the job if you have bad grades and don’t speak well, but if everything else is equal—and we know this from experiments—you’re more likely to get a callback than the people wearing the cheap suits. The interviewer many not be able to say what color your suit was, or anything of that sort. It’s all operating out of conscious awareness, but looking good means looking relatively good and people are in subtle ways aware of who looks good. There is no absolute sense that we can define a standard for a suit to be OK. It’s always relative.
I lived in a two-room house with no plumbing or electricity when I was a Peace Corps volunteer in Nepal. It was not only OK but a great house, one of the best houses that any of the teachers in the school where I taught lived in. I was proud to invite people over. But it wouldn’t be an OK house in Ithaca. It would be a house that screamed out to the community that here is a person who didn’t do what was minimally expected of him.
DSW: This reminds me. I know a little about your personal history. Your personal history is unusual for an economist—is that safe to say?
RF: I don’t think it’s all that unusual. There are many economists who went in the Peace Corps besides me.
DSW: OK, I stand corrected.
RF: But, I would say 99.5% of economists didn’t go in the Peace Corps. That would be true of 99.4% of other Americans. It’s not a huge difference.
DSW: There is a filter, I think, for who becomes an economist and then there is another filter for who succeeds after they start their training. You’ve worked on that. Economic training is a formative experience that molds how you think.
RF: Tom Gilovich and Dennis Regan and I did some experiments long ago in which we tried to determine whether studying economics made people behave in a more self-interested way. It would be strange if it didn’t have that effect, because the models we use in economics assume that people are self-interested in the narrow sense of the term. So, if you do experiments with prisoner’s dilemmas, a very popular game for exploring the interplay between community interest and self-interest, the prediction of the economics models is that everyone will defect (in a one-shot game). Our experiments sought to determine whether students who were studying economics were more likely than others to defect. The first thing to note is that many people do not defect, contrary to the prediction. They’ll never see their partners again; they interact only once. The theory is very clear that you’ll get a better payoff no matter what the other player does if you defect. Yet, a high proportion of people don’t defect. In those experiments, if you studied economics, you were substantially more likely to defect than if you were a major in some other subject. These were all Cornell undergraduate students. Was this a training effect or a selection effect? (Maybe the students who chose to major in economics were just more selfish to begin with.) We couldn’t tell from that result, so we also examined where you were in the pipeline. If you were a freshman or a sophomore, the difference between economics majors and others was much smaller than it was if you were a junior or a senior. The longer you studied economics, the more the difference was in defection rates. That’s the expected finding. If you teach that people will defect in prisoner’s dilemmas—we know from experiments that if you tell someone “look, we’ve seen the form; your partner has already defected. What do you want to do?”—everyone defects in that case. On what grounds might you expect that an economist wouldn’t be more likely to defect if all day long he teaches students that is what people do in that situation. So, it’s an interesting case of life imitating art. We become what we teach.
DSW: Yeah, the theory decides what we can observe. The way I’d like to structure the next part of this conversation is to focus first on a formal theoretical level and second at a narrative level, and to note the disconnect between the two. That’s what I’ve learned. What formal economic theory says and what popular discourse says on a subject such as the invisible hand—basically, they have separate lives.
DSW: I want to explore that. But at the theoretical level, my understanding is that the Walrasian tradition, which is more or less inspired by Newtonian physics and attempts to model humans as a kind of an atom—a social physics—that the assumptions required to build that kind of a model make it very difficult to incorporate such things as norms and preferences that are influenced by other preferences. So the formal theoretical apparatus becomes inflexible for incorporating certain assumptions and that is one reason why it is difficult to base economic theory on something like relative fitness. Am I in the ballpark here?
RF: That was one of the possible explanations I considered too when I’ve been thinking about the resistance to incorporating relative concerns in formal economic analysis, but I think if you look carefully at that hypothesis it doesn’t really stand up very well. Economists like formal models, that’s true, but what’s also true is that the more complicated they are the better. Formal analysis is a way to demonstrate how smart you are. If you’re one of a pair of competing candidates for a economics opening, the most important thing for you to know is that it will be in your interest to be the more formally qualified of the two. Economists have responded to that incentive by becoming ever more formal in their approach to how they write about economic decisions. But we can easily formalize the assumption that people care about relative position. I care about how big my house is in absolute terms, but I also care about where it ranks in the percentile distribution of houses in my area. It adds an extra wrinkle of complication to the model. Why is that wrinkle not an attraction to an economist, as complicating features seem to be in other domains? I don’t think that’s it.
DSW: Let me push back, because way back when complexity science was new and James Gleik wrote his book Chaos, which was one of the best books for a general audience on a complex subject, he made the point for physics and biology that there is a complexity wall beyond which formal analytical models cannot go. The only way to explore that terrain is with agent based models and other computer simulation methods. At the time, because there was so much prestige associated with formal analytical models, what they did was just define their subject to leave all that interesting stuff out!
RF: Yes, that’s an absolutely valid point.
DSW: That’s what economists are doing. So it’s not true that you can go there with formal analytical models. You must change your whole approach in some ways in order to study economic systems as complex systems frequently out of equilibrium.
RF: It’s true that when you’re studying a truly complex system with thousands of variables and interactions and nonlinearities, closed form solutions are just not on the table. You can’t achieve them and so the only thing you can do is clumsy numerical simulations and agent based modeling and the like. That’s less elegant and was at one time less in fashion. I totally accept that explanation for why those types of models were slower to break through than they ought to have been. The modification I just described, though, where you include an additional feature in a standard model—What does the utility function look like? The agent cares about how big his car or house is…
DSW: OK, so you can build a little local model.
RF: …and then you add one more feature that captures the essence of this important phenomenon that is currently ignored altogether. That’s a model that not only fits behavior much better than the simpler model does. It’s not much more complex. It’s certainly not beyond our capability to derive closed form solutions. I’ve built such models and others have too. Of course, If you push far enough you get into deep water and you can’t get closed form solutions. Other methods are becoming more acceptable. I don’t think that’s it. I think there is just something about the invocation of interpersonal comparisons that puts people on edge in economics. There is a libertarian economist I’ve quoted—Donald Boudreaux—who says something like “It’s true people have certain preferences, like we’re suspicious of outsiders and foreigners who don’t look like us, but I wouldn’t want to base economic policy on preferences like that. Similarly, I wouldn’t want to base economic policy on the fact that somebody feels jealous when his neighbor has a better house than he has.” It’s not a denial that people have these feelings; it’s an acknowledgment that they exist, but they are not proper fodder for economic policy concern. And that’s just wrong. It’s not about envy and jealousy–it’s “Is my suit OK?” I’m not envious that other candidates have nicer suits than mine. It’s that I’m not going to get a callback from this interview because they have nicer suits. If my house is less expensive than homes of people like me, my kids will go to worse schools than their kids go to. So, Darwin’s single insight that had more power than anything else, in my mind, was his insight that life is graded on the curve.
DSW. Yeah. It’s like Monopoly. If someone does something policy-wise that gives some players an increase of 10,000 Monopoly dollars and others 1000 Monopoly dollars, that’s not right—because who’s going to win the game of Monopoly?
RF: You’re not better off if you got the 1000 dollar increase.
DSW: It’s so simple!
RF: There’s a great New Yorker cartoon. A guy is saying to his boss pointing to a co-worker on the other side of the big office. “If you can’t see your way clear to give me a raise, how about giving Williams a reduction?”
DSW: [laughs] Wasn’t there a study done using Monopoly, where they gave one player more than the others?
DSW: Tell me the results of that study, because you’re more familiar with it than I am.
RF: This is work done at Berkeley in the psychology department. If people are given additional endowments of paper money in Monopoly, they behave in a very different way than the people who weren’t given money. They feel entitled to privileges outside the domain of Monopoly. The same team studied the propensity of cars to stop for pedestrians lined up to cross the street. In California it’s a very strict norm that you should stop when a pedestrian is about to step into a crosswalk. The luxury car drivers were way less likely to stop for pedestrians than the drivers of economy cars.
DSW: And in the Monopoly game, the ones that were given the most money, as I recall—first of all, they attributed their success to their ability to play the game, and secondly they made larger noises when they were using their pieces. They went Slap! Slap! Slap! [laughs]
RF: Yes! It’s interesting. None of us are immune to these subtle cues. I have noticed occasionally, by accident I will get upgraded to business class when I am on a flight. When I’m sitting in business class, I just feel like I’m a more important person. I’m the same person I was before this accidental upgrade occurred, but there is definitely an aura that you feel when you’re in that position, even though you are fully cognizant of the fact that you had nothing to do with it.
DSW: One of the reasons that evolution needs to be the foundation for economics is that if you go back to the whole story of how we evolved as a species, it’s all about this. It’s all about the ability of members of small groups to hold each other in check, so that the would-be dominant individual is not allowed to bully and boss other people around. That ability to hold people in check enables small groups to function as teams. All of this concern with reputation. In small human groups, the dominant individual becomes dominant by cultivating a good reputation, whereas in other primates the dominant individual is just the biggest thug.
DSW: That’s why we’re human.
RF: What a huge breakthrough that was, too. All the effort that’s wasted when thugs compete against each other is put to better use when we have this other channel for it.
DSW: And the whole secret for governance at a larger scale is to implement at a large scale what takes place relatively naturally at a small scale. It seems like such a simple prescription for good governance is to use small groups as a blueprint for larger groups.
RF: Yes, that’s a really important insight.
DSW: You have a practical prescription for the Darwin Economy, which is a particular form of taxation. Is that right? Could you summarize it and could you tell me how it is going? Is anyone listening to you?
RF: [laughs] I’ve been arguing for my specific policy proposal for about three decades. I’m guessing that if we’re any closer to adopting it than we were when we started, it’s only by a hair’s breadth. So not much progress. Maybe it would make sense to describe the problem it’s meant to solve before describing the policy itself. Since context matters, we get involved in expenditure arms races. For example, your daughter’s getting married. Everybody wants the guests to walk away thinking that they had a good time, remembering a special occasion. How much do you have to spend on the wedding in order to achieve that goal? Again, special is a relative concept. In general, the answer is that it depends on how much others are spending and what they are doing. Standards differ enormously from country to country and from one time in history to another. What we know in the USA is that the average wedding in 1980 cost $11,000 in today’s dollars. The most recent figure I’ve seen was for 2014—it was $31,000. So almost triple today for the average wedding, compared to what we spent in 1980. In Manhattan, the average wedding today is $76,000. So why has it gotten so much more expensive? The only cogent explanation begins with the observation that since 1980, all the income gains have gone to people at the top. They’ve spent more on everything, which is what everybody does when they get more money. So it’s a lack of perspective if you wag your finger at those people and say they shouldn’t be spending so much. They have a lot of money and everyone around them has a lot of money. Their standards are different in their circle and to have a special occasion, it’s got to cost 3 or 4 million dollars. You have to hire a famous rock band to perform, or else it won’t seem like a special occasion. The middle class isn’t trying to do that—they can’t—but people who are just below the rich who go to those same weddings, now the frame of reference shifts that defines what they have to spend, and so it cascades down one level at a time, so the average wedding now is $31,000. Does anyone think that the people married today are happier because they are spending three times as much as couples were 30 years ago? I’ll bet you’d find very few people willing to defend that claim in a debate. The people who have studied wedding expenditures actually have found that the more you spend on a wedding the higher the probability of divorce in any time interval after you’ve married. So it doesn’t seem to do anything good for couples to be spending so much more. What are they doing it? Because if you didn’t spend what others spend or at least come close to it, people would leave thinking you’re a cheapskate who didn’t appreciate how important the occasion was. That’s pure waste. Pure economic waste. We’ve got other important things to do with those dollars.
My policy prescription is to scrap the income tax, and in its place adopt a much more steeply progressive tax on total consumption expenditure for the household during the year.
How do you do that? It’s actually simpler than it sounds. You report your income to the IRS the same as you do now. We could greatly simplify that and should. You would also report how much you had saved during the year. We’ve already figured out how to do that with 401k accounts and other tax-exempt retirement savings accounts. The difference between those two numbers—your income minus your savings—that’s how much you spent during the year. That amount, minus a big standard deduction, say, $30,000 for a family of four, is your taxable consumption. If it’s a small number you don’t pay anything. If it gets into the $40-50,000 dollar range, the rates start out low, just as they do with income tax, but then they gradually escalate and they end up much higher than they would under the current income tax top rates. They would have to be higher, since you are exempting savings from tax, if you wanted to raise the same revenues as before. You might even imagine a system where the tax on the next dollar of consumption, if you’re already consuming two million dollars a year, might be 100%. You could never tax income at 100%, but if you’re taxing consumption 100%, that just makes the last thing you buy twice as expensive as before. So then people, if they’re thinking about spending $100,000 on a wedding, now it’s going to cost them $200,000. We know the rich do cut back when things get more expensive.
DSW: Or if they decide to do it, it is just a better advertisement for their wealth than before.
RF: Then if they want to pay the tax, they’re even better able to broadcast how much they have in the bank. In that case, we’d slow this rate of increase on mansions and weddings. That would mean that the people just below them wouldn’t feel the same amount of pressure, and so on all the way down the line. It would relieve pressure that currently is making middle class families buy houses that are 50% bigger than the ones they bought in 1970. Why are they buying so much bigger houses? Because others like them are doing it, because people at the top are spending more. If you could slow the growth of consumption at the top, steer those dollars into investment, that would be much better for the economy. You’d get some extra tax revenue. Who’s happier—the guy who drives a Ferrari on a pothole ridden road, or somebody who drives a Porche 911 Turbo, which is half as expensive, on smooth roads? Nobody would say that the first guy is happier.
DSW: Then why doesn’t anyone listen?
RF: [laughs]. That’s the great question! Paul Samuelson used to like to say: “People ask me if I’m so smart, why am I not rich?”– to which he would respond: “I am rich!” He was the author of a best-selling textbook, so he actually did have a lot of money. But if this idea is so great, why haven’t we adopted it? I think we’re closer to adopting it now then we were 30 years ago. Two conservative economists published a book advocating this tax in 2012, published by the American Enterprise Institute in Washington, a prominent right wing think tank. At some point we’ll need to do comprehensive tax reform. The baby boomers are retiring, millions more each year, and the budget is going to be further and further out of balance. At some point we’ll have to move and we’ll consider what to do. This will be an item ripe for discussion.
DSW: Is there a way for it to be implemented locally? Are there any other nations that do something like this? For example, Scandinavia?
RF: The European countries have a different form of consumption tax. They have a value added tax, which is objectionable on its face because it’s regressive. The rich consume a much smaller proportion of their income than the poor, so a value added tax is really a tax that lets them off the hook, relative to people further down the income ladder. What those countries do is make up for that fact in their social safety net expenditures. They have a much more generous children’s allowance, much better schooling allowances, universal single-payer health care systems, way better public transportation, better maintenance of the public sphere in general. So the system overall is progressive. We could go that route too, but I think it would be easier to build that progressivity into the tax itself.
DSW: So that’s a kind of path dependence, based on where we are now.
RF: We have, actually, a progressive consumption tax in effect for 95% of Americans right now as we speak. Most people in the country have not yet reached the limit of tax deductible savings in their 401k accounts or equivalent retirement savings accounts. So we’re under such a system now, but the reason it doesn’t deliver the benefits I have described is that the rich aren’t under a system like that, because they already in the normal course of things save way more than the deductible limits in those accounts. We need to bring the wealthy into the system. We need to have the top marginal tax rate on consumption be high enough to get their attention. Then we could start shifting money from high-end consumption into other activities that would yield more value.
DSW: Let’s finish up with the disconnect between what we know theoretically and also empirically and the narrative, or ideology, which sails on despite that. To make it concrete, I just showed you an essay I have written on a survival study of businesses that went public on the New York Stock Exchange. Based on the information made public, you could code their employee policies. The study showed that five years later, the companies that gave a good deal to their employees, such as profit sharing and human resources, flat out survived better than companies that treated their employees as expendable. On that basis, you would think that if it is a Darwinian economy and the practices of companies that survive end up spreading, then doing well by employees would simply spread on its own merits. But that’s not what happened. That study and the book that I learned it from, Jeffrey Pfeffer’s The Human Equation, provided all the scientific information, all the theoretical rationale to tell you that a good business is one that fosters cooperation, prosocial behavior, much like any other good group. But there is a narrative afield that I think was embraced especially heavily by business schools, that makes you see the world a different way…
DSW: It ends up being not a matter of data, not a matter of theory, but a matter of the worldview, the lens through which you see the world. That’s what it seems to come down to. Please reflect on that in any way that you want.
RF: You made a very strong point. If it’s true, as Pfeffer claims, that companies managed in that way outperform other companies, then it seems only a matter of time before only such companies survive; the companies that manage in this more enlightened way. If in fact companies like that are more profitable than other companies. There was a group here at Cornell that claimed worker-managed systems were the only way to achieve a vibrant economy. They were studying firms organized like that in the former Yugoslavia. My question to them was, if those firms were so great—the claim was that workers would be over 50% more productive if they had some say over the organization. It that’s true, why don’t firms like that spread like wildfire across the landscape? That’s a huge profit margin. Fifty percent more productivity, if 70% of your costs are labor costs, which they are in the US, that’s like the most profitable imaginable company, year in and year out. So there would be a tendency for companies like that to gobble up other companies. They didn’t have a good answer to my question of why those companies hadn’t spread. Maybe it’s that companies organized in that way produce what the workers think would be good for people to have rather than what people really want. There must be some reason that the companies haven’t spread. One handicap is that the managers that were churning out the shareholder wealth maximization model caught fire in business schools and became a strong focus for many years in the post World War II decades and we may be seeing some of the fallout from that.
Chainsaw Al Dunlop, who was a notorious short run profit maximizer—let’s raid the company, let’s raid the pension plan, let’s abrogate all the implicit contracts and get the stock price up—came and gave a lecture here. One of my colleagues recognized him to be a charlatan and immediately shorted the stock in the company that he was managing at the time. My colleague lost a bundle of money on his bet because the company’s stock kept going up. He finally had to bail out. The company’s stock did crash but too late to benefit him. These things often take a long time to shake out in the market place and there is a lot of churning. When you’re trying to recruit, the first thing a candidate sees is the salary. The hardest thing I face when talking with students is telling them that they must look at the whole package. There is a well known theory in economics called compensating wage differentials. The stinkier the job, the more they must pay to get you to do it. If you get an offer that’s surprisingly high, given your skills and experience, you should ask yourself what is it, exactly, that they want you do to?
DSW: It was your paper—“What Price the Moral High Ground?”
RF: Exactly. They are probably expecting you to do something that most people don’t want to do. You’re not shopping for a high salary. You’re shopping for a package of job characteristics. You want to be happy—you don’t want to be rich. Money helps you to be happy but it’s not the only thing that matters. It’s a very difficult message for students to take and run with. Most of them see the salary, they see what others are getting in salary. That’s the easiest comparison to make across jobs. If there is something companies can do to boost the short-term salary, that may be a winning strategy.
DSW: Two elements follow directly from multilevel selection theory. One is short-term vs. long-term.
DSW: If you’re trying to maximize short-term profits, that’s typically going to trade off against long-term anything. Number two is some people benefiting at the expense of others. If the elite benefit from something that is not good for the company or the larger economy, if they’re in the driver’s seat that is what will happen. So these are some reasons why an ideology or a particular narrative can spread despite not benefitting the common good.
RF: Yeah, and since the people who embrace that ideology have a lot of money now, and since there are fewer constraints than ever on how they can spend that money to influence political decisions, I think that’s a very important point.
DSW: If we go back to the disconnect between what Adam Smith actually said and what he is taken to have said, and what other figures such as Friedrich Hayek, who is a pillar of free market ideology, actually said, as opposed to what he is taken to say, then any scholar is going to point that out. What’s happening at the ideological level has no support from the academic study of these people or their theories. Nevertheless, that’s what drives the decisions.
RF: It’s frustrating, but that’s true, and there are countless examples of it. The whole idea that cutting taxes on the rich will spur them to work harder and get a massive boost in the growth of GDP is utterly without empirical support in the data. It’s not even theoretically predicted by the basic economic model. If you raise the tax on someone, that does make it cheaper to take time off, so you might be tempted to think it would make the economy grow more slowly, but it also means that he has to work longer to achieve a target level of income, and those two effects cut in exactly opposite directions and which one dominates is not predicted by theory. If you look over the long span of history, what’s clearly true is that we today, at our vastly higher wage rates that we earn compared to a century ago, work many fewer hours than people did then, so the theory combined with the evidence seems to say that higher taxes on the rich would make the economy grow much more rapidly. These fictions persist. The narratives are firmly supported by people with an interest in them.
The important thing is not to get discouraged. Counter-narratives can find their legs under the right circumstances. There was once a very strong narrative that it was unacceptable for people of the same sex to be permitted to marry. All sorts of terrible things would happen if that were allowed. There was not a state in the United States that didn’t have huge majorities firmly opposed to permitting that fifteen years ago. Now virtually every region of the country has a majority saying “why shouldn’t we allow people to marry whomever they choose?” That change happened faster than anyone predicted or even could have imagined, by the arguments getting out there and people talking about them. We’re not sure what to believe, any of us. We don’t have time to investigate every question. Inevitably, we rely on cues from other people. What do they find reasonable to believe? If they all think that slavery is a horrible evil, then I will accept that without critical examination. A student today couldn’t give a sophisticated argument to explain why slavery is wrong because everybody believes it is wrong. At one time there were arguments about it and learned people faced off on it. Once the arguments began to tip, then it became a foregone conclusion. So pushing back is important. We used to see great resistance to the idea of taxing pollution. When an economist first said that we should require companies to buy permits to discharge SO2 into the air, that was a scandal. This would allow rich firms to pollute to their heart’s content, the environmentalists were saying. But finally we did it and 25 years later, in a flash, SO2 levels went down to tolerable amounts. The costs of getting the air clean was a fraction of what had been estimated to be. Keep plugging away.
The one biggest factor in the failure to embrace Darwin’s insight is this lesson that’s drummed into us from early childhood on, that you shouldn’t envy your neighbor. Actually, it’s not really about envy—I’ll tell you about a conversation that shaped my thinking on this point. I was going to talk about an earlier book, Luxury Fever, that also described this expenditure cascade phenomenon, at the University of Chicago. I was having dinner the night before my talk with Dick Thaler (the behavioral economist), Cass Sunstein (co-author of their book Nudge), and Richard Posner, a very distinguished law and economics figure. Posner was the last to arrive. Sunstein, Thaler and I were waiting in front of the restaurant. Posner drives up at the wheel of a brand new Lexus sedan, which was the luxury car of that year. He gives his keys to the valet. We’re walking to our table. He says to me unbidden (I hadn’t mentioned his car at all): “I don’t know or care what kind of car my neighbors or colleagues drive.” He wanted me to know that. He knows what I am going to be talking about the next day. He doesn’t want me to think that he’s the kind of person who would want to show off by buying a fancy car or be worried that his car wasn’t as good as his neighbor’s car. I’d known Posner for a long time and that rang completely true. He absolutely had no idea what kind of car anyone else drove. So I said: “How come you bought the Lexus, Dick, and not the equivalent size Toyota model from the same manufacturer? It’s just as reliable and serviceable. Oh, it was the quality, the palpable quality of the Lexus. It was the buttery soft leather on the seats. It was the wonderful sound that the doors made when you closed them. You could hear the quality. He loved that there were red-letter warnings in the owner’s manual that you shouldn’t try to start up your Lexus when the engine is already running. The engine is so quiet and vibration free, that’s a real risk for the Lexus owner. So it was quality. I asked “What were you driving?” A five-year old something. “What if we sent that car back to 1930 in a time capsule. How would people react to it?
He didn’t miss a beat. He knew immediately that the correct answer was that they would be blown away by it. The would be astonished by how fast it was, how well it cornered, the materials and all that. So I said: “Suppose we want to make a formal economic model of what led you to buy the Lexus. We need a quality measure, so we would take braking distances and if the Lexus stops more quickly than other cars it would get plus points for that. If it took longer to stop it would be minus points. We’d do the acceleration tests, we’d do the skid pad test, we’d do all the tests. The econometricians would estimate what the weights are for all these things. Then we’d make a quality index, and as that number got bigger you’d be willing to pay more for your car. Yes, everyone agreed that was the right way to approach quality choices. Then I said—and this was the punch line of the conversation—“that’s exactly the same model that we would use to explain your purchasing behavior if your aim had been to make your neighbors and colleagues feel bad because you had a better car than they had. Exactly the same model. Posner didn’t seem at all troubled by that. Thaler didn’t seem much interested. But Sunstein’s eyes widened and he said “That means that these effects are everywhere! It’s just a context externality. It’s not jealousy, or envy, but just the way you need a frame of reference to make any quality judgment about any product or service.” So he wanted to write a paper about this right away and got all excited. That subtle shift in the way you frame the phenomenon turned Sunstein, who didn’t know or care about how much anybody else spent on anything–I’m almost certain that he wouldn’t be sensitive to that in any conscious way—that turned him from someone who thought these effects were tangential and unimportant to seeing them as central. And they are central.
DSW: Did you write papers on that?
RF: We did. We wrote a 100-page law review paper on how positional concerns reflect wages in the labor market. So I think in time—100 years to come back to our opening scene—people will see that Darwin’s insight was the central one that helps us understand a really broad swath of economic behavior.
DSW: But that 100 years really bothers me. I want it to be 10 years. What can we do to make it 10 years? I’ve done enough reading to know that if we go back 50 years, we’re going to find it much like it is today. People were criticizing the hell out of orthodox economic theory, for the best of reasons, talking about what a tyrannical grip it has on the economic profession, how things have changed and how they’re hoping it will change faster—all of that written in the 1970’s. Basically, 50 years has already gone by without much change. What’s to say that it will happen in 100 years, or, since there are such things as tipping points, why not 10?
RF: Well, I have a book coming out in January in which I’m making yet another attempt to push this conversation along. I’m sophisticated enough now to know that it won’t be surprising if not much happens with the publication of that book. But given my skill set, I can’t think of what else I’m able to do. My first book on these themes—Choosing the Right Pond—came out in 1985 in January or February. I thought I had stumbled upon some really important insights about why markets don’t give us what we really want, and maybe by September or October there will be bills wending their way through the House and Senate to implement all the brilliant policy prescriptions that followed from these insights. Well [laughs] one thing I have learned in the intervening decades is that isn’t likely to happen in response to any one kick of the ball, but what can you do but take the best swat of the ball that you can?
DSW: One point to make is that the alternative paradigm, which is an evolutionary paradigm, has been developing so fast over the last few decades that if you were to go back even 30 years—your book in 1988, Passions within Reason—was pioneering this sort of thinking. Now if you look at what’s happened for the application of evolutionary theory to human affairs, it’s like night and day, the difference between 30 years ago and now. So we really have a robust alternative paradigm. I would like to think that is a game changer. Armed with that, we could have that tipping point within 10 years. We don’t have to wait 100 years.
RF: I hope you’re right about that. What’s different about the world now—those books came out in the mid-eighties—is that social media didn’t exist then. If a good idea can be expressed simply enough, there is much greater opportunity for it to become viral now than in the not so distant past. Somebody asked me as part of a list serve I’m on to describe my most important idea in less than a paragraph. A sentence or two, at best. What a great exercise! I had never really thought about that. I finally boiled it down to saying: What happens when you have less money to spend is very different from what happens when everyone has less money to spend. When people think about paying more taxes to finance the crumbling infrastructure, thinking: “Oh, I’ll have less money. I won’t be able to buy what I want.” They think that because most of the times that they’ve had less money it’s been because of a divorce or a home fire, or a loss of employment—something that has reduced their income but hasn’t changed everyone else’s. If you pay more in tax, however, that means everyone has less to spend. Then you’re still able to get what you want, because the things you want—those extras—you have to bid for them. Especially if you’re in the top half of the income distribution, you’re bidding for those scarce things that are nice to have but not essential. They go to the highest bidders and if we all have less money then those things go to the same people as before. So we shouldn’t be so reluctant to rebuild our public infrastructure because paying taxes isn’t as expensive and painful as we think it is going to me.
DSW: I’ve started to think that the best one-sentence summary to get people thinking the right way is “Society is an organism”. That is, of course, an old metaphor that goes all the way back to antiquity. But there are two things about it that are new. First, there is a scientific foundation for it that did not exist before. Second, it is so different from the received paradigm, which so very individualistic. What do you think of that? Society is an organism. What an organism does in terms of taking in resources, processing them, doing the right things with them—a society has to be like that too, small or large. When you begin to think of the sophistication and dozens and hundreds of regulatory mechanisms that are required for an organism to function, and that society needs something like that too. The idea that you can have no regulation becomes an absurdity.
DSW: So what do you think of the idea of “society is an organism” as a hook for getting people to think in the right way?
RF: I like that idea. I think your opening sentence is: Society is an Organism. Then you have 100 words and I think you can make exactly the point that you just made. That’s a very good quick and dirty summary of how to think about things. I like it.
DSW: I get your approval?
RF: Run with that.
DSW: That’s great! I think we’re done.
RF: On that note.