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Another Fatal Conceit

The lesson from evolutionary economics is bottom-up self-organization, not top-down government design

A review of The Darwin Economy: Liberty, Competition, and the Common Good by Robert H. Frank. Princeton University Press, 2011, 240 pages. This review appeared online in the Journal of Bioeconomics in March 2012.

When I entered the world of competitive bicycle racing in 1980 no serious cyclist wore a helmet in training, and the leather “hair net” required by some race organizations—thin bands of leather-wrapped cotton stuffing—did nothing more than prevent your hair from getting mussed upon impacting pavement. Bell Helmets already had the technology from their motorcycle division to make a viable crash-tested safety helmet for bicycling, but elite cyclists are an elitist cohort that follows the trends of what looks good as much as what works well. The perception at the time was that a helmet was delimiting on performance and made you look like a “Fred”—two-wheel-speak for geek. Even if an individual cyclist wanted to don protection, unless everyone else did as well the competitive choice was to race sans helmet. When I was sponsored by Bell to compete in the Race Across America—the 3,000-mile nonstop transcontinental bicycle race—they engaged me to help design a helmet that elite cyclists would wear that would, in marketing theory, inspire the masses of two-wheelers to follow in emulation. We came up with the V1-Pro, a model that aped the leather hair net in design but was made of the same compressed polystyrene foam utilized in motorcycle helmets for absorbing the energy of an impact. Nonetheless, it was shunned by the pros until the Union Cycliste International (UCI)—the governing body of professional cycling—mandated the use of safety helmets for all cyclists in all races. No helmet, no race. Period. I was relieved, as were many other cyclists I knew, because I wanted to wear a helmet but didn’t want to stand out or lose a slight competitive edge. In time, as helmet use grew in popularity market forces worked effectively to make them lighter, cooler, and colorfully trendy. Now everyone wears them and we are all better for it.

1 The collective action problem

According to the Cornell University economist Robert Frank, this is an example of a collective action problem that requires top-down government-like regulation.Without such mandated intervention, people will not do what is best for themselves or the group, and this leads to market inefficiencies and moral failures. In his latest book, The Darwin Economy: Liberty, Competition, and the Common Good, Frank uses such collective action problems to make the case for why governments must intervene in economic transactions. Financial exchanges in a free market carry externalities—benefits and costs not included in the price of the transaction that is incurred by one or more of the parties involved, with or without their knowledge or agreement. In my aforementioned example, the UCI had to intervene into and mandate the use of helmets for the collective good, because individual cyclists within the collective body known as the peloton will not have the motivation to do so otherwise (Frank uses NHL hockey helmet rules as his type specimen but the principle problem is the same). From governing bodies in sports, Frank extrapolates to government agencies in society, arguing that in order to correct for market inefficiencies and moral failures we need more government regulations and taxes.

Frank’s term for this collective action problem is the “Darwin Economy,” which he derives from his understanding of Darwinism and the mechanism of natural selection. The ornate and ostentatious tail of the peacock troubled Darwin for a spell because natural selection holds that animals should evolve characteristics that protect them from predation. The peacock’s radiantly colorful tail is not exactly a model of stealthy camouflage. “The sight of a feather in a peacock’s tail, whenever I gaze at it,” Darwin bemoaned in an 1860 letter to his colleague Asa Grey, “makes me sick.”1 Darwin resolved the paradox a decade later through his theory of sexual selection, presented in his two-volume work The Descent of Man, and Selection in Relation to Sex, in which he demonstrated how females select males based on certain characteristics they find attractive, and males compete with other males for status, hierarchy, and females.2 In Frank’s view, what is good for the individual peacock in attracting peahens by building a flamboyant tail is bad for the species in making everyone a greater target for predation; as well, building ever fancier tails is a waste of resources. If the peacocks could form a governing organization to establish and enforce rules to delimit tail design the species would be better off. In like manner, Frank continues by example, the Brobdingnagian rack of antlers on the North American bull elk may intimidate other males competing for status and mates, but it endangers the species by decreasing efficiency of escape from wolves and other predators through thickly branched forests in which said rack would become entangled. This principle of individual success versus collective failure is so important to Frank that he goes so far as to predict that his fellow economists will, in time, come to see Charles Darwin as the most important economist in history.

The human analogue of tails and antlers for Frank are McMansion homes, expensive business suits, high-heel shoes, and extravagant coming of age parties. Much of his thinking here is derived from research conducted by behavioral economists, who report that relative position on the economic ladder—“positional rank”—matters more than absolute value to most people. Once you have a roof over your head and three square meals a day, it doesn’t matter how much more money you make above basic needs as long as it is equal to or exceeds that of your neighbors. As H. L. Mencken quipped, “A wealthy man is one who earns $100 a year more than his wife’s sister’s husband.” Remarkably, research shows that given the choice between, say, a $500,000 home in a neighborhood of million-dollar mansions and a $400,000 home on a street surrounded by $300,000 dwellings, most people opt for the latter.3 They are apparently willing to pay $100,000 for the opportunity to be relatively richer even while being absolutely poorer. Economists call this the hedonic treadmill. Run as fast as you like, you’ll never get there because there is no there there, without a relative context that gives you a positional rank among your fellow consumers.4

In like manner, men competing for limited high-paying jobs will enter an arms-race with their competitors for ever nicer and more expensive suits. If everyonewore a $500 suit to the interview the playing field would be level, but when someone ups the ante and arrives in a $1000 suit, the rest of the field has to…well…follow suit. All are poorer because of it. Ever increasing height in the heels of women’s shoes is another example of a fashion arms race in which everyone would be better off in flats. Once a few start to inch up their heels, the fashion trend takes off forcing those who would not otherwise do so engage in an Achilles-tightening arms race. Coming-of-age parties suffer the same positional rank fate. When the mega rich produce a festival fit for a king for their 16-year old queen, the next economic tier down must up the catering bill to satisfy teenage wants that have been artificially adjusted upward. Money that should be spent on, say, food, clothes, health care, future college tuition, or mortgage payments, is being wasted on frivolous ceremonial one-upsmanship.

2 The hidden costs of market failures and moral hazards

Moving from examples to analysis, Frank employs a technical model developed by the economist Ronald Coase that shows precisely how economists can take into account such transaction costs in order to better understand macroeconomic phenomena and correct for market failures. Here Frank claims that the transaction costs of keeping up with the Joneses is not presently included in the price of homes, suits, shoes, and parties in terms of the real benefit to the owners, so this is an example of a market failure (and, he opines, a moral hazard) that he suggests can be remedied through a progressive consumption tax wherein these newfound liabilities would not only adjust the transaction costs to account for the hedonic treadmill while simultaneously curtailing needless consumptive behavior, it would also generate additional tax revenues from the rich that could be used to shore up our crumbling Social Security and Medicare accounts.

Once you concede the point that markets fail to correct for transaction costs and that individuals must be coerced to act in ways that benefit both themselves and the collective because they would have no economic incentive to do so otherwise, it’s Katie bar the door for adding rules and regulations, taxes and incentives right and left, and while we’re at it correct for the hedonic treadmill and the positional rank problems with some serious income redistribution from those who have it to those who don’t. So-called “sin taxes” on alcohol and tobacco are just a start. Frank would like to tax sugared soft drinks under the rubric that obesity leads directly to diabetes and heart disease and premature deaths from other causes as well. Although economists counter that such early deaths may save us money down the road had these folks lived long enough to incur massive end-of-life health care costs (in a straightforward amoral cost-benefit analysis), the sugared soft-drink consumers will be thankful in the long run that taxing their favorite sodas led them to consume less of the harmful substances. Frank admits that this could lead us down a slippery slope of taxing fried foods, ice cream, and candy, not to mention bad television sit-coms that rot the brain. “But,” he concludes, “we’re forced to go part way down slippery slopes all the time. It’s a concern we can set to one side until we have traveled further down this particular slope. Consuming large quantities of soda laced with high-fructose corn syrup clearly causes substantial harm. And as long as we’re continuing to tax saving, job creation, and other beneficial activities, the case for replacing such taxes with taxes on harmful activities is compelling.”5

3 Either way, we’re paying taxes

Libertarians and other critics of big government might counter that if, say, you don’t want to wear a helmet or pay taxes, you can go somewhere else. But where are you going to go? Just as there is only one National Hockey League and only one Union Cycliste International in which professional hockey players and cyclists can compete, so too are there no tax-free countries. As Frank notes: “Without mandatory taxation, there could be no government. With no government, there would be no army, and without an army, your country would eventually be invaded by some other country that has an army. And when the dust settled, you’d be paying mandatory taxes to that country’s government.”6 Either way, we’re paying taxes, so we might as well concede the point and get on with the business of determining with the best analytics available where, when and how much we should be taxing ourselves to solve these assorted market shortcomings.

Robert Frank is a gifted economist and a skilled rhetorician whose regular commentaries in the New York Times, coupled to his blogs, podcasts, radio and television interviews, and popular books, make him a formidable and influential public intellectual who well represents those who tend to favor top-down government solutions to social problems. Frank’s ideas therefore deserve thoughtful consideration and response, which I shall endeavor to do here from the perspective of someone who has also written extensively on evolutionary economics—what I called evonomics—in my book The Mind of the Market.7 I too start with Darwin, but with a very different outcome from Frank’s analysis.

4 Economics: the connection between Adam Smith
and Charles Darwin

Charles Darwin was not an economist and never penned a single statement or treatise on economics, so it is difficult to imagine how or why a century from now, in Frank’s words, “if a roster of professional economists is asked to identify the intellectual father of their discipline, a majority will name Charles Darwin.”8 Not likely. There is a connection between Darwin and economics, but it isn’t in the way Frank thinks it is.9 In October of 1825, Darwin matriculated at Edinburgh University where, as a matter of general course curricula, he studied the works of the great Enlightenment thinkers, including David Hume, Edward Gibbon, and Adam Smith. A decade later, upon his return home from the five-year voyage around the world on HMS Beagle, Darwin revisited these works, reconsidering their implications in light of the new theory he was developing.10 Although Darwin does not reference Smith directly, Darwin scholars are largely in agreement that he modeled his theory of natural selection after Smith’s theory of the invisible hand.11 Compare, by example, these two descriptions from Smith and Darwin:

Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. … He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. He 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.

—Adam Smith, The Wealth of Nations, 1776, Book IV, Chapter II

It may be said that natural selection is daily and hourly scrutinising, throughout the world, every variation, even the slightest; rejecting that which is bad, preserving and adding up all that is good; silently and insensiblyworking, whenever and wherever opportunity offers, at the improvement of each organic being in relation to its organic and inorganic conditions of life.

—Charles Darwin, On the Origin of Species, 1859, p. 84

These descriptors—invisible hand and natural selection—are so powerful, and so deeply annealed into our thought and culture, that it is difficult not to think of them as forces of nature, such as gravity and electromagnetism, or as mechanical systems, such as gears and pulleys. But they are not forces or mechanisms, because there is nothing acting on the agents in the system in such a causal manner. Instead, Smith’s invisible hand and Darwin’s natural selection are descriptions of processes that naturally occur in the economies of nature and society. The causal mechanisms behind the invisible hand and natural selection lie elsewhere in the system—within the agents themselves—which is why Smith invested so much work on understanding the natural sympathies of people, and Darwin advanced so much effort toward comprehending the natural tendencies of organisms.

If there is a connection between evolution and economics—between Charles Darwin and Adam Smith—it is this: Life is intricate, complex, and looks designed, so our folk biology intuition leads us to infer that there must be an intelligent designer, a God. Analogously, economies are intricate, complex, and look designed, so our folk economic intuition is to infer that we need an intelligent designer, a Government. But as Smith and Darwin demonstrated, life and economies are not intelligently designed from the top down; they spontaneously arise out of simpler systems from the bottom up. Natural selection and the invisible hand explain precisely how individual organisms and people, pursuing their own self-interest in their struggle to survive and make a living, generate the emergent property of complex ecologies and economies. Charles Darwin and Adam Smith each in their unique way trying to solve a specific problem, independently stumbled across an elegant solution to what turns out to be a larger and overarching phenomenon of the emergence of complexity out of simplicity. Apparent design from the bottom up does not imply the necessity of intentional design from the top down.

5 Corporations as species

If there is a specific analogy to make between evolution and economics beyond a description of bottom-up self-organized emergence, it is that species are analogous to companies and corporations, not to societies and nations. In evolution, extinction is the rule, survival the exception. Most species go extinct because they fail to adapt to changing environments, and in their stead arise new species that are better adapted…for the time being anyway. The economist Joseph Schumpeter’s descriptor for this process in an economy was “creative destruction.”12 The term has been adopted by modern economists to describe the natural evolution of firms, companies, corporations, and even entire industries that go extinct and/or are replaced with new ventures better adopted to the ever-changing needs and wants of consumers.13

The meteor impact 65-million years ago that wiped out the dinosaurs opened up new niches to be filled by fledging mammals living in the nooks and crannies on the margins of ecosystems. A good case can be made that were it not for the demise of the dinosaurs we would not be here.14 That’s life. Ditto dinosaur corporations. In 1917 Bertie Forbes published his list of the top 100 U.S. corporations. By 1987, 61 of them were gone, and of the remaining 39, 21 were no longer in the top 100 and 18 underperformed the average growth in stock market value. The only company to both survive and outperform the market was General Electric. Similarly, of the 500 companies that made up the Standard & Poor’s original list in 1957, only 74 survived through 1997, at which point they had all underperformed the S&P 500 index by an average of 20%.15 In both natural ecosystems and economies, extinction is part of evolution. Think Kodak.

Kodak once so dominated the film and camera industry—at one point enjoying a 96% market share—that government bureaucrats were wringing their interventionistic hands in panic that such a monopoly could bring about market inefficiencies, or worse, Americans would get so hooked on capturing their “Kodak moments” that the film giant would force addicted consumers to pay artificially jacked-up prices. In response, the feds sued Kodak twice for antitrust violations in 1921 and 1954, opening the door for Fuji film to jump into the market. The result? Kodak and Fuji became a duopoly, and like most gargantuan organizations both grew sclerotic and failed to keep up with the digital revolution that, in the case of Kodak, saw their stock price collapse from $60 a share in 2000 to less than .50 cents a share at the time of this writing shortly after the story broke that the fearful giant was preparing to declare bankruptcy.16

Apple and Google are hot today, but who knows what a couple of grad students are dreaming up in their dorm rooms this year that in the near future will reconfigure the economic landscape? These giants—which the antitrust regulators are fretting about today—will almost assuredly turn into GM-like lumbering sloths unable to respond in time to the next shift in the economic ecology, and they too could go the way of Neanderthals. The Darwinian focus for economists should not be on societies and nations but on companies and corporations, and at this level of analysis top-down interventions are neither justified by the evolutionary analogy nor necessary for the long-term prospects of either societies or nations.

6 Peacocks and bull elk are doing just fine, thank you

In evolutionary theory, “good” and “bad” for a species is measured by “reproductive success.” The bottom line for organisms is getting their genes into the next generation. To that end entertain this thought experiment: If you were a gene what would you do to survive? First you create a means of reproduction, then you build a vehicle to house your self-replication machinery. You start with chromosomes as a template to hold your self-replicating molecules, then add a surrounding nucleus with a semi-permeable membrane for moving liquid nutrients in and out of the cell, then build yourself a multi-cellular vehicle with eyes for seeing and ears for hearing and legs for propulsion. You can greatly increase your reproductive success by reproducing sexually instead of asexually because this generates greater genetic diversity to adopt to ever-changing environments. You will also want to develop various mechanisms to avoid or prevent other vehicles that want to devour your vehicle, such as claws and teeth and wings and camouflage. You might also want to grow something on your body that will intimidate other members of your sex and to attract members of the opposite sex that is a proxy for your good genes, such as elaborate and colorful tail feathers if you are a peacock or a huge rack of antlers if you are a bull elk.

In such a thought experiment we can see that there are constant conflicts and trade offs in evolution. Heavy armor plating may be good for defending against claws but slows you up for escaping fast predators. Colorful feathers may grant you higher status and attract females, but predators will see you hiding in the bushes. Antlers may ward off challenging males and appeal to females, but you might win a Darwin Award for allowing yourself to be taken out of the gene pool by a predator. The value of such features to the species depends entirely on its overall reproductive success. If effervescent tail feathers leads to more matings with their resultant offspring than they lead to individuals being consumed by predators, then the overall reproductive success for peacocks and peahens is increased and we can say that the peacock’s tail is “good” for the species. Darwin explained such effects with his theory of sexual selection, of which there are at least two forms: (1) female selection of males based on characteristics that are proxies for good genes, (2) male v. male competition for females, status and hierarchy, and dominance. These sexual selection factors can increase the reproductive success of a species far more than natural selection through predation can decrease the reproductive success of the species. In fact, both types of selection go on simultaneously and so each case must be examined in detail to determine whether or not a feature is good or bad for a species.

This interaction of natural and sexual selection is further complicated by a mechanism described by the Israeli evolutionary biologists Amotz and Avishag Zahavi as Costly Signaling Theory (CST).17 Broadly speaking, in a CST model, people do things not just to help those related to them genetically (kin selection), and not just to help those who will return the favor (reciprocal altruism), but sometimes to send a signal that says, in essence, “my altruistic and charitable acts demonstrate that I am so successful that I can afford to make such sacrifices for others.” That is, altruistic acts are a form of information that carries a signal to others of trust and status—trust that I can be counted on to help others when they need it so that I can expect others to do the same for me; and status that I have the health, intelligence, and resources to afford to be so kind and generous. In the specific context here, CST allows us to see that a large rack of antlers or radiantly colorful tail signals to other members of the group that your genes are so good that you can afford the risk that such features may bring as a result of predation. As the UCLA evolutionary biologist Jared Diamond explained it to me in an email discussing Frank’s thesis, “animal signals have to demonstrate the validity of their intended message if they are to be believed. For example, if a male moose evolved to try to signal its superior genes to a female merely by growing a small tuft of red hair on top of the head, any scrawny lousy moose could afford to grow such a tuft, and the tuft would not be a reliable signal of individual quality. When a female sees a bull moose that is lugging around a huge set of antlers and has still survived despite that handicap, then the female can be sure that that really is a superior individual bull moose. More generally, the animal signals involved in sexual displays often or usually carry some disadvantage for natural selection, offset by an advantage for sexual selection. Thus, one can’t say that the peacock’s tail and moose’s antlers are bad for the species.”18

In point of fact, both peacocks and bull elk are doing just fine as species, contrary to what Frank suggests in his claim that such features are inefficient and therefore not good in the long run. In any case, whether or not something is good or bad for peacocks and bull elk has nothing whatsoever to do with what is good or bad for other species, including humans, especially the political economy of humans. As Diamond summarized the problem, “In addition, analogy is dangerous guidance: regardless of whether the peacock’s tail is good or bad for the peacock species, the merits of government regulation have to be assessed without reference to peacocks.”19

I would go even further. Taking Frank’s analogy seriously, not only are such features as the human equivalence of peacocks’ tails and bull elk antlers not a detriment to our species, sexual selection may very well account for most of characteristics that we so admire about our species: art, music, humor, literature, poetry, fashion, dance and, more generally, creativity and intelligence. Science itself may be a byproduct of the cognitive process of trying to impress others in order to gain status and mates by making breakthrough discoveries and formulating important new theories. The University of New Mexico evolutionary psychologist Geoffrey Miller makes a strong case for just such selective effects in his book The Mating Mind.20 Sexual selection, he argues, has driven organisms from Bowerbirds to brainy bohemians to engage in the creative production of magnificent works in order to attract mates—from big blue Bowerbird nests to big-brained orchestral music, epic poems, stirring literature and even scientific discoveries. Those organisms that do so most effectively leave behind more offspring and thus pass on their creative genes into future generations.

Thus, contrary to what Frank argues, a viable case can be made that the evolutionary arms races he so detests—men’s suits, women’s high heels, McMansion homes, and elaborate coming of age parties—are products of a larger system that drives our species to be so successful. By carrying out the biological analogy into political economy, if anything we should be rewarding the most ostentatious displays of power, prestige, wealth, creativity, health, vigor and intelligence with tax breaks and even subsidies! At the very least one could argue that a consumption tax on the rich could very well backfire and reduce the reproductive success of our species by attenuating the creative productivity that has given us so much of our culture that we cherish.

It may sound crude and unromantic to reduce the arts and sciences to little more than the product of organisms trying to impress others in order to gain status, resources and mates, but as the late Christopher Hitchens once advised me after we imbibed several doses of what he was fond of calling “Mr. Walker’s amber restorative,” once you’ve mastered the pen and the podium you need never dine or sleep alone.

7 Positional ranking, relative happiness, and individual liberty

One of Frank’s justifications for taxing the rich involves the matter of positional ranking and relative happiness. If research shows that the existence of wealthy neighbors puts me on a hedonic treadmill that I can never satisfy, legislated policy is therefore justified in forcing my neighbors to redistribute some of their wealth to me and others less fortunate. This, Frank argues, will not only adjust the positional ranking problem, it will help shore up the leaking budgets of Social Security and Medicare and Medicaid (which, with the defense budget, constitutes two-thirds of the overall budget). The problem with this argument is threefold: (1) Taxing the rich will do next to nothing for our debt crisis, (2) taxing the rich won’t make the poor any happier, and (3) positional ranking exists for a range of traits, not just for wealth.

  1. Taxing away the debt crisis. If, say, we followed Warren Buffett’s proposal for taxing the “super rich” who make between $1 million and $10 million a year at an effective rate of 50%, according to the nonpartisan Tax Foundation using figures from the IRS, this would reduce the national debt by a grand total of 1%. What about the “mega rich,” those making more than $10 million a year? If we taxed them at 100%—that is, we confiscated every last dollar made by every person in the country at this level, the national debt would be reduced by only 2%. Taxing the rich will not solve our debt crisis.21

  2. Taxing away unhappiness. In what way, exactly, will redistributing money from the rich to the poor increase the latter’s happiness or decrease their unhappiness? In fact, research shows that economic self-reliance makes people happier than economic dependency, and studies show that people are happier, healthier, and more generous when they voluntarily donate their money to causes they deem worthy, instead of having their money confiscated from them and given to causes that they may not have otherwise chosen to support. Evidence for this claim can be found in two sets of data: (A) studies on international happiness and freedom, (B) studies on national charitable giving.

    1. International happiness and freedom. Research on happiness and freedom internationally reveals that an increase in personal autonomy and self-control leads to greater happiness, and that people tend to be happier in societies with greater levels of individual autonomy and freedom compared to those in more totalitarian and collectivist regimes. The Erasmus University, Rotterdam social scientist Ruut Veenhoven, for example, conducted a comprehensive survey on happiness as a function of three social conditions: individualism, opportunity to choose, capability to choose. “The data show a clear positive relationship,” Veenhoven concludes, “the more individualized the nation, the more citizens enjoy their life.” Further, he found no “pattern of diminishing returns,” meaning that “individualization has not yet passed its optimum.”22 In other words, greater levels of individual freedom and autonomy could lead to even greater levels of happiness, and this could very well counter the alleged decline of happiness due to one’s lower positional rank.
    2. National Charitable Giving. Research on the difference between forced and volunteer giving reveals a counterintuitive finding on the differences between the political left and right. According to the Syracuse University professor of public administration Arthur C. Brooks, when it comes to charitable giving and volunteering, numerous quantitative measures debunk the myth of “bleeding heart liberals” and “heartless conservatives.” The opposite, in fact, appears to be true. Conservatives donate 30% more money than liberals (even when controlled for income), give more blood and log more volunteer hours. And it isn’t because conservatives have more expendable income that they are more generous. The working poor give a substantially higher percentage of their incomes to charity than any other income group, and three times more than those on public assistance of comparable income. In other words, poverty is not a barrier to charity, but welfare is. One explanation for these findings is that people who are skeptical of big government give more than those who believe that the government should take care of the poor. “For many people,” Brooks explains, “the desire to donate other people’s money displaces the act of giving one’s own.” In this sense, liberals feel that they already donated to the poor through their taxes, whereas conservatives believe that it is their duty, not the government’s, to assist those in need. The effects on happiness are measurable in terms of societal health: charitable givers are 43% more likely to say they are “very happy” than nongivers, and 25% more likely than nongivers to say their health is “excellent” or “very good.”23
  3. Positional ranking exists throughout life. The George Mason University economist Donald Boudreaux made an important observation about positional rank and relative happiness in responding to a New Yorker article in which the financial analyst John Cassidy argued for income redistribution because of the hypothesis that people’s health is harmed by relative (instead of absolute) positional rank. In a nature analogue Cassidy claimed that “dominant rhesus monkeys have lower rates of atherosclerosis (hardening of the arteries) than monkeys further down the social hierarchy.” Boudreaux showed how, in fact, income redistribution could have the opposite effect: “Because status among humans is determined not only by income but also by traits such as political power, athletic prowess, military heroics, intellectual success, and good looks, equalizing incomes will intensify the importance of these non-pecuniary traits as sources of status. And there’s no reason why persons with low status in these non-pecuniary categories will not suffer all the stress and envy now allegedly suffered by people with low incomes.”24

In the end, then, following Frank’s line of reasoning, the government should give tax breaks to conservatives, the wealthy, and the working poor in order to reward their pro-social behavior and encourage more giving, and the government should stimulate income inequality in order to attenuate status seeking in other non-pecuniary traits. All liberals in favor of such policies please raise your hands.

8 Other hidden costs: what is seen and what is not seen in government actions

Even if evolutionary psychologists are wrong in this analysis of sexual selection and CST, and it was determined that ostentatious displays of wealth, power, prestige, and creativity should be penalized through a consumption tax because of Frank’s analysis using Coase’s transaction models that reveal the hidden transaction costs of positional ranking and subsequent arms races, there are transaction costs of implementing such a tax. In fact, once you concede the point that at least some government services are necessary and must be paid for by taxes, then to the short list of services such as military, police, courts, and tax collectors, one can bolt on any number of additional services justified under the collective action problem rubric: fire departments, roads and bridges, schools, libraries, national parks and forests, postal service, social security, welfare, Medicare and Medicaid, foreign aid, and countless others embodied in the alphabet soup that this slippery slope line of reasoning has given us. Herewith are just a handful, and these only a select few from the letter A: Administration for Children and Families, Administration for Native Americans, Administration on Aging, Administration on Developmental Disabilities, Agricultural Marketing Service, Alcohol, Tobacco, Firearms, and Explosives Bureau, American Battle Monuments Commission, Animal and Plant Health Inspection Service, Architectural and Transportation Barriers Compliance Board, Archives and Records Administration, Armed Forces Retirement Home, Arms Control and International Security, Army Corps of Engineers, Arthritis and Musculoskeletal Interagency Coordinating Committee. Imagine how long this list grows when you start tossing in all the “Bureaus” “Committees” “Councils” and “Departments” in working your way through the alphabet.25

The not-so hidden costs include the fact that each of these government agencies must be located in an office rented or leased, running up monthly utility bills and staffed by people who must be paid, provided health benefits, retirement programs, and the like. As well, once such agencies are established they are almost impossible to terminate, not to mention that they are also subject to the usual bureaucratic inefficiencies, political favoritism, and corruption and graft that is part and parcel of what we have come to expect from the public sector. A day doesn’t go by that we do not read of politicians and government bureaucrats busted for something they should not have been doing with tax-payers’ money.

And these are not even the hidden costs to which I refer in my subhead. The French economist Frédéric Bastiat demonstrated the difference between what is seen and what is not seen when governments intervene in the marketplace. A public-works project, such as the infamous Alaskan “bridge to nowhere,” is seen by all, gloried by its producers, and appreciated by its few users. What is not seen, however, are all the products that would have been produced or the services provided by the monies that were taxed out of private hands in order to finance the public project. It is not just that individual liberties are violated whenever governments interfere with freedom of choice in the economic realm, but that, in fact, the net result is a loss not just for the individuals directly affected by the confiscation of their monies, but for the nation as a whole for which the government action was originally intended. “There is only one difference between a bad economist and a good one,” Bastiat explained, “the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”26 What is not seen when tax programs are implemented is what that money would have been used for in the private sector.

9 Fatal conceit redux

Robert Frank strikes me as an intelligent and thoughtful man who genuinely wants to employ science and reason to improve the design of society for the betterment of all. His arguments are carefully crafted and artfully presented to make the case that since we’re in the business of designing society from top down anyway we might as well go whole hog and do it right. It is this that worries me—the conceit that interventionists of all stripes hold that if a little interventionism is good then a lot must be great. Granted, we need a military to protect us from foreign invaders, but do we really need a defense budget that currently accounts for 43% of all military spending in the entire world, more than the next 14 largest defense budgets combined? Yes, we need some social services, but a century ago Americans somehow survived and thrived with a government that consumed only 8% of our GDP; today it is over 40% and climbing. Currently we spend $204 billion or 1.4% of GDP servicing the debt. The Congressional Budget Office is now projecting that in the next 70 years that figure will climb to $27.2 trillion, or a whopping 41.4% of GDP. What will happen when servicing the debt exceeds 50% of GDP? Agreed, we need some regulatory agencies, but according to the Small Business Administration we are presently spending $1.75 trillion annually on regulations, which is almost double the amount collected on all individual income taxes in 2010.27 Looking at the global picture, in 2011 government spending rose on average to 35.2% of world GDP, up from 33.5% in 2010. What will happen when that figure reaches half, when half the world is completely financed through taxes paid by the other half?

This is the consequence of the fatal conceit that we can design a society from the top down. “The curious task of economics,” observed the Nobel laureate economist Friedrich Hayek, “is to demonstrate to men how little they really know about what they imagine they can design.” Hayek understood (more than most economists) that Darwinian evolution is a self-organized bottom-up process of design without a designer. “To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.” Hayek called this the “extended order,” the result not of planning and design but of a system that “constitutes an information gathering process, able to call up, and put to use, widely dispersed information that no central planning agency, let alone any individual, could know as a whole, possess or control.”28 The fatal conceit of socialist planners was tested experimentally over the course of the twentieth century and it failed in every case. Presciently, Hayek’s The Fatal Conceit was published in 1988, just before the crumbling of the Berlin Wall and the collapse of Communism, so this was an experimentally verified prediction.

Robert Frank is not a socialist and yet the design conceit is there nonetheless. Even when gussied up in economic jargon with Darwinian overtones, hints of the totalitarian mind from millennia past creep into our thoughts and reach for the controls. Somebody should do something. Take command. Control our actions. Direct our thoughts. Dial our desires. The clan elder, the tribal leader, the chiefdom big man, the state king, the central planner, the apparatchik, the lord savior, the infallible pope, the chief rabbi, the dear leader. Someone somewhere somehow will save us by telling us what to do and how to live. The impulse is a deep one that harkens back to our Paleolithic ancestry. It’s counterintuitive to think bottom up instead of top down. It is why so many people struggle to truly grasp the deep meaning of evolutionary theory, and it is why so many people fail to see that economic order is the product not of human design but of human action.

References
  1. Darwin, C. (1860). Letter to Asa Gray. Darwin Correspondence Project, Cambridge, Letter 2742.
  2. Darwin, C. (1871). The Descent of Man, and Selection in Relation to Sex. London: John Murray.
  3. Solnick, S., & Hemenway, D. (1998). Is More Always Better? A Survey on Positional Concerns. Journal of Economic Behavior and Organization, 37, 373–383.
  4. Carlsson, F., Johansson-Stenman, O., & Martinsson, P. (2007). Do you enjoy having more than others? Survey evidence of positional goods. Economica (Online Early Articles). http://www.blackwell-synergy.com/doi/full/10.1111/j.1468-0335.2006.00571.x
  5. Frank, R. (2011). The Darwin Economy. Princeton, NJ: Princeton University Press. p. 193.
  6. Ibid., p. 6.
  7. Shermer, M. (2008). The Mind of the Market: How Biology and Psychology Shape Our Economic Lives. New York: Henry Holt/Times Books.
  8. Frank, R. (2011). The Darwin Economy. Princeton, NJ: Princeton University Press. p. 16.
  9. I outline some of these connections and illuminate why conservative should embrace the Darwinian view of human nature as parallel to their own in Shermer, M. (2006). Why Darwin Matters: The Case Against Intelligent Design. New York: Henry Holt/Times Books.
  10. Browne, J. (2000). Voyaging: Charles Darwin. A biography. New York: Knopf. pp. 36, 366.
  11. Carey, T. V. (1998). The Invisible Hand of Natural Selection, and Vice Versa. Biology & Philosophy, 13(3), 427–442. Ghiselin, M. T. (1974). The Economy of Nature and the Evolution of Sex. Berkeley, CA: University of California Press. Gould, S. J. (1980). Darwin’s Middle Road. In The Panda’s Thumb. New York: W. W. Norton. Gould, S. J. (1993). Darwin and Paley Meet the Invisible Hand. In Eight Little Piggies. New York: W.W. Norton. Khalil, E. L. (1997). Evolutionary Biology and Evolutionary Economics. Journal of Interdisciplinary Economics, 8(4), 221–244. Schweber, S. S. (1980). Darwin and the political economists: Divergence of character. Journal of the History of Biology, 13, 195–289. Ahmad, S. (1990). Adam Smith’s four invisible hands. History of Political Economy, 22(Spring, 1), 137–144. Walsh, D. (2001). Darwin Fallen Among Political Economists. Proceedings of the American Philosophical Society, 145(4), 415–437.
  12. Schumpeter, J. (1942). Capitalism, Socialism and Democracy. London: Routledge.
  13. Reinert, H., & Reinert, E. S. (2006). Creative Destruction in Economics: Nietzsche, Sombart, Schumpeter. In J. G. Backhaus & W. Drechsler (Eds.), Friedrich Nietzsche: Economy and Society. New York: Springer.
  14. Gould, S. J. (1988). Wonderful life: The Burgess Shale and the Nature of History. New York: W. W. Norton. p. 318.
  15. Foster, R., & Kaplan, S. (2001). Creative Destruction: Why Companies That are Built to Last Underperform the Market—and How to Successfully Transform Them. New York: Crown Business.
  16. Gillespie, N., & Welch, M. (2011). Death of the Duopoly. Wall Street Journal, June 18. http://online.wsj.com/article/SB10001424052702303848104576385922449922958.html
  17. Zahavi, A., & Zahavi, A. (1997). The Handicap Principle: A Missing Piece of Darwin’S Puzzle. Oxford: Oxford University Press.
  18. Personal correspondence by email, December 21, 2011.
  19. Ibid.
  20. Miller, G. (2001). The Mating Mind: How Sexual Choice Shaped the Evolution of Human Nature. New York: Random House.
  21. http://www.taxfoundation.org/news/show/27556.html.

  22. Veenhoven, R. (1999). Quality-of-Life in Individualistic Society. Social Indicators Research, 48, 157–186. Veenhoven, R. (2000). The Four Qualities of Life. Journal of Happiness Studies, 1, 1–39.
  23. Brooks, A. (2006). Who Really Cares: The Surprising Truth About Compassionate Conservatism. New York: Basic Books.
  24. http://cafehayek.com/2011/10/the-better-you-understand-economics-the-more-you-realize-that-moneyisnt-all-that-matters.html
  25. An A–Z list of government departments and agencies can be found online at: http://www.usa.gov/directory/federal/index.shtml.
  26. Bastiat, F. (1995). What is Seen and What is Not Seen. In G. B. de Huszar (Ed.), Selected Essays on Political Economy. Irvington-on-Hudson, NY: Foundation for Economic Education. pp 1–2.
  27. Mackey, J. (2011). To Increase Jobs, Increase Economic Freedom. Wall Street Journal, November 16, p. A17.
  28. Hayek, F. (1988). The Fatal Conceipt. Chicago: University of Chicago Press.
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On the Modern History of Skepticism

In this interview with Reason Editor in Chief Matt Welch, shot at The Amazing Meeting in Las Vegas, Shermer talks about the history of modern skepticism, the connection between evolution and market economics, and how President Barack Obama is better than his predecessor on science.

Shot and edited by Dan Hayes

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Evolutionary Economics

On Thursday June 4, I attended the Cato Institute half-day conference in Century City, California, which started out with a lecture by U.C. Santa Barbara evolutionary psychologist Leda Cosmides, one of the founders of that science along with her husband John Tooby. Cosmides’ talk was on the evolution of cooperation, but for this audience she tailored her lecture toward politics and economics (Cato is a libertarian think tank in D.C.), by asking “Why do free societies arise so rarely and with such difficulty?”

Unfortunately, Leda tried to squeeze about two hours of material and powerpoint slides into a 35-minute talk, and so she was necessarily brief as she blasted through slide after slide, each up on the screen for only seconds, making note taking impossible. That’s too bad because there was a lot of data slides that I think the audience would have liked to absorb (I know I would have). Nevertheless, Leda’s central point was this: our brains evolved for solving specific problems in the EEA (the Environment of Evolutionary Adaptation — the Paleolithic), and so we have domain specific programs that help organize our experiences. The problem is that the modern world is so different from the EEA that it causes conflicts. For example, most hunter-gatherer societies are egalitarian because they live in relatively resource-poor environments and are often unsure about their safety and nourishment, and so we evolved many cognitive instincts for cooperation, food sharing, and group cohesiveness, because everyone in the group was either related to you or you know very well, so as the political saying goes, we must hang together so that we don’t hang separately. But the modern world is nothing like this.

I’ve written about this problem in my book The Mind of the Market, which focuses on evolutionary economics, whereby the world in which we evolved of small bands of egalitarian hunter-gatherers is radically different from today’s world that is resource rich and with vast disparities of wealth between the richest and the poorest. Thus, we have a natural tendency to resent wealthy people, distrust free markets, and misunderstand the bottom-up process of modern economies and try to control them from the top down, usually with disastrous consequences (e.g., Alan Greenspan and the Fed’s constant manipulation of interest rates sent false signals into the market for the price of money, leading to artificially large bubbles that then burst).

Leda noted the difference between hunting and gathering in terms of risk and uncertainty: Hunting meat is highly variable, success is as much due to luck as it is skill, and 4/10 times the hunter comes home empty-handed. Thus, hunter-gatherers must pool risk to deal with frequent reversals of fortune through food sharing. By contrast, gathering foods is a low risk process that depends on effort, not luck, and the results are mostly shared only within the family and trusted partners, but not to the group at large. Cosmides explained that this evolved psychology can be seen today in which we make distinctions between people in need of our help because they were unlucky (as with the hunters who return empty-handed) versus the gatherers who don’t bring home the vegetables because they were lazy and were loafing on the job. We are inclined psychologically to want to help the former but not the latter.

The political and economic consequences of this evolved psychology can be seen today in debates about healthcare, welfare, social security, etc., which are all attempts to pool risk among everyone in society, but without any distinction between those who suffer because of bad luck versus those who suffer because of laziness or lack of ambition. Modern political states are in the business of redistributing wealth from those who have it to those who do not, and since there is no attempt to discriminate between those who were unlucky from those who were just lazy, the people who earn that money through hard work and talent who then have it confiscated by the government and given to people they do not even know, naturally feel resentful, even though statistically the wealthy are extremely generous in giving to private charities that they voluntarily choose.

Cosmides also noted the psychological difference between working land that you own versus working land that the government owns: the agricultural policy of the USSR allowed 3% of land on collective farms to be private, and it turned out that between 45% and 75% of all food in the USSR was the product of that 3% of private farms.

So, in conclusion, Cosmides noted that there is a mismatch between the ancestral and modern worlds, our minds evolved to navigate family and friends and small groups, certain laws and institutions satisfy the moral intuitions these programs generate whereas other laws and institutions regularly fail in the modern world. Cosmides concluded: “Liberty provides the solution to most social problems, but few appreciate it because of our evolved minds.”

The second talk of the day was by Dan Mitchell, the Cato Institute expert on tax reform, supply-side tax policy, the flat tax, and tax competition. His talk was titled: “America’s Looming Fiscal Meltdown.” We are shifting to a European size welfare state, he noted, dolling out blame to both Democrats and Republicans, starting with George W. Bush, who Mitchell noted in his eight year term increased the Federal budget from $1.8 trillion to $3.5 trillion budget, and then noted Obama says he wants change to even more government, adding another trillion dollars to the budget in his first term, if not more. Mitchell also busted the myth that Bush increased the budget for natural security after 9/11. Not true, he said: most of it was for pork projects for his political cronies.

Mitchell then noted that Keynesianism is bad theory: borrow money and then give it to people so they will spend it — but moving money from the right pocket into the left pocket does not produce more wealth; it’s just redistribution. It does not increase wealth. Only free markets can do that. And in any case, where does the government get the money to redistribute? From us! But they take their cut as the middleman, and therein lies the problem. Bigger government did not work for Hoover or Roosevelt, and all that federal spending to get us out of the depression did not work: we did not get back to 1929 GDP levels until WWII. Neither did federal stimulus plans work for Presidents Ford or Bush I during their recessions, and Keynesianism failed utterly in Japan during the 1990s, when its national debt went from 60% of GDP to 150% of GDP. I.e., Keynesianism does not work, and yet politicians on both the right and the left insist that the only reason it doesn’t work is because: “government isn’t spending enough.” Wrong!

We are on the road to serfdom, says Mitchell, as our federal spending is projected to jump from 22% of GDP today to 45%–55% of GDP in the coming years (mostly because of Social Security, Medicare, and Medicaid). Unless our GDP doubles along with federal spending (it won’t) the collapse is coming. Well, not a collapse, per sey: America will not become Argentina or Zimbabwe. But we will become France: instead of growing 2.5–3% a year, we’ll grow 1–1.5%, a difference that has enormous long-run implications, lowering per capita GDP 30–40% below what it otherwise would be. More spending means more taxes: more income taxes, payroll taxes, death taxes, double taxation of dividends and capital gains. And this doesn’t work. In 1980 Ronald Reagan cut the top tax rate from 72% to 28%, and between 1980 and 1988 the number of rich people (millionaires) rose from 116,800 to 723,700, and their share of paying for the federal government rose from $19 billion in income taxes to $99.7 billion in income taxes. In other words, lowering taxes on the rich generates more revenue for the federal government, which is counterintuitive.

In the end, however, there are moral consequences to such economic decisions. Mitchell: “Today there are over 2 million people in America who completely depend on welfare: prisoners; well, the welfare state is a prison for the human soul.”

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The Banker’s Paradox

An evolutionary tale for today

Imagine that you are a banker with a limited amount of money to lend. If you advance loans to people who are the poorest credit risks, you are taking a great gamble that they will default on their loans and you will go out of business. This sets up a paradox: the people who most need the money are also the worst credit risks and thus cannot get a loan, whereas the people who least need the money are also the best credit risks and thus it is that the rich get richer.

The evolutionary psychologists John Tooby and Leda Cosmides call this the Banker’s Paradox, and they apply it to a deeper evolutionary problem: to whom should we extend our friendship? The Banker’s Paradox, they suggest, “is analogous to a serious adaptive problem faced by our hominid ancestors: exactly when an ancestral hunter-gatherer is in most dire need of assistance, she becomes a bad ‘credit risk’ and, for this reason, is less attractive as a potential recipient of assistance.” (continue reading...)

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Money, Markets & Morality

Are markets moral? Is our hunter-gatherer brain geared for modern capitalism, and do economies work like evolutionary organisms? The rise of neuroeconomics, the extinction of Homo Economicus and more…

Those were the topics discussed in last week’s ABC Radio National show All in the Mind, a debate recorded for National Science Week in Australia, with outspoken founder of the Skeptics Society, Dr Michael Shermer, and shareholder activist and Crikey founder, Stephen Mayne.

LISTEN to the debate

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