"For a pure sense of being tumultuously alive, you can't beat the nasty side of existence. I may not have been a matinee idol, but say what you will about me, it's been a real human life!" Mickey Sabbath, in Philip Roth's Sabbath's Theater

"Talent hits a target no one else can hit; genius hits a target no one else can see." Arthur Schopenhauer

“Why does everything you know, and everything you’ve learned, confirm you in what you believed before? Whereas in my case, what I grew up with, and what I thought I believed, is chipped away a little and a little, a fragment then a piece and then a piece more. With every month that passes, the corners are knocked off the certainties of this world: and the next world too. Show me where it says, in the Bible, ‘Purgatory.’ Show me where it says ‘relics, monks, nuns.’ Show me where it says ‘Pope.’” –Thomas Cromwell imagines asking Thomas More—Wolf Hall by Hilary Mantel

My own favorite posts to get started: The Self-Righteousness Instinct, Sabbath Says, Encounters, Inc., and Muddling through Life after Life.

Sunday, November 20, 2011

What's Wrong with The Darwin Economy?

          I can easily imagine a conservative catching a glimpse of the cover of Robert Frank’s new book and having his interest piqued. The title, The Darwin Economy, evokes that famous formulation, “survival of the fittest,” but in the context of markets, which suggests a perspective well in keeping with the anti-government principles republicans and libertarians hold dear. The subtitle, Liberty, Competition, and the Common Good, further facilitates the judgment of the book by its cover as another in the long tradition of paeans to the glorious workings of unregulated markets.

            The Darwin Economy puts forth an argument that most readers, even those who keep apace of the news and have a smidgen of background in economics, have probably never heard, namely that the divergence between individual and collective interests, which Adam Smith famously suggested gets subsumed into market forces which inevitably redound to the common good, in fact leads predictably to outcomes that are detrimental to everyone involved. His chief example is a hypothetical business that can either pay to have guards installed to make its power saws safer for workers to operate or leave the saws as they are and pay the workers more for taking on the added risk.

            This is exactly the type of scenario libertarians love. What right does government have to force businesses in this industry to install the guards? Governmental controls end up curtailing the freedom of workers to choose whether to work for a company with better safety mechanisms or one that offers better pay. It robs citizens of the right to steer their own lives and puts decisions in the hands of those dreaded Washington bureaucrats. “The implication,” Frank writes, “is that, for well-informed workers at least, Adam Smith’s invisible hand would provide the best combinations of wages and safety even without regulation” (41).

            Frank challenges the invisible hand doctrine by demonstrating that it fails to consider the full range of the ramifications of market competition, most notably the importance of relative position. But The Darwin Economy offers no support for the popular liberal narrative about exploitative CEOs. Frank writes: “many of the explanations offered by those who have denounced market outcomes from the left fail the no-cash-on-the-table test. These critics, for example, often claim that we must regulate workplace safety because workers would otherwise be exploited by powerful economic elites” (36). But owners and managers are motivated by profits, not by some perverse desire to see their workers harmed.

"Mobility isn’t perfect, but people change jobs far more frequently than in the past. And even when firms know that most of their employees are unlikely to move, some do move and others eventually retire or die. So employers must maintain their ability to attract a steady flow of new applicants, which means they must nurture their reputations. There are few secrets in the information age. A firm that exploits its workers will eventually experience serious hiring difficulties" (38).

This is what Frank means by the no-cash-on-the-table test: companies who maintain a reputation for being good to their people attract more talented applicants, thus increasing productivity, thus increasing profits. There’s no incentive to exploit workers just for the sake of exploiting them, as many liberals seem to suggest.

            What makes Frank convincing, and what makes him something other than another liberal in the established line-up, is that he’s perfectly aware of the beneficial workings of the free market, as far as they go. He bases his policy analyses on a combination of John Stuart Mill’s harm principle—whereby the government only has the right to regulate the actions of a citizen if those actions are harmful to other citizens—and Ronald Coase’s insight that government solutions to harmful actions should mimic the arrangements that the key players would arrive at in the absence of any barriers to negotiation. “Before Coase,” Frank writes,  
       
"it was common for policy discussions of activities that cause harm to others to be couched in terms of perpetrators and victims. A factory that created noise was a perpetrator, and an adjacent physician whose practice suffered as a result was a victim. Coase’s insight was that externalities like noise or smoke are purely reciprocal phenomena. The factory’s noise harms the doctor, yes; but to invoke the doctor’s injury as grounds for prohibiting  the noise would harm the factory owner" (87).

This is a far cry from the naïve thinking of some liberal do-gooder. Frank, following Coase, goes on to suggest that what would formerly have been referred to as the victim should foot the bill for a remedy to the sound pollution if it’s cheaper for him than for the factory. At one point, Frank even gets some digs in on Ralph Nader for his misguided attempts to protect the poor from the option of accepting payments for seats when their flights are overbooked.

            Though he may be using the same market logic as libertarian economists, he nevertheless arrives at very different conclusions vis-à-vis the role and advisability of government intervention. Whether you accept his conclusions or not hinges on how convincing you find his thinking about the role of relative position. Getting back to the workplace safety issue, we might follow conventional economic theory and apply absolute values to the guards protecting workers from getting injured by saws. If the value of the added safety to an individual worker exceeds the dollar amount increase he or she can expect to get at a company without the guards, that worker should of course work at the safer company. Unfortunately, considerations of safety are abstract, and they force us to think in ways we tend not to be good at. And there are other, more immediate and concrete considerations that take precedence over most people’s desire for safety.

            If working at the company without the guards on the saws increases your income enough for you to move to a house in a better school district, thus affording your children a better education, then the calculations of the absolute worth of the guards’ added safety go treacherously awry. Frank explains

"the invisible-hand narrative assumes that extra income is valued only for the additional absolute consumption it supports. A higher wage, however, also confers a second benefit for certain (and right away) that safety only provides in the rare cases when the guard is what keeps the careless hand from the blade—the ability to consume more relative to others. That fact is nowhere more important than in the case of parents’ desires to send their children to the best possible schools…. And because school quality is an inherently relative concept, when others also trade safety for higher wages, no one will move forward in relative terms. They’d succeed only in bidding up the prices of houses in better school districts" (40).

Housing prices go up. Kids end up with no educational advantage. And workers are less safe. But any individual who opted to work at the safer company for less pay would still have to settle for an inferior school district. This is a collective action problem, so individuals are trapped, which of course is something libertarians are especially eager to avoid.

            Frank draws an analogy with many of the bizarre products of what Darwin called sexual selection, most notably those bull elk battling it out on the cover of the book. Antler size places each male elk in a relative position; in their competition for mates, absolute size means nothing. So natural selection—here operating in place of Smith’s invisible hand—ensures that the bull with the largest antlers reproduces and that antler size accordingly undergoes runaway growth. But what’s good for mate competition is bad for a poor elk trying to escape from a pack of hungry wolves. If there were some way for a collective agreement to be negotiated that forced every last bull elk to reduce the size of his antlers by half, none would object, because they would all benefit. This is the case as well with the workers' decision to regulate safety guards on saws. And Frank gives several other examples, both in the animal kingdom and in the realms of human interactions.

            I’m simply not qualified to assess Frank’s proposals under the Coase principle to tax behaviors that have harmful externalities, like the production of CO2, including a progressive tax on consumption. But I can’t see any way around imposing something that achieves the same goals at some point in the near future.

            My main criticism of The Darwin Economy is that the first chapter casual conservative readers will find once they’ve cracked the alluring cover is the least interesting of the book because it lists the standard litany of liberal complaints. A book as cogent and lucid as this one, a book which manages to take on abstract principles and complex scenarios while still being riveting, a book which contributes something truly refreshing and original to the exhausted and exhausting debates between liberals and conservatives, should do everything humanly possible to avoid being labeled into oblivion. Alas, the publishers and book-sellers would never allow a difficult-to-place book to grace their shelves or online inventories.

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