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The Darwin Economy

Who had a better grasp on economic activity: Adam Smith or Charles Darwin? It is an intriguing question which Robert H. Frank, professor of economics at Cornell University, tackles in his book The Darwin Economy: Liberty, Competition, and the Common Good. Frank challenges aspects of the Smithian neo-classical framework and advocates for better, more effective government; not necessarily less government.

The book is not a hit piece on Smith. Any trained and honest economist will tell you that harnessing the power of a marketplace is one of the key stories of human civilization. Pursuing self-interests in a market economy, where there is rule of law and contracts enforced, has given way to an explosion of material wealth and quality of life over the last 200 years. Rather, Frank differentiates between relative and absolute economic activity.

Liberals (which I’m not labeling Frank) often make the critique that conservative thinking pushes ends over policy objectives. That is, the ideology of smaller government trumps all and there is no clear vision of what government should do. In contrast, the left does not necessarily care about the size of government, per se, just that it meets policy objectives. Whatever size the government shakes out at is an afterthought if it provides the public services we desire.

Now, I don’t know a lot of anarchists who believe there is no role for government. Most of the country believes the government should do something. The question is what. Their initiatives have been expanding for decades and much of the country has disdain for their performance (in fact, Congress has lower approval ratings than porn, polygamy, the BP oil spill, and the country’s “Communist tendencies”).

The power of markets is immense, and almost paradoxically, the pursuit of self-interests in a free market produces unbelievably great results for all. For the most part. Markets are the principal reason we’ve had this incredible burst in material wealth over the last 200 years. But markets do not always produce best results for the common good, as Frank puts it. Neo-classical economic models are pretty good at noting these exceptions to the rule, looking at monopoly power, generally non-competitive environments, assymetric information, prinical-agent issues, externalities, and public goods. We’ve empowered the government to step in and address these instances where markets do not produce best results. Unfortunately, in a crony capitalistic world, big government and big business are in bed with each other. Big business buys off politicians and welcomes regulation for any number of reasons, including to keep competitors from entering the market or reducing risk of a bank’s debtors and insurers in the financial sector.

I’m not sure how surprised we should be that individuals in the marketplace look after their self-interests, including individual firms. That’s called human nature. It would be nice if there was no lobbying and companies refrained from buying off politicians, quid pro quos, etc., but it shouldn’t shock us. The politicians on the other hand are there for one reason: to represent the interests of the people. They have no other function. Except that they’re human, too, with the same incentives to look after themselves and their cronies. They should be refusing the overtures of the lobbyists, but, they like money, power and the sweet symphony of saying “yes” to people. The companies and the lobbyists are looking after themselves, which is what they’re supposed to do (and expected to do). The politicians, the moment they stop representing the people, have breached their entire function of existence in government. This is why I will always put more blame on the politicians for being bought than the companies doing the buying. All the politicians have to do is turn it down, which if in the best interests of the people, is their job. Of course this is an idealized world which is why we have separation of power and checks and balances.

More generally, we expect the federal government to handle the military, homeland security, utilities, roads, and bridges. Hundreds of thousands of pages of regulations have been put on the books. Funny thing, though, is the federal government hasn’t even secured our own ports and borders. We’ll spend trillions on the War on Terror abroad, yet we won’t even make it difficult on terrorists entering this country.

Needless to say, government-corporate collusion has made the idea of government as the solution to market failures a more difficult case to make. The more we ask our government to do, the less they do well. Which is why I say they take care of the basics first before we talk about further expansion to meet the “common good.” Secure the ports and borders; stop devaluing the currency; quit making life difficult for entrepreneurs and start-ups (yes, that means simplifying the tax code and reducing liability for employers, among other things).

As for Frank, it is worth reading his thoughts on relative vs. absolute consumption and trying to make sense of it for yourself. Take any good or service, say health care. Would you rather have better health care than the guy treated before you, or the best absolute level of health care available? Clearly, if the guy before you had lackluster care, getting better treatment than him may not be saying much. I’d like to have the best care available to me. Relative care doesn’t factor into my decision. Frank uses the example of bidding for more expensive houses in better neighborhoods in order to enroll your children in the best schools. If you wanted to give your children the best public education, your hand was forced to live in more expensive homes. After a decade or two of home appreciation, more families were overextending themselves to “keep up with the Jones'” . . . for the “right” reasons, both as parents and for the social good. It’s an interesting argument which is probably partially true for some.

Frank also uses Darwinian examples in nature where competition within species leads to undesirable genetic evolution. He uses the analogy of the difference between running speed and antler size in the gazelle, and the resulting natural selection. The gazelle would like to outrun the cheetah, so “being faster conferred advantages for both the individual and the species.” The gazelle’s antlers, however, are used to fight off other male gazelles for the most desirable female partners and to protect their offspring. This leads to an evolutionary arms race to have bigger antlers which consumes resources that could have been used to fend off disease or some other more efficient usage. Says Frank: “life is more miserable for bull elk as a group.”

The antlers could be the 4,000 square foot house in this metaphor. Luxury items become a drag on the efficient use of scarce resources at some point. I find Frank’s relative consumption ideas and evolutionary metaphors as being, at best, pretty limited. As Slate puts it:

Natural selection sees no difference between running speed and antler size: All evolution is positional. When one gazelle got faster, the slower ones got eaten (a point Frank relegates to a footnote). And when gazelles got fast, so did cheetahs. Cheetahs and gazelles would all be better off if they’d stayed slow, because running fast uses energy you might “better” invest in offspring, and legs that are built for speed are more prone to fracture. The lissome cheetah, meanwhile, is bullied and often killed by bigger carnivores such as lions.

As it relates to income inequality (which Frank feels is a major problem), I’m not sure how Steve Jobs’ $8.3 billion net worth makes me worse off. In relative terms, I should be pretty pissed off. But money only represents a store of value. Profits, when made from voluntary transactions, simply represent the value to society of providing products and services at a low enough price that enough people want. If the market is free, there is competition, and there is no rent-seeking, profits simply represent value to society approaching the direction of an optimum use of scarce resources. The process is ongoing and the optimum may never be reached, but competition and information gleaned through prices keep us headed in the right direction. Think of the number of people using Apple, Inc. creations around the world. $8.3 billion is but a fraction of Jobs’ contribution to society.

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One thought on “The Darwin Economy

  1. Pingback: The Darwin Economy – darwinismin yli ja ohi « politiikan arviointi

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