Robert Frank

Robert Frank

For centuries, economists have believed in the power of Adam Smith’s “invisible hand” to steer the markets. But the global financial crisis and a rising income gap has many reconsidering Smith’s theory: that competition channels self-interest for the common good. One economist proposes a new intellectual giant of economics – Charles Darwin. He argues the naturalist’s understanding of competition describes economic reality far more accurately than Adam Smith . And he warns that failing to recognize that we live in Darwin’s world is putting our economy at risk. What Charles Darwin can teach us about economics.

Guests

  • Robert Frank economics professor at Cornell's Johnson Graduate School of Management, regular "Economic View" columnist for the "New York Times" and author of many books, including, "Principles of Economics" (with Ben Bernanke).

Read an Excerpt

Excerpted from “The Darwin Economy” by Robert Frank. Copyright 2011 by Robert Frank. Excerpted here by permission of Princeton University Press:

Transcript

  • 11:06:55

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Adam Smith is widely cited as the Father of Modern Economics. His invisible hand theory, that competition channels self interest for the common good is considered the basis of today's free market. But one economist believes there's a better market.

  • 11:07:24

    MS. DIANE REHMEconomist Robert Frank argues Charles Darwin's understanding of competition deserves economic reality far more accurately than does Smith's. His new book is titled, "The Darwin Economy." Robert Frank joins me in the studio. He is a professor of economics at Cornell University's Johnson School of Management. He's a regular columnist for The New York Times. And we do invite your calls, questions, comments 800-433-8850. Send us your email to drshow@wamu.org Feel free to join us on Facebook or Twitter. Good morning to you, sir.

  • 11:08:22

    MR. ROBERT FRANKGood morning, Diane, thanks for having me on this morning.

  • 11:08:24

    REHMGood to have you here. I must say when I first saw the title of this book I thought to myself Darwin was no economist. How can we have a Darwin economy? What do you mean?

  • 11:08:38

    FRANKYeah, I think a lot of people wonder what the claim could be about. I tried to press the claim in the book that 100 years from now, economists, if they're polled on the matter, will say Charles Darwin was the intellectual founder of the discipline, not Adam Smith.

  • 11:08:53

    FRANKEverybody would say Adam Smith today and with good reason. I think we'll eventually recognize, maybe sooner than 100 years from now, that Darwin's vision of the competitive process was really more general than Smith's. Smith's invisible hand story is really an amazing account of how markets work. And I'm as big an admirer of Smith as anyone, but I think we'll eventually see that his account was really just an interesting special case of Darwin's more general theory of competition.

  • 11:09:23

    REHMExplain in a little more detail that invisible hand.

  • 11:09:29

    FRANKOkay. The invisible hand idea, which is one that's pressed much more enthusiastically by Smith's modern disciples than he ever pressed it, they say that Smith said that if you turn greedy, selfish people loose in the marketplace, they will be driven as if by an invisible hand to produce the greatest good for all. Smith, of course, didn't believe that. He thought it was quite amazing that you often got good social results from selfish individual behavior. He never believed that you always did.

  • 11:10:04

    FRANKBut the story is quite remarkable. Smith said that producers introduced new product design, improvements not to help mankind move forward but to make more money for themselves. That was their goal and they succeeded spectacularly when they had a really good idea. Customers would leave other sellers and flock to their banner and their profits would soar.

  • 11:10:29

    FRANKWhat I don't think anyone saw clearly before Smith was the dynamic that that process set in motion so rival firms would scramble to copy the innovation. They would introduce it quickly and as it spread competition would drive prices back down again to the cost of production and when the dust settled after all that churning we'd see consumers with better products at cheaper prices as the ultimate beneficiaries of it all.

  • 11:10:54

    REHMAnd somehow that hasn't happened.

  • 11:10:57

    FRANKWell, it has happened again and again. It's a good story, as far as it goes. We're incomparably wealthier than we were 200 years ago when Smith lived and that's a good thing. Many people belittle economic progress, but that's the reason if you have five kids now, three of them don't die before they reach adulthood.

  • 11:11:19

    REHMOf course.

  • 11:11:20

    FRANKThere are many, many wonderful things that come with being more prosperous, but Smith thought markets didn't always deliver good results. Mainly, he was like today's social critic from the left. He was worried about monopoly power. There were powerful actors out there who would set to meet, he wrote, for merriment and diversion, but that the conversation would quickly turn to some scheme to defraud the public or exploit workers.

  • 11:11:46

    FRANKAnd so he thought we needed to regulate to protect the public and workers from monopoly power. That's what you hear mostly from social critics on the left. These days, they say that, sure, we could let markets do everything, if only they were perfectly competitive. But they're not and so we need to regulate. I don't think that charge holds up today in the way it might have in Smith's day.

  • 11:12:08

    REHMSo how does Darwin fare as a better model for what we ought to be striving for?

  • 11:12:19

    FRANKWell, as I said, Darwin had a vision of competition. I think it includes the invisible hand as a special case, but also goes far beyond it. If you think of some traits -- well, the main claim Darwin made was that traits evolve because they help individuals survive and reproduce. That's what natural selection favors and sometimes you get examples that play out exactly analogous to the invisible hand.

  • 11:12:46

    FRANKSo if you think, for example, of keen eyesight in the hawk, there was a mutation, just a random protein deformation, that made the eye of the hawk more able to resolve images. That is how it prospered because it could catch more prey therefore it left more offspring. The mutation spread and then another mutation came along and the mutations accreted one upon another.

  • 11:13:09

    FRANKAnd today, we've got hawks with just unbelievably acute vision as a result of all that. If we put a phone book up on the wall with six point type from the Washington D.C. White Pages at a 100 yards distance, they could resolve those numbers. We couldn't imagine being able to do that. It's not individually advantageous for hawks be able to see so well relative to one another.

  • 11:13:34

    FRANKThey all see well now so none gains an edge relative to other hawks, but hawks, as a group, do incredibly well because they see so well.

  • 11:13:43

    REHMInteresting. What about the example you use of the Irish elk?

  • 11:13:48

    FRANKThat's the exception that Darwin saw. He saw that when traits were selected because they help individuals, sometimes those traits are quite at odds with the interests of the larger group. And when there's a conflict, it is individual interests that trump. So take the big antlers of the bull elk. The Irish elk is extinct now. Let's leave that one behind.

  • 11:14:11

    FRANKWe've still got the American elk. The bulls of the American elk have antlers four feet across. They weigh 40 pounds. They're huge. They're a terrible encumbrance when the animals are chased into wooded areas. Wolves easily surround and kill them. Why do they have such big antlers? Darwin's account was compelling. He said the bull elks, like males in most vertebrate species, take more than one mate if they can. You have to stress the if they can qualifier because it means that if some succeed, other males don't get any mates at all.

  • 11:14:45

    FRANKAnd that means they're the ultimate losers in the Darwinian tournament to pass your stuff along into the next generation. So of course, males fight bitterly with one another for access to females and antlers were their weapons in those battles. If you had bigger antlers than your rival, you were likely to prevail. That meant mutations that coded for larger antlers were heavily favored. They spread like wildfire.

  • 11:15:11

    FRANKAnother mutation would come along and add to the first and so the process has stabilized now. We have antlers that are four feet across, not 40 feet across. That's a compromise, if you will, between the imperative of being able to fight effectively for females and not being killed too early in life by wolves when you're chased into the woods.

  • 11:15:32

    REHMAnd what about the beautiful male peacock?

  • 11:15:36

    FRANKIt's the same story. The peahen will always mate with a male with a brighter and longer tail display. The current thinking is that's because bright tail displays are a reliable signal of a robust, healthy immune system. A parasite-ridden male apparently cannot maintain and display like that.

  • 11:15:58

    FRANKAnd so if you don't have a long tail display as a male, you won't leave copies of anything you have behind. But having a long tail display is a big risk when it comes to being caught and eaten by predators. So again, these tails don't grow without limit. The antlers aren't 40 feet across. They all get reined in by natural selection, but not before, in each case, they're too big from the perspective of the males in the group. The males would vote to have them be smaller if they could, but of course, they can't.

  • 11:16:26

    REHMSo take what you've just told us and relate that to today's current economic problems.

  • 11:16:36

    FRANKOkay. Darwin's key insight really was that life is graded on the curve. It's not how smart you are, how strong you are, how fast you are, it's whether you perform well relative to the people you're competing against. And when you're competing for scarce slots in a hierarchy, the contestants invariably engage in mutually-offsetting positional jockeying things that end up in the end being wasteful.

  • 11:17:04

    FRANKFor example, we all stand at a concert to see better, nobody sees any better than if everybody would remain comfortably seated. Merchants put up a bigger sign to attract more business. Other merchants put up even bigger signs and in the end, we get visual cacophony, no sign stands out from the field there, either. And it's because we have incentives as individuals that lead us to act in these mutually-offsetting ways that there's an enormous amount of waste in the marketplace.

  • 11:17:34

    FRANKIt's not this efficient engine that the proponents of the invisible hand story envisioned. It's often a very powerful engine that produces a lot of waste.

  • 11:17:45

    REHMJust take a look at the iPhone 4 and its introduction last week and the hundreds of thousands of people who flocked to purchase that iPhone 4. How does that innovation, that advancement support or -- go against your theory about Darwin?

  • 11:18:17

    FRANKI would classify that particular development as one that's nicely in harmony with the invisible hand narrative. And it really helps support the idea that monopoly power isn't the big threat it might have been in Smith's day. There are rival companies to Apple. They have -- Many of them have not produced good software products in a couple of decades. And even though they've lots of money and they advertize, they've been driven from the marketplace in hasty retreat by Apple's good product design innovations.

  • 11:18:51

    REHMRobert Frank, "The Darwin Economy."

  • 11:20:03

    REHMAnd welcome back. We're talking with Robert Frank. He's professor of economics at Cornell University. He's a regular columnist for the New York Times. We have an email from Tim in Baltimore who says, "Please remind your listeners that economic Darwinism was despoused (sic) by the robber barons to justify their riches. This repugnant theory is enjoying a renaissance among some of today's wealthy. Herman Cain went so far as to denigrate the poor for not being wealthy. How does the inheritance of great wealth and an economic atmosphere that only amplifies the wealth fit into his theory of economic Darwinism?"

  • 11:21:04

    FRANKYeah, that's a great question. I think many people have a severely distorted view of Darwin's writings on that subject. The social Darwinists in the late 19th Century seemed to believe that whatever survived the hurley-burley of competition was for that reason morally praise worthy and should be celebrated.

  • 11:21:26

    FRANKDarwin never believed that. Darwin saw that competition favored individual advantage and that individual advantage often was quite at odds with the broader interests of the group. And indeed the competition often created abject misery for members of the group. And a vivid example is the behavior of the alpha lion. When he ascends to the alpha position in the pride the very first thing he does is to murder the cubs sired by the previous alpha male. That brings the females into estrus more quickly. And so it helps speed the transmission of the new alpha male's genes into the next generation, but what an utterly brutal spectacle to witness.

  • 11:22:10

    FRANKDarwin was an extremely humane man and I think you can sort of ground a theory of morality in Darwin's observation that what individuals want to do is often squarely at odds with what would be best for the group.

  • 11:22:23

    REHMSo...

  • 11:22:23

    FRANKThat's why we try to restrain individual behavior with morality and law and other collective action.

  • 11:22:29

    REHM...so looking at today's economic policies in this country and the arguments that are going on between progressives, between Democrats, between Republicans, conservatives, what would you say that Darwin would argue, for example, about taxation?

  • 11:22:56

    FRANKYeah, the Darwinian insight suggests a very different posture on taxation than what we hear from the free market enthusiasts. Again, they celebrate the invisible hand as enough to get the job done all by itself. Just let the government stand aside and let markets work their magic is their formula for economic progress. And markets often do work considerable magic. But if individual interest guides behavior in ways that don't serve the interest of the group then we, as a society, have a very clear interest in trying to steer individual behavior in different directions if it's practical to do that.

  • 11:23:36

    FRANKThink, for example, about the person's decision about how big a house to buy. If I'm the median earner, I want to send my kids to a school of at least average quality. We would think ill of a parent who didn't want to do that. And so in order to do that, I've got to buy a house that's at least in the middle of the price distribution for my area, because the good schools are in the better neighborhoods, the ones where houses cost more.

  • 11:24:07

    FRANKSo if I'm in the middle of the earnings distribution, I've got to outbid half the families to get my kid into a school of just average quality. And that means that I can take all my savings, I can borrow as much as the bank will lend me and try to get ahead in that bidding. But since you and others can do the same, all we succeed in doing is bidding up the prices of the houses in the better school districts.

  • 11:24:32

    FRANKAnd so since that doesn't change the fact that still half the kids are going to go to schools in the bottom half of the quality distribution, there's no point in taking those mutually offsetting actions. We could each take a riskier job hoping to earn more money to buy a house in the better school district. But if we each do that we just bid up the prices of the houses in the good school districts.

  • 11:24:54

    FRANKSo we regulate safety. So we encourage people to save more with tax exempt 401K accounts. We could very easily encourage people to spend their money in different ways, to spend less on lavish consumption, which has been the leading edge of demand in the American economy for the last three decades, and to save and invest more. That would help the economy grow faster. And we could, at the very same time, generate extra revenue to pay down government debt and rebuild crumbling infrastructure. So there are ways we could change incentives that would accomplish those things.

  • 11:25:28

    REHMGovernor Rick Perry has proposed a major tax on consumption. Is that what you would go with?

  • 11:25:38

    FRANKIn the book, I do defend a proposal for a progressive tax on consumption. That's very different from Rick Perry's proposal. Herman Cain has a similar proposal, his 999 plan. But those are...

  • 11:25:51

    REHMBut which is now 909 plan.

  • 11:25:53

    FRANK...909, yeah. Those plans would be a disaster if implemented. The last three decades have seen all the income growth in the country accrue to the people at the top of the income ladder. What those plans would do would cut taxes for those people substantially. They would raise taxes for people in the middle substantially. That's pushing in the very same direction as market forces are skewing the income distribution. No other country's doing that. We don't want to be a country to do that. That won't pass in the congress. We don't need to really worry about a flat tax.

  • 11:26:29

    FRANKWhat I propose in place of a flat tax is a steeply progressive tax on consumption.

  • 11:26:34

    REHMGive me an example.

  • 11:26:36

    FRANKSo it's actually just a simple modification of the current income tax system, which of course should be greatly simplified. The proponents of the flat tax say their tax would be simpler. Well, not because it's a flat tax it wouldn't be. The hard step in filing your taxes is figuring what your taxable income is, all the myriad loopholes and exemptions and deductions. That's why the tax system's -- we need to flush all that out. We do it periodically. We haven't done it for a long time. We do need to do that.

  • 11:27:05

    FRANKBut once you've figured out what your taxable income is there's no great complexity in figuring out how much you owe. You just look it up in the table. So that's not why the tax system's complicated. And the progressive consumption tax wouldn't be complicated either. You would report your income to the IRS just as you do now simplified in the ways I suggest. Then you would report how much you saved during the year. We know how to do that. Most Americans participate in IRAs or other tax exempt or retirement savings accounts.

  • 11:27:37

    FRANKThe difference between those two numbers, your income minus your savings, that's how much you consumed during the year. And that amount less a big standard deduction, say 30,000 for a family of four, would be what you would pay tax on. That's your taxable consumption. And the rates would start out very low. Your tax would be as low or lower as under the current income tax. But as people consume more and more the tax they pay on the next dollar of consumption would rise steeply. And it could rise much, much further than we would consider prudent under the current income tax because there we were able to choke off incentives to save and invest.

  • 11:28:15

    FRANKWith a progressive consumption tax if there were very high rates on people who are now consuming 2 or $3 million a year that would encourage them to build smaller mansions, stage less lavish coming-of-age parties and the like, and instead steer those dollars into investment accounts that would help the economy grow.

  • 11:28:35

    REHMDo you believe that cutting programs is the way to grow the economy?

  • 11:28:46

    FRANKCutting government programs? That was one of the great frustrations was listening to the rhetoric about that that got me off the couch and in front of the keyboard to write this book. We're told that the government can't spend money on public projects because that will impoverish our grandchildren. What a strange notion when you look at the public projects that need to be done.

  • 11:29:08

    FRANKMy favorite example is a stretch of Interstate 80 in Nevada. The Department of Transportation in that state has an estimate on its website that we could repair this worn stretch of interstate ten miles long for $6 million if we did the job today. If we wait two years the cracks will go deeper into the roadbed, that's heavy truck traffic on that route, the frost will heave things up and about. It will cost us 30 million to fix that same stretch.

  • 11:29:35

    FRANKDoes anyone seriously propose that we let Interstate 80 go back to gravel? I bet no one would dare say that out loud in Nevada. We're going to fix it. The question is whether we fix it now or we fix it later. If we fix it now, it's going to cost one-fifth as much to do. The only sensible thing to do, quite apart from the fact that we have people unemployed who know how to do those jobs, equipment that's needed to do them sitting idle in the yards, materials cheaper than ever -- they'll ever be in world markets, interest rates at record low levels to finance the project...

  • 11:30:07

    REHMSo what's holding us back?

  • 11:30:09

    FRANKIt's the slogans we hear the moment somebody says we've got to get the economy moving again by...

  • 11:30:16

    REHMTighten our belts.

  • 11:30:18

    FRANK...we've got to tighten our belts. And I think there's a kind of confusion just because a family in distress shouldn't be spending more, that the government shouldn't be spending more either. The government spending more during times of financial distress for the economy as a whole is the only way the economy can recover quickly. We've known that for decades and yet people are saying, no, we can't do it.

  • 11:30:39

    REHMHere's an email from Eric in Charlotte, N.C. "Why is savings and the investing a good thing as opposed to spending and consuming? Aren't companies sitting on $2 trillion worth of cash? Why would further investment encourage them to spend as opposed to more consumption encouraging these companies to hire more, produce more, to fulfill that consuming demand?"

  • 11:31:15

    FRANKYeah, it's an extremely intelligent question. And I should've added that if congress is inclined to take my proposal seriously to adopt a progressive consumption tax, they should not implement it right now when the economy's still in the depths of the deepest downturn since the Great Depression. We don't want to discourage any form of spending right now. We need more spending, as the writer observes.

  • 11:31:41

    REHMBut what is it going to take to get these companies and banks that are refusing to loan to move that cash?

  • 11:31:52

    FRANKHere's one thing we could do. We could enact this tax proposal into law today -- probably too late to do it today -- tomorrow then and stipulate that it be implemented with a gradual phase-in only after the economy is back under 7 percent unemployment. If we did that we would actually kill two birds with one stone. The wealthy, who were thinking at some point to build an addition onto their mansion, would see this tax coming and they would call their architect right away and get the project underway before the tax took effect.

  • 11:32:29

    FRANKWe'd see an avalanche of additional consumer spending in response to the announcement that the tax was coming, all of that without the government having to borrow one additional penny. And knowing that we were committed to this new revenue stream in the future that would reassure people like me who worry about deficits and concede that we must deal with them in the long run, we can't keep on borrowing and enlarging the debt year after year, that we would have the money to pay down those debts.

  • 11:32:56

    REHMRobert Frank. He is economics professor at Cornell University. He's also a regular columnist for the New York Times. His new book is titled "The Darwin Economy: Liberty, Competition and the Common Good." And you're listening to "The Diane Rehm Show." To what extent do you think that the protests we're seeing around the country are going to help move the conversation on the economy forward?

  • 11:33:38

    FRANKI think it's very difficult to predict where all that will go. I think one of the things social scientists have learned very clearly in recent studies is that social movements are incredibly chaotic. They can turn left or right on a dime. You don't succeed very often when you try to predict how they'll unfold over time. Nobody saw the Eastern European governments falling in 1989 before it happened. Nobody saw the Arab Spring coming. Just these things are very difficult to forecast.

  • 11:34:09

    FRANKWhat I think the OWS movement has done is really help get attention focused back on the basic fact that income growth has been wildly uneven during recent decades. We've just seen a recent congressional budget office study that supported what we already knew to be the case, which is that virtually all the income gains of the last decades have gone to people at the top of the income distribution. That's created enormous problems for people in the middle. The traditional Adam Smith view of the economy doesn't quite explain how that would be so. They would say -- the free marketers would say, well people in the middle had a little more income in the past. Why does it matter if people at the top have so much more? Pay attention to your own business.

  • 11:34:55

    FRANKBut that's not the way society works. We're all interconnected. What one group spends has spillover effects on what others need to spend in order to achieve their goals. And the fact that the people at the top are spending so much more now relative to everyone else has put people in the middle under enormous economic pressure. I think the participants in this movement are feeling the heat of that pressure. They're not sure why they're feeling the heat exactly. They don't know what the remedies are, at least not in any statements I've read. But I think they're demanding that somebody take this problem seriously. And I think that's going to be to the good.

  • 11:35:31

    REHMAnd the problem is that we're not quite clear about how they -- that is those involved in the OWS movement want to proceed. How do they get from where they are now to the next step?

  • 11:35:50

    FRANKI told Princeton's publicist, the publisher of my book, if the OWS movement has a steering committee he should arrange a meeting for me to talk to them about what we might do next. Of course they don't have a steering committee. They make a point of pride that they don't have an organized leadership. So that...

  • 11:36:08

    REHMWhat would you have them do?

  • 11:36:08

    FRANK...that's not going to happen, but I'd be happy to share my thoughts on what to do next. I think first it's important to see why the people in the middle have a problem. And it's an interesting dynamic. The people at the top are the first movers in this dynamic. They're spending more on everything because they have more money. I think a lot of people are morally critical of them for that but that's a shallow view. Everybody spends more when they get more money. You do, I do, people in the middle do, people at the bottom do, the rich do too. So they're building bigger mansions. They're staging more lavish coming-of-age parties for their kids.

  • 11:36:49

    FRANKThat's problematic because even though people in the middle class don't envy them or resent them, as far as we can tell from studies, they're interested in seeing the mansions and footage of the parties. But they do influence the people just below them. Now it's the custom to build bigger houses so you have your daughter's wedding reception at home rather than a hotel. People just below the rich have to build bigger. And then they travel in circles with people just below them. They build bigger too and that trickles all the way down -- cascades all the way down the income ladder.

  • 11:37:21

    FRANKNow the person in the middle, if he wants to match what people in the middle are spending on housing, has to build a 2300 square foot house. In 1980, you had to build only a 1600 square foot house. And people in the middle don't have more money. That's a tougher hill for them to climb.

  • 11:37:38

    REHM"The Darwin Economy: Liberty, Competition and the Common Good." Short break and we're right back.

  • 11:40:03

    REHMAnd we're back. It's time for Robert Frank, professor of economics at Cornell University, and a regular columnist for The New York Times to answer your question. He's written a new book. It's titled, "The Darwin Economy: Liberty, Competition, and the Common Good." And on the cover are two huge elks with their horns entwined. We're going to go to the phones and see where your questions take us. Good morning, Lena, you're on the air. Lena?

  • 11:40:46

    LENAHello?

  • 11:40:47

    REHMYes, go right ahead.

  • 11:40:49

    LENAHi, I wanted to make a comment about Adam Smith because we're talking a lot about how capitalism run amok is kind of ruining everything and we're living in, I guess, a Darwinian age where the rich are getting richer. I wanted to say that Smith did not acknowledge that -- or he did acknowledge that competition in banking would cause banks to treat customers better. And he felt that multiplication out of competition was desirable so that the failure of one bank wouldn't take down the whole economy.

  • 11:41:28

    LENAHe also felt that banks needed to be regulated. And he actually stated in "The Wealth of Nations" where the natural liberty of the few might endanger the whole. The few should be restrained. Party walls also restrain natural liberty, but still are needed. Party walls prevented the spread of fire in homes in the 18th Century and they were common to construction so, I guess, the comment I wanted to make was we're talking a lot about Darwin and Adam Smith as if, you know, Adam Smith were akin to this kind of freewheeling capitalism with no restraint at all and I don't really believe that was the case.

  • 11:42:07

    LENAAnd I think that what's happened in the housing market has really been an issue of the government getting very involved. If they hadn't created Fannie Mae and Freddie Mac, there would have no natural incentive for banks to make these 30-year loans at very low interest rates. So I think that that's something that needs to be addressed.

  • 11:42:25

    FRANKYeah, that's a great set of points that you make. I stress in the book that my quarrel is really much, much less with Adam Smith of whom I'm an enormous admirer. He wrote not just "The Wealth of Nations," but an earlier book, "The Theory of Moral Sentiments." He's covered a lot of the territory you described. He was no naïve optimist about what the market could do.

  • 11:42:48

    FRANKMy target really is the movement libertarian, I call them. The people who embrace a very naïve vision of Adam Smith's invisible hand -- one that says that we don't need government at all. We can just let markets handle all the tasks that are to be done, vis-à-vis banks. I completely agree we need to regulate them tightly. They shouldn't be so big that if one fails it threatens...

  • 11:43:12

    REHMExactly.

  • 11:43:13

    FRANK...to take down the system, but I don't think it was the subprime Fannie Mae activity that was the sole cause of the housing crisis. People campaigned for -- the banking industry made very donations to the Congress. They bought banking deregulation as a consequence. Those deregulations allowed banks to lend in ways that wouldn't have been considered prudent in earlier times. They convinced themselves they had rich customers who had a lot of money to park.

  • 11:43:46

    FRANKThey were looking for more and more ways to loan money to the middle class who was having a hard time keeping up because of the expenditure cascade I described earlier. And so there was an enormous demand for where to park this money. And they kept creating derivatives and other things and loaned more and more money on easy terms to homeowners. And if some homeowners take advantage of the easy terms to bid for a house in a better school district, it's hard to really second guess the motive of a parent who does that.

  • 11:44:16

    FRANKI mean, every parent wants his kids to go to the best possible schools. And if you see others doing it, what's your recourse not to borrow? Then your kids go to the schools where the other kids are in the 20th percentile in reading and math. So allowing people to borrow imprudently was the step that, I think, led us into this crisis. We need to regulate that.

  • 11:44:37

    REHMHere's an email from Christopher in Durham, N.C., who says, "A key influence on Darwin, a biologist, was Thomas Malthus who was himself an economist. Could your guest comment on this mutual influence between economics and biology? What specifically was Malthus's influence on Darwin? What, in general, makes for such fundamental cross fertilization between a natural phenomenon evolution and a social phenomenon economics?"

  • 11:45:19

    FRANKYeah. It's true that Darwin was a very careful student of Thomas Malthus's writings. Go back a step and you'll see that Malthus was, in turn, a really careful student of Adam Smith. And so, as I say in the book, if Darwin does, in time, supplant Adam Smith as the founder of the discipline; we can say that Smith is, at the very least, the great grandfather of the discipline. The two subjects have enormous amounts of territory in common.

  • 11:45:51

    FRANKThey're both about competition for the resources needed to survive and carry on. And the analogy between what happens in the marketplace under competitive conditions and what happens in nature under competitive conditions is very, very clear. I think the one salient difference to my eye is that human beings have the cognitive and communication skills to perceive when individual and group interests are in conflict and to actually implement remedies for that. The non-human animals just were stuck with the bad outcomes that they got when individual interests were in conflict with group interests. We can do better.

  • 11:46:37

    REHMLet's go to Baltimore, Md., good morning, Will.

  • 11:46:41

    WILLGood morning, Diane. Thank you for taking my call.

  • 11:46:43

    REHMSurely.

  • 11:46:44

    WILLI'm interested -- it seems that this new paradigm sort of argues for a new kind of vocabulary; whereas in traditional economics you have innovation, creative destruction. It seems that what Robert Frank is talking about is mutation; maybe extinction of some industries. I'm wondering if you would argue for -- you use the word steer, but maybe a more stronger idea of selective breeding of industry say energy or finance to get these desirable traits that we want to see for the public good.

  • 11:47:16

    FRANKYou know, I think the examples you cite are really ones that I would classify, for the most part, as being in the domain in which Darwin's view of competition overlaps more or less with the views of modern free marketeers. The quest to introduce products that are more likely to appeal to people or cheaper ways of making the products they already like; that's a quest that we want to encourage and see continue, maybe even accelerate.

  • 11:47:47

    FRANKHaving more investment would have that effect actually so that's one reason I favor a tax that would steer more resources into investment. Creative destruction is another way of describing the way in which things evolve through natural selection so there I think there we see overlap. That's not really calling attention to the equally interesting and important cases where interests conflict at the two levels -- group and individual.

  • 11:48:14

    REHMHere's an email from Bronwyn in Leesburg, Va., who wants a clarification. She says, "I still hear callers and people referring to a Darwinian economy as one in which the individual rich just get richer. And the notion of survival of the fittest is used as if it means individuals who are physically fit will prevail and the rest of us will be the losers, but Darwinian fitness means something else and a Darwinian economy, as you describe it, is precisely not one in which individuals enrich themselves and the rest lose out. That is not what you're saying is it?"

  • 11:49:12

    FRANKIt is not what I'm saying. What we do see is that under open competition there's a tendency for the rich to get richer. New technologies have enabled the most able performers in every domain to extend their reach. Diane Rehm's on how many stations now?

  • 11:49:30

    REHMAbout 170.

  • 11:49:31

    FRANKAnd so she has displaced less able interviewers in countless local markets. So her reach has grown. Their reach has shrunk. That's not a critique. That's a neutral statement. Technology lets the people who are best at what they do extend their reach further. And one accidental consequence of that is that it helps concentrate the distribution of earnings in a way that creates enormous social problems.

  • 11:49:57

    FRANKThat's probably not a big problem for public radio hosts as much as it is for the captains of industry, but the natural tendency is for wealth to accumulate in the hands of a few and the Darwinian insight on which I'm drawing is that that's not necessarily a good thing for us as a society. And that we might very well want to take steps to counter that tendency that emerges from open competition.

  • 11:50:22

    REHMIf you were advising the super committee, which has to come out with a conclusion before Thanksgiving, what would be the three things you would say?

  • 11:50:42

    FRANKI have very little hope for anything coming out of that committee because...

  • 11:50:48

    REHMBut let's...

  • 11:50:49

    FRANK...I'll tell you what I would tell them...

  • 11:50:51

    REHMOkay.

  • 11:50:52

    FRANK...to do, to get off the dime.

  • 11:50:54

    REHMRight.

  • 11:50:54

    FRANKThe six republican members of that committee each has signed a pledge -- the Grover Norquist pledge -- never to approve any tax increase under any circumstances.

  • 11:51:04

    REHMLet's forget them.

  • 11:51:06

    FRANKSo get them off the committee.

  • 11:51:07

    REHMOkay.

  • 11:51:08

    FRANKOr remind them how constraining it was to sign that pledge. There's no one who's looked at the numbers thinks we can balance the budget going forward without additional revenue.

  • 11:51:18

    REHMOkay, let's forget that they're there. Let's say it's a neutral group...

  • 11:51:24

    FRANKRight.

  • 11:51:25

    REHM...that's on that committee. What do you tell them?

  • 11:51:27

    FRANKThen the sun just rose. We've got good options, good levers to pull that will generate, literally, several trillion dollars worth of...

  • 11:51:37

    REHMSuch as?

  • 11:51:38

    FRANKI mentioned to you already the progressive consumption tax.

  • 11:51:42

    REHMOkay.

  • 11:51:42

    FRANKBy steering revenues away from fruitless mine-is-bigger spending arms races we can make those same resources available to fix that stretch of Interstate 80 I talked about before.

  • 11:51:55

    REHMAll right.

  • 11:51:57

    FRANKThere's a nice phrase in the Strunk and White manual, omit needless words, omit needless words, omit needless words. They say it three times. I would say tax harmful activities, tax harmful activities, tax harmful activities.

  • 11:52:11

    REHMWell, how do you define harmful?

  • 11:52:14

    FRANKBecause individual and group interests don't coincide in every instance, we take many actions that benefit us that cause even greater harm to other people. If I enter a congested roadway, I make everyone who's on it take longer to where he's trying to get to. I shouldn't be able to do that for free. I should be asked to consider the harm. So a congestion fee would be perfectly justified.

  • 11:52:38

    FRANKIf I'm indifferent between buying an S.U.V., a big Ford Expedition, 7,500 pounds, or a Ford Focus wagon, which almost has the same carrying capacity, maybe I'll flip a coin and buy the S.U.V., but then I've imposed gratuitous risk on every other motorist. If I run into them or if they get in my path, they're much more likely to be injured and killed because I chose the heavier vehicle.

  • 11:53:04

    REHMAll right.

  • 11:53:05

    FRANKWhy shouldn't I take that into account when I decide which vehicle to get?

  • 11:53:10

    REHMGive me a...

  • 11:53:10

    FRANKSo tax vehicles by weight.

  • 11:53:11

    REHMAll right.

  • 11:53:12

    FRANKThe MIT Global Simulation Model estimates -- and they're the first to admit how uncertain the estimates are -- they estimate that by 2095, not even the end of this century, global average surface temperature has a ten percent chance of rising seven degrees Celsius, that's about 12 degrees Fahrenheit. If that happens, we're all cooked.

  • 11:53:32

    REHMAll right, so...

  • 11:53:33

    FRANKTax CO2. That would put an end and it would generate revenue to do things that we need to do and balance the budget.

  • 11:53:40

    REHMAll right, so you've given me a progressive consumption tax, a tax on harmful activities, your third suggestion.

  • 11:53:52

    FRANKInvestment in infrastructure projects that will not only pay for themselves, but put people back to work and generate additional tax revenue in the process.

  • 11:54:02

    REHMAnd you're listening to "The Diane Rehm Show." What do you do about Social Security and Medicare?

  • 11:54:12

    FRANKSocial Security is not a big problem. We can, through adjusting the benefit schedules and the tax schedules, keep that in financially good health for the foreseeable future.

  • 11:54:23

    REHMWould you lift the income cap on Social Security?

  • 11:54:28

    FRANKPersonally, I would, yeah. And I don't think the payroll tax is the best way to pay for Social Security. That's a tax on useful activities. Hiring workers is a useful activity. Why discourage that when there are harmful activities we could be taxing instead?

  • 11:54:41

    REHMSo how would you gain the resources for Social Security?

  • 11:54:48

    FRANKWell, we need to talk about new sources of revenue. When anybody mentions a tax the slogans that dominate our political discourse cause the conversation to grind to a halt. That's the real shame of the current political conversation.

  • 11:55:01

    REHMAll right, and we'll take one last call from Scott in Dallas, Texas. You're on the air.

  • 11:55:10

    SCOTTThank you, Diane. Yeah, I think you and many economists missed the benefits of a high marginal tax on both incomes and profits. That won't change the actual tax revenues the company pays, but it will direct, as we've seen from the behavior from the '70s and before when we had a 70 percent tax. It directs behavior into deductible avenues. All business expenses are deductible -- hiring, expansion, R&D.

  • 11:55:36

    SCOTTAnd the high tax rate, again, it's going to expand GDP because it drives economic investment as opposed to (word?) at the top. It makes it cheaper to sell off factories with the low tax rate. It's a whole better economy when we have lower tax rates on the top earners.

  • 11:55:51

    FRANKYeah, I think we can get a progressive consumption tax which would be better still. Many conservatives I'm talking to have expressed support for it, but if we couldn't get it I'd go with higher marginal tax rates on income. I like that as a fallback position.

  • 11:56:05

    REHMYou do?

  • 11:56:06

    FRANKYeah, yeah, that would be better than continuing to run up debt and not paying for the things we obviously want. We've got to bring Medicare expenses into line with what's affordable at some point. And there are ways to do that, too, but we just can't act unless we can have a conversation about what to tax. The moment you say the word tax they throw attack ads saying Frank thinks the bureaucrats in Washington know how to spend your money more wisely than you do. That's not the point.

  • 11:56:34

    REHMDo you think we're going to find our way out of this economic mess?

  • 11:56:41

    FRANKYou know, the one thing that gives me hope is a remark that I saw attributed to the late Herb Stein, Richard Nixon's chief economist. He said if something can't go on forever it won't.

  • 11:56:54

    REHMRobert Frank, he's professor of economics at Cornell University, author of, "The Darwin Economy: Liberty, Competition, and the Common Good." Really wonderful to talk with you.

  • 11:57:11

    FRANKVery nice to be with you.

  • 11:57:12

    REHMThank you. Thanks for listening all. I'm Diane Rehm.

  • 11:57:16

    ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Susan Nabors, Denise Couture, Monique Nazareth, Lisa Dunn and Nikki Jecks. The engineer is Aaron Stamper. A.C. Valdez answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales.

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