Friday, June 28, 2013

The Darwin Economy

Robert H Frank contends that while Adam Smith is credited as the founder of economics it is really Charles Darwin who is more important.  His concern in this book is about hard right wingers who to paraphrase, are too short sighted for the good of everyone.

Referring to our current economic crisis that started in 2008, he deplores that the rich seem hell bent on lowering expenditures and keeping taxes lower for them.  They claim the deficit is the most critical problem, but many readily admit they hate taxes, big government and regulations.  Robert points out that in fact if roads and bridges are not repaired when men are idle and borrowing is cheap these repairs will cost even more as time goes by.  There are no winners, not even rich people who think they are avoiding another "theft" of their property.

Throughout the book Robert gives examples of short sighted thinking that hurts not only poor people, but also rich people. Perhaps more importantly the author points out some of the psychology and philosophy that erroneously support the resistance of the right wing.

For most humans happiness seems related not so much to what we absolutely have, but how we compare ourselves to our neighbours, relatives, work mates and friends.  Not every issue is "positionally" important, but for many people they measure themselves with such factors as the size of their house, the prestige of their car and with scarce items.  Often the really rich bid up prices on some of these items and in turn that can force up pricing all the way down the line.

As part of the argument Robert uses the example of hockey players choosing not to wear helmets when given the chance, but at the same time would like to see a regulation forcing all players to wear helmets.  They want an edge, but they realize there is a risk.  On another field, armament agreements are made because both sides realize they cannot slow down arming up which gets very expensive and risky.

In fact the rich are in a similar spot as the hockey players and the statesmen.  If they gain more money by lowering taxes they will just bid up the price of scarce desirable goods.  They will also lose out on desirable public goods such as improved roads and bridges, education, science, etc that are necessary and desirable to keep pace with the rest of the world.

Robert assumes that ideologues will not be moved by his arguments, but hopes that rational libertarians will appreciate his perspective.  He realizes progressives think that rich people are greedy and cold hearted, but Robert thinks (and backs up his ideas with solid logic) that it is not just greed in absolute terms, but short sighted greed in relative terms.  There are a lot of cliched myths that are trotted out as truths to be beaten down.  Examples include: "the government is the problem";  "Taxes are theft".

Many rich people dismiss luck, attributing their success to hard work and talent.  The author says there is an element of luck in everyone's success, whether it is genes, nurturing or timing.  Small differences are magnified in a lot of winner take all situations.  Many pursue the large payoffs, but only a few are fortunate to achieve the goals while many worthy pursuits fail to attract talent. Entertainment, major league sports, hedge fund selling attract more interest than science, engineering, education.

He has a host of suggestions that seemed based on the idea that anything that is taxed is discouraged, so we should tax harmful things.  His critics say that is social engineering and he really doesn't deny it, admitting that all laws are forms of social engineering.  We have laws against homicide and theft as an attempt to reduce them.  His favorite idea is a consumption tax that is calculated by reporting income and also reporting savings. The difference is considered consumption and can be taxed on a progressive scale.  More conventionally carbon taxes and sin taxes are suggested.  Those who really want what is taxed will not be regulated out of doing so, but if they value other things to be purchased will quite willingly find ways to reduce taxable expenses.  At the same time we will have public goods paid for.

If you haven't got time to hunt up the book and actually read it, you might find this link to a video very informative and it might persuade you that maybe an extra effort would be worth it.

This book is another inspiration from Steve Paikin on TVO. I don't want to rely on Steve, but he and his team are very good in their selection of worthy topics and how to bring  out interesting perspectives.

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