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Darwin: the true father of economics?

18 January 2012

The chief economist of Richard Nixon once said ‘If something can’t go on forever it won’t’. You can’t go on borrowing and spending without limit. You have to balance your budget at some point.

Robert H. Frank, author, The Darwin Economy

 

As Europe stares into an economic abyss and with the US appearing to be in terminal decline, capitalism is under the cosh. The Occupy movement has given a voice to frustration of the many with the accumulation of wealth of the few and UK politicians of every stripe are calling for a new era of ‘responsible capitalism’.

It may not be perfect but, to adapt Winston Churchill's often quoted words on democracy, capitalism is at least 'the worst system except for all the others'. But how do we create a system that distributes wealth evenly, disincentives reckless behaviour and is sustainable over the long-term?
 
In his book The Darwin Economy: Liberty, Competition and the Common Good, Robert H. Frank looks to Charles Darwin for the answer. On his recent book tour, Matt Black caught up with him at The Corner Café, Hackney, to ask why he thinks Darwin, not Adam Smith, is the economist we should turn to in these troubled times, and what action we should take to rebalance the economy.

The Darwin Economy begins with the assumption that, contrary to much economic thinking, people are irrational; more often than not, individuals act in their own interest, even if acting collectively will yield more benefits to the individual and to society. Frank uses the example of the evolution of two animals – the hawk and the bull elk – as a metaphor for this. 
 
“Darwin’s insight was that traits are selected because they help individuals survive and reproduce,” he says. “Sometimes this is good for the group, but not always. Keen eyesight on a hawk: good for the individual hawk, good for the group. Antlers on a bull elk: great for the individual when fighting for access for a mate, not so great when fleeing from wolves in wooded areas.”
 
According to Frank, behaviour analogous to the bull elk “arms race” is evident in the marketplace in many ways. In the book, examples range from the competition for places in the top performing schools through to the desire to always buy bigger, better, bolder than your neighbour. This behaviour is always harmful Frank argues.
 
“Any step I take to land in the top 10%... makes everyone else less likely to land in the top 10%. We take steps that are mutually offsetting in the same way that large antlers are offsetting for elk.” Unlike the elk, Frank argues, “we have the cognitive and communication skills to rein in some of those arms races”.
 
Once the behaviour is recognised, what steps can we take to modify it? Frank makes a range of policy recommendations in the book, largely focusing on ways to regulate markets and disincentivise behaviour that is harmful to society at large. His most radical proposal is to scrap the income tax in favour of a progressive consumption tax. 
 
With the consumption tax the more you save, the less you’re taxed. Taxable consumption would be calculated by subtracting savings from income over the course of a year. Low earners would have a basic living allowance calculated (Frank hypothesizes a family of four spending up to £20,000 a year untaxed) while luxury purchases for millionaires would be heavily disincentivised. 
 
Frank turns to the example of mansion building to explain why this works. If mansion extensions were heavily taxed, even the extremely wealthy would moderate their exorbitant behaviour. The government would still get tax revenues, but “as with antler size, it’s the relative size of your mansion that counts… There is no evidence whatsoever that if the rich lived in slightly smaller mansions that any of them would be any less happy”. Meanwhile, money spent on luxury products could be diverted to “productive investments”.
 
Frank is not the first economist to model an economic theory on the observation of Darwin’s theory; its elegance makes it ripe for reapplication. On the Origin of Species, for instance, was a major influence on Karl Marx, who had planned to dedicate Das Kapital to Darwin. Similarly, it's easy to use Darwin to justify unregulated markets. In this case natural selection will ultimately weed out unsustainable behaviour – as it would have in the financial sector, had the state not stepped in.
 
Marx believed communism was the unavoidable result of societal evolution. In contrast, Frank’s policy ideas counteract our natural inclination to compete. While his understanding of evolution has been called into question, his assertion that something has to give is unarguable:
 
“The chief economist of Richard Nixon had a quote: ‘If something can’t go on forever it won’t.’ You can’t go on borrowing and spending without limit. You have to balance your budget at some point.” 
 
It’ll take more radical thinking from the likes of Frank before we’re able to do that in the UK.
 
You can watch extended clips of the interview here and here.
 
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