Friday, September 23, 2011

Book Review of Robert H. Frank's The Darwin Economy'

A Review of Robert H. Frank, ‘The Darwin Economy: liberty, competition, and the common good’, Princeton, New Jersey, Princeton University Press. September 2011.


Professor Frank, of Cornel University’s Johnson Graduate School of Management, opens his book with the:

prediction that economists a hundred years from now will be more likely to name Charles Darwin than Adam Smith as the intellectual founder of their discipline” (xii).

The ‘Darwin Economy’ attempts to defend that prediction in what follows, and I shall address my reservations with it later, based on what Frank assembles as his evidence primarily in the first five chapters of his twelve chapter book.

In those remaining seven chapters, Frank presents in a clear and well-written, if sometimes repetitive manner, his case for progressive income re-distribution, pollution-sensitive taxation, a mixed economy, without prejudice against public expenditure, much less inequality of incomes, and appropriate levels of government expenditure and necessary interventions. Much of what Frank writes is worthy of consideration if you can cut through the general polemical tone in which it is presented.

The ‘enemy’ of much of what Frank proposes he identifies in a prolific medley of ‘rightists’, ‘anti-government crusaders’, ‘anti-government activists’, ‘anti-government evangelists’ ‘anti-government rhetoric’, ‘movement libertarians’, ‘free-market enthusiasts’, ‘free-market conservatives’, ‘committed anarchists’ ‘trickle-down theory’, ‘anti-tax crusaders’, ‘anti-tax slogans’, ‘libertarian anti-tax rhetoric’, ‘anti-tax zealots’, ‘staunchest libertarian’, ‘libertarian dogma’, and ‘anti-government zealots’.

While the other side are represented by notably softer labels such as ‘liberal friends’, ‘liberal commentators’, ‘mature adults’, ‘commentators on the left’, and ‘critics on the left’. Like Cromwell (paraphrasing), Frank knows who he loves and what he hates; loves what he knows and hates the ideas of those with whom he disagrees. In short, he is partisan, rather than balanced.

Frank’s book is a critique of that strain in politics broadly summarised in the UK and the US by what the centre-right is for, and by definition, what he is against. He addresses standard, and not so standard, economic concepts, plus using some ‘thought experiments’ and other little teasers showing why his positions on the current ills that are common in capitalist societies are sensible, and the above medley of rightist ideologues (i.e., anybody not of a leftish disposition), among economists, politicians, who are not sensible but even positively dangerous, because in his view the rightist’ medley is leading the US and the rest of the world to disaster (or at least, severe, because unnecessary, sub-optimal outcomes). He reveals is own concerns about educating children in good neighbourhood schools by relocating rather than structural reform (school vouchers are not proposed or discussed).

Economists will recognise much of standard economic theory – and not a few little gems for today’s lecturers to use in undergraduate tutorials and in those outside engagements of non-economists that they are no doubt invited to address on occasion (Frank, remember, teaches in a management school where such outside engagements provide regular sources of income for faculty and/or the school).

Frank’s account of the derivation of the Coase theorem is a good case in point, as is his clear statement and applied examples of it. I enjoyed reading his account and his elaborating on the issues with several examples of its application. These also expose some of the weaknesses in the Coase-type argument. If I remember correctly, from an original account of the Chicago meeting, there were disagreements among the select audience of those attending, and some notable ‘failures to agree’ (see Steven Medema’s, The Hesitant hand: taming self-interest in the history of economic ideas, Princeton University Press).

One such is the doctor in practise near by a noisy factory (an externality) and the issue was which party should compensate the other, i.e., which party is liable. Coase presented this against a background that private pair-wise negotiations can stall because transaction costs in private negotiation can be expensive. Government intervention in private disputes aims to assign liability, usually, on the moral basis of which party is the perpetrator of the problem.

Coase came up with what appeared to be startling results, broadly that it is not obvious that the doctor, the victim, should not move his practise, at some personal financial cost, as opposed to the factory, as the perpetrator, funding the necessary measures to reduce the noise. In fact, it did not matter economically which party paid at the behest of the government – the factory to reduce the noise at some cost or the doctor to pay the cost of his moving. (I remember being taught in the 60s the application of the Coase Theorem in a conflict between a cattle rancher and a farmer.) At issue was which was the efficient solution?

If sound proofing cost $5,000 to fix, and moving would cost the doctor $10,000, then the most efficient decision should be for the factory to pay to sound-proof its noisy machinery. Yes, but the decision might change if it would cost $5,000 for the doctor to pay the factory for the sound proofing, against $10,000 for moving. The range opens up a negotiation possibility (see any negotiation theory text on the 'settlement range'). However, not discussed by Frank is the real possibility that if the doctor moves, and somebody else moves into his premises, and the noise remains unsound proofed, the costs are imposed on the new owner/tenant, and all those tenants that might follow, would add up to a larger sum than the factory owner paying the cost of sound-proofing, hence the liability could shift.

Another possible teaser is Frank’s case of two buyers, Susan, a school teacher, and Malcolm a salaried executive, both coming from different circumstances, eyeing a rare clock in an antique shop. The most that Susan could pay is $5,000 (earnings of $28,000 per year) and the most that Malcolm would pay is $10,000 (earnings of $950,000 per year). Frank adds other details loaded to attract sympathy for Susan and hints of opprobrium for Malcolm (a device he uses elsewhere). Who should get the rare clock? The market, says Frank, would dictate the rare clock going to Malcolm; social justice, he implies, that it should go to Susan. Similarly, with over-booked flights; the most deserving passengers lose out apparently in bids for the over-booked seats and the losers have to wait for other flights, perhaps with some compensation, but perhaps also in sad circumstances of frustrating their urgency to get on board to visit a sick relative in a hospital.

There are nagging doubts about the lessons that Frank draws from these cases in the background social reasons he draws upon to make his case that the undeserving rich always get the unfair gravy and the deserving poor only get the beans. Readers may draw other inferences from these cases, such as when Frank adds to the Susan and Malcolm parable the remark that ‘they’re the only two interested cases’ in the unfair contest to acquire the rare antique clock (p 106).

I would hope that bright students in his classes would draw attention to Frank’s slip of ‘only two interested parties’ involved in the price paid by the person who finally acquires the clock. There is always another party involved when two buyers haggle what they are prepared to pay – yes, the seller, the forgotten player who also has direct interests in the outcome. She might need the cash to pay for an expensive operation for her sick child- see how easy it is to write contexts to suit a political slant? Frank does that all the time, and his bright students may tire of his continual writing the cases to play to his particular views of how the world should be re-arrange to suit his political perspectives.

(Continued in Part Two_)



Blogger Paul Walker said...

"If I remember correctly, from an original account of the Chicago meeting, there were disagreements among the select audience of those attending, and some notable ‘failures to agree’"

About the famous meeting George Stigler has written:

"At the beginning of the evening we took a vote and there were twenty votes for Pigou and one for Ronald, and if Ronald had not been allowed to vote it would have been even more one-sided. The discussion began. [...] At the end of that evening the vote had changed. There were twenty-one votes for Ronald and no votes for Pigou"

As to the "Coase Theorem" what Coase showed was that in a regime of zero transaction costs, an assumption of standard economic theory, negotiations between the parties would lead to those arrangements being made which would maximise wealth and this irrespective of the initial assignment of rights. This is the point George Stigler made when he named and formulated the "theorem". Stigler's formulation is that the "Coase theorem [. . . ] asserts that under perfect competition private and social costs will be equal." Coase regards the Coase Theorem as a stepping stone on the way to an analysis of an economy with positive transaction costs. The significance of it is that it undermines the Pigovian system. Since standard economic theory assumes transaction costs to be zero, the Coase Theorem demonstrates that the Pigovian solutions are unnecessary in these circumstances. Of course, it does not imply, when transaction costs are positive, that government actions (such as government operation, regulation or taxation, including subsidies) could not produce a better result than relying on negotiations between individuals in the market. Whether this would be so could be discovered not by studying imaginary governments but what real governments actually do. Coase's conclusion; let us study the world of positive transaction costs.

This is the same conclusion he came to in his other famous paper, "The Nature of the Firm". In that paper Coase pointed out the firms do not exist in a zero transaction cost world - the neoclassical world - but do exist in a positive transaction cost world.

6:08 am  
Blogger Gavin Kennedy said...

Thank you for your summary conclusion about the Coase theorem, with which I agree.

I do not think Frank has illustrated it well in the examples he gives.


1:10 pm  

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