Subsidise the rich for the good of our species

From Michael Shermer’s review of Robert Frank’s The Darwin Economy:

[S]exual selection may very well account for most of characteristics that we so admire about our species: art, music, humor, literature, poetry, fashion, dance and, more generally, creativity and intelligence. Science itself may be a byproduct of the cognitive process of trying to impress others in order to gain status and mates by making breakthrough discoveries and formulating important new theories. …

Thus, contrary to what Frank argues, a viable case can be made that the evolutionary arms races he so detests—men’s suits, women’s high heels, McMansion homes, and elaborate coming of age parties—are products of a larger system that drives our species to be so successful. By carrying out the biological analogy into political economy, if anything we should be rewarding the most ostentatious displays of power, prestige, wealth, creativity, health, vigor and intelligence with tax breaks and even subsidies! At the very least one could argue that a consumption tax on the rich could very well backfire and reduce the reproductive success of our species by attenuating the creative productivity that has given us so much of our culture that we cherish.

Frank’s proposal of a consumption tax to curb conspicuous consumption does not change the relative ranking of the signallers. As Shermer notes, some signalling is socially optimal, but an arms race that does not change rank order is not. Signals are honest by virtue of their cost. By adding a cost in the form of the tax, a smaller signal will require as much creative effort and will be as hard to fake. The assortment based on signalling will continue.

So does the activity itself – the conspicuous consumption – have benefits through requiring innovation or creativity. It may be possible to make this argument if we assume that innovation occurs in the race to produce goods to consume. As Porsche adds new features to its car each year, or as Rolex develops more complex watches with higher precision (a precision far beyond that which any human cares), what are the spill over effects?

Then there is the question as to whether conspicuous consumption is actually sending the signals we are intending to send. As asked by Geoffrey Miller in Spent, are our consumption instincts tuned to our current environment? Are signals using our intelligence and creativity a forgotten but better signal of our qualities? Regardless of the tax, displays of intelligence and creativity will still be freely available.

While Shermer takes on Frank’s proposal to curb conspicuous consumption, unfortunately Shermer does not address some of the more pernicious effects of the competition for positional goods. In the introduction to his review, Shermer concedes he was relieved when helmets in cycling races were made compulsory. I would have liked to have heard his views on collective action problems such as competition for positional goods driving down worker demand for safety standards, instead of the softer target of the size of government.

However, Shermer’s focus on the size of government reveals the shortcoming in Frank’s pitch to libertarians. Frank does not want to decrease government spending or coercion. Throughout The Darwin Economy, Frank laments drops in government expenditure and the deteriorating social infrastructure that results.

A better pitch to libertarians would have involved a shift in the base of taxation, without associated increases. A consumption tax makes sense, with Milton Friedman among those who have conceded that it is a preferred way to raise money. A shift of the taxation base towards consumption, carbon, congestion and the like (Pigovian taxes anyone?) and away from labour and capital could appeal to libertarians. But by also suggesting we need more government expenditure, Frank has lost most libertarians’ interest and dropped us into the usual debate on whether government should be bigger or smaller. When Frank wants to change and shrink the basis of taxation, he might gain some libertarians’ interest.

There were some other interesting points to Shermer’s review. Shermer poses the argument that in considering the evolutionary features of the economy, we should be thinking of corporations as species. This reflects analysis by Paul Ormerod, who showed that extinction patterns of corporations were similar to that of species. Ormerod’s analysis provides an argument that there is more blind luck behind corporation success than skilful management.

This level of analysis provides some interesting outcomes, but using the corporation as the unit of analysis has limitations. If we want to understand why an investment bank behaves the way it does, should we look at the bank as a whole, or the actions of the highly incentivised individuals within it? In the same way, should we examine the actions of government by looking at government as a single entity, or are we better off analysing the incentives of those within it? Public choice theory has already provided the answer to that question.

As a final note, Shermer also pitches his long stated argument that both evolution and economics involve bottom up systems, and as a result, we should not feel the need for a top down economic designer. Shermer writes:

Robert Frank is not a socialist and yet the design conceit is there nonetheless. Even when gussied up in economic jargon with Darwinian overtones, hints of the totalitarian mind from millennia past creep into our thoughts and reach for the controls. …. It’s counterintuitive to think bottom up instead of top down. It is why so many people struggle to truly grasp the deep meaning of evolutionary theory, and it is why so many people fail to see that economic order is the product not of human design but of human action.

Just because something is a bottom up system does not imply that you cannot or do not want to have rules imposed from the top. What evolution show us is that bottom up systems do not always deliver good results, and as Shermer rightly notes, that top down design is fraught with difficulty. Looking at some of Shermer’s other writings, Shermer is not short of top down design wishes in his libertarian world:

• The rule of law. • Property rights. • Economic stability through a secure and trustworthy banking and monetary system. • A reliable infrastructure and the freedom to move about the country. • Mass education. • A robust military for protection of our liberties from attacks by other states. • A potent police for protection of our freedoms from attacks by other people within the state. • A viable legislative system for establishing fair and just laws. • An effective judicial system for the equitable enforcement of those fair and just laws.

While I generally agree with where Shermer draws the boundary, it is apparent that the question is not whether there should be top down interference in an economy, but rather what the nature of that interference should be.