Darwinian Tax Reform

Prima facie the notion of applying ecological theory to challenge our understanding of the national economy sounds intensely intriguing. So it was with great expectations that I read economist Robert Frank’s recent NYT piece based on his new book, “The Darwin Economy.” He presents the same idea in precis, here. Unfortunately the results did not live up to the promise of such an innovative idea.

Frank’s stated ambition is to use Darwin to critique Adam Smith on the basis of their different understandings of competition. In “The Wealth of Nations” (1776), Smith argued that as an individual pursues his or her own self-interest the outcome, without the individual ever intending to do so, can be beneficial to all of society. For example, as merchants compete with each other in their efforts to win customers the result is technological innovation, a collective good.

As a counterpoint Frank offers an example from the animal kingdom that he argues illustrates how Darwin’s theory better explains market behavior. Bull elk have enormous antlers that they use to compete with other males for access to mates. As the bull with the largest rack of antlers typically wins, competition has encouraged an “arms race” resulting in ever larger racks of antlers. Truthfully, the antlers are much bigger than they need to be. Consequently when bull elk flee from predators such as wolves they often get their racks tangled in trees, slowing them down and making them susceptible to predation. Thus, Frank concludes with Darwin contra Smith, in a competition things that are beneficial to the individual can result in an outcome that is detrimental to the group.

I’ll pause here for you to snort derisively.

Frank continues, if the elk could “vote” they might decide to start growing their antlers to only half their size. They could continue to compete among themselves, in fact the scale of the individual competition would remain exactly the same if everyone’s antlers were 50% smaller. At the same time such a deal would expedite their retreat into the forest when pursued by wolves, an increase in the public good. Simply put, the elk’s antlers are bigger than they need to be so cutting down on excess antler growth would eliminate the waste generated by the arms race of competition.

In turning his attention to the American economy, Frank observes a similar pattern of arms race-like competition in the quest to obtain social status through luxury purchases. As the wealthiest acquire status symbols so too do the middle and lower classes race to keep up by spending money in a never ending competition for prestige. The result is a society living beyond its means. Whereas elk “voting” to change their antler size is a fantasy, we can use policy to alter wasteful spending patterns and increase savings by replacing our progressive income tax with a progressive consumption tax. This is not to be confused with a valued added tax, national sales tax or flat tax endorsed by some libertarians, which he recognizes is rightly decried as regressive. Frank’s formula goes like this:

 Taxes Paid = (Adjusted Gross Income – Annual Savings) * (Progressive Rate Structure)

The result of implanting this tax structure, Frank writes, would be that the wealthiest would reign in excessive spending on status goods to avoid the consumption tax. This would relax the pressure to “keep up with the Jones,” prompting the middle and lower classes to follow suit. Of course, there would still be competition for prestige expressed in consumer goods, cars, and real estate, but everything would be scaled back. The progressive consumption tax would generate an economic surplus at the household level. It is the tax structure Charles Darwin would have endorsed and Adam Smith never would have thought of.

Something’s wrong here and it begins with Frank’s misreading of Darwin. The example of elk’s antlers is, properly speaking, one of sexual selection. In “On the Origin of the Species” (1859) Darwin presented his theory of evolution by natural selection, which wonderfully explained why all polar bears have thick coats and all giraffes have long necks. Over time any trait beneficial to the individual will spread through the population if it helps them adapt to selective pressures in their environment. But Darwin struggled to explain things like the ornate patterns of butterfly wings, which don’t seem to have anything to do with the environmental pressures, or the peacock’s tail which, frankly, seems to be detrimental to the individual’s survival.

It wasn’t until “The Descent of Man” (1871) that Darwin hit upon the theory of sexual selection. These things are not to enhance the survival of the individual or help them adapt to the environment but to advertize their fitness as a mate. Frank’s elk example fails because he only considers the male’s point view. Males compete, but females choose. It is female choice that has led to spread of large antlers through the elk population not male competition.

Males and females have different reproductive strategies stemming from the fact that they invest different amounts of energy into the reproductive process. Females have a limited number of eggs, when they are pregnant they cannot take another mate, and after giving birth spend time and energy caring for the young. In terms of reproductive success, females do best when they are choosy and pick a male endowed with the best genes. Males can produce sperm by the millions and after taking one mate can increase their fitness by quickly taking another. Males improve their reproductive success by competing with other males in an effort to increase the quantity of females they mate with.

If you can take that and apply it to economics, great. But that’s not what Frank does. To him Darwin’s theory is just a handy metaphor.

Nowhere does Darwin say that competition among individuals does not always produce results beneficial to the group. That is a conclusion Frank comes to because he’s reading through this lens that forwards agenda for new tax policy. Natural selection doesn’t care about groups, it only ever acts on individuals. It doesn’t really care about survival either, rather “winning” at natural selection means reproductive success. Evolution is the aggregate result of natural selection shaping the frequency of variations within a population. Therefore, no bull elk would have a huge and unwieldy rack of antlers if the benefits of having them did not outweigh the costs.

This is to say nothing of Frank’s weird ideas about social prestige. Maybe this is explained better in the book length work? I’d be interested to see if he sees himself as engaging with Thurston Veblen, another economist who had a misguided understanding of evolution.

The prospect of applying ecological theory to contemporary economic policy is stimulating. That kernel of Frank’s argument is brilliant. Economics, of course, gave rise to modern ecology. After all Darwin had his “Eureka!” moment when he finally got around to reading Thomas Malthus’s “Essay on the Principle of Population” (1798). Malthus, an economist, argued that as the human population continues to grow so too will the pool of available laborers, the multitude of unemployed will depress wages resulting in widespread poverty. Existence is a struggle because resources will always be limited and individuals must compete to access them. When populations exceed their available resources the result is famine, disease, and war.

Ecology grew directly out of economics, epitomized in this historic moment when Darwin incorporates Malthus. My wife, a fisheries ecologist, teaches an evolution class for biology majors using a textbook titled, “The Economy of Nature.” At a very fundamental level ecology and economics are about understanding similar things. What if you could take the insights of ecology and formulate them into a critique of economy? I would be excited to see the results! Too bad Frank failed to follow through.

Frank’s usage of Darwin does not go beyond analogy. Essentially it amounts to little more than a rhetorical move whereby the economist seeks to borrow Darwin’s authority to sell his idea of a progressive consumption tax. Incidentally, I had never heard of such a thing before and maybe it’s a worthwhile policy to consider. But it has nothing to do with Darwin or natural selection.

Matt Thompson

Matt Thompson is Project Cataloger at The Mariners’ Museum in Newport News, Virginia, and currently working on a CLIR ‘hidden collections’ grant to describe the museum’s collection of early 20th Century photography. He has a doctorate in anthropology from the University of North Carolina and a Masters in information science from the University of Tennessee.

10 thoughts on “Darwinian Tax Reform

  1. Great observations here. I would add that in addition to mis-reading Darwin, Frank indulges in a caricature of Adam Smith. Smith did posit the possible benefits of individual competition, but he was also well aware of all the times competition can go wrong, and the need for governance and regulation. He saw those individual actors as already guided by what he was discussing in his companion book, the Theory of Moral Sentiments. I’ve written briefly about this at “Anthropology and the Economists Without History.” I thought there had been a move in economics to at least stop using the caricature of Adam Smith, but maybe not.

    I also like here the explanation of sexual selection. Darwin seems to always get pigeon-holed as natural selection and “survival of the fittest,” but from very early in evolutionary thought there was a consideration of alternative mechanisms at work, including a role for organisms to actively participate in the evolutionary process.

  2. I probably deserve some of the blame for caricaturing Smith as these are my words not Frank’s. My knowledge of economics hardly goes past reading Greg Ip and Steven Pearlstein on an irregular basis! Clearly, there’s a lot going on there beyond the “Invisible Hand” fetishized by an American readership.

    Where I’d fault Frank is that he argues in light of Darwin it is clear now that Smith gets it wrong on competition — and then he goes on to make policy recommendations that, interesting as they are, seem to have nothing to do with the (mis)reading of Darwin he based his argument off in the first place. He also seems rather ham handed when it comes to explaining consumer motivation. Maybe all this is explained better in the book? I don’t expect a single op-ed to explain everything.

    Nevertheless, one comes away wondering if his reading of Darwin was colored by his enthusiasm for his pet project, progressive consumption tax, rather than critically engaging the literature of ecology to critique economics. That last bit is brilliant and I’d like to see someone do it for real.

  3. Hi Matt,

    Thank you for the reply. Before writing my comment, I did check Frank’s article in the New York Times to make sure the caricature was in fact his. Frank does have a bit of a clever sidestep, writing that “according to [Smith’s] modern disciples, it holds that unbridled market forces harness self-interest to serve the common good.” However, he does nothing to correct the caricature and turns directly from there to Darwin.

    I do want to see more of what he does in the book. Thanks again for pointing this out!

  4. Neat stuff, and hopefully Frank or someone else will be able to refine this idea, since the relationship between ecology and economics is perpetually fascinating to me.

    One idle thought I have — idle because I’m busy reading something else atm — is whether there’s some good analysis of how much of the private debt problem is related to purely “status goods” as opposed to covering a “basic budget” (even if the quality of the items in that budget may be inflated by ‘class expectations’, beyond the demands of basic survival). Ie, you might have a nicer car than you can afford or need, but being in debt over a car you need to get to work is not the same as being in debt over, say, a Sea-doo.

  5. Clearly prestige purchases can take many forms and consumer goods are only a part of it. Gawker ran a terrific story, just a few days ago about ultra elite private schools that charge $40,000 a year in tuition AND… AND… those precious little snowflakes still need $400/hr tutors. So what’s being purchased here? If you read the comments section to the article you will find eye opening, first-hand accounts of the benefits of buying the right kinds of friends for your kids.

    But to get to Frank, its not really clear to me, based on the NYT piece what he thinks “consumption” is. The proposed result of his progressive consumption tax is, he argues, increased annual savings. He imagines fostering some kind of savings and investment program like how people invest in their retirement accounts. But if you invest in a corporation by buying its stock are you not buying a thing? Is this not consumption? Right now I need to remodel my bathroom, which means hiring a contractor to lay the tile. I’m buying something, but am I not investing too? Many of us have student loans resulting from our degrees. If you buy an education you are spending money and not saving, but is this consumption?

    It always strikes me as a cruel joke that when calculating for national inflation economists omit food, gas, and energy. Any adult can tell you that it is precisely these categories which have skyrocketed in price over the past ten years. But the feds have held social security payments steady for the past two years because, they say, inflation is so low. Gas, food, and energy + my mortgage is the bulk of my paycheck each month. My status goods are organic dairy products and the ocassional bottle of wine, not big screen TV’s or clothes that need to be dry cleaned.

    Ecology is all about food and energy, perhaps for economics this is a gap. This might be one place to start to make connections between the disciplines and formulate a critique.

  6. For me this discussion began when reading R.F. Salisbury (1962) From Stone to Steel: Economic Consequences of a Technological Change in New Guinea, which, I have just discovered, is available on Questia: http://www.questia.com/library/book/from-stone-to-steel-economic-consequences-of-a-technological-change-in-new-guinea-by-r-f-salisbury.jsp

    What caught my eye and has stayed with me ever since is the observation that surplus income tends to be spent in a predictable pattern: first, prestige goods that assert higher status; second, luxuries; and third, basic improvements. It might be worth thinking about private schools and tutors in these terms and asking where they fit.

    We need to be careful, however, not to use the model in an overly simplistic way. In my own case, we were able to send our daughter to a private international school; at that point—during Japan’s economic bubble—we could afford it and that was the only way to get her a good English-language education. Her winning an appointment to the U.S. Naval Academy saved us the college fund that we had saved up for her and recently spent instead on a Masters in Public Policy at the Kennedy School at Harvard. We and she are conscious that making these choices was neither flaunting status symbols nor luxury spending per se—the schools that she has attended have achieved the often noted elite-track function of providing her with deep networks of similarly situated contemporaries who attend each other’s baby showers and weddings and serve as useful contacts in all sorts of places. She and her husband are continuing the pattern her parents’ set. Having gotten a job in Washington, she wanted to live in the District of Columbia. He wanted a big house in the country. They settled on a split-level built in 1959 in Fairfax, VA. Why? The district in which they bought their house is reputed to have the best public school system in the country.

    Each step in this process has involved bourgeoise habits of saving and investment. Are the end results something of which I am immodestly proud? Damned straight. Are they, from the perspective of below-the-median-income American workers unattainable luxuries? Can’t deny that. Is that all they are? No. They represent, at least in part (I agree with Elizabeth Warren that none of us does this on our own), conscious strategy and persistence in implementation that doesn’t fit Salisbury’s model well at all.

  7. The way Frank is applying Darwin is essentially a slight variation of how Darwinian natural selection is already applied to economics – which I think Thompson has already pointed out partly.

    I just find it frankly a cheeky to try and dress up his suggestion as if he is providing a new insight to economics through a ‘pop’ understanding of Darwin – one shared by almost everyone I know, even students of biology.

    The anthropological interest for me here, is in the relationship between the separation of Religion and Economics (the State in the last bunch of decades) and this void being filled by Science in some sort of way. Where both Religion and Science are both limited by their MOP’s and MOC’s (c = communication) in their appreciation by those without particular access to the MOP’s.

    e.g. people thinking that ‘f**king someone over” in the name of competition is not a moral issue as ‘competition’ is an innate living organism’s characteristic. Firstly as we know that a complete misunderstanding of the context of how competition is used and secondly competition is in most cases not directly referring to the action of competitive behaviour in its literal form. Red in Tooth and Claw is the dominant paradigm – I don’t know if that’s a commentary on the results of instituitionalised education or something.

    But more precisely Frank completely misses the fact that ecological theory has already been applied to economic systems and failed, because and we got ‘deep ecology’ essentially an ecological understanding that is not based heavliy on a technological metaphorization of the world that itself is a cousin of evolutionary psychology… and I am not going to carry on any further on that point.

    e.g. Frank is a populist ignoramous and if I have gone off on one for no good reason please correct me

  8. but he is right about Darwin being the of primary importance to economics so plus points for bringing that up, however its no darwin but an abberation of his theories that should be slotted into Frank’s story

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