Monday, May 10, 2010

Robert Frank's Reply

Robert Frank emailed me his reply to my post, with the explanation that it was too long for the blog software to accept as a comment. I am posting it here with his permission, and will be posting my re-response later.
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My column that provoked David’s comment also provoked a lot of angry mail from other readers who identified themselves as libertarians. None of them, however, made David’s good-faith effort to respond to my argument on its own terms. So I’m pleased that such a respected and able member of the libertarian community has responded to it with care. I will attempt to address his criticisms in a similar manner.

Yet there remain several ways in which we seem to be talking past one another. Most important, we disagree about the very nature of concerns about relative position. In my piece, for example, I claimed that high social rank has substantial instrumental value, observing that the highest-ranking members of society “know they will be able to send their children to the best schools and have access to the best health care. Low-ranking members enjoy no such confidence.” David disagrees, saying that this passage demonstrates my failure “to distinguish between absolute and relative values”: "Getting good health care,” he writes, “is very important to me, but its value does not depend, so far as I can judge by introspection, on other people having worse health care."

As I’ll argue in a moment, the failure to grasp the relevant distinction is his, not mine. He is correct, though, that demands for health and safety are among the least positional of all demands. Suppose, for example, that you ask someone to choose between two hypothetical worlds: World A, in which he has a 5 in 10,000 probability of dying on the job each year while the corresponding probability for other workers is 10 in 10,000; or World B, in which his annual probability of dying is 2 in 10,000 and the corresponding probability for others is 1 in 10,000. Almost everyone picks World B, the absolutely safe but relatively unsafe one.

But that fact has absolutely no bearing on my claim that persons of high social rank have greater access to the best health care. Resources are finite. The most renowned practitioners cannot provide the most costly medical treatments to every seriously ill patient. Indeed, as things now stand in the United States, not everyone has access to even minimal basic care. (We are first among industrial nations in “preventable deaths” per capita—deaths that would not have occurred if the afflicted person had received competent and prompt medical attention for the ailment that later caused his death.) When there’s not enough for everyone, can there be any doubt that society’s lowest-ranked members are least likely to get the best care?

The importance of social rank for education is even clearer. We care about the absolute quality of education, to be sure. Even so, a “good” school in every society is an inescapably relative concept. It’s one that compares favorably with other schools. Such schools are almost always located in neighborhoods with relatively expensive houses. This is hardly surprising, since most parents want to send their children to good schools, and it’s relative income that predicts which parents will be able to outbid others for houses in the better neighborhoods that surround those schools. In contrast, if all we knew was a family’s absolute income, we’d have no idea whether it would be able to send its children to good schools.

David also believes that a society in which people were concerned about relative position would oppose policies aimed at reducing poverty. Thus, he writes,


"Back when Lyndon Johnson was pushing the War on Poverty, his claim was that it would eliminate poverty, result in poor people no longer being poor. If Frank is correct, that claim should have been a death sentence for the program. On his argument, after all, I benefit by other people being poor, since it raises my relative status, and so would be worse off if they stopped being poor. The great majority of voters, then and now, are not poor, so if he is right the great majority should have viewed what Johnson claimed to be doing as hurting them, and voted against it. That isn't what happened. For Barack Obama to center his proposals for health care on making it available to the small minority of uninsured individuals should have been political suicide if Frank is right. But the bill passed."

He goes on to suggest that my argument implies that “the rich ought to be in favor of grinding down the poor…” These remarks betray a curiously dark conception of human nature. Being concerned about relative position surely does not imply taking pleasure in the knowledge that others are poor. If it did, middle-income people would spend long hours observing people in poor neighborhoods, thereby to boost their own self-esteem. That they don’t choose to spend their time this way doesn’t mean they don’t care about relative position.

All available evidence suggests that positional concerns are extremely local in nature. As Bertrand Russell once put it, beggars don’t envy millionaires, they envy other beggars who are doing a little better. If we adopt a Darwinian perspective on the forces that shaped human motivation, this is as we would expect, because similarly-situated others are the rivals that really matter in the struggle for survival. The non-poor simply have no reason to view the poor as rivals. They don’t compete for the same jobs, the same mates, or houses in the same school districts. Because the local comparisons that matter most for the non-poor would be largely unaffected by anti-poverty programs, it makes no sense to say that positional concerns provide a motive for opposing those programs.

Nor are positional concerns the only ones that motivate people. With the exception of sociopaths, people typically experience displeasure from the knowledge that others are in distress. Such feelings predict support for anti-poverty programs. Or perhaps the simple fact that life is unpredictable leads many to favor a generous social safety net as a hedge against the possibility that they themselves might become poor some day. In short, the fact that many voters favor anti-poverty programs does not mean they don’t value favored positions in the social hierarchy.

Rank is a reciprocal phenomenon. High-ranked positions cannot exist in the absence of low-ranked positions. In virtually every private work group, the pay schemes we observe embody an implicit progressive tax that transfers substantial income from the most productive workers to the least productive. On my argument, work groups with mixed productivity levels would quickly dissolve except for this transfer, which creates an implicit market for local rank.

Those who particularly value high local rank can purchase it by transferring some of their pay to their less productive co-workers, without whose presence they would not be able to enjoy high rank. Everyone wins under this arrangement. The least productive workers get a pay premium larger than necessary to compensate them for the burdens of low rank; and the most productive workers take a wage cut that is smaller than the value they assign to high rank.

This arrangement provokes no complaint from libertarians because it is completely voluntary. Someone who doesn’t wish to purchase high local rank doesn’t have to. Instead, he can join a group in which he would be one of the least productive members and be paid more than the value of what he produces.

There would be no similar escape hatch for society’s most productive workers under a society-wide redistributive tax scheme. Even those who insisted they did not value high social rank would face mandatory tax payments to finance transfers to their lower-ranked fellow citizens. From the libertarian perspective, that’s an objectionable feature of redistributive taxation, to be sure.

But is there an alternative that would be as good or better? If societies could form and dissolve as readily as private work groups can, an implicit market for social rank would emerge like the one we see in the labor market. Someone who didn’t want to be a net contributor under a society’s progressive tax scheme could simply persuade more productive others to form a new society in which he would have low social rank and be a net recipient transfer payments.

But transaction costs rule out that option. For the most part, we’re stuck in the societies we’re born into. The upshot is that social institutions cannot be fine-tuned to suit every individual preference. We must choose rules that work as well as possible for people with highly divergent talents and interests.

High social rank, as noted, has substantial instrumental value, and low social rank entails substantial concrete costs, irrespective of whether people care about rank per se. Forcing a productive person to buy more social rank than he wants is objectionable, but the alternative is to give all of society’s most productive members a valuable asset free of charge. That asset would command a high price in the libertarian’s ideal world in which purely voluntary societies could form and dissolve at will. And since its value is a direct consequence of the substantial costs associated with low social rank, a society without redistributive taxation should strike libertarians as even more objectionable.

Ronald Coase argued that when transaction costs make private negotiation an impractical way to limit damage from externalities, collective action should try to mimic as closely as possible the solutions people would have adopted if transaction costs had been zero. When the externalities in question are distributional in nature, the clearest indications we have about what those solutions would look like are the pay schemes we observe in private firms. In virtually every instance, those schemes embody a steeply progressive implicit tax. In my view, those observations make redistributive taxation defensible, even within the libertarian framework.

Almost without exception, however, my libertarian friends belief that redistributive taxation is morally indefensible. This belief implies that society’s most productive members should be entitled to their valuable positions free of charge just because transaction costs make it impractical to negotiate private solutions to distributional externalities at the society level. That claim, I believe, is squarely at odds with libertarian principles.

I know better than to expect this argument to change many libertarian minds. Those who react at all are more likely to follow David’s strategy of searching out flaws in my argument. If you find some, I’d be grateful to hear from you.

15 Comments:

At 6:48 AM, May 10, 2010, Blogger wintercow20 said...

I'd like to point out a few points.

(1) The issue of high transactions costs preventing libertarians from establishing competitive social orders seems contrived. Strong central governments have reduced the role that federalism and similar institutions could play. If you take Coase seriously, as you clearly do, he advocated finding the least costly method of mitigating an externality. In this case, you are assuming that redistributive taxation is the least costly way - but why not promote competitive political entities? In this regard, your example of the inequality in access to good schooling seems to be precisely the one I would use to make MY point.

(2) Some would argue, myself included, that what you continue to call externalities, these so-called "distributive" externalities, are not true externalities deserving of correction. Ought we not distinguish between true market "failures" from what Colander calls, "failures of market outcomes." The latter may be regrettable, but economic theory does not invite correction for the latter (I would argue that it doesn't invite it for the former, but that is not the point I want to make).

(3) Indeed, if position concerns are extremely local in nature, and you use that to argue against David's point on the Great Society agenda, I am not sure you cannot also argue the opposite. I agree that the poor are of relatively little concern (in terms of status competition) to the non-poor - but might the existing locational distribution of poor vs. non-poor be reflecting this very fact? For example, I know of very few non-poor persons who are against the idea of helping the poor find housing. However, almost every one of these same people very much is against the idea of providing the poor with housing vouchers that would allow them to live in their nice neighborhood (e.g. Cayuga Heights). Instead, they all support public housing, rent controlled buildings in high density zoned areas, etc.

(4) I am alarmed when I read comments such as the one in your penultimate paragraph which seem to dismiss out of hand any moral arguments against redistributive taxation. Some of us believe it or not never signed the social contract, and do view taxation as theft - however necessary some view it to be. Therefore, we ought to limit the extent of such morally corrupt activities as much as possible. In the status game, not only is redistributive taxation reducing the relative status of those of us that are net payers, it is being implemented by a group of people who have won their status game in the pursuit of power and political advantage over the rest of us. So even if you have a case for redistributive taxation on the status grounds you lay out, we live in a world where people are not saints and do not behave in the way out textbooks would like them to.

By the way, I was a student of yours at Cornell in 2000 - I learned much from you.

 
At 7:07 AM, May 10, 2010, Anonymous Mike Gibson said...

Frank writes: "High social rank, as noted, has substantial instrumental value, and low social rank entails substantial concrete costs, irrespective of whether people care about rank per se....the alternative is to give all of society’s most productive members a valuable asset free of charge."

What happened to your thesis that all envy-grudges are local? At the end of your argument here you zoom out back to non-local, society wide comparisons. If the trend you observe in private firms holds, then that's the solution to the problem, period. Externalities are compensated. But, as you stress, status concerns are local. By your own logic and assumptions, society wide, low social rank suffers no externality cost from those who are absolutely high in social rank. Therefore there's no need to compensate.

Second point: since status concerns are local, why will side-payments assuage the sting of envy? In fact, this additional wealth will do nothing (except make people feel worse for collecting money based on their inferiority.) On the other hand, if you subsidize a behavior, you can expect more of it. So wouldn't you expect more envy as a consequence of your solution?

Now a moral objection: Why do you blame the man who is envied instead of the one who envies? Why do you punish what's enviable rather than those who envy?

Lastly, there's no one "giving" out this asset. (Which is what, btw? Relative standing in my firm or in society?) Be careful of this kind of Intelligent Design creeping into your assumptions about society.

I do disagree with David's argument in one point. The well off in society wouldn't vote for policies to punish the poor. IF they care more about status than wealth, they will vote for policies that raise their own status and lower that of others. So for example, any policy that identifies a group as being poor and disadvantaged will appeal to the well off because by voting for this program, it will confirm the inferiority of those it purports to help and it will raise their own status by making them appear generous.

 
At 7:21 AM, May 10, 2010, Anonymous Josh Hall said...

Surely it is illegitimate to consider preferences for relative utility without considering how the difference came about. Consider (a) having worked harder than, (b) being luckier than, or (c) having stolen the difference from the other person. No (non-sociopathic) person I know would consider these equally desirable, even if the monetary results were the same. Consider that in hunter-gatherer societies, it is traditional to share the bounties of hunting (where luck is often involved) but not gathering (where effort is more highly correlated with success).

The hard-core libertarian will of course place the recipient of redistribution in category (c) -- but even in mainstream thought, he is clearly in (b) and not (a). The recipient will never have the moral satisfaction of a well-deserved reward.

 
At 7:48 AM, May 10, 2010, Anonymous Unconformist Sheep said...

It doesn't seem like Prof Frank answered Friedman's point that demand for redistribution within a small group does not necessarily translate into demand for widespread redistribution.

Does Prof Frank believe in worldwide redistribution, or only within arbitrary geographical borders?

 
At 9:06 AM, May 10, 2010, Anonymous Anonymous said...

Frank asserts that people value "high social rank" because it enables them to have access to "the best" health care and education, but then he proceeds to argue as if people value "rank" in itself.

The premise is questionable at best - surely if absolute wealth levels increased such that everyone had the means and desire to pay for "the best", the market would shift to make more of it available, and to narrow the gap between the "best" and "worst" qualities of those services offered.

But even stipulating to that, no one - or at very nearly no one - actually behaves as if they're motivated by relative position. People don't think "I need to make more money than that guy", but rather simply "I need to make $X in order to be able to afford this insurance/operation/school". In other words, people think of the wealth needed to buy the scarce services they want in absolute, not relative, terms.

Frank takes desire for status as a given, when in fact it is a very minor motivator for most, and none at all for many.

 
At 1:42 PM, May 10, 2010, Anonymous Nathan said...

Suppose, for example, that you ask someone to choose between two hypothetical worlds: ...
Almost everyone picks World B, the absolutely safe but relatively unsafe one.

But that fact has absolutely no bearing on my claim that persons of high social rank have greater access to the best health care. Resources are finite. The most renowned practitioners cannot provide the most costly medical treatments to every seriously ill patient. ... When there’s not enough for everyone, can there be any doubt that society’s lowest-ranked members are least likely to get the best care?

I've read this three times now and I still can't seem to make sense of it.

I agree with Frank that most people (myself included) would rather have a more dangerous job in a safer world than vice versa. But he then says that this doesn't apply to healthcare because resources are limited and there's no doubt that the poorest members of society get the least care.

But this seems to confused the fact that resources are fixed at a given point in time with the idea that they are always fixed, at all times. In any given world, the rich get better care than the poor, on average. But in certain worlds, health care is better than in others, just as the odds of dying on the job are different.

To pose a similar question to the one Frank asks in the first quoted paragraph, would you rather get the best medical care available in 1880, or below average medical care today? I can say with certainty the latter. In short, as with the on-the-job-death hypo, the absolute quality of care matters more than relative status.

So all he seems to be saying is that rich people get more and nicer stuff than poor people, which has never been in question, and the whole issue of relative status and scarcity serves to gum up the works without making any real point.

 
At 1:42 PM, May 10, 2010, Anonymous RKN said...

Robert Frank said:
Almost without exception, however, my libertarian friends belief that redistributive taxation is morally indefensible. This belief implies that society’s most productive members should be entitled to their valuable positions free of charge just because transaction costs make it impractical to negotiate private solutions to distributional externalities at the society level.


Not sure what your supposed implication means, but it is not the counter argument from moral libertarians I'm familiar with. The one I'm familiar with states that redistributive taxation violates the non-initiation of force principle. What's more egregious is the practical matter that taxes are used to pay for all sorts of things that people don't value and would not otherwise voluntarily fund (e.g. the war on drugs), and not merely to stabilize social rank.

 
At 3:48 PM, May 10, 2010, Anonymous Anonymous said...

"But that fact has absolutely no bearing on my claim that persons of high social rank have greater access to the best health care. Resources are finite. The most renowned practitioners cannot provide the most costly medical treatments to every seriously ill patient."

You are equating quality with prestige, which is a big mistake. Only a few doctors can be renowned but many (or all) can be skilled.

 
At 5:39 PM, May 10, 2010, Blogger Don said...

A terrific discussion.

Don the libertarian Democrat

 
At 8:43 PM, May 10, 2010, Anonymous Mercy Vetsel said...

"(We are first among industrial nations in “preventable deaths” per capita—deaths that would not have occurred if the afflicted person had received competent and prompt medical attention for the ailment that later caused his death.)"

That of course is utterly false nonsense on par in deception with misstating the statistics 101 canard that "people are more likely to die in hospitals" by reporting "SICK people are more likely to die if they go to a hospital".

The U.S. has the lowest mortality rates in the world for those afflicted with diseases that can be treated medically. In other words, overall, the U.S. is the best place in the world to get sick or injured.

But that's not the question the weaselly Commonwealth Fund or Robert Frank want discuss.

No, the Commonwealth Fund study was a purely political hack job that counted lifestyle diseases as "preventable" but didn't count the most common forms of cancer like prostate cancer and breast cancer where the U.S. leads the world in detection and treatment.

Instead the fund based it's analysis on a few cherry-picked lifestyle diseases like heart disease and diabetes mixed in deceptively with truly preventable diseases.

Then they utterly ignored the key metric which is the mortality rate per incidence of disease.

Finally Frank compounds the deception by writing his own fantasy interpretation of the Fund's misleading term "amenable" with his own language -- "that would not have occurred if the afflicted person had received competent and prompt medical attention" -- which is flatly false, 180 degrees from the truth.

For while Frank's version IS the impression that the study authors tried to create, that's NOT what they said. Either Frank was duped or he's trying to dupe us.

So now how are we supposed to have an intelligent conversation (let alone an honest debate) when Frank can't even get the basic facts straight?

Step 1: Agree on the facts.

-Mercy

 
At 9:04 PM, May 10, 2010, Anonymous Mercy Vetsel said...

"(We are first among industrial nations in “preventable deaths” per capita—deaths that would not have occurred if the afflicted person had received competent and prompt medical attention for the ailment that later caused his death.)"

Thinking some more about this Frank quote... Apparently Robert Frank is an economist with a keen interest in health care.

Is it really possible that he doesn't understand the deception and falseness of the statement above?

I'm curious if Professor Friedman and his readers think this false statement -- presented as fact -- can be attributed to:

a) Frank deliberately presenting a false interpretation of a politically-biased and misleading study

b) Frank honestly falling uncritically for the misleading impression conveyed by the study

Frankly I don't see how the deception could be unintentional. These academics live is such an intellectual bubble on political issues that lying becomes second nature.

Well, I for one, am sick of being lied to by people like Robert Frank so that they can advance their fascist political agendas.

They are paid to seek truth not engage in rhetoric.

-Mercy

P.S. If Frank retracts his false statement, I'll be happy to retract the accusation above and replace it with a rant about the staleness and incestuousness of an intellectual circle that would allow such an obviously deceptive study conclusion to survive in the meme-sphere.

 
At 9:23 PM, May 10, 2010, Blogger Nick Weininger said...

The moral argument remains the best one here. There is no need to seek out mechanisms for remedying distributional "externalities" because they are not true externalities, because envy is the fault of the envier and not the envied. That some, even most, firms compensate in part to placate envy may be a sadly inevitable result of flawed human nature. It is not a model to emulate.

 
At 11:13 PM, May 10, 2010, Blogger Jonathan said...

"... we disagree about the very nature of concerns about relative position."

Indeed we do. Enough said, perhaps.

I'm puzzled by references to 'social rank' when what he's obviously talking about is money. Why not call a spade a spade? Yes, obviously people with more money can buy more or better goods and services. If that didn't happen, there would be no point in earning money.

 
At 2:25 AM, May 11, 2010, Anonymous Henry said...

I more or less agree with Frank (although I'd still like further elaboration on how "localised" redistribution should be), but I disagree completely with his premise that such a proposal is "libertarian". The definition of libertarian would need to be highly neutered for this to be the case, as almost any policy could be justified on the grounds that states are equivalent to firms, and firms exist to reduce transaction costs. I personally think such an analogy is reasonable, but it's hardly a libertarian one.

 
At 10:10 PM, May 13, 2010, Blogger Mike said...

Unconformist sheep has a deceptively delicious point.
"It doesn't seem like Prof Frank answered Friedman's point that demand for redistribution within a small group does not necessarily translate into demand for widespread redistribution."

Here it seems morality needs sit the bench. I'm obligated morally, I think, to aid in the care of my aged Aunt who is stricken with cancer. Why? Because as a part of the social unit known as my family she offered such care to many through the years, and to carry on this tradition of voluntary care-giving. Will there be a quantifiable result, no, but then I hardly need such definitions within the fully voluntary organization of my family.

That I should be obligated for your Aunt's care simply shows the perversion of the term 'family' by the state, or indeed, the 'clan' or the 'tribe', all natural social orders that the consummately un-natural state(being based upon violence rather than cooperation) would wish to replace.

My silly injection aside, a fascinating debate, thanks for sharing.

 

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