Robert Frank, Status, and Income Redistribution

Economists usually assume that what individuals care about is their absolute level of income, that if my income goes up by ten percent and everybody else's by twenty that is still a plus, not a minus, for me. Many years ago, in Choosing the Right Pond, Robert Frank pointed out that that is not an accurate description of real human behavior. People care about their absolute level of income (and other things), but they also care about their relative status, which depends in part on how their income compares to that of others. The point itself is fairly obvious; what was interesting about Frank's work was that he went on to show how a taste for relative income could be incorporated into an otherwise conventional economic analysis.

Consider a firm that employs a variety of workers of varying productivity. A standard competitive model would predict that salaries would scale in proportion; if one worker produces twice as much as another, he will be worth twice as much to an employer and will end up being paid twice as much.

Suppose, however, that workers care about both absolute and relative income, the latter being defined relative to fellow workers in the firm. The low productivity worker now contributes an additional input, immaterial but real, to the firm—his presence raises the relative status of the more productive workers, making them happier. The high productivity worker contributes a similar, but negative, input, since his presence lowers the status of other workers, making them less happy. Changes that make workers more or less happy ultimately show up in the firm's bottom line, since it costs less to hire workers the more they like the job. Hence, under Frank's assumptions, the low productivity worker will be paid more than in proportion to his physical output, the high productivity worker less. The market outcome thus incorporates something that looks rather like income redistribution.

In a recent New York Times Op-Ed, Robert Frank offered this analysis as a justification for explicit income redistribution by government, writing:

"Enlightened libertarians believe that the best social institutions mimic the agreements people would have negotiated among themselves, if free exchange had been practical. Private pay patterns suggest that our current tax code meets that test."

It is an ingenious argument, but there are at least three problems with it:

1. Frank's analysis of the effect on pay of concern with status implies that what people care about is not their status relative to the rest of the world but their status relative to those near them—in his case, their fellow employees. The more distant someone is from me, the weaker the effect—a fact some of whose implications I discussed long ago on this blog. Most of the people who benefit from income redistribution are very far from me. That does not eliminate his argument, but it weakens it. When he writes

"For starters, high-ranking members of society, who also tend to have the highest incomes, know they will be able to send their children to the best schools and have access to the best health care."

he fails to distinguish between absolute and relative values. Getting good health care 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.

2. 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.

3. The most serious problem with Frank's argument, suggested by the previous point, is that if it is correct he ought not to be making it, since its implications are ones of which he clearly disapproves. He puts it in terms of what "enlightened libertarians" think social institutions should be. But as an economist, he surely believes that people's behavior mostly reflects their perception of their own interest. The implication of his op-ed is that it is in the interest of everyone to make everyone else poorer, thus raising his relative status. The rich ought to be in favor of grinding down the poor, the poor ought to be in favor of pulling down the rich, and the people in the middle ought to be in favor of both. I do not think that describes the policies that Robert Frank, who is a nice man as well as an able and original economist, wants.

Robert Frank and Libertarian Beliefs

My exchange with Robert Frank over his NYT piece seems to have come to at least a temporary halt. Unless he is going to concede that I am right or I am going to concede that he is, neither of which seems likely any time soon, there doesn't seem to be a lot more to say—although if he wants to respond to my most recent post in the series he is of course welcome to do so.

I thought, however, that it would be worth exploring a different feature of his argument—his view of what libertarians believe, offered as part of his argument for why libertarians ought to support governmental income redistribution. Frank writes:

"Society’s income distribution, [libertarians] argue, should reflect as closely as possible what people would earn in unregulated private markets."

Off hand, I cannot remember ever hearing a libertarian make that argument. A better version, later in the piece, is:

"Enlightened libertarians believe that the best social institutions mimic the agreements people would have negotiated among themselves, if free exchange had been practical."

Libertarians differ widely among themselves on both the basis for views and their implications, so the quote is probably true of some libertarians and certainly false of others—unless it is taken to exclude as unenlightened any libertarian who disagrees with it. But it is worth asking to what degree Frank is correctly describing the implications of the more common grounds for libertarian beliefs. Consider three different alternatives, corresponding to three common approaches to political philosophy.

1. Natural Rights: Probably the most popular position among the hard core of self-identified libertarians, some of whom make opposition to the initiation of force the defining characteristic of libertarianism. For most or all of them, both of Frank's statements are false. Following arguments along the lines of Robert Nozick's distinction between desert and entitlement, they hold that what matters is not what you end up with but how you got it. Whether or not the rich would have willingly given money to the poor in a zero transaction cost world is irrelevant to the legitimacy of coerced transfers by the state.

2. Social Contract: The contract is a metaphorical one. What people would have agreed to if ... is a common basis for deducing it, which makes this a plausible basis from which to defend the position Frank is arguing for. The only problem is that it is not a position popular with self-identified libertarians, few of whom are Rawlsians.

3. Consequentialism: The argument is that libertarian institutions lead to results that most people would prefer to the results of alternative institutions. This is the position I have usually argued from; while I have some sympathy with the moral intuitions underlying the natural rights position I lack arguments to support those intuitions, so prefer to take other people's objectives as given and argue that my preferred institutions would better achieve them. Utilitarianism is one version of consequentialism, but not the only possible one.

From a consequentialist standpoint, Frank's position is at least plausible—how plausible depending on the degree to which one believes that free exchange in a zero transaction cost world would lead to the optimal consequences. It is worth noting, however, that there is no reason to expect it to lead to a utilitarian optimum, for reasons having to do with the difference between economic efficiency and maximum utility.

So far I have been considering the views of self-identified libertarians. The label may also be applied to the much larger number of people, perhaps as many as ten or twenty percent of the population, who support some increase in individual liberty and reduction in government power in both social and economic contexts. I expect that many of them would be sympathetic to the view that Frank expresses but that few would take it as an adequate definition of their position.

I do not know if Robert Frank, in writing what I quoted above, was thinking of statements of principle made by specific libertarians. If he is reading this, he may want to provide examples. My own feeling is that, while many libertarians would agree that his claim about what perfectly functioning markets would produce, if true, would provide some defense for government redistribution, few would regard it as a conclusive, or even adequate, defense—and that, of those few, most would be economists.

My Response to Robert Frank's ...

Reading Robert Frank’s most recent post, I have the impression that he is puzzled and frustrated by my failure to be convinced by his obviously correct arguments for his position. If so, our feelings are similar, since I remain puzzled as to why, after I have pointed out the gaping errors in his argument, he continues to repeat them. Instead of making another attempt at a point by point response, I am going to try to step back, summarize his argument as I understand it, and try to show what is wrong with it. That should give him an opportunity either to understand my argument, if the problem is that he doesn’t, or to point out how I am misunderstanding his.

The basic claim made in his Op-ed and defended in his posts here is that poorer people are worse off due to the existence of richer people, richer people better off due to the existence of poorer people, hence that it is only just to compensate the poorer at the expense of the richer. That claim has two parts. One is his old argument about the effects of the fact that humans care about (among other things) relative status. The other is the claim that, concern with relative status aside, the existence of rich people makes the less rich materially worse off and that the existence of poor people makes the less poor materially better off.

The first claim is, I think, correct; humans do care about relative status. But, as I pointed out in my initial post and as each of us has agreed since, those effects are local, hence provide no justification for income redistribution on a national scale. In his most recent post I think Robert Frank to some degree concedes that, referring to his own argument as “difficult-to-document claims of psychological damage used [caused?] by inequality,” and recasts the argument in terms of “concrete costs” due to a cascade of competitive expenditures, in effect substituting for his first claim a version of the second. Doing so makes the first half of the argument in his Op-ed, his old analysis of the effect of concern with status on wage differentials in the market, almost entirely irrelevant to the second half, his defense of governmental income transfers. Yet it was the first half which was supposed to persuade libertarians that they should approve of the transfers defended in the second, since they only reflected, on a larger scale, what would come out of voluntary interactions in a world without transaction costs.

It is the second claim that seems to me strikingly mistaken. He has now twice—in his most recent post and the one that preceded it—first agreed that what matters in health care is the absolute level and then proceeded to put his argument in terms of the relative level, not how good the health care is that someone can get but whether or not he can get “the best” health care.

Perhaps my point can be made clearer if I put it in terms of a comparison between two hypothetical societies which differ only in the number of wealthy inhabitants; the second consists of the first plus an additional million people, each with an income of a million dollars a year. Obviously, if they get that income by stealing it from everyone else, their presence makes other people worse off, but that is not Robert Frank’s argument. He started, after all, with an explanation of why the wages of more productive workers do not fully reflect their additional productivity. Hence I think I can fairly assume that each of those million gets his income by producing goods and services worth, to other members of the society, at least a million. The question is then whether people other than the million wealthy are worse off in the second society than in the first.

One of the things the additional people will spend their income on is medical services. Hence the second society will have more, and probably better, medical services than the second—more good hospitals, more highly trained surgeons, a larger quantity and probably a larger variety of medical drugs. We might quantify the effect by supposing that the first society has a million doctors whose skill ranges, on some metric, from one to ten, and the second adds to that an additional ten thousand whose skill ranges on the same metric from five to eleven—all of whom are providing their services exclusively to the additional wealthy people.

Robert Frank tells us, correctly, that “When a serious health problem strikes, a person wants the highest absolute quality of care possible, but because the quality and quantity of care are limited at any given moment, not everyone seriously ill patient can have the best. My claim, which is surely completely uncontroversial, is that someone with high social rank is more likely than others to get the best care.” That sounds as though it means that the addition of people of high social rank reduces the quality of medical care available to those of lower rank—but it doesn’t. In my example, constructed to simplify the argument but consistent with his view of the situation, it means that someone who before got medical care of quality ten is still getting medical care of quality ten. The reason he is no longer getting “the best care” is that there are now other people getting care of quality eleven.

Robert Frank conceded, two posts back, that what matters is the absolute level of medical care not the relative level. To complain that someone is no longer getting the best level with the implication that he is now worse off, when what has actually changed is not the medical care he can get but the care others can get, is to treat a relative change as if it were an absolute change. It is his failure to see that very simple point—now twice repeated—that makes me feel as frustrated at his responses as he appears to be at mine.

There is, I think, a second error embedded in what I just quoted, this time in the words “at any given moment.” If my additional million people, complete with their income and their demands for medical care, suddenly appeared in a society, and if none of them happened to be physicians, they would indeed bid existing medical services away from others.

But that is not what is happening, either in my hypothetical or in the real world that we have been arguing about. Putting the analysis in terms of “any given moment” implicitly converts the real economy, in which goods are produced as well as consumed, into the fixed pie economy that one can imagine existing at any single instant, with production frozen and consumers competing over already produced goods. That is a perspective popular with people making political arguments, especially ones in favor of income transfers, but a very odd one for an economist to adopt.

I have focused on medical care, but the same analysis applies to education. It is true that having gone to a better school makes you likely to be accepted into a better job. But the distribution of available jobs is not frozen any more than the distribution of available medical services; both reflect, among other things, the distribution of productive abilities in the society. If my additional million people spend part of their income on their children’s education the result will be more well educated people, hence more very productive people, hence more high paying jobs. The individual who before would have gotten the best job the firm offers at a salary of a hundred thousand a year now gets only the second best job the firm offers—at a salary of a hundred thousand a year. It is true that “persons of high social rank are more likely than others to be able to send their children to the best schools.” But the best schools are now better, as are the jobs available to the graduates of the best schools, so the graduate of what is now only the second best school need not be, in any material sense, worse off. Again there is a confusion, although a less obvious one, between relative and absolute.

In arguing that the poor are not made materially worse off by the existence of the rich I have understated my case. In material terms, Robert Frank’s account is not merely wrong, it is backwards. Not only do poor people not lose, materially speaking, from the existence of rich people, they can be expected, on average, to gain.

This is true for two reasons. One I already pointed out in my previous post. The production cost for some things—medical drugs are a particularly striking example—is in large part the cost of generating information. The more buyers that is divided among, the less the cost to each. The fact that some people are wealthy results in a larger demand for medical drugs, which makes any particular drug less expensive, as well as funding the development of additional drugs. That is a benefit to the poor as well as to the rich.

The second reason is a point underlying the principle of comparative advantage: we can gain more by exchange with people who are different from us than with people who are similar to us. I would have a hard time persuading any of my colleagues to mow my lawn at a price I would be willing to pay. The recent immigrants who in fact mow my lawn would have a hard time persuading any of their friends and relations to pay them a price for mowing a lawn that they would be willing to accept. I am better off by the existence of the immigrants and they by my existence—our different situations make possible exchanges to our mutual advantage. Generalize that and it follows that the rich are indeed made better off, as Robert Frank believes, by the existence of the poor—at least in the context of voluntary interaction on the market—but the poor are also better off by the existence of the rich.

Robert writes: “Unless David has new evidence that persons of low social rank have greater access to the best health care and greater access to the best educational opportunities, I hope he will abandon these objections.”

Unless Robert has evidence that persons of low social rank have access to a worse quality of health care and education than they would if people of high social rank did not exist or had lower incomes than they do, I hope he will abandon arguments that hinge on the word “best,” and so depend on confusing relative with absolute outcomes.

My Response to Robert Frank's Reply

[I am quoting pieces of what Robert Frank wrote (in italics) and my responses. The full text of his response to my response to his op-ed is in the post before this.]

Robert Frank writes:

…

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.

Finite but not fixed. Health care is a produced resource.

The most renowned practitioners cannot provide the most costly medical treatments to every seriously ill patient.

There is not a fixed number of skilled practitioners or good hospitals; the richer the society is, the more of both it can support. If everyone else’s real income doubles and mine increases only fifty percent, that means that the total supply of goods and services has gone up--roughly doubled. There is no particular reason why that shouldn't include the supply of medical services, permitting everyone else to consume twice the medical services he consumed before and me to consume fifty percent more than I consumed before.

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?

I am shocked to see an economist talking about “enough for everyone.” What do those words mean? Additional medical services would produce some benefit well past the point at which the entire GNP is spent on them.

As you have just conceded, what matters is not whether I get the best care but how good the care is that I get. When my absolute real income increases but my relative income decreases, I can afford better care than before, even if other people can afford care better still. So, in the case of medical care, it is absolute not relative that matters.

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.

Schooling is a more complicated case because schools produce both education and status. So far as the education is concerned, a good school is not an “inescapably relative” concept, it is an absolute concept. If all schools get better, that means that students are learning more—becoming better doctors, lawyers, businessmen, parents, farmers, consumers of art and literature, or whatever they are going to use the education for. The result is a more productive economy with more stuff for people to consume and consumers better able to take advantage of what is available to them.

Do you really want to argue that schooling was as good in England in the tenth century, or in Cambodia or Ethiopia today, as it is in a modern developed society? That’s what your “inescapably relative” would imply.

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.

If everybody gets richer, the quality of schools can increase everywhere. You are again confusing absolute and relative. The richer people will still, on average, have better schools--but the “worse” schools can be producing education as good as, or better than, the best schools used to produce.

Your claim is correct only with regard to the status output, not the schooling output. If you go to Harvard and I to Cornell, that may result in your winning out over me in our courtship of the woman both of us wish to marry. It may result in people who happen to know our backgrounds treating you with more deference than they treat me.

I do not know if it has occurred to you, but one implication of your argument is that spending on schooling, insofar as it produces status, imposes a negative externality on others, so private individuals will tend to buy a more than optimal quantity of schooling for their children. It follows, on straightforward economic lines, that instead of subsidizing schooling, as we do on an enormous scale, we ought to tax it. If schooling is “inescapably relative,” we could cut every school’s expenditure in half and still produce the same amount of education, relatively speaking, while saving many billions of dollars. Perhaps that should be the subject of your next op-ed.

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

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.

It was your conception, not mine, whose implications I was pointing out. You are the one who argues that people worse off than I am make me happy (and, in the current version of your argument, materially better off) and people better off than I am make me unhappy (and materially worse off).

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.

You are restating, in a stronger form, a point I already made in the post you are responding to. The problem with the observation that status externalities are local is not that it isn't true but that it destroys the conclusion you were arguing for in your op-ed—your justification for government income redistribution. The middle class suburbanite doesn’t receive a positive status externality from the poor welfare recipient in the inner city or confer a negative status externality on him, for just the reason that you and Russell point out. So your status argument provides no justification for taxing the suburbanite to benefit the welfare recipient. Following through on the logic of your argument while taking account of the local nature of positional concerns, you ought to be arguing for transfers from the working poor to their welfare neighbors, from wealthy suburban physicians to their less wealthy suburban professor neighbors, but not from the middle class suburbanite to the (much poorer) urban poor.

The local nature of status comparisons also undercuts your argument in a more indirect way, because it implies that the proper way of accounting for them is through private markets on a local scale not through national politics. Insofar as the people I am comparing myself to are part of a voluntary association--for instance, my fellow workers in a firm--the market will reward those at the bottom for the positive status externalities they confer on those at the top and charge those at the top for the status externalities they receive from those at the bottom. That, after all, was the point of your analysis of the effect on wage differentials of concern with status.

The effect is not limited to employment. Suppose I am an entrepreneur building a housing development. Some of the houses will be bigger and more expensive than others. Buyers of the more expensive houses are buying not only a bigger house but, along with it, the opportunity to feel superior to their neighbors—and will be willing to pay for it. Buyers of the smaller houses, on the other hand, are suffering the cost of having to look up to the neighbors; in order to sell the smaller houses, the developer will have to compensate them for that cost in lower prices. Just as in your analysis of intrafirm wage differentials, where status externalities exist, the market automatically includes them in its calcalation of costs and benefits and hence in prices.

As in many other cases, the market does an imperfect job of capturing externalities—in this case because not all of the local interactions occur in the context of voluntary associations of the sort I describe. But it does provide a mechanism for measuring them and an incentive to compensate for them at the level at which, as you have just pointed out, they actually occur—locally. The political mechanism provides nothing comparable.

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.

The critical one of these, in my view, is mate competition—that is what explains the human concern for status. Available mates really are a fixed resource, and competition for them is central to reproductive success, which is what evolution “as if designs” us for.

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.

And therefor it makes no sense to say that positional concerns provide a justification for income redistribution at the national level—the claim you were making in the op-ed to which I responded. I was pointing out the implications of your argument, not agreeing with it and them.

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.

If status comparison occurred at the national level, which is what the argument for national income redistribution that you were making required, that would tend to make rich people opposed to lifting the poor out of poverty. Other factors working in the other direction might, of course, outweigh that one. So the observed politics of income redistribution do not prove that the argument you were making was wrong—I was indulging in hyperbole—they are merely evidence that it is wrong.

Perhaps more important, my point implies that your argument, true or false, has perverse implications. The more people believe it, the more they will see benefits to other people as costs to them. That does not mean that your argument is wrong, but it might be a reason not to publish it as an op-ed in the New York Times.

… 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.

This would be a convincing argument if status comparisons were not local--but, as we both agree, they are. Hence they occur at a level at which groupings can and do form and dissolve. The more important such comparisons are, the greater the incentive to put them within such groupings, as in my example of the housing development. We do not need redistribution at a national level, which is what you were arguing for, because status comparisons don’t occur at a national level.

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.

That is your claim, but you have not supported it. Go back to the case of medical services. It is absolute level, not relative level, that determines access—because the supply of medical services is not fixed, any more than the supply of other goods and services. If we all get richer, we can all have more medical services.

This part of your argument hinges on the confusion, early in your response, between “finite” and “fixed.” Similarly for schooling, insofar as it produces education—being better educated is a benefit for me that does not depend on how well educated you are. Either it makes me more productive, and so gives me more money with which to buy stuff, or it makes me better able to live my life, appreciate literature, make choices, which again does not depend on how well educated I am relative to you.

The one place where the claim that relative status has instrumental value has real force is in competition for mates. But that’s because mates are a fixed resource—a fact which a sufficiently sophisticated calculation of changes in real income would take account of. If my money income goes up by five percent, everyone else’s money income doubles, and market prices stay the same, my real income may have actually fallen—because one of the prices not included in the price index is the price of obtaining a mate, and that has been bid up the increased income of my competitors.

Beyond that, your argument depends—as was clear when you first made it many years ago—on individual taste for status. From the standpoint of economics, that is merely an observed fact about utility functions. From the standpoint of evolutionary biology, it’s an implication of competition for mates.

One final point. There are indeed some positive externalities to low incomes and negatives externalities to high income, due both to the fact that people care about status and the fact that in some circumstances, although many fewer than you argue, relative status affects absolute access to resources.

But there are also negative externalities from low incomes and positive externalities from high incomes. Consider again the case of medicine. The cost of drugs is in large part the fixed cost of developing them. The more rich people there are who can afford cutting edge drugs, the lower their per unit cost and the wider the range of drugs available. Similarly for cutting edge surgical procedures and any other good where a substantial part of what is being produced is information. There is no reason in economic theory, and you offer no reason, to think that the net externalities run in the direction your argument requires—that making one person richer on net lowers the welfare of others. For all we know it raises it—in which case the consistent application of your arguments would require you to support redistribution from poor to rich.

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.

Done.

Following Arguments Where They Lead

In my recent exchange with Robert Frank, I suggested that his view of schooling has important implications for government policy. If, as he argues, schooling is largely or entirely a positional good, something where what matters to the individual is not how good his education is in absolute terms but how it compares with other people's education, one implication is that we are spending far too much on it. The benefit I get from attending Harvard comes mostly, on this view, at the expense of other people who don't attend Harvard and as a result lose out to me in the later competition for jobs, mates, and status.

It follows that the social benefit—individual benefit summed over everyone—of my attending Harvard is much less than the private benefit, hence that individuals will be willing to spend much more on schooling than it is really worth. Putting it differently, it implies that each person's expenditure on schooling imposes negative externalities on other people. Frank appears to believe that this is true not only of money spent on going to Harvard but on the money spent by well off suburban taxpayers on the public schools that their children attend.

The usual view of economists is that acts imposing negative externalities ought to be discouraged, perhaps by taxing them. Schooling, however, is subsidized on an enormous scale, at both the K-12 level and above. So I asked Frank whether, on the basis of his expressed views, he would favor abolishing subsidies to schooling and taxing it instead. He never answered the question, perhaps because he viewed it as a digression from our central argument.

His failure to answer it raises a more general issue, not limited to Robert Frank or even to economists who share his political views. To what extent are they—I really mean we—willing to follow out the implications of our arguments when they lead to political conclusion we don't like?

Nuclear power is the one source of electric power that does not put carbon dioxide into the atmosphere and can be expanded more or less without limit—at a cost not wildly above the cost of power from fossil fuel. That ought to make it very attractive to those who believe that we face a threat of catastrophic proportions from global warming. Some environmentalists agree—most, at least so far as I can judge, do not. Similarly for the idea of geoengineering, holding the earth's temperature down by large scale projects to reduce the amount of sunlight the earth absorbs or to increase absorption of carbon dioxide, perhaps by fertilizing aquatic algae. In each case, there are undoubtedly arguments against as well as arguments for. But the arguments for do not seem to get much attention from those who, on the basis of their expressed views, ought to find them of great interest.

For libertarians, especially libertarian economists, a similar problem is raised by the issues grouped under the label of market failure—situations where individual rationality fails to lead to group rationality. Standard examples include public goods, externalities, adverse selection and private monopoly. In each case, good economic arguments can be made for the claim that interventions by government can lead to an improved outcome. Just as in the environmental case, the arguments are not conclusive; one can accept their validity while offering reasons to reject the conclusion (links to two different talks). But that approach is very different from the attempt to deny or evade the straightforward economic arguments in favor of intervention—as I believe some libertarian economists do. Libertarians who are not economists face a similar set of problems in justifying existing property holdings, many of which were not obtained by the means that libertarian political philosophy, going back to Locke, regards as legitimate.

Readers are invited to submit other examples—ideally ones associated with political positions they are sympathetic to.

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.

Robert Frank Responds to Me Responding to ...

[Robert Frank offers what will I think be the final post in our exchange. I agree with much of it, including his praise of the beauties of Ithaca. One of his points—that the rich can benefit from the existence of the poor—is one I already made in the post he is responding to. I do not think, however, that what he says here provides much support for the arguments of his NYT piece. Readers will have to decide for themselves whether they agree.]

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David’s thought experiment about the consequences of adding a million millionaires to an existing society promises to advance our discussion. I share his view that existing members of society would benefit from the presence of the new group in many important ways. But not in all ways.

The relevant issues are similar to those that bear on the question of whether someone with an annual income of $30,000 would be better off today than having that same real income in the United States 200 years ago. Someone with that salary back then would of course have been one of the richest members of society; but the same salary today would fall well below the median.

Some researchers have argued that once society’s absolute per-capita income rises beyond even a small fraction of today’s level, further economic growth does not increase well-being. On that view, it would clearly be better to earn $30,000 in 1810 than to earn the same amount today. But as I have argued elsewhere, absolute income gains confer many important advantages and will continue to do so, even if those advantages go unrecorded in conventional surveys of well-being. If you had a toothache, for example, or a child with bacterial pneumonia, you’d much rather have access to today’s remedies than to 1810’s. And many now-fatal illnesses will be someday be cured as a result of further income growth.

Even so, there are other aspects of life that most people would find more attractive on a $30,000 salary in 1810. If you wanted a house with a view, for instance, you’d be able to afford one, whereas such a house would be far beyond your reach today. More telling, relative income has always been an important factor in mate selection, as David acknowledges. If you were hoping to marry up, your chances would be much better on a $30,000 salary in 1810 than on that same salary today.

If I were making the choice, I’d find the attractions of living in today’s wealthier society sufficient to outweigh the disadvantages of having lower relative income. I’m confident that David would make the same choice. But that does not mean that having low relative income is without cost. And it certainly does not contradict my claim that having high relative income confers important instrumental advantages, quite apart from whatever purely psychological benefits might accompany high rank.

Contemporary examples of the issues we’ve been discussing are also on clear display in the lives of people in Upstate New York. Although most of this region is economically depressed, there remain isolated pockets of prosperity. Ithaca, where I have lived and worked for almost 40 years, is one. It has prospered largely because it is home to both Cornell University and Ithaca College. Other similarly situated small cities nearby are struggling from a steady decline of manufacturing employment over the past several decades. Unlike those cities, Ithaca has great public schools, a long list of good restaurants, a vibrant theater and music scene, and an abundant supply of well-maintained turn-of-the century houses. It also overlooks the scenic beauty of glacially carved Cayuga Lake and is surrounded by numerous parks with dramatic waterfalls and hiking trails. The incomes and other characteristics of the talented people attracted by Ithaca’s universities explain why the city’s built environment and cultural amenities dominate those of otherwise similar cities in the region. The choice between living in Ithaca or, say, a city like Utica, would be a no-brainer for someone like David or me.

But although the presence of people like us creates many tangible benefits for Ithaca’s low-income residents, it also imposes nontrivial costs on them. Because housing prices in Ithaca are so much higher than in other cities in the region, for example, Cornell’s maintenance staff typically find it difficult to find affordable living space anywhere near the city. Many endure daily commutes of 40 miles and more.

Again, this does not mean that Ithaca is a worse place for low-income people than Utica is. On the contrary, the fact that low-income residents here could have moved to Utica but chose not to suggests that they find the Ithaca environment more attractive on balance. But nor should we conclude that all low-income persons would find Ithaca’s environment compellingly more attractive. After all, there are many thousands of low-income people in the region who could have moved here yet chose not to. What is clear, in any event, is that low-income persons in Ithaca experience many costs that they would not have experienced in Utica. Those costs are mitigated in part, but only in part, by the fact that our local tax and expenditure systems are somewhat more progressive than those of other cities in the region. This strikes me as being a fair reflection of the benefits and burdens experienced by different income groups here.

David is also correct that there are enormous economies of scale and scope at the society level. On this point, it is instructive to consider a simple variant of his thought experiment—namely, to imagine a society consisting ONLY of a million millionaires. The wealthiest Americans today show little interest in laundering shirts, teaching seventh graders, fighting fires, stocking grocery shelves, collecting garbage, mowing lawns, or delivering packages. Who would perform these tasks in a society composed only of very wealthy members? The poor benefit from the rich, yes, but the rich also benefit from the poor in ways that transcend feelings about rank per se. In short, everyone benefits from social institutions that make membership in society attractive to as many people as possible.

Needless to say, the mere fact that larger societies generate a larger per-capita economic surplus does not eliminate disputes over how any given surplus should be divided. It is no surprise, then, that top earners often lobby against higher taxes while those who earn least lobby for higher transfers. But those self-interested claims should not prevent us from trying to understand the deeper functions of taxes and transfers.

Compelling evidence suggests that the implicit progressive tax observed in every private pay scheme helps enable heterogeneous work groups to form and remain stable. I have argued that the transfer schemes embedded in every tax system on the planet help foster social cohesion in a closely analogous way. In this sense, they are consistent with Ronald Coase’s observation that the best social institutions are those that most closely mimic the ones that well-informed individuals would have agreed to in the absence of transaction costs.

Robert Frank's Reply to My Reply to ...

[Received from Robert Frank, and posted with his permission]

Many thanks to David for his spirited reply. In responding to it, I’ll begin with another attempt to clear up some issues I thought had been settled in our first exchange.

For example, David again spends considerable energy arguing that health care is not a positional good—that what matters primarily is its absolute quality, not its relative quality—and emphasizing that we can raise its absolute quality by devoting more resources to it. Well and good. But so what? As my original response to David’s comment made clear, I am well aware that the demand for health and safety is among the least positional of all demands. And I agree completely that the absolute quality of it is what matters. But those points do not challenge the fundamental claim on which my argument rests—namely, that high social rank has substantial instrumental value.

When a serious health problem strikes, a person wants the highest absolute quality of care possible, but because the quality and quantity of care are limited at any given moment, not everyone seriously ill patient can have the best. My claim, which is surely completely uncontroversial, is that someone with high social rank is more likely than others to get the best care.

Access to the best care is of course not the only reason that high social rank has instrumental value. It also commands access to the best education. In David’s response, he again devotes considerable energy trying to establish that the absolute quality of education matters. But here, too, I ask myself, why would anyone think I disagree? If everyone were better educated, our economy would be more productive. Our incomes would be higher, and that would be a good thing! In the 19th century, a family with five children typically saw several of them die before reaching their 10th birthday. That this no longer happens is primarily a consequence of the fact that our absolute incomes are so much higher now, which is in part a consequence of better education. So of course the absolute quality of education matters.

But the relative quality of education also matters. In modern labor markets, the absolute salary gap between the best-paying jobs and other jobs is larger than at any point in history, and there are almost always many more applicants for the top jobs than employers could possibly interview. Surely it is uncontroversial to note that educational credentials are one of the most important screens that employers use to whittle their applicant lists. For a candidate even to land an interview, his absolute educational quality must be high, yes. But that’s not enough. It must also compare favorably with that of other applicants. So unlike the health care domain, in which absolute quality is the main concern, the educational domain is one in which both absolute and relative quality matter. But here, too, the important point for my argument is that persons of high social rank are more likely than others to be able to send their children to the best schools. That point is completely uncontroversial.

The health and education domains are hardly the only ones in which high social rank has instrumental value. That value is the basis for my claim that in the libertarian’s ideal world of zero transaction costs, people would not be able to claim positions of high social rank for free. As in the analogous case of high-ranked positions in private work groups, they would command positive implicit prices.

David’s health care and education objections, as noted, seemed clearly settled in our original exchange. I am therefore puzzled by his decision to again make them the focal points of his critique. I have responded to these objections. Simply repeating them will not give them additional force. Unless David has new evidence that persons of low social rank have greater access to the best health care and greater access to the best educational opportunities, I hope he will abandon these objections.

He does raise another objection, however, that merits detailed consideration. He begins by conceding my claim that the interpersonal comparisons that really matter to people are those with others like themselves. That claim implies that the non-poor don’t gain self-esteem from the knowledge that others are poor. But that fact, David argues, destroys the rationale for my claim that high-ranked members of society are taxed to compensate the low-ranked members of society without whose presence high social rank would not exist. If the rich don’t benefit from comparisons with the poor, he asks, why should they be willing to compensate them for the burdens of low social rank?

This objection sounds much more promising. But it, too, falls short on closer inspection. I agree that high-ranked members of society receive no direct benefit from comparing themselves with the poor. Also true (though this may seem less obvious) is that the poor do not seem to suffer direct damage by comparing themselves to the rich. On the contrary, low-income people appear to have a vigorous appetite for media coverage of the lifestyles of the rich and famous.

But the poor are nonetheless adversely affected by indirect externalities spawned by expenditures by the wealthy. I refer to a process that I have elsewhere called “expenditure cascades.” The lion’s share of all income gains in recent decades have accrued to top earners, and their spending on housing and other goods has risen accordingly. Despite the finger-wagging of social critics, that’s hardly a moral indictment of the rich. All groups in society, after all, spend more when their incomes rise. Although there’s no evidence that the poor or middle class are upset by the bigger mansions at the top, those same mansions shift the frame of reference that defines acceptable housing for those just below the top, who travel in many of the same social circles. And so they, too, have built bigger, which has shifted the frame of reference for others just below them, and so on, in a cascade that extends all the way down the income ladder.

That cascade has raised the cost to poor and middle-income families of maintaining their places in the educational hierarchy. A good school, again, is one that compares favorably with other schools. To gain access to such a school, a family must bid for a house in the neighborhood that surrounds it, and that’s what has gotten more expensive. For example, in 2007 the median new house built in the United States had almost 50 percent more floor space than the corresponding house in 1980, notwithstanding the fact that median real household income had risen little during the intervening years. People could have abstained from trying to keep up with the housing expenditures of their peers, but that would have meant sending their children to worse schools than before.

In short, notwithstanding the fact that the most important interpersonal comparisons are local, the poor have experienced substantial costs because of the additional spending of the rich. Far more than difficult-to-document claims of psychological damage used by inequality, it is these concrete costs that constitute grounds for saying that in a world without transaction costs, high-ranked positions in the social hierarchy would not be available free of charge. The rich are not paying for the right to compare themselves directly to the poor. They are paying to maintain a social structure from which they benefit greatly.
Everyone gains, for example, from greater opportunities for specialization and exchange. But as international experience amply demonstrates, social stability cannot be taken for granted when income and wealth inequality grow beyond a certain point. Diverse societies are efficient, but will not remain stable unless the terms of the social contract are perceived as fair. And as every country on the planet has decided—implicitly or explicitly—part of such a contract entails income transfers from rich to poor.

To the libertarian’s objection that such transfers are morally unjust, I have argued that they are consistent with the libertarian dictum that the best social arrangements are those that mimic as closely as possible the arrangements people would have negotiated in a world of zero transaction costs. I continue to invite attempts to rebut that argument in its own terms.

Status and Evolutionary Biology

Economists tend to judge in absolute terms. If my real income doubles that's a big win for me—even if yours triples. We find it odd and annoying that other people often prefer to look at relative measures. If the income of poor people doubles and the income of rich people triples, many will see that as the poor losing out, or at least falling behind. In Choosing the Right Pond Robert Frank, an original and interesting economist, explored the implication for economics of the fact that people care about relative as well as absolute outcomes. That fact suggests an obvious question: Why do we care about relative outcomes? To explain why humans are as they are, the obvious tool is evolutionary biology.

Humans, like other living creatures, are "as if designed" for reproductive success. Reproduction requires two sorts of inputs—resources and a mate. If you are a better hunter than I am you will get more resources than I will, making you better able to feed your offspring. But that doesn't make me any less able to feed mine. From our standpoint as members of a hunter/gatherer tribe, the environment in which humans spent almost all of their evolutionary history, game is out there to be hunted in effectively unlimited supply.

If you are a better hunter than I am, more generally if you have more resources, status, whatever matters in our society than I do, you will also be better able to attract a mate. Mates, unlike game, are in strictly limited—for practical purposes, perfectly inelastic—supply. The better you are at attracting one or more, the worse my chances of doing so are. That is a good reason for me to be concerned about relative as well as absolute results, to wish not only that I should succeed in the hunt but that you should fail. It might even be a reason for me to put some efforts into increasing the chance of your failing if suitable opportunities arise.

The late George Stigler taught me an important lesson when he rejected the original version of what was to become my first published journal article in economics. He told me that in order to be publishable, the article required not only a theory—in my case of the size and shape of nations—but also some way of testing that theory. In revising to meet that requirement I not only found evidence in support of my theory, I also, and perhaps more important, was forced to think through more carefully and precisely what the theory said.

I have done no testing of my theory of why we care about relative status, but I do have predictions. The first is that males should be mainly concerned about their status vis a vis other males, females about theirs vis a vis other females, since males are competing with males for mates, females with females.

The second is that males should be more concerned with relative outcomes than females. Reproductively speaking, wombs are a scarce resource, sperm is not. Even a not very successful female can expect to reproduce, although her success in mate search may determine how much help she gets raising her children. An unsuccessful male is likely to have no children at all, a successful one many. From the standpoint of reproduction, being male is a high risk gamble.

The third prediction is that people should be most concerned about relative outcomes in a range near their own level. If Bill Gates increases his wealth from twenty billion dollars to thirty billion, that has no effect on his ability to compete with me for mates; insofar as wealth is the relevant criterion, at twenty billion I've already lost, although that would be less true in a polygynous society, where his extra wealth might result in his bidding a few more potential wives away from me. If a homeless man finds a job at MacDonalds, that has no effect on his ability to compete with me for mates either. The people I ought to worry about—supposing that I am a male in the mate market, as most males were for most of their adult lives in the environment where we evolved—are the men at about my level, the ones who might beat me out in courtship if they were a little richer, or a little handsomer, or ... .

This is a blog post not a journal article; I haven't actually done the research to test these predictions, although I wouldn't be surprised if someone else has. If any readers know of such ... .

(It has been many years since I read Robert Frank's book and I don't have a copy ready at hand to check; it's possible that he came up with some or all of my explanation first.)

Blog to Book, an Open Source Project

In a recent post I raised the possibility of producing a book based on the contents of a blog such as this. My initial feeling was that the project wasn't worth doing, since the material was already available to be searched and read in its present form. A number of comments offered persuasive arguments on the other side, suggesting that, for at least some blogs, the material could be made considerably more useful and accessible by the sort of selection and organization that would accompany the conversion into a book.

At which point it occurred to me that, while the project might indeed be useful, there was no particular reason why I—more generally, the blog author—had to be the one who did it, or even had to give permission for someone else to do it. 

Initially I was imagining that what was being produced would be a physical book, a hardcopy, but that is arguably an obsolescent technology anyway. Suppose instead what is produced is a web page, a hyptertext table of contents to a blog, whose purpose is to select out and organize those parts of the blog of interest to the author of the page. Each entry links to the corresponding blog post; notes clarify what is where. It is not a full substitute for the original proposal, since the author of the web page, unlike the author of the blog, is not in a position to combine three posts into two, eliminating duplication, or revise the post that started a discussion to take account of what came later. But it could provide quite a lot of the additional value that would be provided by the earlier version. In particular, it could let someone interested in my political ideas follow that subset of the blog without being distracted by my search for the perfect pocket computer/internet device, and it would make it easier to see the connections between my views of how to organize the world and my views of how to bring up children.

At which point it also occurred to me that the project itself need not have a single author. It could be in the form of a Wiki targeted at the blog. There could be multiple such web pages, written by authors interested in different subsets of the blog content. There could be dueling versions, one by a fan of my political philosophy, one by a critic, each using his organization of and comments on my posts to support his view.

In at least one important way, this would be an easier project than my original version. A significant amount of the material on my blog was written by other people. That's obviously true of the comments. But I also had extended exchanges with two other professors, Robert Frank (who I managed to confuse with Robert Ellickson in my original post on this subject), and Robert Altemeyer, who came on the blog to defend his work against my criticism. Their contributions are, morally and I suspect legally, their intellectual property, not mine, so I could not legitimately include them in a book I authored without their permission. Very possibly they would give it, possibly not—and if we imagine stretching such a project far enough into the future, some of the people whose permission was required might no longer be around to give it. I could, of course, give my summary of their arguments, but that would be less informative and, I think, less convincing, than their version. But given that their contributions are already available online, no permission is required to link to them.

At which point this is becoming not so much an idea for my blog as a speculation about the ways in which exchanges of ideas and arguments might evolve over the next few decades, given the technologies now available.

The Intensive Margin: Math vs Econ

I was recently told, by an undergraduate a top school who had been planning to major in economics, that the required courses had turned out to contain a great deal more mathematics than economics. That report was confirmed by a senior faculty member at the same school with whom I raised the question, who agreed that the situation was an unfortunate one.

Presumably, the content of such courses reflects what professors believe that their students must learn in order to go to graduate school and end up as academic economists publishing articles in leading journals. That fits my not very expert impression of the current state of academic economics, that it is heavy on what Gordon Tullock used to refer to as "ornamental mathematics," advanced tools used to demonstrate the author's mathematical sophistication but contributing little to the substance of the analysis.

I have not been much involved with the world of journal submissions for a long time—I prefer to write books and blog posts—so am in a poor position to make blanket judgments. But some years back, reading an interesting article by Akerlof and Yellin on why changes that should have reduced the number of children born to unmarried mothers had been accompanied instead by a sharp increase, I was struck by the fact that they had used game theory to make an argument that could have been presented equally well, perhaps more clearly, with supply and demand curves. Their analysis was simply an application of the theory of joint products—sexual pleasure and babies in a world without reliable contraception or readily available abortion. Add in those technologies, making the products no longer joint, and the outcome changes, making some women who want babies unable to find husbands to help support them.

Assume, for the moment, that I am right, that both economics in the journals and economics in the classroom emphasize mathematics well past the point where it no longer contributes much to the economics. Why?

The answer, I suspect, takes us back to Ricardo's distinction between the intensive and extensive margins of cultivation. Expanding production on the intensive margin means getting more grain out of land already cultivated, expanding it on the extensive margin means getting more grain by bringing new land into cultivation.

In economics, the intensive margin means writing new articles on subjects that smart people have been writing articles about for most of the past century—new enough, at least, to get published. One way of doing it, assuming you don't have some new and interesting economic idea, is to apply a new tool, some recently developed mathematical approach,. It has not been done before, that tool not having existed before, so with luck you can get published.

The extensive margin is the application of the existing tools of economics, and mathematics where needed, to new subjects. Examples include public choice theory, law and economics, and, somewhat more recently, behavioral economics. The same thing can be done on a smaller scale if you happen to think of something new that is relevant to more conventional topics. I have considerable disagreements with Robert Frank, some exposed in exchanges between us on this blog a while back. But when, in Choosing the Right Pond, he showed how the fact that relative as well as absolute outcomes matter to people could be incorporated into conventional price theory, he really was working new ground and, in the process, teaching the rest of us something interesting.

My conclusion is that, if you want to do interesting economics, your best bet is probably to work on the extensive margin—better yet, if sufficiently clever and lucky, to extend it.

Turning Behavioral Economics Around

I am currently involved, elsewhere online, in a discussion of behavioral economics. One point it raises is that arguments from behavioral economics—observed patterns of irrational behavior—tend to be used to support positions that those using them already believe in. Much the same is true of arguments from market failure. As I pointed out some time ago in the course of an exchange with Robert Frank, the argument he was making had a perfectly straightforward implication—that instead of subsidizing schooling, at both high school and college levels, we should tax it. It was not a conclusion that he drew, or even acknowledged and responded to when I drew it.

Consider the case of behavioral economics. One of the observed patterns is a status quo bias—a tendency to over weight potential losses relative to potential gains. I am not sure if it has occurred to any of those arguing for behavioral economics that two of the most striking examples of that pattern are the precautionary principle and the campaign to slow or prevent global warming.

The essence of the precautionary principle is that one ought not to do anything—build nuclear reactors, say, or create genetically engineered crops—unless all possibility of very bad results can be eliminated. The principle does not permit balancing some risk of very bad results from doing something against a risk of very bad results from not doing it. Still less does it prescribe always doing something unless one can show that there is no chance that failing to do it will have very bad results. Hence it makes sense only if bad effects from change are weighted much more highly than good.

Or consider the widely held view that global warming on the scale suggested by the IPCC reports—a few degrees C over about a century—would obviously be a catastrophe. It cannot be based on the idea that humans cannot live with somewhat higher temperatures, since humans already exist, indeed prosper, across a much wider temperature range. It cannot be based on the idea that increased temperature is inherently bad, since there are obviously lots of places that would be better suited to human habitation if a little warmer, including most of Canada, Alaska and Siberia. The world was not, after all, designed for our benefit, so there is no reason to believe that current climate is optimal for us. There has been a good deal of talk about higher sea levels, but most of it ignores the fact that the increase suggested by the various IPCC models is only a foot or so—much less than the usual difference between high tide and low.

Rapid climate change is presumptively undesirable, since our present way of doing things—what crops we grow where, where our housing is located and how well it is insulated—is optimized to present conditions. But over a hundred years, farmers will change crops several times over, a large fraction of the housing stock will be replaced or modified, we will change what we are doing for lots of reasons unrelated to climate change. Hence it is hard to argue any strong presumption that climate change at the rates suggested by current models is bad.

Yet discussions of the subject almost always take it for granted that it is not merely bad but catastrophically bad, worth bearing very large present costs to prevent. A clear case of status quo bias.

For one final example, consider the case of Social Security. Behavioral economics provides an argument in favor of it. Individuals badly underweight costs and benefits in the distant future—so-called hyperbolic discounting. Hence they will be less willing than they should be to provide voluntarily for their old age. Hence the government must solve the problem via a program of forced saving.

The problem with the argument is that hyperbolic discounting, insofar as it is real, applies to voters and politicians as well as to people saving for their old age. Hence it is predictable that the force will be real but the saving will be imaginary—there are always politically profitable ways of spending money that happens to be lying around—leaving the system with a trust fund full of IOU's.

Readers are invited to contribute other examples, other situations where behavioral economics provides arguments against the sort of things that most behavioral economists appear to be in favor of.