Tuesday, May 11, 2010

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.



Michael F. Martin said...

I knew this would come down to disagreement over the appropriate temporal and spatial horizons for comparisions.

Unless I misunderstand him, Prof. Friedman takes the view that any choice of such horizons should be made to maximize aggregate wealth (or welfare). This tends, of course, to push out to larger and longer horizons.

But people don't live an infinite amount of time. Shouldn't we be concerned with the quality of life for individuals over horizons that reflect the average life span and social circle?

To make the point more concrete: does it matter to the person living below the poverty line in the Appalachians that the quality of public schools in the United States today is far superior to what was available in 10th Century Europe?

Daveon said...

If we all get richer, we can all have more medical services.

That's a fairly glib thing to stick in their as part of your argument though.

We have a good empirical case example to look at. Healthcare access in the relatively rich US (at least by any GDP measure) versus the "poorer" EU countries [NOTE: I realize I'm splitting hairs here as actually there's not a lot in it income wise...]

At what point does healthcare access improve for the poorest members of society? The US still leads among preventable deaths and the US spends significantly more as a percentage of GDP than any of the "poorer"/comparable countries.

While I can see your argument having merit with access to esoteric cancer treatments or similar, I'm struggling with idea that it's acceptable for a person to ignore a cough and die of untreated pneumonia when they arrive in ER, or end up in renal failure because of untreated, undiagnosed hypertension...

To be harsh on this: saying that things will get better as people get richer seems to be an outrageous cop out.

Unconformist Sheep said...

Prof Friedman writes: 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

Yep, and even if such wealth increase means a productivity boost everywhere except medicine, it still frees resources to be redeployed to that area. ie. People have now more money to spend on health insurance. Unless supply of medicine is inelastic due e.g. to restrictions on medical schools.

Unconformist Sheep said...

Daveon, I read prof Frank as saying that due to resources being limited, wealth distribution determines how much health care you get, because any wage increases are absorbed by the producers since supply of medicine is fixed.

I think that's the point that prof Friedman was addressing in your out of context quote.

marko said...

I've really learned something today.

You should have more of such debates on the blog.

Russ Nelson said...

'preventable ddeptths' is a leftist term. they're preeventable only at the cost of having somebody else pay for your health care, which has many costs. we in america choose not to pay those costs, which makes the deaths not preventable.

Mario Rizzo said...

David Freidman makes the decisive point.

The market is a mechanism by which the relevance of positional factors in the productivity of the firm can be approximately measured. So that if what Frank says is quantitatively important it will be taken into account (more or less).

The political system, on the other hand, is incapable of measuring the positional effect as contrasted with rent-seeking and other "perverse" effects.

As far as I am concerned, the policy-relevance of Frank's theory falls to the ground because of these considerations alone.

I am rather surprised at all the mileage Professor Frank has gotten out of this very pedestrian idea. I guess there is always a market (so to speak) is redistributionist rationales.

Glen said...

The "preventable deaths" talking point comes from a study that only compared the number of deaths amenable to medicine in various countries. What they did not look at was the number of deaths attributable to medicine in each country. Given that we have on the order of 200,000 iatrogenic deaths annually in the US - deaths caused by too much medicine, it's not immediately obvious that providing more health care would on net save more lives.

TGGP said...

Alex Tabarrok presents empirical evidence that Frank got the externality backwards.

Anonymous said...

If everybody gets richer, the quality of schools can increase everywhere....

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.

Or in our courtship of a job offer. In practice, any given employer has a limited number of jobs available, and those won't go to everyone with a "good" education from a "good" school, they'll go to the candidates with "the best" education from "the best" school. (Which, as others have pointed out, may have little correlation with actual learning, but that's beside the point.)

Doubling the educational level of everybody in society may eventually lead to more economic activity and more good jobs, but not for years -- and even then, it won't double the number of good jobs available. In this sense, education's value to an individual is largely relative -- much more so than health care's, which as Frank has acknowledged is mostly absolute.