Monday, February 6, 2012


In chapter 1 – Paralysis of The Darwin Economy Frank, Robert H. Frank sets a foundation for the rest of the book by arguing the logic of his underlying assumptions.

His first assumption concerns our legislative institution’s inability to make financially and economically sound investment and taxation decisions.  Idealism is polarized to the point of paralysis. He assigns partial blame to a politically-uneducated population and the media that fuels their opinions (in-part). Not only are some media outlets biased to the point of distributing irrational, unsupported, and emotionally-based claims (for profit reasons, I presume), nearly all outlets focus more on the politicking of politics, than the fundamental purpose and process of the government itself. I agree with Frank when he states “we must take seriously the question of how government institutions should be designed and monitored.” (Pg. 6) And I further agree that these discussions (on government design, transparency, public goods, taxes, etc.) are not being held as prominently as they should.

My problem is when Frank draws the conclusion that political gridlock would be easy to overcome. He states it is not irreconcilable differences in values that has precipitated gridlock, but from a “profound misunderstanding about how competition works. Even if gridlock has been caused by a misunderstanding of how competition works rather than values (for argument’s and time’s sake I will humor this assumption), providing the public and legislators a solution with profound evidence in its favor (assume a 100% truth for this example), I do not believe that opinions will change and gridlock will be resolved ‘easily’. For the purposes of his book, however, I understand Frank’s enthusiasm.

Second, he claims that open competition becomes inefficient when the actions’ of agents (individuals or organizations) is based on head-to-head competition within the society. As agents attempt to improve their relative position, they reach and surpass an ideal point at which society benefits greatest. Beyond this point, society is harmed by agents’ self-interests. Many of Frank’s analogies make sense in their own right, but he fails to provide examples that are convincing in real-world economies. There are many more stakeholders in relation to an organization than a bull seal, and utilizing a legislative mechanism to fix market imperfections is much more complicated than bull seals fighting each other and becoming too fat. One example, however, that may (big may) support Frank’s claim is the financial industry in 2007: investment banks fight for self-interest by creating dangerous instruments and being naïve by over leveraging on too much risk. Third parties were harmed substantially due to this arm's-race. A tax on financial instruments in proportion to the systemic risk they create could be reallocated to those who incur the systemic risk. This example is quite controversial and illustrates why his claim is overly simplified.

The last assumption that I’m going to address here is Frank’s view of governmental taxation. He views that governments should tax harmful activities and not beneficial activities. The first difficulty is the definition of ‘harmful’. He provides examples that harm competitor’s relative performance (steroids in sports). The non-steroid competitor is faced with two options: don’t take steroids and lose, or take steroids and incur increased risk for health issues. Therefore, Frank claims, the steroid user is causing the abstainer harm. Attempting to define ‘harmful’ is a process that alone could cause inefficient gridlocks.

I believe that taxing harmful activities would reallocate capital from detrimental activities to productive or valuable ones. A problem is attempting to get a society and legislative body to agree on the definition of ‘harm’ and the identification of ‘productive’ and ‘valuable’ activities. Another problem is bureaucracies’ tendency to focus on its own survival and growth which creates inflated departments. Furthermore, government is incredibly slow to evolve and adapt to emerging conditions.

Notwithstanding the vague generalities, analogies, and simplifications that I should probably learn to expect in the 1st chapter of a book, Frank brings to conversation important topics that must be analyzed for the sake of social efficiency.

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