The Darwin Economy
The Darwin Economy

The Darwin Economy

Smith never believed that the invisible hand guaranteed good outcomes in all circumstances. (Location 259)

but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” (Location 261)

One of his central insights was that natural selection favors traits and behaviors primarily according to their effect on individual organisms, not larger groups. (Location 266)

There's no practical way, of course, that elephant seals could implement such a proposal. Nor could any bull solve this problem unilaterally, since a bull that weighed much less than others would never win a mate. (Location 283)

Schelling noted that hockey players who are free to choose for themselves invariably skate without helmets, yet when they're permitted to vote on the matter, they support rules that require them. (Location 286)

began with the observation that skating without a helmet confers a small competitive edge— (Location 289)

The immediate lure of gaining a competitive edge trumps more abstract concerns about the possibility of injury, so players eagerly embrace the additional risk. (Location 290)

hence the attraction of the rule. (Location 292)

Rather, it's a garden-variety collective action problem. (Location 295)

Parties who confront a collective action problem often realize that the only way to get what they want is to constrain their own ability to do as they please. (Location 300)

Rewards that depend on relative performance spawn collective action problems that can cause markets to fail. (Location 306)

even at the expense of all having lower wages. (Location 320)

Merely knowing that individual actions are self-canceling doesn't eliminate the incentive to take those actions. (Location 323)

namely that in many important domains of life, performance is graded on the curve. (Location 334)

The dependence of reward on rank eliminates any presumption of harmony between individual and collective interests, and with it, the foundation of the libertarian's case for a completely unfettered market system. (Location 336)

they're often wrong about the causes of those shortcomings, and therefore often wrong about how best to counteract them. (Location 340)

We all agree that it's legitimate for government to restrain people from stealing others' property or from committing violence against them. The difficult cases involve more indirect forms of harm. (Location 345)

But it will require a Congress that is willing to redesign tax policy from the ground (Location 366)

A tax on any activity not only generates revenue but also discourages the activity. (Location 368)

But the reverse is true when we tax activities that cause harm to others. (Location 371)

Taxes levied on harmful activities kill two birds with one stone. They generate desperately needed revenue while discouraging behaviors whose costs greatly outweigh their benefits. (Location 374)

Every dollar raised by taxing harmful activities is one dollar less that we must raise by taxing useful ones. (Location 389)

Wasteful government spending, of course, should be cut whenever possible. (Location 392)

One century hence, if a roster of professional economists is asked to identify the intellectual father of their discipline, a majority will name Charles Darwin. (Location 409)

Today Smith is best remembered for his invisible-hand theory, which, according to some of his modern disciples, holds that impersonal market forces channel the behavior of greedy individuals to produce the greatest good for all. (Location 418)

Darwin's view of the competitive process was fundamentally different. (Location 423)

What others did not see clearly was the responses those actions would provoke from rival business owners, and how the ensuing dynamic would produce outcomes very different from the ones intended. (Location 431)

Modern marketing methods are surely up to that task. Competition is obviously still far from perfect, but today's markets are much closer to the perfectly informed, frictionless ideal than were those of Adam Smith's day. (Location 463)

The failures he identified resulted not from too little competition, but from the very logic of the process itself. (Location 467)

selection favored variants of traits and behaviors insofar as they enhanced the reproductive fitness of the individual animals that bore them. (Location 468)

Since the selective pressure that forged speed in gazelles was the threat of being caught by predators from other species, greater speed posed no conflict between the interests of individual gazelles and those of gazelles as a species. (Location 478)

Because a mutation that coded for larger antlers made a bull more likely to defeat its rivals, it was quick to spread, since winning bulls gained access to many cows, each of whose calves would then carry the mutation. (Location 486)

The conflict between individual and species arises because reproductive fitness is essentially a relative concept. Under natural selection, the traits that succeed are those that confer relative advantage. (Location 496)

The libertarian's faith in unregulated markets rests on several premises. (Location 508)

Unless we insist on reading these premises literally, there is nothing in Darwin's framework that challenges either of them. (Location 509)

As Darwin saw clearly, much of life is graded on the curve. (Location 533)

To survive and prosper, an individual need not be the strongest, fastest, or smartest animal in the universe. (Location 536)

What matters is that he be able to compete successfully against members of his own species vying for the same resources. (Location 536)

The Darwinian framework is the only scientific framework available for trying to understand why humans and other animals are motivated to behave as they do. (Location 543)

Most vertebrate societies, including the vast majority of early human societies, were polygynous, meaning that males claimed more than one mate when they could. (Location 554)

one that codes for a brain that cares strongly about relative position, and the other for a brain that doesn't care at all about it. (Location 560)

So individuals who care more about relative position would be more likely to muster the behaviors necessary to acquire and defend positions of high rank. (Location 561)

The hypothesis that concerns about relative position are part of the evolved circuitry of the human brain is supported not just by everyday experience, but also by evidence of specific neurophysiological processes that respond to local rank. (Location 581)

But the real reason we regulate is to protect ourselves from the consequences of excessive competition with one another. (Location 603)

That context shapes evaluation is completely uncontroversial. (Location 606)

Another economist speculated that many of our colleagues fear that taking context seriously might signal a certain lack of rigor. (Location 615)

the most frequent response of libertarians and others on the right has been to accuse me of trying to incite class warfare. (Location 624)

We can all agree that society has a legitimate interest in discouraging negative emotions like envy and jealousy. (Location 626)

Such waste stems far less from envy than from the fact that many important rewards in life depend on relative consumption. (Location 630)

They were deeply committed to ideals of social justice and extremely skeptical about conventional hierarchical capitalist firms. (Location 648)

Yet these organizations occupy an extremely circumscribed niche in the economy. (Location 669)

That observation raises a basic question: If labor-managed firms are so great, why don't we see more of them? (Location 671)

their considered response was that labor-managed firms had failed to proliferate because financial markets refused to make capital available to them on fair terms. (Location 673)

My response was that this handicap couldn't possibly explain why labor-managed firms had failed to proliferate. (Location 678)

Similarly in banking, if enough bankers lend money to labor-managed firms, the resulting prosperity of those firms might cause the capitalist system to crumble, but nothing would have played out differently if any particular banker had held back. (Location 698)

As noted, however, there is no compelling evidence that labor-managed firms enjoy a competitive advantage at all. On a visit to Berkeley years after I had finished my (Location 705)

But over time, perhaps they grew weary of having to attend so many meetings. Or perhaps the difficulty is that workers who are put in charge produce the kinds of products they think would be good for people, rather than those that people actually want. (Location 714)

In short, theories that imply that vast sums of cash are being left on the table for extended periods are bad theories. (Location 728)

If the worker owned the business and had to make the decision on his own, the calculation would be straightforward. (Location 736)

there would be cash on the table available to any rival employer willing to install one. (Location 747)

Many critics of the market system respond that it's morally reprehensible to use cost-benefit analysis for deciding whether a safety device should be installed. (Location 753)

Safety devices cost money that could be used to purchase other things people value. (Location 755)

Did you get your car's brakes checked today? If so, do you plan to get them checked again tomorrow? No sensible person answers yes to both questions. (Location 757)

There are few secrets in the information age. A firm that exploits its workers will eventually experience serious hiring difficulties. (Location 775)

It rests on Darwin's central insight that the interests of individuals are often in conflict with those of broader groups. (Location 807)

the fact that a worker is willing to accept lower safety in exchange for higher wages implies that the extra income was sufficient compensation for reduced safety. (Location 809)

Firms are also required to carry workman's compensation insurance, whose rates rise sharply with the number of injury claims filed. (Location 824)

Adam Smith's invisible hand would provide the best combinations of wages and safety even without regulation. Yet that belief is indefensible when people care strongly about relative position. (Location 830)

As Darwin clearly recognized, many of the most important domains of life are graded on the curve. (Location 832)

And when relative income is important, the invisible hand breaks down. (Location 833)

Merely understanding the incentive structure that produced their problem does not solve it. (Location 842)

Those who don't want to be coerced by safety regulation can move to a country that doesn't regulate safety. But as we'll see in chapter 12, the only such countries are probably ones they wouldn't want to live in. (Location 845)

If a rival firm came along and offered a safer job at a lower wage, no one would have taken it, because that would have meant having to move to an inferior school district. My explanation (Location 849)

mobility. It does not require that anyone be irrational. Nor, finally, does it require powerful actors with the ability to impose their will on reluctant subordinates. (Location 851)

that individual incentives often differ from collective incentives. (Location 853)

The resulting wedge between individual and collective incentives also helps us understand other ways in which the invisible-hand account might break down. (Location 854)

Smith also recognized, however, that as tasks became more specialized, they often took an increasing toll on the human psyche. (Location 858)

But if workers care about relative income, that claim simply doesn't follow. (Location 865)

Workers as a group might be happier if all had a little more variety and a little less income, for that shift wouldn't jeopardize anyone's ability to achieve goals that depend on relative income. (Location 866)

This doctrine holds that we learn more about people's preferences by observing their behavior than by listening to what they say. (Location 874)

A direct consequence of that fact is that when someone acquires additional income, she not only enhances her ability to achieve those goals, she simultaneously makes others less able to attain them. (Location 879)

Many movement libertarians will be content either to ignore this problem or to insist that they have a right to cause indirect harm to others as they please. (Location 882)

Having bridge access would have been more convenient, obviously, but nowhere enough so to justify the enormous cost of the project. (Location 899)

The politicians who proposed the project hoped to curry favor with the local voters who would directly benefit from it, while foisting the bill on millions of distant and unsuspecting taxpayers, who would never even notice, much less complain about, the eventual small increment in their tax bills. (Location 901)

The encouraging coda to this story is that a firestorm of unfavorable national publicity eventually forced the project’s cancellation. (Location 905)

If inattentive or corrupt government officials could be induced to pay such prices for familiar items, how much greater might the potential for abuse be in contracts involving complex and difficult-to-understand equipment? (Location 910)

It’s been said that if you want to see where America is headed, you should study California. (Location 919)

When revenue shortfalls force government to make budget cuts, the best predictor of which programs get the ax is the power of the particular constituents who support them. (Location 934)

Antigovernment activists insist that the best way to deal with revenue shortfalls is to eliminate wasteful government spending. (Location 955)

The difficult question is how to eliminate wasteful spending without inflicting even more costly collateral damage. (Location 956)

The battle against parasites entails costs as well as benefits. The rule of thumb for how to wage such battles is the same as that for battles in other domains: (Location 966)

The best way to reduce it is surely to reach first for the most cost-effective weapons at our disposal and deploy them against the most important causes of waste directly. (Location 970)

Falling consumption, in turn, caused a parallel decline in investment, because most businesses already had the capacity to produce more than people wanted to buy. (Location 1008)

Consumers won’t lead the way, he argued, because even those who still have jobs are fearful they might lose them. (Location 1020)

Although most economists now favor the Keynesian approach to combating deep economic downturns, an influential group of dissenters has inspired libertarians and other antigovernment activists to oppose all economic stimulus measures. (Location 1022)

On the contrary, when the government borrows money at 4 percent and invests it in a project that yields 18 percent during an economic downturn, the effect is not only to put people to work who otherwise would have been sitting idle but also to enrich our grandchildren. (Location 1043)

Having a more honest and effective government helps support activities that raise per-capita income. And being richer generally makes citizens more able and willing to support more effective forms of governance. (Location 1073)

namely that existing financial commitments far exceed current tax revenues. (Location 1089)

But special is a relative concept. (Location 1131)

The driving force behind that change has been a fundamental shift in the pattern of income growth. (Location 1151)

one nation gains advantage over a rival by building additional armaments, which prompts the rival to build additional armaments of its own to restore the balance. The first nation then acquires still more weaponry, provoking yet another response from its rival, and so on. (Location 1191)

From the perspective of any individual nation, it's perfectly sensible to place high priority on being as well armed as rivals. (Location 1215)

On the contrary, they have historically pitted nations against the rivals with whom they compete most directly for important resources. (Location 1218)

If one sprinter takes anabolic steroids, he improves his chances to land a spot on the medal stand. (Location 1235)

He also knew that although blocking salary caps and revenue sharing would substantially increase each team's payroll, including his own, maintaining his ability to field consistently winning teams would more than compensate for that disadvantage. (Location 1248)

Even when all decision makers are fully informed and perfectly rational, and even when all labor and product markets are perfectly competitive, there can be no presumption that the invisible hand of the marketplace leads to outcomes that are best for society as a whole. (Location 1316)

If housing is positional and safety is nonpositional, as evidence consistently suggests, unregulated markets will serve up houses that are too big and jobs that are too dangerous. (Location 1318)

The ultimate measure of success within that framework is the individual's ability to pass copies of its genes into the next generation. (Location 1329)

As noted earlier, famines were a frequent occurrence when the human nervous system was evolving, and although there was always some food available, only those with the highest relative incomes were certain to get (Location 1339)

In contrast, the Darwinian perspective suggests that investments related to the raising of offspring should tend to be highly positional. Expenditure categories that are more easily observed—such as those for cars, clothing, and jewelry—should also tend to be more positional than those that cannot be observed, such as those for insurance. (Location 1354)

Working against that prediction, however, is the fact that saving less today means having less to spend on positional consumption (Location 1357)

Saving less today means less positional consumption tomorrow, yes, but a current deficit can be experienced directly, whereas a future deficit can only be imagined. (Location 1359)

Public goods would also be predicted to be nonpositional by virtue of one of the basic properties that defines them. Unlike private goods, for which quantities and qualities can vary for different people, public goods are provided in the same quantity and quality to everyone. So they cannot be a source of relative advantage. (Location 1364)

If the problem is that people spend too much on positional consumption and not enough on nonpositional consumption, the least intrusive way to right that imbalance is by altering the relevant prices. (Location 1389)

good in accordance with the extent to which context shapes its evaluation. (Location 1391)

But given that luxury is an inherently context-dependent phenomenon, it's uncontroversial to say that the last dollars spent by those who spend most are most likely to be spent on luxuries. A steeply progressive consumption tax is thus a luxury tax that completely sidesteps the need to identify specific goods as luxuries. (Location 1400)

People would then pay tax on their “taxable consumption,” which is just the difference between (Location 1405)

their income and their annual savings, less a standard deduction. (Location 1405)

Proposals to generate additional income tax revenue by raising top marginal rates invariably summon concern about possible negative effects on the incentive to save and invest. (Location 1410)

If people at the top were to save more and spend less on mansions, that would shift the frame (Location 1416)

of reference that influences the housing expenditures of those just below them. (Location 1417)

In the environmental domain, firms for which pollution reduction is most expensive may find it in their interest to continue to pollute even after the imposition of an effluent tax. (Location 1447)

Despite the gaps in current knowledge about positional concerns, recent experience provides some insight into how switching to a steeply progressive consumption tax might affect social welfare. (Location 1453)

I have been advocating the progressive consumption tax for many years. (Location 1478)

But at some point, refusal to consider fundamental tax reform will cease to be a viable option. (Location 1481)

1997,10 I received a warm letter from Milton Friedman, who, until his death in 2006, was the patron saint of small-government conservatism in the United States. (Location 1486)

With higher density, people collide with one another more often. (Location 1520)

Society is not only more densely populated now, but also much more highly interactive, in part because of higher density. These trends will continue, and with them will come (Location 1521)

That same link, however, is squarely consistent with Darwin's insight that individual and group interests often diverge sharply. (Location 1527)

Even the earliest hunter-gatherer groups employed social norms extensively to constrain the self-interested behavior of their members. (Location 1530)

John Stuart Mill's harm principle must be understood as saying that the only legitimate reason for government to limit someone's freedom is to prevent undue harm to others. (Location 1534)

They saw Coase as their champion because they believed his framework provided the most cogent arguments for limiting the reach of regulators. (Location 1547)

On the first point, Coase showed that, under certain restrictive conditions, private parties could resolve many problems on their own that were once thought to require detailed intervention by regulators. (Location 1548)

Coase argued that much better use would be made of those rights if they were instead sold to the highest bidders, who would put them to the highest-valued uses. (Location 1555)

Coase's insight was that if negotiations between broadcasters were practical, they could resolve such problems satisfactorily on their own. (Location 1558)

Both the factory owner and the doctor, Coase argued, have a shared interest in finding the least costly solution to it. (Location 1574)

Since soundproofing is cheaper, it's a better way to solve the noise problem than for the doctor to incur the expense of moving. (Location 1579)

He pointed out that if the government did not make the factory owner liable for noise damage, the doctor's best option would then be to offer to pay the factory owner to install soundproofing. (Location 1586)

In short, Coase argued, both parties would have a strong incentive to implement the efficient solution to the problem, irrespective of whether the law held the factory owner responsible for noise damage. (Location 1591)

“Milton Friedman did most of the talking, as usual. He also did much of the thinking, as usual. In the course of two hours of argument the vote went from twenty against and one for Coase to twenty-one for Coase. (Location 1604)

Scholars on the left were upset because they interpreted Coase to be saying that government had no essential role to play in regulating pollution or other activities that cause harm to others (beyond seeing to it that property rights were clearly defined and enforced). (Location 1611)

seemed oblivious to the moral framework underlying the earlier perpetrators-and-victims approach to such activities. (The doctor didn't harm anyone! Why should he have to pay for the soundproofing?) But neither of these objections withstands scrutiny. (Location 1613)

His answer—which, like many big ideas, seems painfully obvious in hindsight—was that the latter approach would necessitate a host of complex and costly transactions. (Location 1623)

On the contrary, the deeper message of his 1960 paper was that when negotiation is impractical—as it typically will be—the assignment of liability will often change how problems get solved. (Location 1633)

Coase challenged that logic at its core. His view was that government should assign the burden of adjusting to externalities to the party for whom that burden would be least costly. (Location 1636)

That framework, again, viewed the factory owner as the perpetrator and the doctor as the victim. It assumed, without explaining why, that the doctor has a right to conduct his practice undisturbed by noise, and that the government has a duty to enforce that right. (Location 1645)

traditional perpetrators-and-victims moral framework was simply misguided or question-begging. (Location 1667)

Those solutions would always place the burden of adjusting to externalities on the party for whom that burden was least costly. Sometimes that would entail assigning liability to the party whom most would describe as the perpetrator. But not always. (Location 1669)

Their embrace of Coase stems largely from the perception that his framework helped expand the range of problems believed to be soluble without regulatory intervention. (Location 1672)

His framework is rooted in strictly pragmatic concerns. (Location 1674)

Rather, it would be because he believed that it would be cheaper for people to curb the noise they emit than for affected parties to avoid noise on their own. (Location 1679)

someone who believes the right course of action is the option that produces the best overall consequences. (Location 1682)

Deontologists face other hurdles, such as how to explain where the bedrock moral principles they invoke come from. (Location 1689)

Rights to behave in certain ways don't arise out of thin air. (Location 1744)

Defending any given right creates benefits for those who value it. (Location 1745)

And society's decision about which rights to enforce clearly has a moral dimension. (Location 1747)

Many libertarians seem inclined to embrace the harm principle when doing so provides them with additional ammunition against a regulation they don't favor. (Location 1752)

much of the negative reaction from critics on the left was prompted by the perception that measuring costs and benefits by willingness to pay was morally tone-deaf, a gross violation of the principle that citizens should have equal rights irrespective of their incomes. (Location 1804)

Most people actually seem willing to accept the fact that willingness to pay determines who gets what in private markets. If a painting is being auctioned, for example, and many (Location 1807)

But its use in the public sphere is more controversial—so much so that we often reject the recommendations of traditional cost-benefit analyses in major public policy decisions. (Location 1809)

this example illustrates, the size of the economic pie is maximized when scarce goods are allocated on the basis of willingness to pay, notwithstanding the fact that using that criterion may offend in some way. (Location 1878)

Prior to 1979, this question would have been decided on a first-come, first-served basis. John would have gotten to go, and Eric would have had to wait. (Location 1894)

It forces some people to wait who would be willing to pay a lot for the right to arrive on time, while permitting others to fly even though they wouldn't be willing to pay much to avoid waiting. (Location 1901)

The CAB's specific proposal was to require carriers with oversold flights to offer cash payments, free tickets, or other compensation to induce volunteers to relinquish their seats. (Location 1904)

which called for carriers to keep raising the compensation offer until enough volunteers stepped forward. (Location 1906)

Now imagine that just as John was about to accept the cash payment of $400, (Location 1921)

He volunteered because, in his judgment, the $400 offer was greater than the value he placed on retaining his original seat. Otherwise, he'd have refused. (Location 1923)

Skepticism about markets in general, together with legitimate concerns about the high and rising inequality that characterizes market reward systems, have made many liberal commentators hostile to the use of unweighted willingness-to-pay measures in public policy decisions. (Location 1955)

Conservatives, through their opposition to income transfers, have been an even bigger obstacle to the adoption of efficient public policies. (Location 1962)