Frank talk with Frank

by Russ Roberts on September 12, 2011

in Podcast

This week’s EconTalk is a little more combative than usual. Robert Frank talks about his new book, The Darwin Economy, and I push back. Lively and civil.

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Mark T September 12, 2011 at 12:06 pm

This quote shows a remarkable lack of understanding:

… the regulations required strict vetting of the mortgage applications; they required large down-payments. There was stability in that system. Once you lifted those restraints, you can make more money in a rising market by lending more money out. It’s just the standard leverage argument. And so banks saw they could bundle these securities and sell them; they could move a lot more credit if they would relax the standards. So, you think about the homeowner who is trying to decide what to do–and here’s where I think the Darwinian insight comes in full bore–they are letting people borrow more to buy houses; that means people like me, earn the same income I do, can pay more for a house than before they started relaxing those credit terms. How does that affect me? You could say, and it has been said: I should borrow prudently and not be affected by it. But that’s where I think the social dimension of our existence is so crucial, and it’s the one that the invisible hand account doesn’t take fully into the picture.

What invisible hand? There was a put to the government! There was all kinds of demand for yield from public pension plans. It just ignores all the laws that shaped that bubble.

Greg Ransom September 12, 2011 at 2:45 pm

Darwinist Michael Ghiselin has an excellent book on Darwinian explanation and the division of labor: _The Economy of Nature and the Evolution of Sex_.

I’m deeply frustrated and disappointed by the “pop Darwinism” of so many economists, when there is serious stuff by serious people on the topic of differences and similarities of Darwinian explanation and economic explanation, e.g. the work of Alex Rosenberg and Friedrich Hayek, etc.

Greg Ransom September 12, 2011 at 2:55 pm

Greenspan has admitted he was intentionally unclear, confusing, and full of mush in his testimony before Congress.

He also gave us the famous “Greenspan put”.

Market theorists have long argued for things Greenspan was against — e.g. transparency in the financial markets, competitive restraints of leverage, etc.

Greenspan also explicitly rejected the idea that the Federal Reserve could radically distort markets by setting the interest rate far below the natural rate of interest — he called the “natural rate of interest” mythological entity which essentially didn’t exist because it couldn’t be observed or measured.

In other words, he didn’t behave at all in the manner which would have been recommended by the leading free market economist of the last 100 years — F. A. Hayek.

Doc Merlin September 12, 2011 at 8:09 pm

Come on, Russ. The money in politics isn’t a bad thing. If anything the money, in the short term mitigates the problems.
The problem is that government agents can demand the money (or else).

Wrt “better” off evolutionary aspects. What made us into intelligent humans was the kind of wasteful sex-selection evolutionary strategies he describes. The giant brains we developed, in the short run were to impress mates, not to actually help us survive better. But, in the end this strategy gave us the ultimate survival tool.

Doc Merlin September 12, 2011 at 8:11 pm

“government agents” and also politicians.

Doc Merlin September 12, 2011 at 8:09 pm

It seems as if he is saying, “Evolution is wasteful, we should suppress evolution.” However, ultimately the /only/ arbiter that can decide what is actually wasteful or not is that same evolution.

indianajim September 12, 2011 at 11:42 pm

The error that I think Frank makes is in thinking that what he calls the “Darwinian” dimension of human behavior simply adds a drive for status (relative standing); humanity is so driven, but IMO we are also driven by reciprocally altruistic urges toward peers. Frank focuses on the social costs associated with the pursuit of relative standing (status) to the exclusion of the behavioral tendency toward reciprocity that we share with many other social animals of higher intellect. For more on this:
which fortunately got published in, unfortunately, a much abbreviated form in JEBO:

Frank’s overemphasis of just one aspect of humanity’s social nature lead him to conclusions that are biased away from the cause of individual liberty. Russ rightly challenges that emergent norms might constrain behaviors that Frank finds concerning; Frank concedes the possibility but persists that he still has a point. This is because, again, he does not see reciprocal cooperation as an innate characteristic of our species; Frank’s focus, again, is on status.

Martin Brock September 13, 2011 at 2:26 pm

Great clash in this episode. You won all the major points. Frank overstated the paucity of government in the U.S. relative to Europe (as though Europe is an enviable model these days), and he failed to make a case for intervention while making a case for sub-optimal utility. The issue is not the optimality of less central authority. The issue is the capacity of more central authority to improve anything. You called Frank on this point, and he basically laid down.

Some of Frank’s “Darwin” effects of competition are reasonable enough, but where he made this point effectively, you didn’t much dispute him.

I disagreed with you on one point, the progressive consumption tax. A high marginal tax rate on personal consumption above a sufficiently high level is never a problem. A 99.9% rate above a million dollars a year, say, is not any sort of problem. The utility of this rate follows largely from the fact that no one would ever pay it, so the central authority would collect no revenue with it, but it could counter Frank’s Elephant Seal effect, wherein more central authorities, employing forcible propriety, organize vast resources to produce for their exclusive consumption, even to their own detriment. The tax denies this consumption to officers in the most central organs of the state as much as it denies consumption to other beneficiaries of forcible propriety.

Lerxst von Syrinx September 13, 2011 at 9:34 pm

I was hoping Frank would bring up a better “Elephant Seal” example than the housing market. As Mark T rightly pointed out, there was no invisible hand guiding that malinvestment. The buyers were bidding up homes in good school districts precisely because of our government dominated education system, not to mention all the plethora of legal carrots and sticks presented to the lending institutions.

Frank briefly said something about it not being desirable to separate the link between your address and where your kids go to school at about 48:00 – 49:00. You quickly agreed with him (sort of) after a cryptic explanation. I played it back several times and still don’t understand. Can you explain what that was about?

Also, loved your retort about regulation vs. custom for handling the “Elephant Seal” question. I had to play it more than once to really sink in, but I got it. Very insightful.

Randall September 13, 2011 at 9:56 pm

I thought Mr. Frank made a very good argument for school choice. He implies that the absence of school choice distorts the housing market. A point he may not have intended to make but one that flows logically from his thesis.

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