Bob Frank, Professor of Management and Economics at Cornell, is brilliant at framing economics in evolutionary terms. Visit his home page for some great articles, videos, NPR interviews, and books, if you want a quick tutorial in common sense economics.
His new book, The Darwin Economy, is an elegant argument for why rising economic inequality hurts any economy, and why evolutionary competition always must be balanced against developmental cooperation. The Spirit Level, The Fair Society, The Impact of Inequality, The Great Divergence, and Wealth and Democracy are other highly recommended books in this vein.
To start, we must recognize that certain levels of income and asset inequality are incentivizing and proinnovative. Think for example of the levels we see in Germany, Scandinavia, and other social democracies with innovative, healthly small business and strong industrial bases.
But if you don’t have a state that understands its critical role in limiting the income and asset divides via appropriate levels of income and estate taxation, they grow until they become counterinnovative. Cartels and collusions and special interest lobbying take over, incentives for inter-class cooperation are destroyed, and real bottom-up competition disappears. The folks at the top gain the economic means to change the rules to benefit just themselves, and the economy becomes a nepotistic kleptocracy, as seen in the kind of capitalism in autocratic states like Russia. Or the way Israeli capitalism is being captured by a few uberwealthy families in almost all the major industries (some areas of infotech a current exception). Marginal U.S. income tax rates over $2 million/year were 90% in Eisenhower’s term, and they are effectively 15-20% today, to our great shame. We’ve got a long way to go to get our house back in order.
Frank makes clear the unclaimed potential of an evidence-based bipartisanship emerging in coming years, and the real value of both liberal and conservative ideologies, policies, and rulesets in a capitalist social democracy. He also discusses the dangers of taking both right (libertarian) and left wing (nanny state) views too far, of giving either camp too much rope to hang themselves with.
Here’s a nice USA Today op-ed between liberal Frank and the conservative P.J. O’Rourke on how Liberals and Conservatives can get bipartisan agreement on infrastructure spending in a depression, and should avoid proposing visionary projects, which are anathema to each other. This has some merit to it, and I’d be excited about it if they were talking not about roads, which are of real but ever-declining relative value in a world of accelerating tech, but about digital infrastructure, as that is the greatest bottleneck holding back all kinds of new technical productivity in this country, as Yochai Benkler’s The Wealth of Networks (free PDF version) and other books eloquently describe.
The harsh reality is that big business, particularly big media and telcos, have always been able to derail fast-track digital infrastructure building, as it will of necessity disrupt their business models. Read my whitepaper, How the Television Will be Revolutionized, if you want some of the grim details on how big business has thwarted the arrival of real broadband for American citizens, and will continue to do so until we have political leadership with vision and backbone.
What we need is a President who recognizes that government must place the needs of society above the needs of big business, for key decisions. Obama felt he was that president, but he fatally decided that health care, rather than digital infrastructure, would be his first key play for reform. In a major recession no less. But health care reform won’t create the jobs we need, only a special combination of digital infrastructure reform, immigration reform, small business support reform, regulatory and tax reform, educational reform, and a few other key reforms will. Just as Keynesians know the state needs to save in a boom and spend in a recession, they should know you don’t do health care reform in a recession, but in a boom, or on the way out of one. By going up against the wrong big businesses for the time, and focusing first on health care over “jobs, jobs, jobs,” he crippled his political capital, and screwed up any chance of a productive jobs-oriented bipartisan alliance emerging on the hill for years to come.
The only reason it’s 60% likely he’ll get another term, as the useful prediction market Intrade will tell you, is because the other choice is no better, so we’ll stay with the incumbent. (Dear reader, I hope you are paying as little attention the U.S. presidential election circus as I am these days, as there’s far better things you can do with your precious time). Obama advisors, please read my post on The Race to Inner Space. What matters in tech policy if you want to accelerate national productivity in your second term is driving innovation in nanotech and infotech first, and every other technology (including health care, which already takes up a staggering 18+% of our GDP) second. Until we have a president who realizes this, our tech policy will continue to be unenlightened.
Fortunately, the smarter the web gets, and the smarter our circa-2020 AI assistants (cybertwins) become, the closer we’ll get to seeing the emergence of an evidence-based bipartisanship, and a plethora of evidence-based policies that advance our technical and human productivity. We may have to wait a decade to see meaningful political change, but oh what a decade of scientific and technical advance this one will be. I can’t wait.
Ever Smarter World 
Great article, thanks John. I haven’t read the book but am interested to know if Frank addresses the lack of Darwinism in the economy. For instance, saving failing banks or car manufacturers with public money is anything but the behavior of a free market.
With the recent Tabbai article we all now know even more about the crimes banks and lending institutions have been allowed to get away with under the current system.
Hi Jake, Frank has what I’d call a balanced take on the topic of subsidies. He sees the value of them if they don’t work as corporate welfare and increase the rich-poor divide. For example, a one-time subsidy of car-makers, subject to them improving their technology, can go a long way to saving manufacturing jobs and allowing a domestic industry to recover from stupid mistakes by short-sighted CEOs. One could say that the auto industry bailouts worked that way, at least mostly, and our domestic auto companies have been given a reprieve to get smart or go extinct.
The bank bailouts had no structural reform paired with them and there’s no good innovation argument for keeping the big financial companies around. They should have been creatively destructed, but apparently they are far too powerful for that, for now. Thank the Universe for Tabbai and friends, as they’ve made it clear where the fat is that needs cutting. I’ve moved much of my money to Ally bank, voted “least evil” by CNN Money. In coming years, with the aid of digital assistants, I firmly believe we’ll get a democracy strong enough to reform even the financial industry. In the meantime, we do what we can.