Frank and Stein

July 12, 2009

by Thomas McQuade  

In a recent opinion piece in The New York Times (“The Invisible Hand, Trumped by Darwin?”), Robert H. Frank proposes that Charles Darwin, not Adam Smith, should be seen as the real intellectual founder of the discipline of economics.  He claims that Smith’s most famous idea – that the competitive pursuit of individual self-interest can redound to social good – is but a special case of Darwin’s more general picture of competition in which individual benefit sometimes does, but often does not, benefit the larger group.  The sort of competition for which the invisible hand does not work well is, he says, where the competition is for relative gain, i.e., when the rewards depend on relative performance, and people gain by bettering each other rather than by bettering nature.  

The problem with Frank’s argument is his careless deployment of the analogy between human beings interacting in a highly structured social environment and animals in general interacting in an environment of considerably less social complexity.  He is ignoring the effects of human institutions in constraining self-interested behavior.  And compounding the error, he appears unable to distinguish between those institutions which provide constraining feedback and those which undermine and deflect such feedback.  Not that he’s alone in this – from the other side of the tracks, Ben Stein (“Good Intentions Aside, Are We Killing the Patient?”) is equally analogy-challenged with his depiction of the government as economic surgeon (an overactive one, but a surgeon nonetheless) and equally blind to institutional complexities.  

The economic problem at hand is not, as Frank characterizes it, competition based on relative performance versus competition based on absolute performance.  It is competition constrained by negative feedback versus competition freed from normal constraints.  Successful social institutions, as well as providing positive incentives for personal gain, incorporate negative incentives for straying very far from conventional expectations.  The interplay between these opposing forces can make for stable growth of the societal activity in question.  It is the reason why science has been such a spectacularly successful social enterprise, and why markets, despite being set about by all sorts of monetary and regulatory interventions which weaken the feedback, have greatly increased human wellbeing.  

Frank points to “the recent economic wreckage”, an instance of what can happen when “greedy people trade for their own advantage in unfettered private markets”, as evidence for his contention.  Unfettered markets, if they existed, could certainly display greed, herding behavior and other “inefficiencies”.  But the scope for such enthusiasms would be limited by the reality checks of financing and profit-making.  However, with the interjection of central banks keeping rates low, Congress mandating lax lending practices, and government-sponsored entities such as Fannie and Freddie pushing loans, these feedback mechanisms can be circumvented for an extended period of time, allowing the ever-present greed to flourish until the disconnect from reality is too obvious to ignore and the economy wrecks.  

Adam Smith’s contention was that the pursuit of self-interest, constrained by appropriate social institutions, would be much more effective at producing societal wellbeing than actions which purported to aim at that wellbeing directly.  And “appropriate” does not involve the overriding of constraining incentives.  That is why so much of The Wealth of Nations is taken up with analysis and criticism of the social institutions of Smith’s day.  Frank predicts that, 100 years from now, economists will point to Darwin as the owner of the shoulders they are standing on, not Smith.  Let me make a competing prediction: that 100 years from now economists will look back and wonder how so many of their predecessors could have been so superficial in their appreciation of Adam Smith and, as a result, could have so completely misunderstood the economic events they lived through.

4 Responses to “Frank and Stein”

  1. Greg Ransom Says:

    Another problem is that Frank doesn’t know anything about the problem-explanation structure of Darwinian biology, e.g. as laid out in the work of Ernst Mayr.

    And of course, Darwin identified a number of different selection mechanisms, e.g. sexual selection, artificial selection, group selection, nature selection, etc.

    Someone who knows both Darwinian biology and basic neo-classical economics is philosopher of science Alexander Rosenberg. I’d recommend his work for a more sophisticated account of some commonalities and differences between mainstream Darwinian biology and mainstream neo-classical economics.

  2. Richard Ebeling Says:

    One other problem with Robert Frank’s analysis is that a number of writers have pointed out that is was some of the ideas in political economy in the early decades of the 19th century that apparently were a stimulus to Darwin’s thinking.

    These writings, as I understand, were Adam Smith’s “Wealth of Nations,” and especially Thomas Malthus’ “Essay on Population.”

    So Mr. Frank seems to have it historically backward.

    Richard Ebeling

  3. chidemkurdas Says:

    I thought there was something very wrong with the Frank piece but couldn’t figure out what. Good to have it spelled out.

  4. bill butos Says:

    Thomas,
    An excellent piece of disssection on both Frank and Stein. The financial crisis and its handling by the government and the Fed is a useful illustration of what happens when market institutions are swept away. We are now in a floodtide of massive moral hazard problems in which rightly considered competition is all but prevented from culling the wreakage.

    Bill Butos


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