http://www.city-journal.org/2009/bc0612gs.html

Rationing Happiness
by Guy Sorman
Robert Frank makes the behaviorist case for less economic competition—and higher taxes.
12 June 2009

The Economic Naturalist’s Field Guide: Common Sense Principles for Troubled Times, by Robert H. Frank (Basic Books, 240 pp., $26)

Based on formerly published columns, all finely written, easy to grasp, and sometimes humorous—not common qualities in economics writing—Cornell professor Robert H. Frank’s new book provides a clear articulation of the liberal economic worldview. True, Frank shuns the liberal label and calls himself a libertarian. But there is no doubt of the direction in which he’d like to see the United States go: toward a more Europeanized society, with higher taxes, a more active state, and an expanded national welfare system.

Frank’s rationale for the policies he recommends—higher taxation, more regulation—is happiness, as American as apple pie (a European leftist would argue for social justice instead). But what is happiness? “It all depends on the context,” Frank says. An individual is not happy per se, he argues, but only compared with his neighbors. Why do Americans buy gas-guzzlers? Frank’s answer: to possess bigger cars than their neighbors do.

This bigger-is-better mentality is ultimately socially destructive, diminishing happiness. The Johnsons, say, want to outperform their neighbors, the Smiths and the Wangs. This desire, Franks claims, brings them into an endless competition, seeking ever-greater individual consumption. In search of this elusive happiness, American consumers power an economy that churns out many individual goods but few collective services. Big fancy cars proliferate, but local schools are left dilapidated: Frank sees a correlation between the phenomena.

Let us imagine, following Frank’s lead, a supposedly better world, in which the Johnsons, Smiths, and Wangs pay higher taxes. A heavier tax burden would prevent them from buying an excess of what liberal economists call “positional goods.” As a consequence, they buy smaller cars and compete with one another less aggressively. Better still, the higher taxes generate a new collective wealth—not just better schools nationwide, but upgraded public infrastructure, reliable public health care, and so on. In Frank’s remade world, a happier world, the Johnsons, Smiths, and Wangs could choose to live anywhere they wished, without worrying that their children might wind up in mediocre public schools, since all the schools would be good. The way things are now, he says, parents’ search for good schools drives them to upscale neighborhoods. Real-estate prices then increase in these areas, and many parents get priced out and must then settle for cheaper locales with poorer schools. Americans would be happier, Frank concludes, with less social competition, under higher taxation.

This inverse relationship between happiness and competition, Frank claims, is not his formulation alone. Behaviorist research has uncovered it over the last 30 years. By merging psychological surveys and brain scans of the human decision-making process, behaviorists have sought to demonstrate that individuals aren’t terribly rational. Behaviorist economics has become the latest fad among liberals. Classic free-market economists hold that individuals are rational, or at least act rationally: thus free decisions in a free market deliver optimal economic results. The behaviorists, among whom Frank is a pioneer, propose by contrast that government should protect us against the consequences of our passions. Behaviorist economics has supplied a scientific rationale for increasing taxes, imposing additional regulations, and limiting individual choice. It’s all for our own good.

One wonders to what extent the current success of behaviorism on the liberal left might implicitly draw on the American Puritanical tradition. In the name of science (global warming, healthy living, and so on), the liberal academic community seeks to impose limitations on individual free choice, the same way the old-time Puritan pastors did. (When I raised this historical precedent in a conversation with Frank, who sees himself as a God-free libertarian, he was speechless.)

Frank insists that in a less competitive society, endowed with more public goods, the market would still play a major role. He simply favors a smaller, more regulated marketplace. As an example, he supports limiting private cars’ access into downtown Manhattan by imposing tolls, as London does, making urban space friendlier to pedestrians. But New York’s City Council rejected just such a proposal from Mayor Michael Bloomberg on the grounds that it would exacerbate inequality between rich and poor drivers and between Manhattanites and other boroughs’ inhabitants. Frank’s solution to this apparent dilemma: give vouchers to the poorest motorists, creating an efficient and egalitarian free market. The idea sounds clever, but of course someone would have to pay for the vouchers. New taxes would be necessary, as would a new bureaucracy to manage the voucher system. And given the way politics works in New York, one way or another, all constituents, rich or poor, would eventually get vouchers. Manhattan would not be less clogged, only more taxed and regulated.

Frank is at his best when describing the free market’s imperfections, which pro-market economists sometimes prove reluctant to acknowledge. He is at his worst when he idealizes government: all of his proposed solutions rely on the supposed efficiency and neutrality of the state. The “common sense” that he appeals to ought to tell him that this is an unbalanced view. Deregulation may indeed generate some negative outcomes, for instance, but regulation has brought plenty of unintended negative consequences as well. Starting in the late 1970s, the U.S. opted for deregulation because regulation was suffocating the national economy.

Frank also reaches biased conclusions on happiness and government’s proper role. Behaviorists have convincingly demonstrated that in economic circumstances dictated by passion, individuals do not always make the most rational choice (see the real-estate bubble). Does it follow, however, that we should be deprived or constricted in our choices—or should we rather be better informed about the consequences of those choices? Citing behaviorist economics and the current financial crisis, liberals demand more regulation, more government, and less choice. Free marketers—rightly, to my mind—argue for greater market transparency.

Are Europeans happier than Americans? When Frank visits France, he told me, he enjoys the public transit and nearly free health care. Being an economist, he should know better: the collective services he uses when he visits France are paid for (heavily) by French taxpayers. As a consequence of high taxes, the French get their high-speed trains—along with slow economic growth and a level of unemployment unheard of in the U.S. In the end, economics always imposes trade-offs. To pretend that one can have socialized benefits and economic freedom, and be happy on top of it all, is naive liberalism—or an ideological construction.

Yeah. For themselves.

Do classic free-market economists really exist anymore?

thodoks

Besides him, who knows.

nope, not a "classic" free market guy. i realized a while ago that not everyone acts rationally. but they do act to futher their perceived self-interest given the information and incentives they face. it's the perceptions that can vary and give rise to what can be called irrationality.

It's also.... irrationality that can give rise to irrationality. What makes peoples decisions irrational is not that they receive bad information, but that they use the information they have poorly. If everyone had perfect information there would still be plenty of stupid decisions. But I suppose the libertarian view is something like with perfect market transparency everyone will have near-perfect information and.... ? I don't know.

so what we expect the government made up of irrational individuals to somehow make rational decisions with the peoples money? Are these same guys not also after bigger houses, bigger cars, higher priced prostitutes?

Isn't there some argument in here about the tragedy of the commons also?

As far as regulation, absolutely it essentially sucks that our captains of industry and our elite captains of politics can not police themselves.... but it's kind of a joke really, the only ones who get screwed are the ones who don't pay their protection money in the form of lobbying or government schmoozing.

Yeah taking more money away from people who live well within thier means to give it to people or who don't is fucking crap and I will never EVER be ok with it...

With one exception. Infrastructure.

plus, perfect markets are far from a reality in almost any area. there are bound to be lots of distorsions, whether through barriers, govt intervention, imperfect info, etc, amirite?

can you give me an example of what you're referring to as irrational here?

Happiness is such a subjective thing that it kind of irks me when people try to measure it.

Not at all. Thats a neo-classical concept. Libertarians fully recognize and accept that life is trial and error.

Buying a house you can't afford? Selling your stocks after the market drops 700 points in a day?

That is from a little text of Jesus Hueta de Soto, if anybody wants it, just ask me, its quite informative.

Possibility that the actors err a priori and nature of entrepreneurial profit:

Austrian (libertarian) Paradigm - Pure or sheer entrepreneurial error and ex post regret
exist. Pure entrepreneurial profits arise from alertness.

Neoclassical Paradigm - There are no regrettable errors because all past decisions are explicable in terms of cost-benefit analysis. Profits are considered the payment for the
services of a factor of production.


5. Nature of information:

Austrian Paradigm - Knowledge and information are subjective, disperse and change constantly (entrepreneurial creativity). Radical distinction between scientific knowledge
(objective) and practical knowledge (subjective).

Neoclassical Paradigm - Complete, objective and constant information on ends and means is assumed. There is no distinction between practical (entrepreneurial) knowledge and scientfic knowledge.

Both of the examples had a logic behind them, even if its a flawed one. For example, many people bought houses because they believed that the house was an investiment, that its value would rise in 20% in just a year.

Anything can have a logic behind it. Me picking my nose and petting my dog has a logic behind it, "even if its a flawed one". Having flawed logic behind something doesn't make it rational. Otherwise irrationality wouldn't exist.

People bought the house expecting to make money, not just for the pleasure of having a new house. They speculated, took risks. They could have listened to Peter Schiff though.

This.

being wrong doesn't make you irrational.

And being right doesn't make you rational.

agreed.

IMO, rationality depends on the process by which a decision is reached, not the result of said decision.