Sunday, September 26, 2010

Bob Frank and the Libertarian Welfare State

In a forthcoming book, economist Bob Frank advances a bold proposal for a "Libertarian Welfare State."  Following John Stuart Mill, Frank holds that behaviors can be legitimately regulated when they cause harm to others.  This is a position that, on its face, most libertarians would agree with (in ways that might make Mill uncomfortable, but that's another story). 

Frank is able to square this view with the apparent contradiction of a "welfare state" by (rightly) taking an expansive view of what constitutes "harm to others."  This is a brilliant jujitsu move, taking the libertarian stance seriously-individual freedom is paramount until it causes harm to others, and then it should be legitimately restricted in the least coercive way possible-and showing how it leads to counterintuitive solutions.

Frank deals with some classic "externalities," such as pollution and second-hand smoke, but he also takes into account coordination problems and competition driven by positional goods.

"The social environment profoundly affects individual decisions," Frank writes.  Wow!  There it is, out in the open, and straight from the mouth of an economist.

Recognizing this, then, radically shifts our conception of causing harm to others.  Frank writes of high school hockey players, whose ruggedly individualistic identities and competitive team culture would, absent enforced rules, lead most to forego wearing a helmet; individual players (and certainly their parents) might want to wear a helmet but would feel constrained by group norms.  Thus, hockey players and teenage cyclists need a mandate, a clear rule, to wear a helmet or perverse coordination problems will lead them (some unwillingly) not to wear one; both for a utilitarian greater good and to ensure freedom of choice, rules to wear a helmet are necessary.

Frank also takes on the issue of "positional goods," that is, goods whose value derives in (large) part from how much they are desired and consumed by others.  Status symbols are the iconic example of positional goods.  Elsewhere and in his new book, Frank has written of super-sized houses as examples of counter-productive positional goods.  A 30,000 square foot house may actually reduce a household's utility but it may also feel necessary in a keeping-up-with-the-Jones atmosphere of competitive positioning. 

Frank presents a revealing thought experiment: Which world would you choose?

World A: You live in a neighborhood with 6,000-square-foot houses, others in neighborhoods with 8,000-square-foot houses;


World B:  You live in a neighborhood with 4,000-square-foot houses, others in neighborhoods with 3,000-square-foot houses.

The materially maximizing rational choice is, of course, World A.  But most Americans would choose World B.  This little exercise reveals that the value of house construction is not in its pragmatic utility as a home but in its relative size compared to others.

This leads Frank to the surprising conclusion that a highly progressive consumption tax would not only divert resources toward more productive ends but actually might increase the utility and wellbeing of those same high-income households.

It also makes me think of all the grumbling I hear these days from unhappy airline passengers.  With airline flights, most bought online, a particular framing of choice leads us to privilege low price over all else.  Comparing prices online, we reduce the value of the seat from here to there to price only.  We shouldn't complain about food and service as we are all part of the system that is pushing it in that direction.  Another coordination problem, although this might be the sort of thing that just needs a nudge, an emblem with more information easily understood for example.

In this book, Frank moves beyond the "choice architecture" and gentle nudges of Thaler and Sunstein, who are resistant to advocating clear mandates.  Frank advances a more radical proposal that takes into account the social and relational (positional context) as well, willing indeed to invoke legislation, regulation and higher taxes to most efficiently determine cost/benefit analyses (and under a Libertarian banner, no less!).

Indeed, I read his proposal even a bit more radically than he intends, I think.  If the economy is meant to make us better off, and if we understand "better off" to mean a more holistic, multidimensional, fulfilled life (in the Aristotelian sense, or the Amartya Sen-ian sense of freedom and capabilities), then we could go far beyond not doing harm to others in our mandates.

Frank's work, and that of Lynn Stout discussed below, is part of an exciting new wave of social science that brings high-level theory into conversation with real world problems and policies.  This is a book that should be read by policy makers and pundits as well as academics and students.

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