November 28, 2011

Cornell Professor’s Theory Relates Economics to Theory of Evolution

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Prof. Robert Frank, management and economics, detailed his new theory of how capitalism can be explained by Darwinian concepts at a lecture in the Plant Sciences building on Monday.

As detailed in his recently published book, The Darwin Economy, Frank explains that natural evolutionary behavior leads people to consume more in order to compete with the relative wealth of others.

For instance, “The middle class admires the rich and attempts to mimic them, which leads to more consumption,” Frank said. These behaviors allow individuals to fight for resources in the global market, much like animals in a Darwinian system.

Frank said that the parallels extend to the potential drawbacks of Darwinian evolution. Just as some evolution creates inefficiencies for animals, some habits of individuals in the marketplace, such as conspicuous consumption, can hurt people.

“The large antlers on the bull elk are good for winning battles for females, but make the bull elk more cumbersome,” Frank said. “This behavior is brought on by competition like a military arms race.”

This Darwinian theory provides an alternative to Smith’s “invisible hand” theory, which suggests that deregulation allows self-interest to advance societal interest. However, Frank’s theory is not meant to absolutely contend with Smith’s, Frank said.

“Smith explains how often there are effects of self interest. I have no quarrel with his insight,” Frank said.

Frank said he disagrees more with contemporary disciples of Smith who, he said, wrongly interpret the principle of the invisible hand to be the sole determinant of the forces of capitalism.

“It is not the whole story,” Frank said of this interpretation. “It is a naïve version of Smith.”

Frank also discussed his ideas about how a revised tax code would help mitigate the problems posed by competitive consumption, which, he said, creates an unnecessary drain on resources.

“What I propose is that we scrap income tax and replace it with consumption tax,” Frank said.

Under Frank’s plan, a standard “consumption value” would be calculated using their income and savings.

Under Frank’s plan, the difference between the income and the savings of families would be used to calculate the families’ consumption rate. This rate would in turn be used to determine the families’ tax rates.

“More consumption [would lead] to more tax,” Frank said. “Revenue gained from building mansions could be used to build bridges … This is something we should do right away because everyone would benefit.”

At Monday’s lecture, Frank said his solution could do wonders for the economy.

“I am going to perform fiscal alchemy,” he said.

Frank laid out his tax policy and showed how it could increase revenue by trillions of dollars.

“It was very engaging,” Raza Raja grad said. “I liked the presentation so much I bought the book on my Kindle during it.”

Other audience members said they were drawn in by Frank’s unconventional ideas and presentation style.

“I think he has really good ideas and explains complicated economic ideas in simple terms,” Tal Akabas grad said. “I think his ideas about the tax code are extremely relevant.”

Original Author: Erica Augenstein