In this episode, the ReSolve team is joined by Dr. Robert Frank, the Henrietta Johnson Lewis Professor of Management Emeritus and Professor of Economics at the Samuel Curtis Johnson Graduate School of Management at Cornell University. They delve into the role of luck in success, the myth of meritocracy, and the dynamics of free markets. They explore various topics, including:

Topics Discussed

• The approach to both microeconomics and macroeconomics in the textbooks co-authored with Dr. Ben Bernanke

• The impact of behavioral economics on the understanding of microeconomics and macroeconomics

• The role of luck and meritocracy in success and how policy is informed by this understanding

• The concept of 'smart for one, dumb for all' in the context of competition

• The implications of the Darwin Economy and the interplay between individual self-interest and societal outcomes

• The effects of tax structures on entrepreneurial initiative and economic growth

• The need for effective human coordination to solve major problems and improve the future

This episode is a must-listen for anyone interested in understanding the complex dynamics of economics, the role of luck in success, and the impact of policy decisions on societal outcomes. It provides valuable insights into the intricacies of economic theories and their practical implications.

*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.

And so, if you don't invoke that process, you can't easily explain why the median new house is about 50 percent larger than it was in 1970. It, the median earner has about the same hourly wage in inflation-adjusted terms. Why are they spending so much more building bigger? It's because others around them are building bigger. But why are they building bigger? It's because the people at the top are building bigger, ultimately.

Some notable titles include The Winner Take All Society. I guess, that was co-authored, that, with Philip J. Cook. Falling Behind, How Rising Inequality Harms the Middle Class. The Darwin Economy, Liberty, Competition, and the Common Good, which is actually where I stumbled on your work, and then Success and Luck, Good Fortune, and the Myth of Meritocracy, 2016.

I also note that you co-authored Principles of Economics and Principles of Macro Economics with a name that many people who will listen to this podcast will be familiar with, Dr. Ben Bernanke, Governor of the Federal Reserve, or Chairperson, rather, of the Federal Reserve for several years around the, and after the global financial crisis.

And so, maybe if you don't mind, I'd like to start with sort of core economics, and maybe the topics that you cover in your textbooks that you co-authored with Dr. Bernanke. how would you characterize what was novel or different about the approach to both microeconomics and macroeconomics in the textbooks that you wrote with Dr. Bernanke?

I think what’s unfortunately true is that introductory texts try to teach students not only that short list of core ideas, 5 maybe 7, but also 900 other ideas, every idea virtually that economists have ever written about. In the process, everything goes by in a blur. Nobody really learns anything. And what was clear to me as a result of several different experiences I had early in life, was that you've got to keep it simple and repeat it often, or people won't get it. And, but if you do that, then they can learn it the same way a small child learns to speak her native tongue. It's effortless. They just, they know it without really knowing how they came to know it.

[00:04:32] Robert Frank: So if you see the ideas embedded in examples that are familiar from everyday context, if you use them, if you apply them to related contexts, in the span of a single semester, you can really get quite good at being able to apply the most important ideas in economics.

So that was my thought about the micro text. The publisher, McGraw Hill said, well, you know, we can't publish just an introductory micro text. We need a macro companion. I said, well, I don't really know anything about macro, by which I meant, I didn't know enough to write a textbook about it. And they said, well, we'll look around and see if we can find somebody who'd be interested, and McGraw Hill's rep called on Princeton one day and told Ben about the project. Ben took a copy of my micro draft home, read it overnight and came back and said he wanted to do the macro half.

He liked the idea of the course too, and we were off and running. I was, of course, thrilled that he signed on. He was, even then, quite well known in the profession. And so having his name on the textbook would really help bring it to the market's attention. He very modestly insisted that his name go second, even though it's often the case that names are listed alphabetically in co-authorships. He said it was my idea to do the project, and he didn't feel right about going first on the book binder. And so we probably didn't sell as many copies as we would've if he'd been first, but the book's done quite well. You know, we're still able to pay that, pay our rent from what we've earned from it.

And on the macro side, I mean, he was not yet the Chairman of the Federal Reserve System when we wrote our first edition of that book. In fact, we had been in a meeting about the book with our editors. We were in San Francisco. He had to leave the room to take a call. He came back and announced that he'd just been nominated by George Bush to be a member of the Federal Reserve System. And I asked him, why would George Bush nominate a Democrat to be on the Federal Reserve Board? And he said, well, actually I'm a Republican. And we'd been working together for several years.

That was the first time I had any idea he was a Republican. He's not an overtly political animal. Very soft spoken and modest in his approach to things. He was the Chairman of the Economics Department at Princeton and was extremely popular in that role, which if you know anything about academia, that's quite unusual. I mean, usually, if chairmen do a good job, which he did do, he moved the department well up in the rankings, they have to step on toes. Undoubtedly, he did step on toes, but he managed to do it without offending anybody. So, he was a great c-author, and there was a number of innovative steps he introduced on the macro side, but you'll have an interview with him if you want details on that.

[00:08:37] Robert Frank: Yeah, I think I'd put it slightly differently. In micro, we study the behavior of individual consumers and firms, and we often aggregate that into whole markets, individual markets. What happens in macro is that we study the economy as a whole. So, total spending, unemployment, inflation, things at a much more aggregate level. It's not that people make joint decisions. It's rather that we analyze the consequences of all these individual decisions on how the whole moves, as a system. It's, I mean, we say that microeconomics is the foundation of macroeconomics, but there, it's really two different ways of seeing the world.

[00:09:48] Robert Frank: Right, right. There's lots of, yeah, there's lots of storytelling in both. But, I think, and psychology plays a big role in both spheres, but yeah, you really need a systems kind of thinking, much more in macro than in micro.

It's less clear to me how it's made explicit in the macroeconomics text, but maybe how did your background in sort of behavioral or maybe, rejecting the purest form of rational expectations inform how you approached, what were the core principles in the microeconomics text?

I taught what I think was the first undergraduate course in behavioral economics to Cornell undergraduates, starting in 1983. There wasn't a syllabus, obviously. I divided the material up into two parts. I titled the course as a whole, Departures From Rational Choice. Speaking to your question, I'm not sure I would have used that title if I were doing it today, just because it seemed to encourage a lot of spirited but largely fruitless debates about what it means to be rational.

Anyway, the two parts of my reading list were Departures From Rational Choice With Regret. Those are the kinds of errors people make because they don't frame the problem correctly, or they just make a mistake when they're trying to compute the right answer. This was essentially the cognitive errors literature spawned by, and that was Thaler's main interest. So, for example, you should ignore sunk costs when you're trying to decide what to do.

You've already bought a hundred dollar ticket. There's a snowstorm. Should I still drive 50 miles through the dangerous weather to get to the game? Well, I've paid a hundred dollars. I got to go or I'd be waiting. Somebody who got his ticket for free wouldn't make the drive. Somebody who bought the ticket would make the drive, but, in essence, the 100 expenditure is sunk. You can't get it back.

So the only question is, does the benefit of seeing the game outweigh the risk and the hassle of driving through the snowstorm? If the answer is yes, you should go, for both people. If it's no, you shouldn't go for both. And yet one is much more likely to go. So that's the kind of problem that caught Thaler's fancy.

I was interested in Departures From Rational Choice Without Regret. So people leave a tip at a restaurant they'll never visit again in the future. Maybe it's a city they're visiting for the first time and never intend to go back to. You've gotten good service. It's the end of the meal. You can either pay your bill and leave and not leave a tip, or, what should you do? If you believe the textbook economics, You should not leave a tip.

Why? Because it's too late for the waiter to withhold the good service he's already provided, and you, he can't punish you with bad service next time, because you're not going there again. Yet most people don't seem to regret leaving a tip. If you point out that textbook prediction, they think you're kind of creepy if you even suggest that somebody would consider doing that. So, that was a departure from rational choice, that was much more my focus in those early years.

So Thaler thought behavioral economics was the integration of economics and psychology. I thought that's a useful step to take, but it would be much better if we combined the insights of psychology with economics and added in the insights of Darwinian biology. Why do we care about the things we care about? Why would somebody want to leave a tip even though he knows he's not coming back to that that restaurant again? So that that was my focus.

And so I think the path I've taken has been a little different from what most behavioral economists have done, which is more in the psychological domain. The behaviors that have been of greatest interest to me are ones that I call, in shorthand, smart for one, dumb for all. Decisions that look good to us individually, that when we all take them, we get results we don't like. The simplest example maybe is, everybody stands to see better, nobody sees any better than if everybody had remained comfortably seated.

[00:16:32] Robert Frank: That's an old and familiar problem, but it's my view that it's vastly more widespread and important than most people realize.

[00:18:00] Robert Frank: You know, I think Ben is very sympathetic to the behavioral approach, and the crisis was a turning point, but I think we saw behavioral ideas coming, in the good … in macroeconomics even before that. You know, the whole idea of loss aversion and asymmetric expectations about inflation. Those weren't in the classical micro foundations of macroeconomics, but I think they're quite routinely accepted ideas now.

And, do you have any insight, or has it been an area of study for you specifically, how those things, or those elements have shifted the focus of macro over the last 10 or 15 years?

[00:20:22] Adam Butler: Right. Yeah, no, all very fair. All right. Well then, why don't we transition to a discussion of how you began to think about integrating Darwinian concepts into behavioral economics, or economics in general. I guess, so you're, the Darwin Economy came out, or what, Darwin economics. Yeah. The Darwin Economy came out in what, 2011.

[00:20:51] Adam Butler: Yeah. So I, that's where I first discovered your work, and began to do more of a deep dive into how you thought about things, and what really stood out for me, was made very clear in the opening chapters. And it was this idea that it is a foundational principle of most traditional economic canons that, or schools, that individuals pursuing their own self-interest in a market style economy, will almost always lead to optimal outcomes for the larger group, for society, et cetera, with some caveats, and what your book illuminated for me was the fact that, in fact, in many types of domains, a market economy where individuals are encouraged to pursue their own self-interest, can actually lead to extremely suboptimal outcomes for smaller local communities, and broader societies at large.

So maybe take me through how you came to be, to discover these sort of what I might call kind of perverse incentives, or what others might call game theoretic traps, and then how did that coalesce into the book, The Darwin Economy?

We were in the process of deregulating that industry when I was the Chief Economist there. And while I was there, I was there for two years, I bought a townhouse near the CAB office building, and was doing some renovations in it in my spare time, in the weekends and evenings. And I had hired a crew of people to help with the work. And I noticed that they would, instead of putting up scaffolding to work on the high parts they couldn't reach, they would stack two or three sheet rock buckets, sheet rock mud buckets on top of one another, and then put a plank across between two stacks of those, and then, climb up and stand on that structure in order to reach the high spots.

And from time to time, the whole thing would teeter and collapse, and they'd be in a heap on the floor. Why didn't you buy some scaffolding and set it up, I wanted to know. And they consistently said, oh, it's really expensive, and it takes so long to put it up and tear it down and to move it. You wouldn't get nearly as much done. So it'd be more costly in other words. All right, that's a plausible response. But what was true also was that they, each of them came to the job site each morning in a brand new van, not a 2 year old van, but a brand new one, with lush carpeting on the walls and ceilings, stereos, state of the art stereos wired throughout. And it seemed clear that if they'd bought a two year old van, they would have had plenty of money for a scaffold, and that would have been just as good.

But a two year old van, wouldn't have been good enough, because they all had new vans. So that was my first glimpse of why Milton Friedman's argument that workers choose the amount of safety in the workplace in a rational way, would break down. You know, if you care not about what kind of car you drive, but how the car you drive compares with the cars driven by your close peers, then if they buy a new car, and you don't, then your car seems inadequate. And so you'd be willing to take a little bit greater risk in order to avoid that bad feeling, even though it meant falling off the structure once in a while and getting bruised up.

That, I think that was probably too trivial an example to base a theory on it. I think much more plausibly now, I would say workers have always been able to earn higher pay by accepting greater risk on the job. I mean, why? Because it costs the employer money to put a guardrail on the lathe. Of course, he can't pay as much. And so as an individual worker, one of my main goals is to send my kids to the best possible schools. How do you do that? Well, every country in the world, the good schools are the ones located in the more expensive neighborhoods. So, if I want to send my kid to a better school, I’ve got to buy a more expensive house. How can I do that? Well, I can accept a riskier job that will serve my purpose. It's completely rational for me to do that. What I don't take into account is that you can do that, too. So, we each accept a risky job, and when we all do that, we succeed only in bidding up the prices of the houses in the better school district.

Still half of all kids go to bottom half schools, the same as before. So that was the core outline of the insight that I published first in the, in a book titled Choosing the Right Pond, and then elaborated in numerous other books over the years, including the one you mentioned.

[00:27:36] Robert Frank: Yes. Yeah. A positional good is one that takes its value, in large measure, from how it compares with other goods in the same category.

[00:28:26] Robert Frank: One example I like is the case of the elephant seal. The males of the species grow to be about 23 feet long. They weigh 6,000 pounds. That's on the order of the size of a Lincoln Navigator SUV. I don't know if you've ever seen them. There are beaches south of San Francisco where they mate. You can go and, at a distance, watch them. The males weigh, as I say, 6,000 pounds. The females weigh about a fifth of that, 1,200 pounds or so. The size difference, sexual dimorphism, is common in vertebrate species, and the explanation that biologists offer for it is that most vertebrate species are polygynous. That means the males take more than one mate if they can. The qualifier is important because it means that if some take more than one mate, others are necessarily going to be left with no mates at all, which of course is the ultimate loser slot in the Darwinian scheme of things. So, of course, males do everything they can, compete with one another for access to females, and often they fight bitterly with one another.

That's what the elephant seals do. They bludgeon one another for about five hours at a time on a beach, until one of them slunks away, completely exhausted, unable to continue. And then the victor gets access to a stretch of beach where he has near exclusive sexual access to anywhere from 50 to 100 females. So if the reason he won that fight was that he was bigger than his rival, and it's not only size that matters, but size does matter, then whatever mutant gene caused him to be bigger than his rival, will be in the pups of all those hundred cows that he mates with.

And so over time, those mutations accrete, and we get this enormous dimorphism. Males are so much bigger. That's a good thing if you're trying to out-compete another male for access to females, but in every other respect, it's a horrible thing. It makes you less mobile. You're less able to escape from your principal predator, the great white shark. You have to work vastly longer hours to acquire and maintain the extra body mass. You suffer from arthritis and other orthopedic ailments at a younger age. Yeah. You, if you could all push a button and say, my weight is cut by half, all of us, if we press the red button, we would all do it, but they can't do that. And so they're stuck.

The big antlers of the elk. There are lots and lots of examples that follow the same pattern. Smart for one, dumb for all is the, is the summary of those examples. And, it's a hugely important phenomenon everywhere that we see competition of any kind, because competition is always resolved by relative performance, and any step I take that you can match leaves the balance of power the same as it was.

And so that those steps, which are in general costly to take, are, in the end, essentially wasteful. If there are ways we could figure out to limit them, we would all do better. And so, you know, had the racing associations put engine displacement on the car engines, that's not mysterious. The engines would get bigger and bigger, and there'd still only be one winner in the race, and everything would be more dangerous. So, of course they do that. There's a whole lot that we do that has that same character.

[00:32:44] Robert Frank: Yeah, that's Tom Schelling's example. And, watching his Boston Bruins one night, the question occurred to him. He said, if hockey helmets are so great, why don't you just wear them? Why do you need a rule requiring yourselves to wear helmets? He noted that whenever there wasn't a rule, invariably, the players would skate without helmets. But then they would vote, often unanimously in secret ballots, for a rule that would require themselves to wear helmets. Why don't you just wear them if they're so great? And his answer was along the lines we've just sketched, which is that taking off your helmet confers a competitive advantage. Maybe just a small one, you can see better or hear better.

Maybe you can intimidate your opponents more effectively because they give you a little wider berth. If you're crazy enough to skate without a helmet, you know, what might you do? So, here's a case where a nudge, the favorite instrument of the behavioral economist, just won't work. If you put up a sign in the locker room, caution skating without a helmet could lead to serious injury, that won't have any effect at all.

You need a rule, they vote for a rule, and they're willing to abide by it, and to object that the rule violates their freedom to decide for themselves whether to wear helmets, is an incoherent objection. It's like saying, okay. If the U.S. and the U.S.S.R. sign an agreement not to build more nuclear bombs, that robs them of the freedom to build more bombs. Well, it does, but of course, that's the whole point. Right? Wanted to do. So, yeah, individual choice does not, as Milton Friedman insisted, lead to optimal outcomes, each and every case, and I think he knew that too. I think he was so skeptical of government that he thought, well, even though markets don't get it right, government's going to get it worse.

[00:34:59] Robert Frank: He once famously said, if you put the government in charge of the Sahara Desert, in five years, there would be a shortage of sand.

And it's the same thing with skirt height. So she goes to school, there's a certain minimum length that the skirts need to be. Now, if I needed to enforce that at home, there would be this constant creeping up of skirt lengths. And so I'm grateful that the school enforces a certain minimum skirt length, but this really, this phenomenon exists everywhere. It's like, you know, when you buy a Volvo car, everywhere, you see Volvos everywhere, right? Do you find the same phenomenon that…

But I think going, the more thoughtful libertarians are willing to concede that if what they're going to do causes sufficient harm to others, then maybe they shouldn't be allowed to do it. That's John Stuart Mill's harm principle. And I think the, a libertarian, but I think a lot of libertarians would be willing to live by his harm principle.

But I don't think they see clearly how widely it applies. So, for example, libertarians will say, sprinters ought to be able to take steroids if they want to. It's their body after all, and they have a right to put into it whatever suits them. And that sounds like a cogent argument. Yeah, taking steroids does entail long-term health risk. And if you're willing to pay the cost of those risks against whatever benefits you get, why shouldn't that be just up to you? Right?

[00:39:41] Adam Butler: What's…

[00:40:12] Adam Butler: Yeah, I mean, it's a very narrow definition of harm. You know, it's narrowing the domain of potential harm to first order effects, and not acknowledging that the secondary, and potentially tertiary and further on effects, and I wonder whether, I've given some thought, and I'm curious about your thoughts.

It seems to me that humans become much greater consumers of positional goods. The further we go as a society away from being unable to meet basic needs, let's call it for sake of simplicity, the first two or three levels of Maslow's hierarchy, right? And once you sort of get up into levels four, five, six, your consumption basket begins to be dominated more by positional goods than by, and I don't know what's the name of the other type of non-positional goods, I guess, or basic…

[00:41:29] Adam Butler: Right.

[00:42:13] Adam Butler: Sure. And I think it's, I mean, I agree that to a very large extent, those are positioned purchases. I think we would probably both acknowledge that there are absolute, there's a level of absolute utility from having a view of the park from your condo. But more generally, I just wonder, whether, because, well, would you agree that a more classical view of the benefits of competition in free markets applies to economies that are, where most citizens haven't risen out of the need to more efficiently allocate scarce, non-luxury goods, and that once a society, sort of a majority of a society, or plurality, maybe if society moves into, at a level of wealth where those basic goods are met for almost everybody, and the vast majority of the consumption basket is positioned goods, that maybe Milton Friedman's dictates of the absolute advantages of free markets and individual, pursuing individual, pursuits is no longer the right framework for even, for microeconomics.

[00:44:05] Adam Butler: Right.

So, so conditions are obviously vastly better now than they were then, but even then, the, and for, there was considerable inequality of income, and whenever there is inequality of income, we see what I've called expenditure cascades. These are, they're spending patterns that are launched by people at the top. They spend more on everything. Why? Because they have more money. The people in the middle don't seem jealous of what the people at the top spend. Typically, at least in the United States, that's never, never been. People wanted to see footage of the mansions and the yachts.

And so, if you don't invoke that process, you can't easily explain why the median new house is about 50 percent larger than it was in 1970. It, the median, earner has about the same hourly wage in inflation adjusted terms. Why are they spending so much more building bigger? It's because others around them are building bigger. But why are they, they building bigger? It's because the people at the top are building bigger, ultimately. So no, it's not efficient. Even, I lived in Nepal for two years, right out of college. I was in the Peace Corps there, and there was considerable wealth inequality in the village where I lived. And there was an expenditure cascade there.

Most people had very little, but the things that they spent their money on, how much they spent on, felt they had to spend on celebrations of special occasions, were shaped by this cascade. And so if they had all been able to spend less without seeming like they didn't appreciate what an important, important day it was, they would have been better in India. They tried to regulate what families spent on funerals because as people at the top spent more and more to celebrate the lives of the dead, then that crept down. And so it's never been true, that Friedman's view, that individual decisions get things allocated efficiently. That's been false from the beginning.

But was anybody happier because of that? We have a big literature that says beyond a certain point, increases in those categories of spending just lift the bar that defines what we think of as adequate. Nobody gets healthier or happier than before. So that's a lot of waste, $3 trillion dollars You know, we could do some pretty useful things with all that.

[00:48:52] Robert Frank: Yeah. We couldn't pay it off in one year But we could make a dent in it, and going forward, we're going to need to spend a bundle to avoid what's not exaggerated, to call an existential threat from warming. There are now hundreds of millions of climate refugees. In a few decades, there will be several billion climate refugees.

And if you look at the political turmoil that's been spawned by several hundred million refugees, imagine what it would be like with two or three billion refugees. It's going to be a nightmare beyond our imagination. And we have the technology to solve all that, get that trajectory back onto a livable outcome, but we can't do it without spending a lot of money. But the good news is we have a lot of money. If we could redirect what we're now spending wastefully toward those ends, we could do it, and not feel like we were sacrificing a lot.

So we actually manage private and public funds, as well as bespoke separately managed accounts for investors that seek the potential to smooth out portfolio returns in the long run. So if you do want to see that theory that we've been talking about put into practice, please do go ahead and check us out at www.investresolve.com. Now back to the podcast.

[00:51:44] Robert Frank: This is the one strand in my work that doesn't fit neatly under the smart for one, dumb for all rubric. Almost everything else I've done, the question of why you tip on the road, the question of positional competition and why it's way wasteful, all of that fits quite neatly under smart for one, dumb for all. I got interested in luck just because even though the influence of chance events on our lives typically is subtle, and easily goes unnoticed, if you're hit over the head hard enough with a chance event, you can't help but notice it. If you bought a, one lottery ticket and won 10 million, you would notice that you were lucky, I'm sure, although there too, we see examples.

There was a famous example in Spain of a guy who bought a lot. He put out ads. He wanted to buy a lottery ticket ending in the number 48. And he advertised widely for weeks. Finally, somebody came forward with one and he bought it. And of course, he won the lottery and reporters were quick to question, how did you know to buy a lottery ticket? And well, he invented this story, made it seem like he had agency. He said he had a dream. Seven nights in a row, I dreamed of the number seven. And since seven times seven is 48, I knew I had a dream. But of course, seven times seven is not 48. It was the best example of pure dumb luck I came across.

[00:53:45] Robert Frank: So yeah, I think, typically you remember big events like that. Several conspicuous examples of luck got me thinking about the role of luck more generally. And if you succeed in life, it's almost always true, not always, but almost always true, that you were talented and you worked hard. Especially in the kind of markets Cook and I described, winner take all markets, where there are thousands of competitors trying to occupy a few very highly remunerative slots at the top of a pyramid.

If you're not talented and hardworking, you're not going to be a semi-finalist, much less a finalist. So, if you succeed, and you ask yourself, you know, how did I get here, of course you can say, because you remember so vividly all those times you stayed late and came in early, all those hard problems you solved, all those formidable foes you had to beat along the way, you claim credit for it.

What you don't remember is the teacher who steered you away from trouble in the 10th grade or the first promotion you got because a colleague had to stay home to care for an ailing parent. Those things are maybe small changes in, on your path, but each small change affects every step that comes after it.

And cumulatively, they have huge effects once you're further down the road. So it's easy to see why people don't imagine the role of chance along their path to success, especially in the context of winner take all markets, if you've got a thousand finalists, and it's a purely meritocratic race. So, talent and effort are the only things that count in any important way. They determine 98 percent of your performance, 2 percent of your performance is due to luck. Well, let's find the person in those thousand who has the highest talent and effort score. He will not win the contest typically.

Why? Because there will be others, since there are normal human limits on the amount of talent and effort you can have, there will be many crowded up close behind him on those traits. Will he be lucky? Well, he might be. He might be unlucky. On average, he'll have average luck. But in the horde of people who are just behind him on the talent and effort scales, there were, are bound to be some who were very lucky, and if luck counts for only two percent, they're going to pass him in that turn. So yeah, no matter who you are, no matter how hard you work, no matter how talented you are, you probably wouldn't have succeeded unless you were also very lucky.

I think many people misread my account as saying talent and effort don't matter. That's not that's not the case at all They do matter, and parents don't tell your kids it's all luck, sit back and hope for your lucky break They say it's all up to you. You know, if you don't work hard and do everything you need to, you're not going to have a chance.

[00:57:31] Robert Frank: In fact, I think it's all luck, if we really drill deep.

[00:57:38] Robert Frank: What's it depend on? Depends on your ability, your temperament, and chance events to some degree. But where did you get your ability and your temperament? We don't know exactly, except that they come in some strange measure, from your genes and your upbringing, and you have absolutely no claim to moral credit for having inherited good genes or a thoughtful set of parents who raised you carefully. You're lucky if you're in that category. I don't think you should think it's all luck. I think, when the chips are down and you need to dig deep and pull yourself up off the mat and keep trying, it's got to seem like you're responsible for the outcome. And if you don't think that you're going to just lie there and roll over. So, so…

[00:58:42] Robert Frank: Yeah,

[00:58:49] Robert Frank: Yeah, yeah, no, that's exactly the right way to frame that issue, I think. People seem to stumble all over themselves on the free will question. I mean, to say there's no free will is to say, I mean, we need to believe that things have causes. You know, if you pull the lever on the right side, there was a reason for that. It wasn't just arbitrary. If we had all the information that there is to be had, we could predict which lever you'd pull.

[00:59:23] Robert Frank: But if you go through life thinking it doesn't matter, I'm going to pull whatever lever I pull, and I'm not going to think about it anymore, you're not going to do very well. Yeah.

And what he found was in simple, and even fairly complex models of behavior, that over a small number of generations, basically all wealth in the economy accrues to a single individual, right? Then he sort of injected this redistribution term in, then he derived the distribution term, rather than sort of simulating different economies with different, he derived it for different economies, given the wealth, the distribution of wealth over time for different economies.

[01:01:21] Adam Butler: Yeah, and anyways, for the U.S., discovered that the redistribution variable was actually negative, so that the poor subsidized the wealthy over time, given the U.S. tax code, which I found was really interesting. I know you've got proposals on how to maybe re-craft an economy to better recognize the impact of these positional goods and the counterproductive types of competition, and maybe better balance out the role of luck. Walk us through some of those thoughts.

And I think I'm an outlier on that dimension. I really don't like any. Being a professor is a great career option for people like that. Somebody said, I like being a professor because I'm the boss of no one and no one's the boss of me. There are things we have to do. You know, we're not completely in charge of everything, but we do have an enormous amount of autonomy.

And I think, to be a libertarian and be responsible, you have to be what I've, I call a Mill libertarian. That means I can do whatever I want, as long as I don't cause undue harm to others. You can't do anything without causing at least some harm of some form to others, more and more these days. That's true, but you can't cause undue harm to others. And I think what people are fearful of is a government that's going to tell them what they can and can't do. That's the thing that people seem to fear most about government intrusion on their lives.

The form of government intervention that I've always favored has not been of the command and control sort. You must do this, you can't do that, but it's born in a recognition that certain actions we take, do cause harm to others. They're misleadingly attractive to us for that reason. And that the solution is not to tell us that we can't do them, but to instead discourage us from doing them by making them a little more expensive.

So the, a nice example is to imagine an initial situation where everybody's driving a 2,000 pound car. That's a small car. Then somebody buys an 8,000 pound SUV. Why did he do that? Well, it wasn't an incoherent action. If you're in a 2,000 pound car and you have a head on collision with another 2,000 pound car, you're going to get injured or killed. If you're in an 8,000 pound car and you hit a 2,000 pound car head on, you won't be killed. You may not even notice that you hit a 2,000 pound car head on. The driver of the 2,000 pound car, however, will notice that car will be destroyed, the driver injured or killed. So if I buy an 8,000 pound car, the drivers of the 2,000 pound cars, their best response to my action may be to buy an 8,000 pound car themselves. And then we've got everybody driving an 8,000 pound car, and everybody's then at greater risk of injury and death than if we'd all still been driving 2,000 pound cars. We were each rational to take the step we took, but when we took it, we ended up in a worse position. And the solution, I think the better solution is to simply tax cars by weight.

That is to say, buy a big car full stop. Some people need a big car. Maybe they have a cabin in the mountains on a lake, and they tow their boat up there every weekend. They can't do it in a 2,000 pound car. They need one of these big vehicles, or maybe they have a trade they ply that they need to carry a lot of tools around in. So yes, if I buy one of those big cars, I cause harm to others, but if I'm taxed by the weight of the vehicle, I make it possible for everyone else to pay lower taxes, and thereby compensate them for the harm to which I've exposed them. So in general, my policy recommendation is to tax only activities that cause harm to others.

And maybe the simplest and most important specific tax I've proposed is the progressive consumption tax. It's essentially keeping the tax system we have, but for a small change. We say, report your income to the IRS as now, simplify it, ideally. Then report how much you added to your stock of savings, like many of us do for tax free retirement accounts. Then the difference between those two numbers, your income minus your additions to your savings stock, that's how much you spent this year. If we take that amount minus a standard deduction, that's your taxable consumption.

When that number is small, the tax rate is zero. As that number grows beyond a certain point, we start taxing it. And then the tax rate on the next dollar you spend each year goes up and up and up, and can go much higher than the current tax rate, marginal tax rate, on top incomes, because we don't worry about choking off saving and investment. On the contrary, the higher that marginal tax rate, the more we encourage saving an investment. So that’s the basic policy prescription. It's a libertarian prescription, I insist. I can't imagine that the people who call themselves libertarians wouldn't outvote me. In fact, even the people who don't call themselves libertarians outvote me, because we have not adopted this proposal despite my having advocated for it as hard as I know how to do, for 50 years.

[01:09:17] Robert Frank: You know, I talked to a friend who had a high point post in the Obama administration, who was very sympathetic to the idea that positional competition is wasteful. And he said, whenever he would bring up something like this tax proposal with others in government, people seemed reluctant to go there, because it seemed to rest on the idea that people envied one another's possessions, and most people feel they don't envy one another's possessions. And most people, when they buy nice things, are imagining themselves to be people who can appreciate quality and savor the fun. They don't think of themselves as buying these things to make their neighbors and colleagues feel bad, and indeed, most people are not motivated by such things, but that's the image that's conjured by mention of this kind of tax.

And there's even one economist who said that the logic of the tax makes sense, but we shouldn't base policy on base emotions like jealousy and envy, an objection I find both mystifying and infuriating. I would ask this economist, I don't ever see him, so I've never had an opportunity, but, do you think bank robbers are motivated by greed? I imagine he would answer, yes, in part at least. Should we not have laws against bank robbery, because the action is motivated by base emotions? What would he say? I can't imagine what he would say in response to that. In fact, my tax is not motivated by base emotions. It's motivated by quality being a context-dependent phenomenon.

[01:12:21] Adam Butler: Yeah. So one area where I would wonder whether this type of tax framework would improve things materially, would be related to your example about, for example, schools, right, where no matter how you tax, your ability to go to an above average school or below average school will remain equally competitive, regardless of tax policy. And, the rewards for going to a better school versus a worse school will still be ultimately entirely positional, and it's the same for university. And, I think you could argue sort of the same for relatively safe neighborhoods versus less safe neighborhoods, et cetera. Right? So, and I think a meaningful portion of incomes go to those categories of consumption. Am I off base there? Am I missing something?

[01:13:46] Adam Butler: Right.

I mean, Steve Jobs would not have abandoned his quest to make a dent in the universe if the tax rate on top incomes had been higher. Michael Jordan wouldn't have become a social studies teacher if the tax rate on top incomes had been higher. You know, the implicit beliefs that people have to hold in order to justify some of the policy positions they take are really quite extreme. If they were described in clear English terms, most people wouldn't embrace those beliefs. Because we don't speak clearly, we're willing to believe things that on their face don't make any sense at all.

It's just that the cost of achieving whatever those positional incentives or targets might be, at any given point, would be vastly lower, right, and therefore impose a vastly lower burden of waste on society. Is that, would you generally agree with that?

In California, they raised the top state income tax rate by more than 50 percent, and in the face of predictions that the top earners in California would leave for Oregon and Nevada in large numbers, a Stanford study a couple of years after the rate change showed that among people who left California in the succeeding years, the top 1 percent had the lowest rate of out-migration of any other spot on the income distribution. They got better services. They were still the top players in their communities. It was a, a better deal overall for them than the situation previously had been.

I like this experiment. Imagine two parallel universes, a high tax universe, and a low tax one. In the high tax universe, rich drivers cannot afford the Ferrari Berlinetta. They drive the lowly Porsche 911 Turbo, $150,000, $160,000 car. In the low tax universe, they buy the Ferrari. Who's happier, the wealthy drivers in the high tax universe or the low tax, if everything else were the same? Well, we don't have an exactly relevant experiment, but we do know that it would be very hard to detect any measurable differences in happiness between the wealthy drivers in those two cases, because the Porsche, by the time you get to the Porsche 911, the car has virtually every feature that has any measurable impact on handling or performance, or anything else that drivers care about. Is the Ferrari even a better car? You'll find debate about that. But let's suppose it's better. How much better? It's just a hair's breadth better. And we would, and since nobody sees the other environment, drivers in both cases would be driving the best car on the road. In each universe, they'd be equally happy.

I think that's a pretty safe conclusion, but things wouldn't be the same in the two universes. One's a high tax universe, and you can adopt the very most cynical view of the waste in government you like, still look at the government budgets. Most of it goes for military, domestic infrastructure, senior transfer payments and the like. Very, very little of it goes to bridges of nowhere, in fact. So what we know is that in the high tax universe, the roads are going to be better maintained than in the low tax universe. So then the question is, who's happier? Somebody driving his Porsche on well-maintained roads, or somebody who's driving his Ferrari on roads riddled with foot deep potholes. And that's not even an interesting question. You know, no serious driver would pick the Ferrari on bad roads. The driving experience is vastly better in the first case.

[01:21:07] Robert Frank: We're being stupid, is the only conclusion. You know, we're walking away from a mountain of cash that we could put to good use.

[01:21:23] Robert Frank: I'm finishing the manuscript I mentioned earlier, which I call Smart for One, Dumb for All. And it's an attempt for me to try to reconstruct how I came to think about the various ideas I've written about during my career. If you believe the claims I've just been making, they're, they're important ideas.

I think of myself as somebody of modest intellectual ability. So the question is, how does somebody of modest intellectual ability come up with ideas that have at least the potential to create big boosts in human wellbeing? And that was for me, a challenge. You know, in the university, we were all good students. I was a good student, but you know, I wasn't the best student. So if these ideas are important, and I really do think they are important, how did somebody with no obvious inside advantages come up with them? So that's what the book is about, and it sort of ties together the links between the various things I've written about, and the deepest link is this conflict between individual and collective interest. What serves our individual interest is often squarely in contrast with what's best for us as a group.

[01:23:48] Robert Frank: Well, congratulations to you on coming up with that clear insight. I endorse it 100%. In fact, I was just on a Zoom call with a big group of researchers. What's the most important thing we need to learn more about? And my answer was along the lines of yours, which is that I think we already know how to solve many of the most important problems that are confronting us. What we don't know how to do is to get people to act on the knowledge that we already have. And that's a problem that would be well worth studying. You know, how is it that we persuade people to take actions that would be so clearly beneficial for everyone.

[01:25:01] Robert Frank: I don't spend much time on what the site that was formerly known as Twitter. The site has been degraded in recent years. I'm thinking I might migrate to one of the other sites. None of the other sites that have attempted to stand in for the former Twitter seem to have captured agreement on it being the place to go, but…

[01:25:33] Robert Frank: Bluesky is the site of the moment, I'm hearing too. So yeah, maybe I'll, so what do you do if you were on the site formerly known as Twitter, how do you migrate, and do you have to start all over again? Trying to figure out who's worth following and…

[01:26:28] Robert Frank: Right.

[01:26:41] Robert Frank: No, no, I've been thinking to start a Substack.

[01:26:47] Robert Frank: Yeah, that, I follow a number of people on their Substack writings, so I've been thinking to do that. I haven't taken a concrete step to do it yet, but that's under consideration.

Okay, well, I've been talking to Dr. Robert Frank, the Henrietta Johnson Lewis Professor of Management Emeritus and Professor of Economics at the Samuel Curtis Johnson Graduate School of Management at Cornell University. Also the author of among many other titles, The Winner Take All Society, Falling Behind, The Darwin Economy, Success and Luck, Good Fortune and the Myth of Meritocracy, as well as some textbooks on micro and macroeconomics. Dr. Frank, thank you so much for spending almost 90 minutes with me today. It was everything I would have hoped for. I've been looking forward to this conversation for quite a long time, actually. So thanks again.

[01:28:04] Adam Butler: Well, there was plenty of grist for the mill. I don't think we left anyone feeling wanting.

[01:28:10] Adam Butler: Thank you very much. Have a great rest of your day.

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