Book Review by Alex Scott
I boarded a long-haul flight, read this book and finished my journey with the unlikely conclusion that I should pay more tax! In this haiku of an economic treatise, Robert Frank analyses our troubled economic and social status quo and puts forward an economically libertarian solution. The key to the change he wishes? Acknowledge the omnipresent role of luck underpinning success.
First, the state we are in. Since an increasing share of what makes a product valuable is accounted for by ideas (or IP), there is hardly any cost in shipping to a globally integrated economy. This helps explain why, since the late 1960s, there has been a growing income difference between ostensibly similar individuals; technology has allowed the most gifted performers to extend their reach and stay ahead of the competition.
A normal lifetime containing many millions of events is bound to include a few that seem totally fortuitous; “and so it is with contests that determine who gets society’s biggest economic prizes”. Frank argues convincingly that the more competitive a sector, the more luck you need to succeed. And since luck is random, the most skilled participant in a competition is no more likely to be lucky than anyone else.
Frank argues that whilst winners and their products will always be enormously talented and driven, they will rarely be the most talented or hard-working person in their chosen sector. But we (and they) intuitively believe that this is the reason for their success – “once we acknowledge luck having even a trivial impact, our intuitions begin to unravel”.
The acknowledgment of good fortune is the key to unlocking Frank’ solution to our increasingly economically and socially separated society. Failure to acknowledge luck has made successful people more reluctant to pay the taxes necessary to make the investments required to maintain a good environment. A better environment (the complex infrastructure of government-run initiatives, assets and services that underpin society) can sustain the luck of future generations and also improve living standards of even society’s most successful members.
Some of the most successful in our society tend to resist paying higher taxes and have used their political influence to do so. The resulting government spending cuts fall upon the least influential and this reduces our societal investment in the future. Since most of the income gains of the last four decades have accrued to those atop the earnings ladder, most of the missing government revenue would or should have come from the wealthiest.
Accepting this thesis suggests that taxes upon the wealthy must rise because “long-run historical narrative bends towards the truth”.
The reasons for resistance of higher taxation are most understandably that higher taxes would lower standards of living – but also probably because successful people underestimate the role of luck in generating their success. If all the wealthy were taxed more, the demand for the goods they most desire would fall… and so would the prices, and so standards of living could be maintained although the aggregate cost would be higher.
Frank is concerned about our wastefulness and tendency to spend ever-increasing sums on luxuries. Costs of weddings have tripled and the average new house is 50% larger. Yet the social outcomes are demonstrably no better, whilst median incomes have not grown. We all have an innate desire to maintain our positions in society and spend what we think is appropriate, but greater expenditure has not led to greater happiness.
We seem to be on an ever-upward spiral of expenditure since the richest show no signs of pulling back and this behaviour trickles down to have far from benign impacts upon the lives of those who are not at the top of the economic pile. Middle-income families have to work harder to achieve their basic goals and financial stress is evident everywhere.
Our tax systems don’t urge restraint on the uppermost strata of expenditure – and it is this expenditure that launches the spending cascades that are so painful to less fortunate members of society.
So what is the solution? Frank urges a progressive consumption tax that encourages saving and investment. He argues that this would reduce the share of national income (wastefully) consumed and increase the share invested. Luxury goods would still be available to all but the tax raised from their consumption could be well invested and used to increase the future income of society.
Some will argue that resulting revenues would be wasted by government inefficiency, but perhaps that’s no worse than expenditure driven by a societal positioning arms-race in personal expenditure. The latter will not make people happier whilst the former might.
We all know of prominent examples of our society’s wealthiest members (perhaps acknowledging their good fortune) who are remarkably philanthropic, and their contribution is notable. But many sit on their hands and government action rather than personal donation will the only way to generate a necessary societal good from the extraordinary accumulations of wealth that our technologically impacted societies have created.
I know, the implication is that I should pay more tax too. But this idea would tax my discretionary expenditure, not what I have. I think I could live with that.
My travels ended in Singapore and here I discovered (of course!) ancient Chinese wisdom has something to add about the origins of success, which depends upon a confluence of factors – “god’s will, timing, location, strategy and human condition”.