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Robert H. Frank, Choosing the right pond: Human behavior and the quest for status. New York and Oxford: Oxford University Press, 1985. 306 pages. $22.95. What people say they want, think they want, really want, and ought to want, what they try to get and what they really get, are six different things. Sorting them out is the main job, maybe the only job, of social science. Economics mostly studies the connections between the last two: what they try to get (the choices people make) and what they really get. Economics actually only studies a subset of the last two, that which is produced and exchanged in markets, and public choice theory extends this study to nonmarkets. The first four, the wants and their formation, are left to the other social sciences, especially psychology and sociology. Economists usually take wants as 'given'. In practice, this means that the strength of a person's wants is straightaway for absolute amounts of various goods, whether these goods are to be consumed right away or to be used to produce other goods, such as ingredients used in a recipe, People are implicitly held to be autonomous; the utility of my consumption of a good depends only on the absolute quantity and not at all upon the quantity of my consumption relative to that of others. We all know, of course, that this is plainly not so, but for the most part economists rarely study the matter of relative consumption. Along comes a book to incorporate relative consumption into economic theory, Robert Frank's Choosing the Right Pond. The book discusses the omnipresent quest for status in human affairs, how people sort themselves out into separate, local hierarchies, how this implies that wages are far more compressed than marginal productivity alone would prescribe, and most importantly for public choice theorists, how there come to be the manifold collective restrictions on unlimited status-seeking that we observe. The reasons usually offered for these restrictions, what people say they want, are not what they really want. It is Frank's hope that if people understood what restrictions they really wanted, namely to put brakes upon status seeking, they would go about it better. Choosing the Right Pond is successful in showing that in the dividing up of an industry into firms, the market place does help people get what they really want. We all know that microeconomic theory often does just this. We all know that theory teaches (preaches?) that firms really want to maximize profits and that the way to do it is to set prices at marginal cost. What we further know is that firms rarely actually know their own marginal costs but that even so, economic forces will make price equal to them. Never mind myriad objections of and qualifications to this theory; the theory is nevertheless helpful, even if not the entire truth. Choosing stays within the neoclassical orthodoxy but extends its logic of

85 utility functions to incorporate the human desire for status. The extension is done in a wholly orthodox way. To accomplish the job, Frank supposes not just that people value status but also that they are somewhat myopic about it. People are rarely concerned with where they stand relative to all inhabitants of the Earth (and why don't people rest content with having big brains and opposable thumbs, placing all of us very near the top of the animal kingdom?). Rather, they compare themselves with their neighbors, residential neighbors partly, but also with coworkers. Given that people vary in their demand for status, Frank's main conclusion follows that the structure of firms in an industry will respond to this variation in demand. The argument is straightforward: a first person who cares greatly about relative status will work for less in a firm where his income is relatively higher in that firm. Contrariwise, a second person who cares little about status will accept a relatively low position in a firm that pays him more. Firms will specialize in attracting workers of different levels of productivity. Persons with a given level of productivity and a great concern for status will go to work for firms with lower productivity, achieve a relatively high status there, but be paid less than their marginal product. Conversely, those with a low concern for status will go to work for firms with high productivity, achieve a relatively low status, and be paid more than their marginal product. The upshot is that within each firm there will be a tendency (sometimes strong) to offer compressed wage schedules that do not fully reflect internal differences in productivity. 'Firms may be thought of as posting menus (their wage schedules) of wage-status combinations they have to offer' (p. 55). In addition to theoretical considerations, Frank investigates actual cases and finds, for example, that car dealers in upstate New York reward a salesman who generates an extra dollar in gross commissions only 24 cents more in wages. On the other hand, in real estate firms, whose salesmen are not so visible to each other, the figure is 50 to 70 cents. Frank gives a host of other examples, from university professors getting research monies to the singularly compressed salaries of top federal government executives. Frank next argues that, while individuals are myopic, in that they compare relative status more with their co-workers than with everyone generally, they are not so myopic that relative status outside the workplace is wholly unimportant. We might see, for example, a segregation of shopping centers into those selling low- and those selling high-priced goods. A person with a given level of income would patronize one or the other shopping center depending on the strength of his desire to be seen as a conspicuous consumer. In other cases, however, market segregation and ensuing compressions will be impractical, due to transactions costs or economies of scale. This sets the stage for collective action for direct

86 redistribution to achieve what the market cannot. (Frank's arguments here are somewhat difficult to follow, as he overlays them with different ones on high transactions costs of mutual agreements to put brakes on statusseeking. See below.) But emulation can be a powerful motive to work harder, so a balance must be struck. On the other hand, as Frank notes, every society seeks to informally suppress envy (which used to be regarded as the deadliest of the seven deadly sins) through socialization of its members, whence I add that government action may not be needed on a major scale. Frank says, 'I did not intend to claim that the income distribution we currently have in the United States is just' (p. 127). It is a large step between what we ought to want (justice) and what we get. Indeed, there is a large gap between what we try to get, as embodied in our Constitution (which is far from the ideal of unanimity of James M. Buchanan's The Limits o f Liberty), and what we have got, which is a government whose main function today (as the public choice literature often argues) is to redistribute wealth and income among organized pressure groups. Besides, no two persons agree on what our Constitution aims for. Along with all this, Frank argues from sociobiological and neurological considerations that the drive for status is innate but, also and importantly, that it can be counterproductive or at best futile, as least in modern society. Resources are invested in climbing up the totem pole. They are countered by expenditures of others to do just the same, with the result that relative positions are left largely unchanged. In many cases, from the arms race between nations to conspicuous consumption and the chasing after college degrees within a nation, an agreement might be negotiated to limit statusseeking. Here, Frank's contention is that we really want to limit this seeking and that many of the laws we get reflect this. Much of the book is given over to discussing legislation that has the effect of limiting status-seeking, a good example being occupational safety laws. The argument is that workers really want safe workplaces but that the scramble to provide a better start in life for their children would lead them to accept less safe, higher paying jobs than would be the case if they could somehow collectively agree upon limiting the status questing so that relative positioning would stay the same. Now after Robert Frank came along to point this out, it all sounds plausible. But: how do people get from what they really want but don't know they want to the laws that implement what they really want? The public choice student asks, what sort of constitutional rules might they set up? How might, not just some level of safety measures be adopted, but an optimal (in some sense) level be put into being? What will keep O S H A bureaucrats at bay? And given powers under a constitution to limit status-seeking generally - and our government has undertaken these

87 powers even if the Constitution of 1789 did not exactly provide for them how will laws in specific cases overshoot or undershoot the mark? The invisible political hand must work miraculously indeed if an inchoate desire (inchoate until Frank's ideas filter down) works out to something even occasionally approaching an optimum. Frank's answer is that, given conscious recognition of the desirability of putting brakes on status-seeking, we would do far better to tax conspicuous consumption goods directly and avoid round-about measures such as OSHA. So, ideally, there will be no OSHA bureaucrats to keep at bay It would be silly to berate the author for not having provided a complete theory to explain every piece of legislation, some of whose side effects limit status-seeking. Public choice theory is, after all, a perspective. It gives partial explanations of some things, not total explanations of everything. The reader may feel that Frank can get carried away, rather too often seeing an unconscious intent to limit status-seeking as being the major operative force behind a piece of legislation whose secondary effects of limiting status-seeking are rather minor. Nevertheless, the author argues well that much status-seeking is zero sum in nature and that collective limits on it can often be desirable, though he realizes that the quest for status up to a certain point furnishes a powerful drive for economic progress. Frank expounds various other theses in later chapters. In Chapter 8, he argues that, inasmuch as incomes are bunched closer together at the lower end of the spectrum, apparent status increases by way of conspicuous consumption are greater, dollar for dollar at the lower end, which is why we observe relatively more spending and less saving at the lower end. He also argues that trade unions can and do internalize the negative externalities of treadmill conspicious consumption by collective bargaining arrangements that channel cash incomes into such things as health care and retirement plans. In Chapter 9, he argues that the left's critique of capitalism is simply contrary to all evidence when claiming the economy is not competitive but that there is an imbalance of power held by corporations. By organizing, workers really only harm themselves, as far as cash wages go. However, they can use this organizing to collectively limit status seeking and the 'alienation' that results. The benefits here could outweigh the lower money wages, but this will be more likely if the workers consciously realized that this is what they really want to do rather than to combat a spurious imbalance of corporate power. Chapter 10 surveys various ethical restrictions limiting the use of money which have the effect of reducing status seeking, which again is what people really want. In particular, Frank observes that public financing of education (whether governments should operate schools is an entirely different matter) reduces the positioning advantages parents can obtain for their children by paying for private education. In this regard I note that, as government aid

88 to students has increased, so have the relative costs of private versus public colleges. Far greater than the effect of reducing positioning expenditures, I suspect, is simply the effect of getting more students listening to professors. Indeed, colleges, and especially college administrators, complain far more loudly about proposals to reduce student aid than do the students themselves or their parents. The last two chapters give a general overview of the limits of government maternalism and the tendency for government to grow out of bounds and calls for a tax, not on all income, but on the consumption of positional goods. Frank would have a political constitution that would 'mimic as closely as possible the decisions that citizens would reach themselves if they could negotiate costlessly with one another in a hypothetical restricted environment' (p. 242). The current welfare state does some of these things poorly, but what he calls a 'libertarian welfare state' would do them ideally. He calls such a state 'libertarian' to emphasize that it is only giving people what they really want. Frank will get many protests from libertarians here (isn't the word far too stretched as it is?), but he is arguing for an ideal, one of political freedom under an ideally unanimously agreed-upon constitution, as well as for the traditional individual freedoms. Skeptics, including perhaps the bulk of public choice scholars, will doubt whether any constitution that provides a government so powerful as to be able to restrict status seeking will be able to keep Leviathan at bay. Choosing the Right Pond, beyond extending neoclassical economics to explain how the market oftentimes takes status into account, is thus provocative in seeking to justify certain aspects of government action as doing the same. Frank offers for now only a vague evolutionism to explain what are now side consequences, and he never says just how far such restrictions should go before they turn off a major force for economic progress. These are topics for a second book. Frank Forman U.S. Department of Education Washington, DC 20202-6418