A Brief Response to Robert Frank

Professor Frank’s blog post downplays the role of competition, diversity, and the potential for supply responses to mitigate the “Arms Race” that he worries about.   In economics, there is demand and there is supply.  He solely focuses on one side of each market he discusses.

In 1956, Gary Becker published his thesis on the economics of discrimination.  You can read about his key points in his Nobel Prize lecture available here.  If there are employers who only hire attractive people, then there is a profit incentive for employers who do not discriminate to step in and hire the average Joe and Jane.   If both types of firms produce pizza and sell on a competitive market (and if the pizza buyers don’t observe the beauty of the pizza sellers), then the firm that discriminates against average people will be driven out of business because its profits will be negative.

Frank writes;  “If you’re applying for a job, for example, you’re advised to look good when you go for your interview. But looking good is an inescapably relative concept. If other applicants spend more on clothing, your best bet may be to spend more as well, even though your likelihood of a callback won’t rise if all spend more.  Yet if others spend more and you don’t, your odds will fall.”

This sounds like there is an arbitrage opportunity for firms who aren’t picky about appearances to contact the slackers and screen those with tattoos and no neck tie to see who might be  a good fit for their firm.   My point is that those who don’t partake in the Frank arms race won’t be “doomed” if there are arbitraging firms seeking a bargain.   Firm heterogeneity brings about efficient matching with those who engage in the “counter-culture”.    Dr. Frank implicitly is assuming that there is no firm heterogeneity.  If firms were all homogeneous with respect to their hiring practices then they would all agree with respect to what they are looking for in individuals. But diversity is two sided!

Consider UCLA.    If UCLA paid attractive Professors 20% more, I would not get a raise, and student tuition would eventually rise.  This wage premium wouldn’t be sustainable as students would transfer to a school with an equally good but ugly faculty.   In which industries do the beautiful win the relative beauty competition, the workers  earn the wage premium and the firms persist in earning non-negative profits in competitive equilibrium?    If UCLA didn’t hire professors who don’t wear a suit to the interview, these folks will be hired by some up and coming university (think of the University of Chicago hiring Jews in the 1930s) and that school will rise and the discriminators will sink.

Implicit in Professor Frank’s blog post is a strong assumption about the shape of the “supply curve”.    Why can’t good schools be replicated? Why can’t good neighborhoods and housing be replicated.   He writes;  “Any family that failed to rent or purchase a house near the median of its local price distribution would have had to send its children to below-average schools.”  But, why are the schools below-average?  What investments could be made to increase the supply of good schools?

In Econ 101, we teach the concept of constant returns to scale.  Constant returns to scale means that industry can always double output produced at a constant average and marginal cost. In this case rising demand leads to more output with no rise in price and no worries about the “Arms Race”.   When does CRS apply versus when are we in the Frank “Zero Sum Game” fighting for a finite set of slots?   Intuitively, when does  the supply curve slope up versus when is it flat versus when is it vertical?

An “Arms Race” breaks out in a zero sum game for slots (when the supply curve is vertical) but why can’t Harvard or Stanford increase their number of slots as they gain more endowment income from the benevolent billionaires such as Zuckerberg and Bloomberg?

UPDATE:  As I re-read Dr. Frank’s post, I see several examples at the end related to the pursuit of status. But note again that he assumes that we are all identical in our common agreement that our status is defined by our toys such as the “biggest house, the whitest teeth, the biggest jewel” and that we can be ranked on this single index criteria as if we were pro chess players be  ranked from Kasparov to Kahn.    This world view that embraces the “single index” of quality ignores that there are many ways to achieve “self esteem” and self respect.  He downplays such comparative advantage and diversity.  How many of the RBC readers rank themselves on the  “tacky toys criteria”?