Evolving Thoughts

Evolution and economics

Posted by John S. Wilkins on September 28, 2008
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It all began with Larry Arnhart giving a “Darwinian” account of the case for financial bailouts. Then David Sloan Wilson rejected the argument from the Invisible Hand. Then Massimo Pigliucci entered the fray. What’s at issue?

There are two basic extremes in economics: laissez faire and command economies. The former suppose, with the overextrapolation of Adam Smith’s Invisible Hand, that a truly unbiased and free market will generate goods better than any other economic system. The latter is socialism, and supposes that a central planner, usually the State, will control economies reducing waste and inequality. Neither works.

Arnhart holds that the bailout is a form of market control, and that this runs contrary to his interpretation of Darwinian dynamics as justifying laissez faire conservatism. Sloan Wilson said that the Invisible Hand is a dead idea. Massimo tends to agree with Sloan Wilson on that point. On other points, particularly Sloan Wilson’s claim that we are adapted to cooperative social behaviour, Massimo disagrees with Sloan Wilson. We have a Mexican standoff on the implications of Darwinian theory, and indeed even what Darwinian theory really is. Arnhart seems to be a radical methodological individualist, Sloan Wilson is a noted group selectionist, and Pigliucci is a noted advocate for the role of self-organisation in biology.

I won’t go through the ins and outs of this debate – it’s a civil and fairly clear set of contributions by all concerned. But there’s something that I think nobody has mentioned yet, so I will make my case for it now. If neither free markets nor a command economy can work in all cases, what can? Most democracies are a mixture of socialisation of infrastructure, regulation of financial institutions, open market access, and so on. The American case, in which regulation is held to be ipso facto a bad thing in as many cases as it can be eliminated, is a very weird and unrepresentative view in the world today. Most nations, my own included, have regulation of financial instruments and practices, as we know, from prior experience, that self regulation doesn’t work. And that does seem to be based on human nature. Nepotism and corruption is the default behaviour of humans. We are not enlightened self interested rational egoists. Nor are we total bastards to each other.

So a mixed strategy will tend to be the optimum for a given case, leading to the question: “how much regulation?” None is vulnerable to exploitation by a Tragedy of the Commons. All is vulnerable to the inefficiencies and corruption of the controllers. Some seems to be the answer, but there doesn’t seem to be a universally optimum mix, and Darwinian theory gives a reason for that, too. What we are seeking is an evolutionarily stable strategy; a mixture of populational variants that is the best tradeoff possible in the conditions. And this is not some magic number – it depends on the initial starting point of the population, the selective landscape over time, and the fitnesses of the variants themselves. All of this is highly dynamic and contextual. No single answer can be specified in ignorance of these conditions.

But economists are always acting under the constraint of very partial information. So at best we can justify post hoc some effective mixture of strategies, but we cannot know ahead of time what is going to work out for the best. As Darwinians, we ought not expect that one strategy or the other will always do best, any more than we should expect Tit for Tat will always win in simulations of social transactions. So we need instead to constantly revise and review the effectiveness of regulation, but to ensure that obvious regulation is in place.

Fact is, a Darwinian knows that selection processes can drive a population to extinction. A Darwinian knows that sometimes rational egoism can be less fit than an innate bias towards sociality (as humans seem to be slightly more than ordinary chimps, who do act like rational egoists). And a Darwinian knowns that social structures are never entirely one thing or the other, but instead that they depend on the local fitnesses of the variants available in the population (in this case of economic institutions).

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Comments

  1. #1 Elliott Grasett
    September 28, 2008

    But economists are always acting under the constraint of very partial information.

    In two senses, John! Both incomplete and slanted.

  2. #2 Chris' Wills
    September 28, 2008

    Looking at the present bailouts (taxpayers picking up the tab for the greed of the bankers, I don’t think that the bankers are stupid I think they knew what they were doing and did it with malice aforethought).

    Isn’t it a case of Alphas doing whatever they like with the Betas (politicians, pundits etc) coercing the rest (Gammas, Deltas etc) to clean up the Alphas’ mess?

    Now in some cases the rest will rebel but we are seemingly too cowed to do so and the Betas know that they’ll still be elected/retained in future whatever happens.

    I would point out that from their personal viewpoint the Alphas haven’t done anything wrong, they are born to rule so whatever they do to retain/gain wealth/power is righteous.

    Also, given the short term gains to be made (enormous bonuses) it was totally rational for the bankers/traders to do what they have done and for the politicians to support the bankers (helps them retain power and gain wealth).

    Everyone wins, apart from the peons of course but they don’t count.

  3. #3 Leo Freund
    September 28, 2008

    You must recognize that the USA is a command economy. The Federal Reserve Bank determines desired growth, and areas of economic growth. Command Economies all fail.Every historic example of a Laissez Faire system has always been backed by government bailouts.

  4. #4 Ian H Spedding FCD
    September 28, 2008

    Isn’t it the case that a laissez faire policy will eventually produce results, it’s just that the political and social costs of allowing something like the present crisis to run its course would be unacceptable?

    If the US government were to simply stand back an allow overextended banks and mortgage-lenders to collapse, it could precipitate the kind of economic depression that would cause immense hardship, bring down governments and trigger even worse wars than we have now. Perhaps some sort of seismic adjustment like that is necessary, just like an earthquake is a natural and necessary release of pent-up stresses in the underlying rock strata. At present, though, there is nothing we can do to ameliorate the effects of earthquakes but does anyone doubt that we would if we could?

    In a sense, couldn’t we contend that laissez faire arguments fall foul of the “is/ought” problem? After all, the fact that such a hands-off policy will ‘naturally’ play in a certain way doesn’t mean that it’s necessarily the right or good or best thing to do.

  5. #5 Erik Svensson
    September 29, 2008

    Interesting post, and I largely agree except on one point: ocialism does work and has worked in the past, contrary to the current dogma of today in the aftermath of “Washington Consensus”. And coming from Sweden, which used to proudly denote itself as a “mixed economy”, I know that this “golden compromise” is sometimest idealized, particularly among progressive americans who tend to admire “The Swedish Model”.

    The fact that the stalinist one-party dictatorships in the Eastern Europe and in The Sovjet Union collapsed is no evidence against socialism, it only reflects the collapse of a particular kind of state-socialism that grew out of certain historical contexts.

    There are, throughout history, many examples of functioning socialist societies and attempts to build more democratic socialisms , but unfortunately they have been crushed, either by the right and the US (Chile 1973, Guatemala 1954) or by the Sovjet Union (Tjechoslovakia 1968). And of course we should not forget the anarchist and libertarian marxist attempts with worker-controlled factories and agriculture during the Civil War in Spain (1936-1939). The latter was unfortunately crushed between the stalinists in the Spanish communist party and the fascists under Franco.

    Personally, I think that a society under control and ownership by workers and employees is likely to be more well-functioning and likely to experience faster growth, due to a more motivated work force, who work for themselves and not their owners. That is also consistent with the high growth rates in the worker-controlled areas in Spain 1936-1939, which historian Anthony Beaver has described in his book.

    Today, I admit that this vision is not immediately knocking on the door, although I would say that the current left-wind in Latinamerica, particularly Bolivia and Venezuela, might indicate that things will change in the future. And the current economic crisis in the US at least will convince more people about the failure of capitalism.

  6. #6 John S. Wilkins
    September 29, 2008

    Erik I agree that socialism, sensu lato, does work (until it doesn’t, a somewhat truistic observation about all social systems). My own country has a number of socialised institutions (as, indeed, does the United States). In particular we have a socialised medicine that seems not to have made us all communists.

    My point is that no pure socialism will work, or at least not for long. Centralised economies fail (and this is not some contingent effect of history) when they are unable to adapt to changing external or internal conditions. One of the problems with command economies is that error in information creeps in inevitably, and nobody has any vested interest in getting the data right.

    Likewise no pure market economy will work for long, due to corruption of the information to serve vested interests. A curious paradox, or rather, a feature of extremes. Terms like “capitalism” fail to be helpful, as all markets have a need for some capital. Terms like socialism are equally unhelpful, as all societies have a need for shared (common-wealth) assets run without a profit motive.

    But I appreciate your points.

  7. #7 Erik Svensson
    October 1, 2008

    John:

    It seems as we largely agree, and our minor differences of opinion may more centre around the words “socialism” and “capitalism” and what they mean. To me, and many other Europeans, socialism means an economic system with greater democratic control over production, such an increased common ownership (whether that is busy government, local municipials or worker-owned factories is less important). Increased common ownership, as opposed to private monopolies and dictatorship of a few owners, is likely to work more efficiently than today’s capitalism, not less.

    With increasing complexity of the society, particularly in the information-age it seems like a “natural” progression that the common ownership domain (e. g. “Creative Commons”, GeneBank, file sharing etc.) will increase, at the expense of the power of private ownership. That is not the same thing to say that a centralized stalinist command economy á la Sovjetunion under Stalin is the only alternative to today’s failed capitalism (thank God!!!!). But even the Sovjet Union was never a purely centralized command economy, simply because it did not work. Even in the Soviet Union, there were local (private) markets, presumably because it did not work there either to centralize everything.

    As for myself, I think that “markets” and “capitalism” are distinct things, just as you seem to think. I see no reason why we could not have functioning markets also in an economy with an increasing share of common property, e. g. different companies owned by the employees specialize on different things and try to complement each other, rather than outcompeting or buying up each other. Socialism of this kind, I believe, could even free the market from the evils of capitalism and its destructive tendencies. All pure capitalist market economies run the risk of destroying themselves and the market mechanisms as power is concentrated in the hands of a few monopolies.