Monday, February 04, 2008

Are markets darwinian machines?

Mike at Rational Reasons has an interesting book he recommends: Schermer's The Mind of the Market. Apparently, Schermer argues that evolution and free-market economics both operate on the same fundamental principles. Right away, however, Schermer loses points by putting up this strawman in the Prologue to his book.
...most scientists — especially social scientists — have resisted with the emotional intensity of a creationist any attempts to apply evolutionary thinking to psychology, sociology, and economics.
This is simply false, and a ridiculous straw man for someone who bills themself as a scholar of the history of science to put up. There's been a constant mixing of evolutionary thought and economics from the very beginning -- Malthus and Smith were enormously influential on Charles Darwin, for just one example. More recently, A Farewell to Alms by Greg Clark, a book that makes an explicit argument that natural selection culled out the poor, has been one of the most talked-about economic books of the year. In political science, it's hardly a new theory that the Westphalian state system spread around the world not because of some inherent virture or efficiency, but because it excelled at using selective pressures to create war-capable states. Evolutionary psychology has been around for years.

Now, it's true that there has been resistance to all of these ideas, but there is resistance to any new scientific theory, regardless of content. People resisted plate tectonics for decades both because it was revolutionary and, in the US, because prominent scientists had made their names espousing opposite views. Still, with the exceptions noted, resistance to new ideas is a good thing. Absent rigorous analysis and debate, there's the danger of accepting unworthy ideas too soon. We should probably not, for example, dump all of our current energy spending in the hands of a few anneutronic fusion advocates who may or may not have stumbled on Nobel-worthy discoveries. That isn't science, that's called credulity. So right away, I'm not disposed to take Schermer's arguments charitably -- straw men, constructed so early in a book and so egregiously, do not put me in a charitable mood. There's the additional note that Schermer is explicitly trying to equate the natural, proven, processes of science with the fervent know-nothingism of the anti-science crowd, which is so clearly false and cheap that it pisses me right off.

But there's the additional part that, after reading his Scientific American article and the prologue to his book, I still have no idea what his argument actually amounts to. Or, to put it another way, I don't know what his argument would prescribe:
In biological evolution, nature selects from the variation produced by random genetic mutations and the mixing of parental genes. Out of that process of cumulative selection emerges complexity and diversity. In economic evolution, our material economy proceeds through the production and selection of numerous permutations of countless products. ... Those that are purchased “survive” and “reproduce” into the future through repetitive use and remanufacturing.

As with living organisms and ecosystems, the economy looks designed—so just as humans naturally deduce the existence of a top-down intelligent designer, humans also (understandably) infer that a top-down government designer is needed in nearly every aspect of the economy. But just as living organisms are shaped from the bottom up by natural selection, the economy is molded from the bottom up by the invisible hand.

The correspondence between evolution and economics is not perfect, because some top-down institutional rules and laws are needed to provide a structure within which free and fair trade can occur. But too much top-down interference into the marketplace makes trade neither free nor fair. When such attempts have been made in the past, they have failed—because markets are far too complex, interactive and autocatalytic to be designed from the top down.
Now, he explicitly rules out prescribing "nothing" with respect to the economy -- he says the state is necessary, and even this is too much for Mike! But Schermer, here, has a point -- competition and diversity in the natural world occurs within bounded conditions (i.e., the capacity of a forest to absorb sunlight, the weight of krill a whale is able to ingest) but I kind of think that if you're going to buy the "markets are like nature" argument you should be on Mike's side -- the market and nature share the same planet, in case you hadn't noticed, so the same pressures that apply to nature automatically apply to market actors.

Indeed, if I were accepting this kind of argument, I think Mike actually has a better stand: the state will always have a major, and sometimes determinative role, in shaping the market so long as it exists. (See ethanol.) States are not competitive actors domestically, so if you want to see a genuinely unconstrained, competitive market you should, as Mike does, argue for the exit of the state.

But this line of argument is actually very suspect to me (surprise!) because like I said I'm not sure it means what we think it means. And here it's worth looking at the most successful examples of natural selection, and what it would mean in an economic sense. What are the most successful examples of natural selection? If our unit of analysis is the organism (is this a "firm" in the biosphere?) then surely the most successful life forms are unicellular microbes who have made only marginal changes in the last few billion years? In the multicellular world, we could look at beetles, ants, or other insects who have endured millions of years without substantial evolutionary change. Sharks and crocodiles are called living dinosaurs because of their evoloutionary histories. In the plant kingdom, we can look at the forests, where fundamental change is actually quite rare -- the Redwoods of California were thousands of years old during the Fall of Rome.

My point, in all this, is that successful ecologies and life forms do not, by their nature, show a lot of change. Indeed, life changes in nature because of failure, not success. Change is manifested by the death of unsuccessful life. Successful organisms and ecologies show a lot of stasis, in fact, and redundancy -- the opposite of what we usually call an efficient market. A forest might occasionally burn to the ground, but this is part of the process -- the system is built with enormous redundancy to accomodate that, and soon the same tree species will be back. The US financial system is in the process of burning to the ground, and instead of being something the system is meant to accomodate, even normally even-keeled people like Paul Krugman are (politely) scared witless. You rarely see an ecosystem collapse like this, absent a massive exogenous shock -- climate change, or more likely an invasive species: disease, predator, or good ol' homo sapiens.

Now there's an analogy I can get behind. All cultures, throughout human history, have had some mix of market and non-market forces in their economies. (And let's all remember that the "market" is distinct from the economy.) But the market-centered approach was spread across the planet, usually accompanied by fire and the sword. (See Westphalia, above.) More recently, it's been IMF conditionality packages, but the process has been the same -- marketization and globalization have been processes of the powerful, against the weak. See also Power and Plenty. Now maybe this proves Schermer's argument better than he intended: armies march only as far as the wallets of their sovereigns, after all.

But I don't think so. You cannot simultaneously argue that markets are an emergent, synergistic system that require no creator if you also acknowledge the historical fact that the global market has only been created by explicit use of political violence.

Finally -- and this post has gone on too long -- I would ask how Schermer would explain development states: those miracle economies that were explicitly created by the heavy use of government powers. The best example might be South Korea, which in 1963 had a lower per capita GDP than Ghana, and today belongs to the OECD. Again, a contrast: the best example of economic growth has shown incredible dynamism and massive change in just over half one human lifespan, while the most successful organisms change little to none over millions of years.

To anyone who thinks the Korean miracle was done with liberal, laissez-faire policies, I can only say, read a book. Specifically, this one. Unlike Dr. Schermer, Chang's PhD is in economics, which I think gives him some credibility to speak on the matter. Chang is also South Korean by birth, and has a number of moving pasages describing what it was like living in the Korean economy during the miracle years.

Actually, Chang makes an argument that is relevant here: he says the market, like my description of a mature ecology, tends towards the status quo. This makes the market an efficient allocator of resources, but a shitty mechanism for actual development -- defined, for these purposes, as the transition from agrarian poverty to industrial wealth.

So let's see: the most successful economies do have effective creators, successful organisms and ecologies tend to exactly the opposite behaviour of healthy economies, and the social sciences have been mixing it up with darwinian ideas since the very beginning. Have I left anything out?


Mike said...


You really should read the rest of the book. Shermer does go into great detail from scientific studies to back up his claims. And he admits that the analogy is not 100% - there is a bit of Lamarckism in markets that are physically impossible in biology, which explains the variations in rates of change.

But in reality they are both emergent bottom up creations rather than top-down creations. He also deals with the very things you discuss about beetles and sharks and other kinds of stability in the market.

His main thrust is that the evolutionary basis for human behavior is the driver of huamn action and dispells the traditional economists myth of the rational actor in perfect competition. And helps understand why we make the choices we do and believe the things we do.

"But I don't think so. You cannot simultaneously argue that markets are an emergent, synergistic system that require no creator if you also acknowledge the historical fact that the global market has only been created by explicit use of political violence."

But he does not argue that...he does argue that free markets are emergent but, like animal husbandry or genetic manipulations, they can create economic eugenics and distortions. He is also arguing against the very mercantilist use of political violence, protectionism and corporatism that Adam Smith did in The Wealth of Nations or that Dean Baker does in The Conservative Nanny State.

In fact I would argue that this book argues against what is mis-labeled "the free market" by the capitalists we have around today. He is a great fan, as you may have noticed, of Frederic Bastiat, who sat with Proudhon on the left side of the Assembly, and who advocated that allowing people to trade freely with whomever they wanted was more empowering and enriching than merely getting rid of the king. That would hardly put him in the good books of those want to try to control markets via government regulation, tariffs, protectionist barriers, and so-called "free trade" deals that take years to negotiate and fill volumes with even more regulations (designed to let certain industries and corporations make money at the expense of the rest of us)

I would also point to his final chapter that is a clever fusion of Bastiat and Jared Diamond that shows that having tools and conducting trade actually does a good job at development and promoting peace rather than war and other political violence.

I understand your reaction (I would have had it a few years ago too) but I hope you read the rest of the book. Its really very good.

john said...

"But he does not argue that..."

That was a bit unclear -- I didn't mean to say that he was arguing that, or that he should, but that I don't think an economic theory that neglects the overwhelming historical impact of violence in the economy, isn't worth discussing much. So you either have to deal with the violence, which would seem to contradict his arguments, or you ignore it, in which case it's worthless as arguments go.

I am actually strongly tempted to read it, but it really due more to your recommendation than to what I've seen so far...

"allowing people to trade freely with whomever they wanted was more empowering and enriching than merely getting rid of the king."

See, and I find laissez-faire doctrines disempowering, not empowering. Not for all things in all cases, but the ability of humans to come together to collectively solve social problems is a great thing. The fundamental divide on this question, as I'm beginning to suspect in all political questions, is what is private, and what is social.

Mike said...

Well to be fair to Bastiat, his laisser-faire was also about breaking down hierarchy and giving people control - instead of working for the Earl and getting next to nothing for doing so, you own the land, keep what hour produce and can sell it to whomever. What we have now is merely an free market for the Earl, not the farmer.