What can the theory of evolution tell us about how the economy works? A lot. But probably not what you think it does.
Famous
economists such as Joseph Schumpeter (author of the notion of "creative
destruction") and Milton Friedman, and the contemporary economic
historian Niall Ferguson, have viewed economies as Darwinian arenas:
competition among firms reflects the ruthless logic of natural
selection. Firms struggle with each other, with successful firms
surviving and unsuccessful ones dying.
Thus evolution seems to
support three pillars of the conventional, neoclassical model of the
economy. First, that "economic actors" are self-interested, second, that
self-interest works to the good of the public (propelling Adam Smith's
"invisible hand") and, third, that together these lead the market to
deliver the community ideal outcomes ("optimisation").
But there's
a basic fault in this contention, as Dominic Johnson, of Oxford
University, Michael Price, of Britain's Brunel University, and Mark van
Vugt, of Amsterdam's VU University, point out in their paper, Darwin's
Invisible Hand.
In conventional economics, "economic actors" can
be either individuals or firms, although the theory tends to treat firms
as though they were individuals. In reality, however, firms are groups
of individuals - in the case of big national and multinational
companies, thousands of them in one firm.
So if Darwinian
selection applies to competitive markets, this implies that selection
pressure acts on groups, not individuals. And group selection, as
opposed to conventional Darwinian selection at the individual level,
leads to the emergence of traits that act against self-interest.
With
group selection, "we should expect the suppression of self-interest
among individuals, not its flourishing", the authors say.
"Firms
with less self-interested workers will compete more effectively and
spread at the expense of firms with more self-interested workers, which
will compete less effectively and decline. In other words, the model
predicts nasty firms but nice people.
"Firms vie for market share
and profits, group selection would predict, while individuals within
those firms sacrifice their own interests for the good of the group.
They will work long hours, accept low status and low salaries,
co-operate with each other, share resources, accept hierarchy, obey
their bosses, volunteer for extra duties and never help - or move to -
rival firms."
Does that sound realistic to you? No, me neither.
"In
reality," the authors say, "firms are made up of individual human
beings, with various goals and motives but, most importantly,
considerable self-interest.
"Darwinian selection at the level of
groups implies that the interests of group members are weaker or
synonymous with the interests of the group as a whole. In the real
world, they are not. There is often some overlap, of course: the boss
will want his workers to perform well; the workers will want the firm to
survive.
But we also have strong personal desires for salary, status,
rank, reputation, free time and better jobs.
"In short, any
evolutionary model must account for two opposing processes that operate
simultaneously: competition between firms and competition between the
individuals within them."
So the authors are adherents to a
relatively new school of thought holding that selection occurs at both
levels: "multi-level selection theory". And this leads them to conclude
that taking account of the role of evolutionary selection doesn't really
bolster the conclusions of the neoclassical model.
Economic
actors are self-interested only sometimes. Self-interest promotes the
public good only sometimes. And these things mean markets produce
optimal results only sometimes.
Great. But where does that get us?
The authors argue that being more realistic by integrating the factors
at work at group level with those at work at the individual level allows
us to make better predictions on which interests - individual or group -
will dominate in particular circumstances.
"A one extreme, if
selection among groups is frequent and severe, we may expect an
increased alignment of individual and group interests resulting in
successful firms with hard-working, groupish, highly committed
employees," they say.
"At the other extreme, if selection among
groups is rare and weak, we may expect increased conflicts of interest
resulting in inefficient firms and lazy, self-interested workers."
By
group selection they mean cultural selection - some ideas and practices
beat others - not biological selection. And, because ideas can spread
so quickly, not needing to wait for genetic evolution to occur
generation by generation, cultural evolution is much faster and more
powerful.
The authors say competition between firms may be a quintessential example of cultural selection.
A
weakness of the neoclassical model is that it exalts competition
between economic agents while ignoring the co-operation within firms
that is such an important part of real-world competition in markets.
The evolutionary approach, however, does much to illuminate the role of co-operation.
"Individuals
are adapted to co-operate in groups but do so in individually adaptive
ways," they say. "That is, we are co-operative, but only so long as our
own individual costs and benefits are taken into account."
People
want to be rewarded for their contribution but also to see that their
reward doesn't compare badly with the rewards fellow workers are getting
relative to their contribution.
But whereas the conventional
economic model focuses on only monetary rewards and punishments, the
evolutionary approach predicts that individuals will be powerfully
motivated to strive for social status and prestige within their firm,
even at the expense of material rewards or the risk of punishment.
The
evolutionary approach also offers a better explanation of why
individuals would want to take on stressful and time-consuming
leadership positions, which are not always compensated by higher
salaries: higher social status rewards.
The key to improving the
performance of firms, we're told, is not to strike some inefficient
compromise between the interests of individuals and their group but to
work with the grain of human nature to bring individual and group
interests into alignment. If you know what you're doing, this can be
achieved relatively easily and at low cost.
