Another Poor Darwinian Application

 Dominic D. P. Johnson, University of Oxford, Michael E. Price, Brunel University, Mark Van Vugt University of Amsterdam have written a paper: “Darwin’s Invisible Hand: Market Competition, Evolution and the Firm.”

Abstract

Competition among firms has been suggested to reflect the ruthless logic of Darwinian selection: a free market is a struggle for survival, in which successful firms survive and unsuccessful ones die. This view appears to bolster three pillars of neoclassical economics: (1) that economic actors are self-interested; (2) that self-interest leads to public goods (Adam Smith’s “invisible hand”); and (3) that together these lead to market optimisation. However, this chain of reasoning leads to a paradox. We show that the application of Darwinian selection to competition among firms (as opposed to among individuals) invokes group selection, which leads to exactly the opposite predictions: notably altruism and the suppression of individual self-interest. We apply an alternative evolutionary model of economic competition, Multi-Level Selection (MLS) theory, which integrates the effects of selection at both individual and group levels. This approach reveals that, while individuals may generally pursue their own self-interest (as in the standard evolutionary account), humans also have evolved traits that—as if led by an invisible hand—steer our self-interest to align with the good of the firm or wider society as well. But it is the hand of Darwin, not Smith.

“Firms compete. Good ones survive and bad ones die. This looks like the logic of Darwinian selection, as has been periodically suggested over the last century by prominent economists including Joseph Schumpeter (1961, 2008[1942]), Milton Friedman (1954, 1970), and Niall Ferguson (2007, 2008). If true, it would be important because it offers independent support for three pillars of dominant economic wisdom: (1) that actors are self-interested; (2) that this self-interest leads to public goods (Smith’s invisible hand); and (3) that together these lead to market optimization. However, we have shown that, ironically, applying Darwinian logic to competition among firms invokes group selection. If firms compete with each other and experience Darwinian selection at this level, then the firms that are most likely to survive (all else equal) are those with altruistic individuals who accept fewer resources to work harder. So either the theory or the predictions are wrong. A Darwinian view of economic markets may accurately reflect competition among firms, but undermines the individual self-interest assumptions of neoclassical economics.  (P 35)” …

“Modern economics, [Gowdy, J.M., Dollimore, D., Witt, U., Wilson, D.S., Forthcoming in Economic Cosmology and the Evolutionary Challenge. Journal of Economic Behaviour and Organization] put it, “focuses selectively on [Adam] Smith’s plea for unfettered markets as a source of wealth and welfare.” We concur with their view that an evolutionary understanding of human behavior is vital if we are to ensure positive outcomes in economics and public policy. People cooperate with each other and create public goods, but only in the “right” circumstances. A popular reason that they do so is buried in human nature assumptions of economics that everyone knows are wrong. Evolution led to Homo sapiens, not Homo economicus. The real reason people cooperate the way they do is buried in evolutionary time, but has resulted in evolved cognitive mechanisms that serve individual and sometimes also group interests, often at a subconscious level—as if led by an invisible hand. But it is the hand of Darwin, not Smith.”

Comment

This is an interesting paper, following recent papers and books on the Darwinian alternative to Smith.  I find them unconvincing.  They start from complete misrepresentation of Adam Smith’s works, largely because they start from the mainstream mistaken view of Adam Smith on the IH, even though the error is easily corrected by direct reference to Adam Smith and from the elementary and obvious error in ascribing to Smith a wholly contradictory view of the alleged “three pillars of dominant economic wisdom: (1) that actors are self-interested; (2) that this self-interest leads to public goods (Smith’s invisible hand); and (3) that together these lead to market optimization.”  People's self interests can conflict with the self-interests of others.  An elementary flaw in the "dominant wisdom" (sic).

Smith’s view of self-interested is wildly at variance with the neoclassical summary of its alleged “three pillars”.

“Actors are self-interested” truncates Smith’s more complex moral philosophy.  Humans are social animals not like natures’ animals with individual egos.  Humans are dependent on the cooperation of others in the species.  This is a distinguishing characteristic of humans, outlined in Book I of Wealth Of Nations (read the first 2 chapters if you are unfamiliar with them).

Because we are inter-dependent on the co-operative assistance of others for our daily sustenance over our lifetimes, outsight selfish egoism is not a winning strategy.  Each self-interested ego must learn (and does) to mediate with other self-interested egos.  No man is an island in a sea of indifference to others.  Ayn Rand romanticised the virtues of selfishness.  So did Bernard Mandeville (1724).  Smith described such views as licentious.

Smith did not say that “self-interest leads to public goods”. Read through Books I to III (and most of Book IV) and note how many times the mentions self-interested behaviours leading to harmful consequences for others, which by definition did not add to human welfare. I give you over 70 examples:

Wealth Of Nations: Book 1: 40, 43, 52, 71, 77, 78 (2), 79, 80, 83, 84, 91, 100, 106,  112, 115, 135, 136, 139, 140 (2), 141, 142, 143, 144 (2), 145 (3), 146 (3), 151 (3), 152, 153,  154, 157 (2), 158, 160, 171, 174, 267; Book 2: 285, 294, 301(2), 302, 303, 308, 310, 311,312, 315, 316, 326, 339, 342, 346, 349, 357, 362; Book 3: 378 (2), 380, 382 (2), 384, 385,  386, 387, 390, 393 (3), 397, 398, 402, 406, 415, 418, 419, 422, 427.

In short, it is a travesty of Adam Smith’s singular use of the IH metaphor in WN to generalize it into a ‘law-like’ principle of an IH.  The blame for that nonsense started with Paul Samuelson in 1948 and continued with modern economists working their imaginations without checking what Adam Smith was saying. As for Homo economicus, such an idea is absurd when applied to Smith.

Seeking analogies in Darwinian selection is fashionable, but often misses the point.  Firms can have short lives (exemplified in the old saying: “clogs to clogs in three generations”).  Long before the first firm, humans experienced multiple generations of hunting bands, tribes, nations, and empires.  Their detritus is scattered wherever humans settled.   Was this typical of Darwinian selection too?  It took c.6 million years to speciate from the common ancestor through to Homo sapiens, and c.200,000 years to arrive where we are today. 

This ‘survival of the fittest’ notion should be put in context.  Firms come and go for all kinds of reasons (‘three generations’ says folk lore).  Some go on for a couple of hundred years. Living things can go on for billions of years.  Natural selection works throughout these long time periods.  Species can separate (that’s why we are here) and continue alongside each other, others die out, even without competing, and some out-compete in limited space.  Innovation removes firms from old technologies either directly or indirectly.  Within the lifetimes of individuals these changes may have no effect upon them.

I short, I am not convinced by biological analogies, though I am convinced by Darwinian science.  When people who are convinced by biological analogies demonstrate that they understand Adam Smith’s moral philosophy and his use of the IH metaphor, I shall take more note of them.  Should I referee a paper like that of Dominic D. P. Johnson, Michael E. Price, and Mark Van Vugt I would suggest, respectively, that they read Adam Smith first and then re-submit. 

PS. Somebody send a comment which I passed for publication but it appears to have disappeared!  It was about the gap between Darwin's thinking and Social Darwinism.   Please re-send!