Tuesday, December 11, 2012

Another Leap into Darwinian Selection Applied to Economics

"Darwin’s Invisible Hand: Market Competition, Evolution and the Firm"
Dominic D. P. Johnsona, (Oxford University), Michael E. Price (Brunel University), Mark Van Vugt  (University of  Amsterdam)  HERE
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 optimization. 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.”
I have yet to read the paper in full, for which I shall post my ideas on it in due course, but I think it worthy of some publicity on Lost Legacy just now.  Judging from the reasoning expressed in the abstract I see several flashing red lights.  I do not defend neoclassical economics or its thinking, but I consider that the source of my unease with it lies in each of the “pillars’ attributed to neoclassical economics.
To say that “economic actors” are “self-interested” as if it is true in itself and for all matters, cuts off the complex ways in which such self-interested actors express their self-interests in societies of other self-interested actors (and is an example of the weakness of neoclassical economics).  It is insufficient to note a characteristic of self-interest without recognizing the unalterable necessity for those same actors to mediate their self-interests with other self-interested actors (as Smith noted in both TMS and WN).  We are not merely individuals in a crowd of self-interested egos indifferent to the self-interests of others.  We need other self-interested actors to co-operate with us, as we must co-operate with them.  No human, other than the occasional mystic, could survive without the daily co-operation of others (we would not survive childhood without our parents, particularly our mothers – fathers are less important than males generally), not adulthood acting as if we are at “war” with everybody we rely upon. 
Smith did not say that all self-interested actions “led” to “public goods”, nor did he describe all public goods as the necessary outcome of “an invisible hand”.  He identified only two cases suitable for the metaphoric description of certain actions as being “led by an invisible hand”. He noted that there were “many other” cases where the metaphor may be appropriate, but nowhere did he say that all cases were applicable. In both cases in which he used the metaphor to discuss the unintended outcomes of the specific motives leading individuals to act in a certain specified manner, in which the consequences of actions, not the motives, had different “unintended outcomes” in each case.  The distinction is important. 
To use the metaphor of “an invisible hand” correctly it is necessary to identify its particular “objects” as a metaphor (see Smith’s “Lectures On Rhetoric and Belles Lettres” [1783] 1983, 29).  The assertion of “an invisible hand” leading to market optimization” is a wholly modern assertion (from Pareto’s Theorem and General Equilibrium theories, not Adam Smith). Parenthetically, I think to describe the actions of “proud and unfeeling landlords” as about “market optimisation in Smith’s example as leading to “market optimisation” is absurd.
Darwinian selection operates on individuals whose breeding outcomes over a very large number of generations may result in selecting for the successful survival of the group  (it can also lead to evolutionary dead ends).  Applying this idea in toto to competition between firms is a massive unpredictable leap of faith.  Whether the outcomes of any particular Darwinian selection process leads “to exactly the opposite predictions: notably altruism and the suppression of individual self-interest” is another mighty speculative leap, even assuming that self-interested humans eschew “altruism” and so on in human societies (which I think is crass), let alone, whether this applies among chimpanzees, among others.
 The authors of this paper have formed a theory of which I am not sure they properly apply it, nor have they challenged their assumptions.  But I shall do them the courtesy of reading their text before pronouncing any suggestions or conclusions. (I am rather busy just now on a chapter project for Princeton University Press, now running up against its deadline).


Blogger SM said...

Although a bit off topic, my question is what was the original use/meaning of the term Laissez-Faire?

I came across an interesting essay by William Graham Sumner called Laissez-Faire in ~On Liberty, Society, And Politics: The Essential Essays of William Graham Sumner (Liberty Fund). In it Sumner argues that the socialists and German Historical School had misconstrued the term Laissez-Faire to mean a scientific (economic) principle of no intervention in the economy. Sumner goes on to argue that the correct understanding meant, “If the statesman proposes to interfere with exchange, then laissez-faire comes in as a general warning, not as an absolute injunction: Let them manage for themselves.” Sumner’s definition gives a completely different understanding (one of caution) from what the modern use of the term has become as defined by the socialists and GHS. I was just curious what your thoughts were as it pertains to the subject.

6:15 pm  
Blogger Gavin Kennedy said...

My Adam Smith's Lost Legacy (Palgave, 2005) reported on the origins of laissez-faire doctrine.
Le Gendre, a ‘most sensible and plain spoken’ merchant, was asked by Louis XIVth’s finance minister, Jean-Baptiste Colbert (1619-1683), 'Que faut-il faire pour vous aider?' (‘How can I assist you?), to which Le Gendre replied: “lassez nous faire” (‘leave us alone’). His words became popularised as ‘laissez-faire’ (‘leave alone’), while the French Physiocrats expressed their interventionist policies for state-commerce relations as compatible with the “continuing modification of property rights”. Their leader, Francois Quesnay (1694-1774), a man admired by Smith, did not include ‘laissez-faire’ among his ‘General Maxims of Government’, preferring instead to use “the full freedom of competition”.
English speakers after 1774, also used the French words, but Smith never mentioned Laissez-faire in his books or correspondence. How then did Adam Smith’s name become so strongly associated with ‘laissez-faire’? I suggest from an assumption that ‘laissez-faire’ meant Smithian general freedom in the broad interests of consumers in competitive markets rather than just freedom from state regulations in the narrow interests of merchants and producers. For example, 19th-century employers supported laissez-faire when they resisted modest safety measures, restrictions on employing child or female labour, and general shorter working hours as proposed in the UK Factory Acts. As did James Wilson (1805-60), an avid fan of Adam Smith’s, who founded ‘The Economist’ newspaper , who supported the Anti-corn Law League in its campaign to repeal the ‘Corn Laws’ (1846), which kept domestic farm food prices high by restricting imports, thus adding to factory wage costs.
J. B. Say (1767 –1832) and F. Bastiat (1801- 50) spread the intellectual case for laissez-faire and linked it to Smith’s prestigious name, but laissez-faire for merchants alone was not Smith’s idea of free markets. He showed he did not trust merchants and manufacturers on their meaning of laissez-faire: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices” (WN I.x.c.27: 145). Merchants would and did treat the laissez-faire idea as a license to “fix” their markets against their customers and employees.

10:11 am  

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