Saturday, February 16, 2013

Society, Evolution and Change

Bora Zivkovic, writing in European-magazine, is Blog Editor, Scientific American, and is quoted in Muck Rack HERE  
The New Invisible Hand” — The invisible hand does not exist - at least in its modern incarnation. A return to the original texts of Adam Smith and a look at the theory of evolution can help us craft a better metaphor for how markets actually function. Cooperation is as important as competition.
Adam Smith famously observed that people neither intend to promote the public good nor know how much they are promoting it. Nevertheless, in pursuing their own selfish goals, they are led, as if by an invisible hand, to promote an end that was no part of their intention. Smith’s observation stands for one of the most fundamental questions in economics—the degree to which economies can run themselves without government intervention.
The two tenets of the invisible hand metaphor are (1) a society automatically functions well (2) without members of the society having its welfare directly in mind.  These two tenets can be evaluated for any society, including the thousands of animal societies that have evolved by natural selection. …
… For any group (animal or human) to function well as a society, members must perform activities that typically do not maximize their relative advantage within the group. Natural selection within groups therefore tends to undermine the performance of the group. …
…” The evolution of group-beneficial traits requires a process of group-level selection. In a multi-tier hierarchy of social units, the general rule is “adaptations at level X require a process of natural selection at the same level and tend to be undermined by selection at lower levels.” …
… “In a sense, group-level selection is the invisible hand that winnows the tiny fraction of behaviors that work at the group level from the much larger set of behaviors that don’t work. …
… Our ancestors became different from other primate species because mechanisms evolved that suppressed disruptive forms of within-group selection, causing between-group selection to become the dominant evolutionary force. …
… In fact, the received economic view doesn’t even resemble that of Adam Smith, who invoked the metaphor of the invisible hand sparingly and outlined a more nuanced view of human sociality in his Theory of Moral Sentiments. Smith clearly understood the need for strong social institutions and “moral sentiments” to check the abuses of unregulated and purely self-interested social interactions, economic or otherwise. The modern economic concept of the invisible hand bears little resemblance to the full corpus of Smith’s thought. … Neoclassical economics was originally inspired by the ideal of Newtonian physics, as if there can be a complete mathematical description of human economies.
Bora Zivkovic innocently accepts the modern myth of the “invisible hand” in economics as if it expresses Adam Smith’s actual views.  For the most part it does not. This leads Bora Zivkovic to misrepresent Adam Smith. I also have reservations about his presentation of Natural Selection – a biological phenomenon common to all life forms since life began on Earth – accurately. Some senior economists innocently turn to a version of Darwinian science to find ideas that supposedly explain economics better than what they teach about ideas that Adam Smith held.  I have in mind here the example of Robert Frank’s “The Darwinian Economy: Liberty, Competition and the Common Good”, 2011, critically reviewed on Lost Legacy (scroll back to winter 2011-2012).
I concur with Bora Zivkovic’s opener that the “invisible hand” does not exist.  I am less sure that he has found a “better metaphor” for “how markets actually function”.  Adam Smith said nothing about markets (or prices, supply and demand, or even competition) in relation to his use (twice only) of the IH metaphor.  Adam Smith’s use of the IH metaphor related to what led people, such as “unfeeling Landlords” in Moral Sentiments and “insecure” merchants in Wealth Of Nations, to act in a specific manner that Smith described as their being “led by an invisible hand”.  The “unfeeling” landlord fed his slaves, serfs, retainers and staff from produce from “his fields” and the risk- averse Merchant avoided risking his capital in foreign trade.
Bora Zivkovic, like many others, including the distinguished economist, Paul Samuelson, gets Smith use of the “invisible hand” metaphor wrong: Bora writes: “led, as if by an invisible hand”. Smith did not use the IH metaphor as a simile: “as if led by an invisible hand”; he used the IH as a metaphor, writing: “are led by an IH”.  Zora Zivkovic repeats a secondary report about the invisible hand “pursuing their own selfish goals” from modern, not original sources.  The modern “selfish” formulation can be traced directly to Paul Samuelson’s 1948 popular textbook, “Economics: an analytical introduction” (McGraw-Hill).  It had 19 editions to 2010 and about 5 million sales. I recommend reading Adam Smith’s works, not secondary reports, before basing an argument on what he is alleged to have written in 1776.
Bora Zivkovic states: “Cooperation is as important as competition”.  He is absolutely right and at one with Adam Smith!  It is precisely the view of Adam Smith as he expressed it throughout Moral Sentiments and Wealth Of Nations.  It is stated precisely in the famous passage about seeking one’s dinner from the “butcher, brewer and baker”.  Smith advises the buyer to “address” the “self-love” of the “butcher, brewer, and baker” and not his own self-interest “and never talk to them of our necessities but of their advantages” (WN, Book I, chapter 2, para 2, page 27).  In other words to serve our self-interests we have to be “other regarding” and not just “self-regarding” or selfish.  He elaborated on the realisation of our own “self-interests” throughout Moral Sentiments (scroll through Lost Legacy for posts of Smith’s advice on bargaining and gaining what we need from others by ‘persuasion’, by ‘exchanging’, and adjusting ourselves to their interests and such like). Egoistic self-oriented behaviour cannot be successful in a world where of necessity we depend on thousands of others for most things we need.
The sentence that “Smith’s observation stands for one of the most fundamental questions in economics—the degree to which economies can run themselves without government intervention” is quite strange.  Smith was no an anarchist, opposed to all government interventions.  He saw major roles for government’s “first duty” in defending society from invasions, in funding large-scale public works, and the administration of justice (Book 5, WN). He gave many instances when government must intervene, including in markets and in bank finance.  These government roles were central themes in Wealth Of Nations, even where sometimes such breaches were against “Natural Liberty” whenever the actions of private individuals threatened the lives and securities of others.  Bora Zivkovic must read Adam Smith and not rely solely on the many modern economists whose second-hand false views clearly have influenced him.
Bora Zivkovic’s interpretation of Natural Selection is somewhat partial.  Biological Natural Selection operates at the individual level over very long time periods.   The organisms do not control such changes whether they be beneficial or otherwise. Charles Darwin also wrote (1871) “The Descent of Man, and selection in relation to sex”.  Biological changes, positive or negative, are spread among each generation. These are not voted on or consciously adopted. Such changes initiate behavioural changes they may give individuals advantages over the rest of the group, and a changed group advantages over non-changing groups.  Also, in so far as behavioural changes occur on reflection of a problem or by experiment to an individual they may spread through the group by imitation, in competition with all other possible changes of other individuals, again over long periods of time. Sexually transmitted advantages from biological characteristics are spread among their progeny which over many generations the changed progeny may “out breed”, if I may so say, those progeny of less advantaged individuals.  Robert Frank is in error when trying to apply an analogy of what he sees as conscious competitive behaviours in economics compared to the unconscious positive and negative effects of large antlers among male deer.
The evolution of moral behaviours was a long historical process. Smith discusses these throughout Moral Sentiments.  He rejected his Professor’s (Francis Hutcheson) teaching that morality was an innate faculty (from God, etc).  Smith saw moral behaviours as learned from elders and companions in the schoolyard using the stoic metaphor of the “great school of self command”.  We learn from the reactions of others to our behaviour.  Society is a “mirror” (another metaphor!) on the effects of our behaviours on others.
Individuals discover behaviours that work for them better than existing behaviours; others in the small society observe and choose to copy or not.  The behaviour spreads or not; if it does the group may pass those workable behaviour on to their young; if it doesn’t work they may not pass it on.  Of course, some groups adopt behaviours that work against the group’s interests. Social evolution like biological evolution is blind.  If a prevailing ideology of a group is violently opposed to immunisation against polio, more of its children will die younger.  Likewise with believing superstitions spread by “mystics” that are destructive of a group’s cohesion and can promote escape by risky emigration into the unbounded surrounding bush.
Smith’s point about an action benefitting a society in his two cases using the IH metaphor were quite sound.  The landlord feeding his slaves, etc., was “led” to do so because no slaves, no matter how hard they were driven by the cruellest of overseers could live a week without some minimal food intake and therefore could not work. If fed to some minimal standard, some of the new births would live long enough to work for him in future.  In so far as this arrangement was maintained the outcome was the propagation of the species across the generations   Landlords did not need to think of this outcome at all when they fed their slaves.  That was Smith’s point.
Risk-averse merchants investing their capital locally rather than sending it abroad out of their sight did not think of benefitting society.  The unintended consequences of adding the risk-averse merchants’ capital to the amount of domestic capital was arithmetically to increase “revenue and employment” of the society (the ‘whole is the sum of its parts’).  I am certain that numerate readers of Scientific American understand that consequence immediately.  Smith regarded that arithmetic consequence as a public benefit. 
That is all he was asserting in both passages using the IH metaphor.  Nothing else.  He makes no reference to “markets”, “laissez faire”, “supply and demand”, “price theory”, “General Equilibrium”, or “Pareto’s Welfare Theorem”.  It was just an arithmetical consequence of people’s actions.  Adam Smith, an accomplished mathematician by 18th-century standards, did not try to apply mathematics to the whole economy, nor did he suggest that society could be mathematically described.
Bora Zivkovic fights a phantom Adam Smith completely at odds with the Adam Smith born in Kirkcaldy, Scotland in 1723 and the author of the “Theory of Moral Sentiments” and  “An Inquiry in the Nature and Causes of the Wealth Of Nations”.


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