Tuesday, April 1, 2008

Economics in One Lesson

Liberty is the mother, not the daughter, of order.
- Pierre-Joseph Proudhon

Economics is usually presented in a Newtonian, axiomatic light, but in this essay I am taking a Darwinian approach. This perspective is used because it provides an intuitive understanding of the big picture in economics, which is too often hidden behind a wall of math and jargon.

From this evolutionary vantage point, businesses in a free market are subject to Darwinian selection. There is a limited amount of money in an economy. Firms producing products that satisfy customers are selected with that money — they get the resources. Unproductive firms, on the other hand, are not selected, and die (go out of business). Thus a free market, as with biological evolution, weeds out the unfit and leaves only the fit. The fit being those that make customers happy.

And there's more.

Entrepreneurs take successful business practices, and apply them in new businesses, and sometimes create new practices. Thanks to the entrepreneurs' desire to make money, productive business practices, which attract money, spread (on average) and unsuccessful business practices are abandoned (on average). Business practices in this way serve the role of genes.

Therefore all humans control the economy, through their discerning choices (selection) and through their innovations (mutation). Because all human knowledge is consulted, the invisible hand is, in a very real sense, pantomathic. In a free market, the economy evolves to serve humans.

Here is a proof: nobody on Earth (except perhaps Leonard Read) knows how to make a pencil. The rubber, the lacquer, the graphite, the wood, the metal, the glue — no single person on Earth could create or harvest these on his own and combine them to create even a simple pencil. How, then, did pencils come to be produced?

I am ignorant of the historical details, but, presumably, a smart man had the idea of using graphite to write. An entrepreneur then took this idea, and turned it into a profitable business. Because these graphite rods were selected rigorously by consumers, other entrepreneurs entered the market — the ancestral pencil genes reproduced. After the second entrepreneur entered the market, competition ensued. Mutations were introduced. Mills were exapted to provide the wood holder for the graphite. And so on, up to the modern pencil. Along the way, the evolution in other industries — mining, metallurgy, and chemical production, among others — was harnessed by the pencil entrepreneurs, who in turn gave money to the businesses they judged to be most fit.

The result was, and still is, a complex system of cooperation where a large variety of people, acting only to benefit themselves, are led to contribute directly and indirectly to the creation of your pencil. Most are not aware of this cooperation, and they do not need to be — it is a natural consequence of the incentives created by private property and trade. This is the force organizing market economies, creating a social order designed specifically to satisfy human needs.

There are many economic myths possessing our society which can be discredited by a careful application of this model. Socialists, for example, advocate an economy organized by the government. This simple model shows why the idea is silly — through the use of force, governments avoid the Darwinian selection of the market. When consumers have no power to select, the institutions do not evolve to serve them. (There is some choice, in voting and location, but these are negligible compared to voluntary market interaction.) The result is an uncoordinated, unadapting economy and mass poverty, as shown by the failure of communist China and the Soviet Union. Beware of economic creationism.


John P. Birchall's Evolutionary Economics

Paul Krugman, What Economists Can Learn from Evolutionary Theorists

Greg Mankiw, Principles of Economics — the math and jargon version


Jeremiah said...

If you haven’t already read the book, The Mind of the Market is by far the best intro to evolutionary economics I’ve come encounter with. Nevertheless, this is a good opening spark interest in the one of the fastest growing fields in economics. If you’re pursing publication in this field, beware that it’s quite competitive.

Jeremiah L-VA

Σκεπτικός said...

Actually, I was introduced to the idea of evolutionary economics by a guy in the MySpace Libertarians forum (William the Weird, in an offhand comment), and thought it was frikkin fascinating, so I ended up buying Shermer's book to learn more.

I was disappointed because he focused on evolutionary psychology, and the bit of evolutionary economics he explained I had already figured out.

I'm still trying to get a hold of Kenneth Boulding's book on this (I forget the title); presumably it will focus more on economic evolution.

It's amazing how much simpler economics is with this perspective, though. It becomes very intuitive.

I don't know about publication — not in any academic sense, at least. Not for a good while.