Sunday, September 18, 2011

Darwin and Economics

Just a week or so ago, I began thinking, in a shallow way, that perhaps the insights from evolution are required for economics. Just as random variation and natural selection can provide the illusion of intelligent design, perhaps it can also produce the illusion of the rational actor, upon which so much of economics depends.

Anyway, in today's NYT, Robert H. Frank provides yet another way that Darwin lends insight into economics. The insight is understanding the forces that leads individuals in a a group to behaviors that are detrimental to the group, and to themselves. Excerpts beneath the fold.

WHO was the greater economist — Adam Smith or Charles Darwin?

Since Darwin, the pioneering naturalist, never thought of himself as an economist, the question seems absurd. Yet his understanding of competition describes economic reality far more accurately than Smith’s. Within the next century, I predict, Darwin will be seen by most economists as the intellectual founder of their discipline.

Smith is renowned for his “invisible hand” theory. According to his modern disciples, it holds that unbridled market forces harness self-interest to serve the common good. Darwin understood that individual and group interests sometimes coincide, as in Smith’s framework. But Darwin also saw that interests at the two levels often conflict sharply. In those cases, he said, individual interests trump.

A spectacular example from nature illustrates his point. The massive antlers of bull elk are often four feet across and weigh more than 40 pounds. Why so big? Darwin’s explanation began with the observation that bull elk, like males in most vertebrate species, take more than one mate if they can. If some succeed, others end up with no mate at all, making them the ultimate losers in the contest to pass along their genes. So bulls fight bitterly for females, and mutations coded for larger antler size help them win. That arms race has produced the gigantic antlers we see today.

As a group, bulls could better escape from wolves in densely wooded areas if their antlers were smaller, yet any individual bull with relatively small antlers would never win a mate. So bull elk are stuck with unwieldy antlers.

...{Darwin} understood that competition often favored traits that brought misery to all, and he knew animals like elk could do nothing about it. But human beings, who face similar conflicts, have better options.
Today, though, markets are far more competitive than ever, just as conservatives maintain, but they’re also hugely more wasteful. The apparent paradox is resolved once we recognize that market failure stems from the very logic of competition itself. As Darwin knew, when individual and group interests diverge, competition not only fails to promote the common good, it also actively undermines it.
The modern marketplace is rife with individual-versus-group conflicts like the one that spawned outsized antlers in bull elk.