Behavioural Economics ... ? Institutional Economics ... ? Darwinian Economics ... ?
If you're an aspiring student of economics the pages around here should interest you. They're a light hearted and optimistic look at wealth creation, economic growth and technological & institutional innovation.
These notes were originally put together around the turn of the millennium for a series of tutorials in the English language to help Eastern European students of market economics to think about economics as the science of choice. Have a look at the site map here to find your way around.
Understanding economic choice starts with the 'why?' questions and the big one - why are some economies rich and some poor? ... and the gap is enormous ... and growing ... could it be -
just the luck of geography, climate & natural resources?
or was it planned design by super intelligent Gods or less intelligent folks or Bishops, Princes, Generals or bureaucrats?
or could it all be explained by the process of evolution?
It must be one of the three ... mustn't it?
Around 1850 Karl Marx and Charles Darwin rejected both luck and divine intervention; they proposed new answers to the 'why?' questions.
Marx suggested an historically plausible top down design process of command & exploitation - an elitist class conspiracy.
Darwin suggested a counter-intuitive bottom up process of adaptation - the differential survival of inherited variants. It is misleading to think of the output of economies as the result of deliberate, rational, purposeful, intentional, planning ... folk have nous and simply discard alternatives that don't work.
Marxist top down thinking was discredited by economic realities and Deng Xiaoping's reforms of 1978 and the fall of the Berlin wall in 1989 but meanwhile, relentlessly, for 150 years Darwin's 'strange inversion of reason' explained more & more ... however Darwinism proved very difficult for folk to grasp ... the penny had to drop ... folk simply learn and have no truck with things that don't work.
I don't know any economic science that isn't about behaviour, I don't know any behaviour that isn't embedded in institutions and I don't know of any institutions that are not Darwinian ... so Evolutionary Economics is an OK description of the science of choices ...
In the following pages four examples of economic breakthroughs are explored with the help of evolutionary thinking; the gist of the exploration is four Why? questions ... or How? questions? How? questions might be better as they tend to lead to scientific explanations?
NB different people, at different times, in different places will suggest different answers to these questions ... all students, if they are scholars, will wish to avoid all the myths, magic & mirrors of supernatural explanations and search for evidence & do their own experiments to share with their peers ...
1. Why are some economies
rich and some poor?
adaptive efficiency & The Industrial Revolution - wealth creation gravy trains discover & accumulate survival tricks
Around 1750 something dramatic happened. In some economies a process of technological & institutional innovation started to create an abundance of new wealth. The process had two notable characteristics -
the growth was not cyclical but self sustaining
most economies missed out
This industrial revolution is a striking fact of recent economic history, an explosion in our capacity to change things, a potential 'gravy train' of wealth helping to alleviate ignorance, fear, poverty and violence.
neo-classical economics has traditionally explained the explosion using Newton's maths with a focus on market equilibrium and the rational allocation of scarce resources. This tended to neglect explanations of dynamic growth, technological change and theories of choice inspired by an environment of emergence, risk and uncertainty - complex, changing and full of conflict & scarcity.
evolutionary economics explains the unleashing of a process of technological & institutional innovation by generating & testing a diversity of ideas which discover & accumulate more survival value for the costs incurred than competing alternatives. The evidence suggests that it could be adaptive efficiency that defines economic efficiency.
2. Why does freedom
& democracy help
enabling environments & Economic Growth - synergies of specialisation & scale are secured as lawful individual freedoms discover & accumulate a diversity of specialised survival tricks which generate synergies when traded in larger scale cooperative social groups
In a changing environment where the future is risky and uncertain there are evolutionary pressures for aspiring people to try for their own survival tricks and oppose the impositions of oppressive Bishops, tyrannical Princes, dictatorial Generals and errant bureaucratic majorities. Any notion of domination by divine right, natural authority or elitist designers claiming access to survival elixirs is evolutionarily unstable and economically inefficient.
Evolution diversifies knowledge and skill widely and differently amongst the global population. This individual diversity means tyranny & oppression can never survive long term because there are always better alternatives to be discovered, sometime, someplace ... which nobody knows in advance.
Folk get into a pickle when they want to be 'top peck', control events and have the pick of the girls ... crowd trouble emerges ... others will always want to try their own hand and go for longevity.
Alternatively free democratic institutions tend to unleash and speed up the adaptation process because more creative individuals are free to lawfully participate in larger cooperative institutions in an environment of diversity & choice - keeping more options open and increasing the chances of discovering & accumulating new survival tricks ... once a good idea is discovered it spreads rapidly amongst the population by exchange ... economic synergies from specialisation & scale.
A diversified culture of save & invest has a statistical advantage over centralised tax & spend when it comes to an enabling environment for economic growth. Survival & prosperity was built not on command & exploitation but moral sentiments & synergies.
... it seems we are like inspired dwarfs standing on the shoulders of giants who have managed to accumulate survival tricks over past centuries.
The critical issue enabling economic growth is the diversity of competing institutions.
Unfortunately the evidence of history of Jeffersonian Democracy has been the slow erosion of decentralised institutions and the checks & balances on the elitist power grabs for tax revenues. Democratic politics has often matured into a fight for 51% of the vote and access to tax revenues.
Unfortunately turkeys don't vote for Christmas so we shouldn't expect authoritarian elites (particularly elected majorities) to abandon the reins of command & control and promote institutions which encourage diverse cooperative participation ...
The good news is that evolution can't be stopped and competitive innovative ideas are always being hatched by ingenious folk ... 'enabling' institutions which tend to undermine top down processes are always emerging and spreading ... take the splendid institution of monogamy for example ... think about it?
Today evolutionary scientists are providing more evidence to support Thomas Jefferson and his mentors Francis Bacon (empirical science), John Locke (separation of powers) & Isaac Newton (mathematical description), 'the three greatest men that have ever lived, without any exception'. Their works in the physical & moral sciences were instrumental in Jefferson's world view of liberal democracy.
The science underpinning cooperation and freedom & democracy as a universal expression of biological cognitive & emotional phenomena has been recently summarised by the brights, and includes 70 substantiating research studies ... and they have produced a superb infographic which provides a gripping introduction to Evolutionary Economics. Perhaps Adam Smith started it all with his 'Theory of Moral Sentiments' in 1759, I think I can see him smiling at this piece of work from The Brights ... and, for sure, Charlie Darwin would also be gruntled ...
the universal declaration of human rights is a good summary of the evolving principles of freedom and democracy ... the protection of human rights is more universally acceptable than bureaucratic majority voting which tends to be naturally polarising and doesn't protect minorities ... folk are free to choose but not free to harm others ... folk tend to choose cooperation because ... cooperation is a universal emotion ... and cooperation is profitable.
NB the UDHR emerged from aeons of evolution, it was not written ex nihilo in 1948
NB the crucial Article 30 caveat guards against the authoritarian 'top down' interpretation and the tyranny of majorities ...
NB not the best just better than the alternatives which have been tried from time to time ...
3. Why is wealth creation so difficult to plan?
cooperative synergies & Wealth Creation - 2+2=5 synergies - survival tricks 'emerge' from trial & error social interactions as folk do deals & learn, they can't be deliberate rational purposeful intentional plans
All 'wealth' is survival 'know how', it is discovered by trial & error and accumulated in social institutions. Only a very few of the ideas spurting from the brains of folk, survive and grow to become institutionalised. These surviving successes become part of inherited 'know how'. In this way wealth is a changing population frequency of survival 'know how', emerging in the midst of vast complexity from a tacit, dispersed and incomplete discovery & accumulation process ... impossible to design from above ... no one has the necessary knowledge ... no wonder so many miss out ... but it is the only way evolution can work ... differential survival of inherited variants ... folk simply discard alternatives that don't work ...
Synergies are impossibly difficult to plan as there are many more ways of being dead than alive. Evolution needs a constant stream of energy to run faster and faster in diverse directions just to stand still. Innovation is necessary for survival, not an optional extra, competition is around and yesterday's success is tomorrow's failure.
Cooperation is the greatest survival trick for all social animals. Although new survival tricks start with an unproven idea of individual creativity, innovations grow and compete with alternatives in interacting populations by exploiting 2+2=5 synergy benefits ... economic synergy.
But cooperation is risky. Unfortunately evolution provides survival niches for 'free riding' parasites & predators who thieve any stocks of wealth. To enable wealth accumulation defence systems must co-evolve ... we need not only innovation but also immunity ... a double whammy!
There is a 'technical' problem. As new survival tricks emerge from interactions they not just copying history there is no cause and effect because effects become causes and the maths doesn't work, the evolutionary equations can't be solved ... it seems we are totally enmeshed in the complex vagaries and foibles of our mates, our adversaries and our ancestors ... a complex adaptive system ...
4. Why is wealth about survival 'know how' and not
other factors of production?
technological innovation & Social Institutions - science & technology - the cultural learning of 'know how', the best survival trick of all
During the latter half of the 20th century rapid technological growth and globalisation forced neo-classical economists come to terms with two counter-intuitive issues -
'money' is just a useful measuring trick, it is survival 'know how' that is the fundamental economic resource that drives growth ... it is found in technology & social institutions
'rational calculating economic man' is a myth, no one is 'in charge' of economic growth there is just a dynamic process of adaptation
History classes traditionally teach that the pursuit of power and progress is a deliberate, materialistic, resource dependent process -
Feudalism and primitive pecking orders
Mercantilism and pilfered gold
Empires and territorial expansion and
parasites & predators who steal other people's property
For sure money grabbing is an historically plausible zero sum behaviour which explains much ... but it doesn't explain wealth creation & economic growth ... much better positive sum survival strategies exist.
Land, power and war, all to often thought of as the key to wealth, but the evidence indicates it is 'know how' that is crucial ...
By a process of discovery & accumulation survival 'know how' from technological & institutional innovation converts labour, capital and natural resources into products and services which are more valuable than the factor costs incurred. It is 'know how' that evolves ... not gold or money ... 'know how' defines what counts as a useful resource.
Yes energy flows are needed to convert materials & sustain the process but without 'know how' -
oil is just a dirty pollutant in the desert sand and
pills that cure cancer are just bits of chemical compounds ... think about it?
Furthermore although the ghost of 'rational calculating economic man' still stalks the corridors of power, no one is 'in charge' of wealth creation and economic growth. read a little snippet about James Watt and his steam engine and get the idea ... ?
Human behaviour involves individual decision making and customer & investor choices. A system best described by Herbert Simon's satisficing. In their ignorance folk survive only if they adopt behavioural rules of thumb about cooperating and responding to threats which enable the discovery of synergies and the accumulation of benefits in institutions.
And order emerges from these activities because markets co-ordinate activities 'as if' a control loop, not because the boss issues instructions ...
NB the words 'as if'
... Adam Smith excluded the words 'as if' and his 'led by an invisible hand' was misunderstood ...
... Richard Dawkins included the words 'as if' and his 'Selfish Gene' was misunderstood ....
The bottom line ... if evolutionary economics is all about adaptive efficiency ... there are four important implications for behaviour -
Beware of Soothsayers - there is no evidence that the 'deliberate rational purposeful intentional planning' of economic agents is anything more than a Darwinian generate & test process. Long term co-ordination of economic activity cannot be achieved by Bishops, Princes, Generals, bureaucratic and other intelligent designers who 'pull levers and press buttons' in a vain attempt at command & control of the future.
Moral Logic - 'Universal Darwinism' seems
'as if' it involves an optimistic moral and economic efficiency logic, suggesting
cooperative behaviour will tend to evolve as deep down in the skull moral
These moral sentiments are -
biological cognitive & emotional emergent phenomena
universal throughout the globe & not confined to self conscious folk but also apparent in infants and animals
synergies evolve, they are a better way to survive. Sure it is a hit and miss affair
and 'know how' only increases slowly in population frequency before eventually
becoming established in institutions of economic behaviour. But over time,
survival 'know how' will tend to move populations from less efficient zero
sum conflict behaviours - 'red in tooth and claw'/anarchic/'laissez faire'
- to the
highly organised positive sum behaviours associated with the lawful,
individual freedoms which we see slowly emerging in democracies and the
global market economy? The market was accountable human beings facing
the consequences of their deals. Clearly this is not a result of any overarching
purposeful design, but merely the failure of alternatives!
The universal Darwinism of evolutionary economics does not attempt to explain everyday human life in entirely biological terms, everyday human life is a complex whole shebang & caboodle ... what is passed on to the next generation is an overall package, warts an' all ... a whole shebang & caboodle where separate subsystems are impossible to isolate for tidy analysis ...
The science underpinning cooperation and freedom & democracy as a universal expression of biological cognitive & emotional phenomena has been recently summarised by the brights, and includes 70 substantiating research studies ...
& Predators also evolve - defence & immune systems
must always co-evolve, otherwise there could
be no innovative hosts and no accumulated stocks ... and no such thing
as investment nor compound interest ... and Thomas Jefferson was also
well aware that any government could easily become parasitic & predatory
and checks & balances were always required ...
Jefferson et al set up a robust constitution which failed to stop a civil war ... was there a Federal power grab over issues like abolition which could have been settled in the courts?
The 10th Ammendment, Caveat 30 of the UDHR, EU Subsidiarty ... were all examples of constitutional principles of checks & balances which failed to stop centralising power grabs?
Behavioural Strategy - all this suggests that the best economic strategy is to adopt simple rules of thumb which unleash & speed up evolution. This is best done by encouraging the freedom to search for synergies by generating & testing rival wealth creating ideas widely amongst the population and rewarding the discovery & accumulation of new tricks with positive feedback loops.
To protect specialised minorities & secure economies of scale social animals voted with their feet & joined clubs of their choice.
All folk clubs have rules of behaviour involving biological systems -
universal moral sentiments which nurtured cooperation and
tit for tat immune systems rewarded cooperation & coped with parasites & predators.
Why was this impracticable?
There is no secret ... this behavioural pattern lies deep in all successful cultural institutions which constantly have to confront soothsayers who fraudulently claim to know the unknowable and parasites & predators who steal stocks ... complex adaptive systems involve inheritance with modification & differential survival ... and nobody knows in advance which innovations will 'work' and generate the synergies of specialisation & scale ... folk simply have to discard alternatives that fail ...
Students of the evolutionary process are challenged to test for themselves its explanatory power through debate and discussion of four examples of significant economic issues from recent history -
why did the scientific revolution take place in Western European when it did and where it did, around 1500 - 1800 in parts of Western Europe? An introduction and some essay notes are here
why did democracy spread so rapidly from only one third of global Nation States in 1975 to more than two thirds in 1995 and still growing? An introduction and some essay notes are here
why did Eastern European economic planning collapse with the Berlin wall in 1989? An introduction and some essay notes are here
why did the reintroduction of competitive markets in the 1980’s reflect an economic theory and practical policy consensus? An introduction and some essay notes are here
Why? Why? Why? all this complexity & ignorance hurts the brain, so here's some more of Darwin's grist for the debate -
evolutionary economic principles act 'as if' to drive evolution by discovering & accumulating more survival value for the costs incurred than competing alternatives ...
some fun with evolutionary economics which may help 'the dismal science' to recover some of its poise ...
quotes from some of the contributors to evolutionary economics ... a memorable collection of succinct encapsulations of the key ideas ...
criticism of Evolutionary Economics comes from all quarters - economists, scientists, political analysts and religious believers ...
g - 'Darwinism in Economics: from Analogy to Ontology' 2002 ... a summary note on Evolutionary Economics, far more concise and erudite than I ...
bibliography - here are a few sources of inspiration from the great & the good ...
nick gogerty is a cultural anthropologist and business man, in his recent book 'The Nature of Value' he outlines insightful, topical and highly relevant ideas about the economy as a Complex Adaptive System ... the implications may be disturbing to many but they will certainly fire motivations and renew enthusiasms of evolutionary economists ... here is my draft review
mike king is a science graduate and software engineer with a post graduate qualification in mysticism. Physics is an excellent foundation for all understanding, but at the moment empirical science is only the start point for the understanding of complex human behaviour. The mathematics of neoclassical equilibrium economics has often proved misleading so Mike's studies in mysticism may be an appropriate way to wrestle with animal spirits and the imponderables of economics. Especially when 'mysticism' is defined by Wikipedia as 'aspects of reality, beyond normal human perception' ... following the 2008 crisis, economics was confirmed to be 'beyond normal human perception'! Mike's draft paper takes a trip through history and asks the question - do the commercial banks create money out of nothing? ... here is my review
hirak bhattacharya born in 1953, a postgraduate engineer from the Indian Institute of Technology, Kharagpur who has served in the public and private sector in India for about 25 years and is currently working as a freelance management consultant. His book 'Evolutionary Economics' has just been published ... here is my review - it is a fascinating challenge to conventional wisdom, all students should read it ... as Hirak suggests ‘it is intended not to educate but animate’ ... what do you think?
chris muzavazi was born in Zimbabwe and studied at Oklahoma City University, Lancaster University, the University of Liverpool and the London School of Economics. His paper explores the feasibility of applying theories of complexity to the study of International Development and is awaiting publication ... here is my review ... the conclusions are shattering - it is physically impossible to manage & control 'complex adaptive systems' by purposeful design. The process of International Development involves technological & organisational innovation, a bottom up process of emergence rather than a top down imposition of dogma' ... what do you think?
Don't forget all this material intentionally challenges some orthodox economic theory to provoke thinking about choices. I'm happy to see any comments, corrections and critiques ... here