Why are the economic drivers of evolution often counter intuitive, destroying many 'extraordinary popular delusions' and confirming 'the madness of crowds' ?

No.1. Complexity and Charles Darwin's attack on intelligent design ...

- bottom up evolution builds all the complexity we see in the universe, it's 'the only game in town'!

'Who is in control of the wealth creation process'?

Rational calculating economic man of neo-classical economics doesn't exist!

But isn't it blindingly obvious that the ingenuity of the human brain is continually creating wealth and is capable of designing the most complex of machines like the Boeing 747?

Yes ... but ... intelligent design suggests –

* evidence is evaluated, weighed and balanced

* future consequences are thought through

* appropriate decisions are taken

* necessary actions to deliver the desired result are implemented

Progress seems to result from a plausible process of logical cause and effect, an imagined outcome is implemented by design.

But if this is so the economic plight of Burundi becomes a stupendous puzzle, why can't they design economic efficiency? 

Perhaps solutions emerge. Perhaps there is simply no knowledge available to enable intelligent design to cope with an environment rampant with - 

* complexity

* scarcity

* change

* conflict?

The alternative of universal Darwinism suggests that ideas evolve just like everything else, and ‘intelligent' design is just an experiment in the imagination and only a part of a dynamic process –

* evidence is incomplete, dispersed, diverse and complex

* future consequences and responses of others are unpredictable and unknowable

* decisions are experiments in the imagination and alternatives will be better

* successful outcomes differentially survive

Survival progress results from Darwin's counter-intuitive process of natural selection, a diversity of options are generated and outcomes tested for benefits in the imagination & in reality -

* copy = heredity & replication

* vary = random diversity

* select = differential survival & changing population dynamics

Outcomes are unknowable in advance and complexity makes interpretation difficult even with hindsight. Although intelligent design is a myth the success of the rich economies is not random luck. Statistical uniformities and patterns emerge from diversity and choice.

The key to the 'control' of complex economic systems is the failure of all the alternatives.

The supporting evidence for evolution is inexorably mounting through empirical scientific methodology not a priori hysteria –

* observation

* mathematical theory

* testable hypotheses

* experimental validation 

* peer review

A definition of economic efficiency is adaptive efficiency - discovering and accumulating more survival value for the energy costs incurred than competing alternatives.

The drivers of economic efficiency which economists have identified and which evolution will tend to exploit are all underpinned by synergies from awesomely complex social interactions -

* specialisation

* scale

* science

* imitation

* innovation

* investment

Economic behaviour emerges as 'rules of thumb' acting 'as if' speeding up evolution with the generation of ‘know how’ in the imagination and then testing promising imaginative ideas in reality.

Herbert Simon’s ‘satisficing’ –

* build on inherited success

* choose freely and test options available 

* experiment to generate diversity

* cooperate to discover new synergies

* retaliate to protect value from parasites & predators

* learn from outcomes of differential survival  

Order emerges from this behaviour as markets coordinate activities 'as if' a control loop -

* inherited price information from millions of trades in technological 'know how' (the sensors) lead to

* diversity as innovative alternatives are generated by competing entrepreneurs (the set points) for

* selection and testing by customers who sift value (the algorithms) resulting in 

* some investments (the actuators) differentially surviving and changing the population frequency of successful 'know how' 

In this way difficult cultural skills are discovered & accumulated. The long hard slog from the foothills of Richard Dawkins' 'Mount Improbable' may explain why so few economies have reached a rising pinnacle of complexity where we find complex social institutions like Freedom & Democracy and Louis Armstrong’s ‘West End Blues’!

No.2. Natural Selection and Adam Smith's invisible hand & increasing returns

– unintended consequences of free market activity!

'Why is the customer always right'?

The supply & demand equilibrium is the most basic of economic principles but it isn't a stable equilibrium!

Leon Walrus used mathematical models to demonstrate how markets balance the prices and quantities of desired goods and services sold at minimum cost -

* demand curves sloping down to the right reflect the decreasing marginal utility of consuming increasing quantities and

* supply curves sloping up to the right reflect the increasing opportunity costs of producing increasing quantities

* producing a market clearing price where gluts and surpluses from high prices and queues and shortages from low prices disappear 'as if' by magic.

But his maths required unrealistic assumptions about rational calculation, static equilibrium, perfect information and perfect competition and a strange method of price fixing he called 'tatonnement'?

However Adam Smith had earlier identified the necessary behavioural elements and they were all present in human nature -

* innate moral sense encouraging the development of the necessary trust, 'propensity to truck, barter and exchange' - Theory of Moral Sentiments 1759.

* striving to discover & accumulate 'survival tricks', 'it's not from the benevolence of the butcher that we expect our dinner but from his regard to his own interest' - Wealth of Nations 1776.

Richard Dawkins suggested in the 'Selfish Gene' that genes act 'as if' they do cost/benefit analysis. It is 'as if' marginal utility and opportunity costs were calculated ... but it is not a rational process rather a statistical tendency resulting from adaptation - 'he intends only his own gain, but he is led by an invisible hand to promote an end which was no part of his intention'.

'Equilibrium' prices are dynamic and are tendencies which emerge from economic activity as inefficient prices are continually adjusted by consumers and suppliers who want to avoid unnecessary waste for their own survival.

There is no requirement for a supernatural invisible hand, only a process of adaptation, inefficient prices don't survive - just like short necked giraffes!

Normal behaviour tends to produce economic results otherwise it wouldn't have survived to become normal behaviour … think about it … ?

No.3. Democracy and Vilfredo Pareto’s optimal and Francis Fukuyama's trust 

- free to discover and accumulate but avoid harm to others!
‘Why is Democracy an idea pregnant with economic significance’?

The economics of the pecking order and the top down exercise of power is an irrelevance for modern industrialised economies!   

Economics is the science of decision making in an environment of scarcity, risk and uncertainty. Democratic decision making is self determination by 'we the people', freedom under the law.

Democracy widens and deepens participation thus increasing the chances of discovering harmless survival value. More activity in larger groups!

Some authoritarian decisions which make some people worse off will tend to be resisted by those people, destroying the benefits of co-operation.

In 1789 Jeremy Bentham’s ‘greatest happiness’ principle defined Democracy as maximising the sum total of the happiness of the all individuals who compose society.

However, self determination cannot be based on majority voting because this outlaws the aspirations of the minorities who voted the other way …

Plato’s conundrum was debated at the birth of the democratic idea - 'mob rule and emasculation of the wise …'

In 1906 Vilfredo Pareto resolved this issue of Democratic progress by defining as Pareto Efficient any decision which results in perceived betterment but does not result in anybody else being worse off, in their own estimation and after compensation where appropriate.
All Democratic institutions tend to exploit this optimal through decisions which avoid harm to others. For Nigel and Joe the Pareto efficient improvements from initial conditions X is to anywhere on the production possibilities curve from N1 to J1.

The initial conditions X grossly favour Nigel but the economic significance of the idea is that Joe’s position can be dramatically improved without harm to Nigel by pushing the ppf1 to ppf2 through the process of economic education, imitation and technological innovation.

Pareto's analysis is criticised as –

* involving unrealistic assumptions about perfect competition and clear legal property rights

* static and tending to protect the status quo and inhibit progress because most economic activity in the real world hurts somebody

* dependent on inequitable initial wealth distributions

* requiring all markets to be distortion free; ‘The Theory of 2nd Best’ suggests imposed uniform distortions maybe better than some free market distortions

However an evolutionary analysis of Pareto decision making suggests the criticisms have no foundation. Remember evolution involves –

* a scientific theory of reality and avoids all unrealistic assumptions

* a dynamic process suggesting decisions will tend statistically to be driven in a Pareto optimal direction because of synergies of co-operation and retaliation against parasites & predators

* current initial conditions which are themselves the result of evolution (both cooperative and predatory) and the only starting point for all innovative improvements

* interactions with all 'harmed' parties and ongoing progress from 'compensation contracts' tendencies to drive decisions towards economic efficiency, ‘The Theory of 2nd Best’ is not ‘Evolutionarily Stable’ it harbours inefficiencies, all distortions will tend to be eliminated as niches are filled and opportunities seized to - 

* make somebody better off without harming others

* retaliate against parasites & predators who inhibit Pareto improvements

Hence the institutions of civil society which always spontaneously emerge in free Democracies – churches, clubs, societies, associations, co-ops, partnerships and public limited companies … produce diversity and choice for Pareto optimal decisions, the successful institutions will increase in frequency and size provided they are protected from parasites & predators.

Francis Fukuyama has more recently suggested that the cultural evolution of trust has helped the cohesiveness of larger social groups.

The democratic ideal of free participation is geared by the scale economies from wider participation, the more the merrier. Over deep evolutionary time there is a clear tendency for larger and larger interactive groups exploiting increasing specialisation and scale.

Democratic ideas play an important role in intensifying economic interactions in larger groups ... genes, phenotypes, families, tribes, religions, cities, nation states, democracies, globalisation ...

No.4. Cooperation and Robert Axelrod’s & William Hamilton’s evolution of cooperation and John Maynard Smith's Evolutionarily Stable Strategies …

– it's profitable to cooperate!‘

How is the public interest served by private greed’?

Selfish maximising animals 'red in tooth and claw' is not an accurate description of social human beings!

Evolution will tend to drive decision making towards cooperation whenever 2 + 2 = 5 type synergies exist.

Cooperation will not be universal, parasites will evolve, however co-operation will tend to differentially survive and institutions exploiting these synergy advantages will tend to proliferate.

Matt Ridley – ‘Game Theory is an esoteric branch of mathematics but provides the bridge between biology and economics whenever there is an apparent conflict between self interest and the common good’.

Richard Dawkins – ‘wherever there are suckers there will be cheats but genes/memes act ‘as if’ calculating costs/benefits and all the optimistic conclusions about cooperation apply in the world of nature’.

In 1983 Robert Axelrod explored computer models of the iterated ‘Prisoner’s Dilemma’ game and formalised the risks and payoffs associated with ‘evolutionary tit for tat’ strategy and with William Hamilton published ‘The Evolution of Cooperation’. The key is that it is not a one off zero sum game!

The ‘evolutionary tit for tat’ strategy is 'moral' and grows the benefits of co-operation over time and protects them from predators –

* cooperate - discover the 2 + 2 = 5 synergies, be nice, don’t try to win at the expense of others, avoid unnecessary conflict

* defend - retaliate if attacked to protect the benefits and discourage parasites and predators

* communicate - responses must be clear, simple, timely and emphatic to avoid misunderstandings and develop trust – cooperation is the rule but there will be a proportionate defensive response to all attacks

* recruit – forgive to maximise the scale opportunity for future co-operative benefits

* learn from outcomes – cooperate with cooperators

In summary cooperation is the guiding principle for decisions but there will be a proportionate defensive response to all attacks.

There are no expensive prerequisites, the strategy is applied ‘blindly’, everybody can participate, long term co-operation becomes understandable. 

The 1994 Nobel Prize for economics went to John Nash for a concept of equilibrium where there is an optimal response to any position adopted by other people. A strategy that always works whatever other people do.

John Maynard Smith called the Nash equilibrium an ‘Evolutionarily Stable Strategy’, such strategies emerge from evolution and require no human intervention.

Downward spirals of ‘tit for tat’ are not ‘Evolutionarily Stable Strategies’ because -

* genes/memes act ‘as if’ calculating cost/benefit, the development of the Peacock’s tail and ‘arms races’ always end

* random events always offer alternative options to avoid local cul-de-sacs.

This breakthrough in understanding has important implications for evolutionary economics and illuminates all decision making.

Steve Jones – ‘people are now asking of molecular biology the questions once asked of philosophy, religion and politics’.

No.5. Tort and Douglass North's history of adaptive efficiency and Jane Jacobs' intensification of economic activity in cities …

– protection from parasites & predators must co-evolve with cooperative synergies to secure the survival benefits!

Why must profits be protected by property rights?

The rule of law is not the elitist whim of powerful Bishops, Princes, Generals nor majorities!
Robert Axelrod (1983) suggested how cooperation could evolve and develop immunity from cheats but it was Thorstein Veblen (1898) who had earlier reminded us of the age old problem of parasite & predator theft. Thorstein Veblen's ceremonial/instrumental dichotomy described how the 'instrumental' necessity for survival value creates the opportunity for theft and the 'ceremonial' 'conspicuous consumption' of the pecking order.

Evolutionary economics explores how the survival benefits of cooperation always involve a defence cost -

* a tit evolves for every tat

* the solution to Plato's democratic conundrum 'mob rule and emasculation of the wise' involves constraints on the mob

* the 'democratic trap' is avoided by institutional checks and balances which outlaw 51% majorities voting to tax 49% minorities

Evolutionary economics recognises the importance of the long evolution of Tort Law culminating in the Universal Declaration of Human Rights. 

As men become domesticated in social groups interactions intensify and systems of conflict resolution must co-evolve if economic benefits are to emerge. Evolved laws push the incentive system towards productive positive sum synergies and away from zero sum 'rent seeking'. It is the rule of law that is much more energy efficient than violence in resolving conflict.

Douglass North has emphasised the institutional innovations which enable larger and larger groups to secure the rewards for cooperation while at the same time providing 'free rider' sanctions.

The institutions of property rights, contract and low transaction costs embedded in Common Law and enlightened behaviour provided the cohesive incentives and sanctions.

North describes the economic change as 'adaptive efficiency' - a society's effectiveness in creating institutions that are productive, stable, fair, and broadly accepted and flexible enough to respond to political, economic and predator feedback.

Douglas North - 'adaptive efficiency copes with novel uncertainty in a non-ergodic world, the best recipe is the maintenance of institutions which enable trial and error experiment to occur, and an effective means of eliminating unsuccessful solutions'.

Some evidence from English history traces the evolution of Tort Law, from Magna Carta to UDHR, a long evolution of survival incentives and sanctions.

A continuous 'golden thread' enabling larger and larger groups to specialise and trade unhindered by Bishops, Princes, Generals and majorities by -

* identifying property rights

* lowering transaction costs

* and constraining parasite and predators

From the iron age farmers on the Berkshire Downs to Magna Carta & English Common Law (1215) - Parliaments & Tax (1265) - Renaissance & the Greek and Roman Humanist Legacy - Reformation & the Pope - Agricultural Revolution & Free Cities - Phillip II & the Counter Reformation (1588) - Petition of Right (1628) - Westphalia & Sovereign States (1648) - Hobbes & Leviathan - Locke & Universal Freedom - Constitutional Monarchy & Bill of Rights (1688) - Enlightenment - Scientific & Industrial Revolution - Act of Union (1707) - Reform Acts - US Declaration of Independence & US Constitution - Wilberforce - War on Nationalism (1814) - War on Demagogues (1914) - War on Fascism (1940) - Cold War on Socialism (1989) - from Empire to Commonwealth - UDHR …

Jane Jacobs has also described the process of institutional adaptation enabling the intensification of economic interactions in cities. The explosion of the industrial revolution was in the cities and such intensification of activity was inconceivable without the rule of law.

Once the rule of law is established, a process of dynamic economic change emerges spontaneously in regions - not a 'homogeneous society' but a tapestry of different individuals who group together in cooperating families, tribes, religions and states but above all in towns and cities.

Six regions are usually involved in interconnected economic activity -

* innovative heart (high density interactions & immigration) - low tax?

* resource supply (food & raw materials) - low prices?

* clearance (labour saving investment & emigration) - job mobility?

* transplants (low density mature technology & routine) - planning freedom?

* obsolete (abandoned technology & the rust belt) - no subsidies?

* subsistence (non-participants & bypassed) - skill acquisition?

The delicate dynamic is easily destroyed by 'breaking the rules' of property rights, low transaction costs and parasite/predator constraint, by misunderstanding the integrity of the whole system and separating the political from the economic.

The political evolutionary process establishes the rules of the game - the institutional 'know how'.

The economic evolutionary process delivers the wealth - the technological 'know how'.
But the process can't recognise boundaries; institutions and technology co-evolve.

No.6. TRADE and David Ricardo’s COMPARATIVE ADVANTAGE and Adam Smith's pin factory…

– economic specialisation fosters trade!

'Why pay transport costs to import lamb from New Zealand, when producers of excellent local lamb are going out of business'?

The answer is not some absolute advantage of economic efficiency!

In 1817 David Ricardo identified the principle of comparative advantage which is so very important for economists that it is well worth going through the mathematics –

Nigel, a world beater, is an excellent bricklayer and a very good typist.

In 8 hours he lays 100 bricks OR types 1000 words …

NB = I brick barters for 10 words.

Joe, an incompetent, is a terrible brick layer and he is a barely adequate typist.
In 8 hours he lays 20 bricks OR types 400 words …

NB = I brick barters for 20 words.

Nigel has an absolute advantage in both activities (his 8 hours is more productive in both activities) but a comparative advantage in bricklaying (his brick will barter 20 of Joe’s words but only 10 of his own)

Joe has a comparative advantage in typing (20 of his words will barter for 2 of Nigel’s bricks but only 1 of his own) specialisation and trade will tend to evolve (unless there is intervention) because of mutual benefits.

Nigel will tend to do more bricklaying and Joe more typing increasing total output.

With no trade both have to be self sufficient in both bricks and words …

Say in 8 hours Nigel lays 50 bricks and types 500 words.

Say in 8 hours Joe lays 10 bricks and types 200 words.

Combined output 60 bricks 700 words.

With specialisation & trade …

Say Nigel lays 60 bricks types 400 words and trades 5 to 10 bricks to Joe for the 100 words he needs (NB = I brick barters for 20 words) he has up to 5 bricks EXTRA to share with Joe.

Say Joe lays only 5 bricks but types 300 words and trades 100 words with Nigel for the 5 bricks he needs plus a share of the 5 brick SURPLUS (NB = I brick barters for 10 words).

Combined output 65 bricks 700 words = 5 EXTRA bricks.

The counterintuitive conclusions are –

* both gain from specialisation and trade even though Nigel is better at both activities.

* the principle explains trade at individual and national level, with money or barter.

* specialisation and trade will evolve because extra 'value' is created, it does not require the intervention of a government 'designer'.

* every person (and country) has a comparative advantage in something (even inadequates like Joe) and will benefit from trade.

The Open University summary – "The principles of comparative advantage and gains from trade are the most important results in the whole of economics. They apply at national, and also individual level. It maybe that a doctor is better than a farmer both at practising medicine and growing potatoes. It does not follow that the doctor should do both. If each specialises in the activity in which they have comparative advantage and engage in trade they are both better off than if each tries to be self sufficient".

The concept is counterintuitive, I quote Nobel laureate Paul Samuelson – "Thousands of important and intelligent men have never been able to grasp it or believe it even after it was explained to them'.

A mathematical model can easily be constructed to introduce money, transport costs, wage costs, market prices, exchange rates … confirming this wealth creation principle.

NB. understand - 

* real wages are determined by the value of output

* real prices are determined by supply & demand

*prices & exchange rates don’t determine trade, they result from trade, they are measurements of opportunity costs ... and if everyone specialises on what he does best and everyone is included in for economies of scale then everyone benefits … but innovators benefit most … ??

Ricardo's principle of comparative advantage was an explanatory breakthrough building on Adam Smith's earlier insight in his descriptive account of specialisation and trade in his pin factory.

Adam Smith has an ongoing influence on economics, guiding us from an innate moral sense to the increasing returns of the industrial revolution, as he and his friends in the Scottish Enlightenment explained what was happening in a complex free and individualistic English culture. 

No.7. Technology and Robert Solow’s total factor productivity & Paul Romer's Endogenous grow theory ...

- technology drives productivity and output growth!

Why does output growth from technology dwarf other factors of production?

Natural resources, hard labour and investment capital can't explain economic growth! 

In 1957 Robert Solow used 'growth accounting' mathematics to analyse historical GDP data and identified the overwhelming importance of a residual, ‘total factor productivity’, in securing growth and NOT the neo-classical endogenous variables capital (resources) and labour (effort) inputs.

Solow defined ‘total factor productivity’ as technological innovation, 'know how' or understanding and practice.

Paul Romer dramatically extended Solow's insight and integrated economic growth into evolutionary theory with his Endogenous Grow Theory' in 1990 - 
The key to growth is 'know how' not physical factors of production and 'know how' is -

* nonrival, used over and over without depletion to the extent of the market resulting in increasing returns

* lumpy because it involves fixed costs and clusters associated with specialisation and division of labour

* discovered, therefore risky and uncertain, making government design and entrepreneurial incentives a problem

* partly appropriable as intellectual property, making investment in commercial R&D rewarding

* temporary and dissipates as people learn

Goods and services are welfare spread by trade (comparative advantage) but 'know how' is spread by cultural learning

The production of 'know how' makes growth endogenous and monopolistic competition keeps growth rolling, a constant stream of innovation is necessary to secure temporary monopoly profits.

No.8. EXTERNALITIES and Ronald Coase's social costs …

– consumers must pay for global pollution.

How can payments be made without property rights?

Economic analysis of law and the problem of social costs.

Two parties are always involved in troublesome externalities - the polluters and the polluted. The polluters can stop polluting and the polluted can move elsewhere but there is a cost - who pays? - how much? Markets resolve the problem efficiently by bargaining between the antagonists, the higher cost avoider paying the lower cost avoided market determined 'compensation'. When transaction costs are low and property rights are defined contracts will be negotiated to satisfy both parties. But transaction costs are the problem not externalities. Transaction costs make some markets prohibitively expensive.

With zero transaction costs the allocation of resources remains the same whatever the legal position, however, with positive transaction costs, the law plays a crucial role in determining how resources are used.

Proposed solutions - 

* regulation = no incentive for technological innovation. Output declines. Restricts new competition. Adds administrative and compliance costs which customers and shareholders have to pay. some win some lose and regulation becomes impossible to implement in a democracy where economic growth reduced from 2.5% to 2.4% over the 21st century = total 2000 global income!

* Pigouvian Taxes = a one-size-fits-all theory does not distinguish between high and low cost avoiders. Pigouvian taxes are inefficient if they tax the highest cost avoider. Tax is used as a revenue raising device in excess of the 'unknown' social cost and output suffers.

* rights trading = define property rights then freely bargain. Social costs are paid by the lowest cost avoider. If the legal rule chosen is inefficient, parties will bargain around it. Rights will be acquired by those who value them most highly, which creates an incentive to discover and implement transaction cost minimizing governance forms. Don't build houses near polluters build other polluters thus confining cleanup costs to the periphery. Which costs less you stopping or me moving? Pareto efficient, nobody loses, but property rights are required to measure the costs.

Example - the Kyoto objectives are admirable apple pie but solutions will be technological alternatives driven by the high social costs - piecemeal, tentative and adaptive.

1. Throwing filth at other people harms them, it is an illegal nuisance.

2. The polluter must pay the cost but how much? Who is the least cost avoider? Polluters could pay the costs of 'know how' for fuel cells, flood relief and relocation?

Competitive Property rights with tradable permits - 

Process A emits 100 tons of obnoxion p.a. costs £100 per ton to reduce
(this process could be new technology in industrialised countries).

Process B emits 100 tons of obnoxion p.a. costs £1 per ton to reduce
(this process could be old technology in developing countries).

Competitive Property rights with tradable permits, reduction in obnoxion costs £2 per ton + transaction costs = £99 cheaper than regulation!!

No.9. MONEY and Friedrich Hayek’s denationalisation of money …

- a system of measuring and lubricating economic activity and profitable investment.

‘Who controls the money supply and interest rates'?

Money is not necessary for economic activity but it is a very useful tool having intrinsic value as a - 

* unit of measurement - money x velocity = price x output

* medium of exchange avoiding the double coincidence of wants in barter - trust and caveat emptor

* store of value over time avoiding inflation - marginal utility and opportunity cost

In the past Cowry shells, stones, gold, cigarettes, LETS (Local Exchange Trading Systems) and paper IOUs promising to pay 'the bearer' have been generally acceptable as ‘money’ but in modern economies money is overwhelmingly credit and its many innovative variants.

Banks produce money by creating credit for sale, credit has a price, the interest rate, which is determined by supply and demand -

* supply is determined by the interest rate cost necessary to induce saving after satisfying liquidity preferences. Claims on the bank for repayment of deposits in the shorter term.

* demand is determined by the opportunities for profitable investment. Promises to the bank to repay in the longer term.

Profitable economic activity is funded by banks and a Banking Institution Balance Sheet will reveal - 

A liability of a $10,000 deposit becomes an asset of $10,000 cash and (after maintaining a prudent loan/cash ratio of 10/1) is put to work to fund other assets - a series of loans - these loans will result in further deposits and interest payments which will be available to finance further loans ... etc ...

$10,000 of initial savings generate $90,000 of growth. The growth of the system is dependent on a series of profitable economic activities. Without profit, the interest could not be paid and the loans could not be repaid. Banks make their own profit by maintaining a loan portfolio whilst minimising bad debts.

Not only is this an 'Evolutionarily Stable Strategy' for funding those with the ideas by those with the money. But we can make growth endogenous to the system and see how the 2 + 2 = 5 profitable investments produce a surplus to pay interest to banks and depositors.

Economic growth will feed back and real economic output of goods and services will determine the ‘value’ of the $10,000 initial ‘money’ deposit.

The system has its own in built control systems. The money supply is determined endogenously by interest rates as a function of national income. Government interference in ‘interest rate control’ is an irrelevant and inefficient distraction -

'in a market economy where money includes deposits with private sector banks, monetary policy can never be simply a question of the 'authorities' deciding on the quantity of money it will 'allow' to circulate in the economy'. Economic Briefing No.5 August 1993

NB as a lender of last resort the Bank of England can influence interest rates ... but then so too can India China and America ... ...

Usury is not immoral after all!

No.10. THE JOINT STOCK COMPANY and William Baumol's FREE-market INNOVATION MACHINE …

– diversity and choice, progress from differential survival!

‘Why is the joint stock company the growth miracle of capitalism'?

It is usual to be in awe of the great individual achievements of Charles Darwin and Isaac Newton but the overwhelming success of wealth creating cooperative institutions is less easily grasped and often denied.    

Definition - the jsc is an economic institution, a complex system built by evolutionary processes 'as if' to cope with the age old problems of scarcity, conflict, complexity & change. 

Evolutionary Success - a neat survival trick evolved, an incentive system for rewarding individuals who satisfy customers. A self-policing system based on private property where competing alternatives to vie for customer sales, encouraging the preservation and enhancement of assets and contracts for employment and supplies. Evolution inevitably produces a diversity of competing institutions, some of which differentially survive. Innovations are not 'a best way' which is known in advance, but more simply those institutions which produce more survival value for the cost incurred than competing alternatives survive -

* wealth creation - understand the jsc as a wealth creating institution it has proved remarkably successful. The jsc has cemented the survival of western civilisation, the international jsc is the driving force of the global economy, this success is exposing the inability of national governments to control their own economies

 * robustness - immune from internal and external treachery and responsive, able to learn from past outcomes and exploit future innovations.  

NB The jsc suffers from inefficiencies -

* hierarchical organisations like the jsc are less efficient than perfectly competitive markets - new institutional economists describe how the jsc exists only because market transaction costs can be prohibitive 

* managers cannot always be relied upon to act in the interests of the shareholders - the moral hazard and the principal / agent problem.

The evidence of history - a mix of elements contribute to the success and robustness of the jsc.

The elements did not evolve sequentially but gelled into a coherent whole displaying all the characteristics of a complex system.

The emergence of these elements was not an accident but the result of a selection process from the trial and errors of experiment. 

The jsc emerged in a modern form in England - some significant landmarks in the evolution of the jsc -

* Origins - economic activity grows and prospers when folks co-operate to benefit from synergies associated with scale, specialisation, science, imitation, investment and innovation. Groups of people associating together and sharing resources, in order to pursue a common purpose. Historically economic interactions intensified initially in towns and cities and then further intensified in institutions within the cities - 

* as money replaced payment in kind there were more opportunities to save and accumulate capital

* as trade in the cities grew there were opportunities for profit from risky trading ventures, particularly far away and overseas 

* in England in the 17th century there was an increasing opportunity for free men to choose the form of their co-operative endeavours. The jsc was the result of voluntary co-operation between merchants who copied earlier Italian practice and pooled their resources in return for a pro rata share in any profits. The prizes these merchant sought were - property ownership - limited liability - succession and continuity - legal remedy for debts

* in mercantilist times a tempting source of state revenue was the granting of licences to trade as joint stock companies. State sponsorship was common when ventures were unsupportable by taxation - East India Company, Hudson Bay Company, Virginia Company - many of the first companies were privileged state monopolies 

* 1624 Repeal of ‘The 1571 Act of Usury’ - confirming a change of moral attitude to investment returns, rewarding risk taking became legitimate. Risk was uncomfortable and discouraged investment - ‘a glimpse of risk made the crowd shrink’ - 

* risk associated with saving, why delaying consumption today when tomorrow is unknowable? 

* risk associated with lending your savings to others, do you trust him?

* communities which evolved the new morality started creating more wealth as more people took more risks. Those with the money have no ideas, those with the ideas have no money

* those seeking investment opportunities realised that trust was essential not only because of some inner driven ethic but because honesty was seen to be profitable

* 1773 Securities Exchange - traders started to deal in utility and industrial stocks as future income streams were bought and sold - 

* risk was reduced as information became more transparent, investment choice started to become an important indication of value

* value was enhanced as resources were allocated to the more profitable ventures, private commercial decentralised decisions start to provide an alternative to central taxation

* 1825 Repeal of ‘The 1720 Bubble Act’ - for 100 years the jsc was indictable as a common nuisance and, although fraud remained illegal, at a stroke regulation could no longer inhibit legitimate creativity and innovation -

* investment scale increased as savings from larger numbers of smaller folk were mobilised

* investment flexibility increased as investments could be freely transferred to others

* 1834 Legal Entity - opportunities for legal remedies -

* companies could sue for the recovery of debts through the courts

* companies could be sued for the recovery of debts through the courts, honesty was the best policy

* 1844 Board of Trade Registration - a specific act of Parliament was no longer necessary to form a company - 

* companies could be readily formed by anyone, for any legitimate activity quickly and easily with minimal cost and red tape

* profitable trading no longer depended on political influence, vested interests and monopoly power

* 1856 Limited liability - savings capital could be mobilised to exploit profitable opportunities with a minimised personal risk, innovation took off! - 

* investors liability for debts was limited to the amount of the investment

* rewards for choosing profitable investments correctly were going directly to substantial numbers of people who could not prevent others from proving them wrong! Investors had only themselves to blame if they burnt their fingers. A restatement of an old principle of Caveat Emptor? 

* 1890 Stock markets - business finance became readily available as small packets of risk were freely valued and exchanged - 

* information flows around the world as folk were able to quickly and flexibly move funds into wealth creating activities 

* mass participation becomes possible.

* 1989 Fall of the Berlin Wall and abandonment of Clause 4 - the success of the jsc is more generally accepted - 

* privatisation is embraced

* massive populations in China and India join the globalisation gravy train.

The line of causation runs from economics (survival necessity) to an institutional and legal response. There was a competitive economic necessity for investors to share the risks associated with business innovation in co-operative ventures. Specifically the trading rivalry between England and the Netherlands.

The Wealth Machine - here is a 'PowerPoint' presentation describing how the machine works and why it works ... this material was put together for a business appreciation course for first line managers ...

... more gleanings and questions from University tutorials to come ...