[p2p-research] Economic View - The Invisible Hand, Trumped by Darwin? - NYTimes.com

[Paul D. Fernhout]

http://www.nytimes.com/2009/07/12/business/economy/12view.html?_r=1&em
"""
   If asked to identify the intellectual founder of their discipline, most 
economists today would probably cite Adam Smith. But that will change. 
Economists’ forecasts generally aren’t worth much, but I’ll offer one that 
even my youngest colleagues won’t survive to refute: If we posed the same 
question 100 years from now, most economists would instead cite Charles 
Darwin. ...
   In Darwin’s framework, then, Adam Smith’s invisible hand survives as an 
interesting special case. Competition, to be sure, sometimes guides 
individual behavior in ways that benefit society as a whole. But not always.
   Individual and group interests are almost always in conflict when rewards 
to individuals depend on relative performance, as in the antlers arms race. 
In the marketplace, such reward structures are the rule, not the exception. 
The income of investment managers, for example, depends mainly on the amount 
of money they manage, which in turn depends largely on their funds’ relative 
performance.
   Relative performance affects many other rewards in contemporary life. For 
example, it determines which parents can send their children to good public 
schools. Because such schools are typically in more expensive neighborhoods, 
parents who want to send their children to them must outbid others for 
houses in those neighborhoods. [Or families can step out of that "two-income 
trap" bidding war and homeschool elsewhere. :-)]
   In cases like these, relative incentive structures undermine the 
invisible hand. To make their funds more attractive to investors, money 
managers create complex securities that impose serious, if often 
well-camouflaged, risks on society. But when all managers take such steps, 
they are mutually offsetting. No one benefits, yet the risk of financial 
crises rises sharply.
   Similarly, to earn extra money for houses in better school districts, 
parents often work longer hours or accept jobs entailing greater safety 
risks. Such steps may seem compelling to an individual family, but when all 
families take them, they serve only to bid up housing prices. As before, 
only half of all children will attend top-half schools.
   It’s the same with athletes who take anabolic steroids. Individual 
athletes who take them may perform better in absolute terms. But these drugs 
also entail serious long-term health risks, and when everyone takes them, no 
one gains an edge.
   If male elk could vote to scale back their antlers by half, they would 
have compelling reasons for doing so, because only relative antler size 
matters. Of course, they have no means to enact such regulations.
   But humans can and do. By calling our attention to the conflict between 
individual and group interest, Darwin has identified the rationale for much 
of the regulation we observe in modern societies — including steroid bans in 
sports, safety and hours regulation in the workplace, product safety 
standards and the myriad restrictions typically imposed on the financial sector.
   Ideas have consequences. The uncritical celebration of the invisible hand 
by Smith’s disciples has undermined regulatory efforts to reconcile 
conflicts between individual and collective interests in recent decades, 
causing considerable harm to us all. If, as Darwin suggested, many important 
aspects of life are graded on the curve, his insights may help us avoid 
stumbling down that grim path once again.
"""

While this is progress in economic thinking, as my wife points out (we both 
have ecology and evolution graduate training), there are many aspects to 
modern evolutionary thinking beyond natural selection of individuals and 
survival of the fittest (varying units of selection across genes, cells, 
organisms, groups, and species, the importance of random drift, the role 
co-evolution, cooperation, and symbiosis plays in evolution, and so on).
   http://en.wikipedia.org/wiki/Evolution#Mechanisms

So, while this is a step forward in economic thinking, it would be nice to 
see economics embrace all of ecology and evolution, not a simplified cartoon 
version.

Also, it would be a fair criticism of regulation, like Richard Wolff suggests:
   http://www.capitalismhitsthefan.com/
that the regulation process is often taken over by the one being regulated, 
who often has the money to buy favorable legislation. So, regulation is not 
a panacea for deep structural social problems relating to not accounting for 
external costs. Openness in designing and decision making may still be 
critical issues.

--Paul Fernhout
http://www.pdfernhout.net/