Darwinian Economics ... ? Behavioural Economics ... ? Institutional 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 encourage Eastern European students of market economics to think about economics as the science of choices and the co-operative institutions which have evolved to help.
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 Bishops, Princes, Generals or bureaucrats ... or just ordinary folk?
or could it all be explained by the process of evolution; natural selection?
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 driven by selfish greed. The 'designers' used human intention to explain economic activity ... oblivious to their own ignorance and the autonomous mindset of others.
The last time we looked, happenings were a tad more complicated than that.
Darwin's process was unequivocal -
Folk have intentions but it is their interactions with all other happenings that determine outcomes.
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 ... rather billions of ordinary folk have some wit & nous and simply discard alternatives that don't work. Everything else follows. Probe into any of the alternatives to natural selection and reasonable logic simply falls apart ... we are ignorant of what it is we don't know.
Marxist top down thinking has always been discredited by economic realities? An almost endless list and most recently Deng Xiaoping's reforms of 1978 and the fall of the Berlin wall in 1989?
Meanwhile, relentlessly, for 150 years Darwin's 'strange inversion of reason' explained more & more ... every day the evidence mounts. Nevertheless Darwinism has always proved very difficult for folk to grasp ... stubbornly ... the deliberate, rational, purposeful, intentional, planning by Bishops, Princes, Generals & Bureaucrats has remained the plausible top down viewpoint in the minds of most folk. But ... perhaps folk simply stop repeating behaviour that doesn't work and ... perhaps they learn?
When the penny drops ... the implications are shattering ... Richard Dawkins described the learning problem as akin to the flip flopping Necker Cube ... and we all know about our flip flopping emotions ... Excitement or Fear ... is our beer glass is half full of half empty?
In this way economic science is about human behaviour embedded in institutional custom & practice and it is all relentlessly Darwinian ... in this way Evolutionary Economics is an OK description of the science of choices.
The genes themselves do cost/benefit analysis and take economic decisions ... otherwise they would not survive ... would they? ... think about it?
In the following pages four examples, just examples, of economic breakthroughs are explored with the help of evolutionary thinking; the gist of the exploration is four Why? questions ... or should they be How? questions?
Were Why? questions about purpose, reasons, emotions & beliefs ... and intentions?
Were How? questions about methodology, learning & science ... and evidence?
... all about getting to the What? the empirical results ... and outcomes?
NB different people, at different times, in different places suggest different answers to these questions ... so the follow up questions must be - 'What do you mean?' and 'How do you know?' - all students will follow their guts, but if they are scholars, they will avoid the myths, magic & mirrors of supernatural explanations and search for evidence & do their own experiments and share results with their mates.
Economics is Evolutionary Economics there is no evidence of any alternative process going on. Economic activity is a process of natural selection, progressing one funeral at a time, it is not intentional intelligent design but rather the weeding out of failures.
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 traditionally explained the explosion using Newton's maths with a focus on market equilibrium and 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 involving the generating & testing of 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.
Evolutionary Economics explains how trade shaped the world inspired by Synergies of Specialisation & Scale as billions of folk did billions of deals ... everywhere.
Don't get it wrong it was not luck - it was all about synergies and cooperation ... and synergies required differences ... different opportunities for deals & participation ... liberté not égalité
But don't get it doubly wrong ... deals & liberté were not inevitably successful - it was all about local experimental improvements which survived better than competing alternatives ... we fail our way to success via experiments ... no one said it was easy!
Watch out ... beware, as soon as there were stocks there are inevitable parasites & predators ...
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 corrupt 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 centralized 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 mythical 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. Confirmed in spades by Charles Darwin in 1859.
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, we think we can see him smiling at this piece of work from The Brights ... and, for sure, Charlie Darwin would also have been gruntled ... nay ecstatic.
The Universal Declaration of Human Rights is a good summary of the evolving economic 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 delivers synergies ... cooperation is profitable for all.
Human rights are a matter for the natural law of the land, they could not be a matter for State legislation ... for every right there must be an obligation -
'Power and authority are deliberately divided. If I have a right to a job, education, health care or a house, then I must be able to specify the person or persons who owes me any or all of these things', Epstein.
UDHR with the caveat leads inexorably to our mantra - Vote with Your Feet & Join Clubs of Your Choice
Don't get it wrong it is not about Bishops, Princes, Generals nor bureaucrats - more often than not, 'they're up to no good' - the UDHR emerged from aeons of evolution, it was not the whims of elites and not written ex nihilo in 1948. It is all about synergies of specialisation & economies of scale - no one said it was easy!
But don't get it doubly wrong ... Article 30 caveat guards against the authoritarian 'top down' interpretation and the tyranny & oppression of majorities.
Liberal Democracy is not the best economic system, just better than the alternatives which have been tried from time to time ... we wrestle with very slippery concepts ...
Watch out ... beware ... Democracy is not about 51% screwing 49% ...
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 ...
Amazingly in an uncanny anticipation of Charles Darwin, Adam the Smith and the Scottish Enlightenment in TWO books - 'Theory of Moral Sentiments' (trust & cooperation) and 'Wealth of Nations' (division of labour and 'pin factories') - confirmed his unassailable position as the father of Evolutionary Economics.
Don't get it wrong it is not about regulation & price fixing - it is all about market exchange and minimising the costs of gluts & queues.
But don't get it doubly wrong ... the 'fatal conceit' is to plan your way out of complexity, change, conflict & scarcity.Watch out ... beware ... we are ignorant of what it is we do not know ...
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 but his 'Selfish Gene' was also misunderstood!
Don't get it wrong it is not intelligent design - it is all about the growth of 'know how' 3% pa compound.
But don't get it doubly wrong ... 'know how' is tacit, diverse, dispersed & incomplete, it is discovered & accumulated throughout the population.
Watch out ... beware ... there is no alternative to hard work, honesty & thrift ...
The bottom line ... supporting evidence mounts ... pressure on myths & magic builds ... how to be crisp & clear when confronting complexity, change, conflict & scarcity?
Economic Value is 'know how'. It is 'know how' that is evolving and Evolutionary Economics is all about adaptive efficiency and the 'supply chain' of successful ideas which compounds the growth of the knowledge base ... a database which is dispersed, incomplete, tacit and ? which resides in cultural institutions.
There are four shattering implications for the behaviour of folk -
Worms in the Head, Moral Sentiments Evolve
'Universal Darwinism' involves an optimistic moral and economic
logic. It seems 'as if' cooperative
synergies evolve, they are a good way to survive. Suggesting deep down
in the skull moral sentiments tend to emerge ... a conscience, which
cooperative synergistic economic behaviour.
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
Sure it is a hit and miss affair and such sentiments only increase slowly in population frequency before becoming established in institutions of economic behaviour ... and eventually become instinctive and hard wired? In this way 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? Markets are accountable human beings facing the consequences of their deals. Markets are not a result of any overarching purposeful design, but merely the failure of price fixing alternatives.
The universal Darwinism of evolutionary economics does not attempt to explain everyday human life in entirely biological terms, everyday human cultural life is a complex whole ... what is passed on to the next generation is an overall package, warts an' all ... a whole shebang & caboodle of genes and memes where separate subsystems are impossible to isolate for tidy analysis.
Cooperation and Liberal Democracy are universal expressions of biological, cognitive, emotional & cultural emergent phenomena?
Caveat Emptor & Due Diligence, Parasites & Predators Evolve
As soon as there are stocks there are parasites & predators. 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.
Thomas Jefferson was also
well aware that any 'authority' could easily become parasitic & predatory
and checks & balances and separations of power were always required.
Jefferson et al set up a robust constitution which failed to stop a civil war and had difficulties with the politicisation of justice ... was there a Federal power grab over issues like abolition which should have been settled in the courts?
Caveat 30 of the UDHR, 10th Amendment, EU Subsidiarity ... all examples of constitutional principles of checks & balances ... but did they fail to stop centralising power grabs?
Meanwhile keep your options open and follow your 'gut' which embodies aeons of accumulated wisdom from the past ... and trust your trusted peers.
Don't Sprinkle the Desert with a Teaspoon, Know How Evolves
Beware of the 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, bureaucrats and other intelligent designers who 'pull levers and press buttons' in a vain attempt at command & control of the future. So never trust the 'authorities'; the Politicos, the BBC, the Guardian & the Sun all have different agendas which take a guess at different futures. 'Google it' and discover diversity, a blitz of advice, and watch, over time, how the errors slowly drop off hit list. 'Know How' is available to everyone with a tuned brain.
Eternal vigilance as Caveat Emptor & Due Diligence are prerequisites for the hard work, honesty & thrift involved in cooperative behaviour, which is the only way to discover & accumulate an ever expanding of fountain of 'survival know how' ...
The arrogant Bishops, Princes, Generals & bureaucratic despots always thought otherwise, remember -
Industrial Revolutions = some thought production problems could be solved
Welfare States = some thought social problems could be solved
The usual problem suspects for blame -
Monopoly Power = successful ideas from the innovation funnel become opportunities for every youngster who specialises with a tuned brain and joins the club
Globalisation = supply chains of successful ideas become opportunities for economic synergies of specialisation & scale and impossible to confine
Absent Regulation = 'it must run on our machines' becomes an opportunity for a better mouse trap
Malevolent Manipulation = 'men convinced against their will are of the same opinion still' becomes an opportunity for Empirical Science and Cultural Learning
The case for business rests on opportunities wealth creation from technological & organisational 'know how' ... rather than problems from taxing success & spending on failure ... 'know how' to help production, education, jobs and health.
Simple rules of thumb is the best economic strategy, behaviour which unleashes & speeds up the evolution of 'know how' as poor ideas die out. 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 vote with their feet & join clubs of their choice.
All folk clubs have rules of behaviour involving biological systems -
universal moral sentiments which nurture cooperation ... 'fairness of shares' & 'resentment of cheats' and
tit for tat immune systems which reward cooperation & cope with parasites & predators.
Herbert Simon described 'Satisficing' as the evolved way of human behaviour? It is the way we can be us without stopping you from being you ...
Why is this impracticable?
There is no secret ... this behavioural pattern lies deep in all successful cultural institutions which constantly have to confront the soothsayers who fraudulently claim to know the unknowable and the parasites & predators who steal stocks ... complex adaptive systems evolve ... inheritance with modification & differential survival ... and nobody knows in advance which innovations will 'work' and generate the synergies of specialisation & scale ... folk simply discard alternatives that fail ... get on with it ... but beware of the arrogance of easy answers ... there is no alternative to hard work, honesty & thrift.
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 liberal 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 ongoing 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 ...
bibliography - here are a few sources of inspiration from the great & the good ...
Geoffrey Hodgson - 'Darwinism in Economics: from Analogy to Ontology' 2002 ... a summary note on Evolutionary Economics, far more concise and erudite than we ...
Four reviews of books authored by some friends -
Nick Gogerty is a cultural anthropologist and business man, in his book 'The Nature of Value' he outlines insightful, topical and highly relevant ideas about economies as Complex Adaptive Systems ... the implications may be disturbing to many but they will certainly fire motivations and renew enthusiasms of evolutionary economists ... here is our 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. 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? ... here is our 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, and 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 paper takes a trip through history and asks the question - can the commercial banks create money out of nothing? ... we only agree on one thing; 'fake money' is everywhere ... real money cannot be created out of nothing? ... here is our review
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. 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? ... here is our review
Don't forget all this material intentionally challenges some orthodox economic theory to provoke thinking about choices. We're happy to see any comments, corrections and critiques ... here