February 28, 2024

Economic View: Darwin, the Market Whiz

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

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

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

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

Many 19th-century social Darwinists mistook Darwin’s message to be that whatever emerges from the struggle to survive is morally praiseworthy. But Darwin believed no such thing. He understood that competition often favored traits that brought misery to all, and he knew animals like elk could do nothing about it. But human beings, who face similar conflicts, have better options.

Darwin’s insight can help us resolve a host of seemingly intractable economic problems in the United States, and in nations that have followed our lead. Applied properly, it would lead to simple steps that could liberate trillions of dollars in resources each year — enough to end perennial battles over budget deficits, restore our crumbling infrastructure and pay for the investments needed for a sustainable future. No painful sacrifices would be required. No cherished freedoms would be threatened. Just a few changes in the tax code would suffice.

These bold claims evoke an alchemist’s promise to transform lead into gold. But they rest on sound logic and compelling evidence.

POLITICAL gridlock in Washington has many causes. A seldom-discussed one is that the current rhetoric often rests on basic misunderstandings of how markets work.

On one side, advocates of minimal government invoke Smith’s invisible hand to argue that we could make the economy more efficient by pushing government aside and letting markets work their magic. Liberals counter that markets aren’t truly competitive. We need extensive government regulation, they say, because powerful elites would otherwise exploit workers and consumers.

Close reading of Smith’s work shows that his position was very similar to the modern liberal’s. He thought it remarkable that self-interest often promoted the common good, but he never claimed it always did. Like modern liberals, he saw market failure as rooted in insufficient competition. In “The Wealth of Nations,” he wrote, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Today, though, markets are far more competitive than ever, just as conservatives maintain, but they’re also hugely more wasteful. The apparent paradox is resolved once we recognize that market failure stems from the very logic of competition itself. As Darwin knew, when individual and group interests diverge, competition not only fails to promote the common good, it also actively undermines it.

The modern marketplace is rife with individual-versus-group conflicts like the one that spawned outsized antlers in bull elk. If you’re one of several qualified applicants seeking an investment banking job, for example, it’s in your interest to look good during your interview. But looking good is a relative concept. If other applicants wear $600 suits, you’ll make a more favorable impression if you wear one costing $1,200.

Robert H. Frank is an economics professor at the Johnson Graduate School of Management at Cornell University. This essay is adapted from his new book, “The Darwin Economy: Liberty, Competition and the Common Good.” (Princeton University Press).

Article source: http://feeds.nytimes.com/click.phdo?i=85bd5b319e949decb91cc657e7aee526

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