Evolution of Economy

Banksy's caveman. Image by Lord Jim via Flickr || Creative Commons

The first task an economist has to master is to explain to people that there is such a thing as an economic problem. That is because people are more concerned with everyday emotionalism creeping into their lives by means of having to deal with another type of a problem that we could call an ‘engineering’ one. This is a problem that runs along the lines of how to install the new washing machine and do the servicing. Unarguably, it’s a problem worlds away from the economic one which is predicated on an economy functioning by dint of millions of unrelated and yet inextricably intertwined individuals’ autonomous actions.

Though we can work out a perfectly plausible solution to an economic problem’s intricacies so long as all the resources have been properly allocated and available technologies fully utilized to meet consumers’ preferences – i.e. taking stock and fully capitalizing on opportunities the way neoclassical economists had propounded – this solution is merely illusory. The economists that realised this came up with arguments aimed at incontrovertibly proving the socialist rational-engineering approach to ordering a society around these problems is destined to fail. It has been nearly 100 years since the publishing of the groundbreaking 1920 paper titled The Economic Calculation in the Socialist Commonwealth and these economists have in the meantime made many a case for solving the problem with its various aspects. Gluing these seemingly incongruous pieces together, we see an emergence of a lager mosaic of a general theory – the theory of cultural evolution with respect to the coordination of production plans.

Three Common Features of Market Processes and Evolution

First among those cited by the paper mentioned above who flagged up just how cockeyed the notions of people who wanted to plan the economy were, was Ludwig von Mises. Mises alluded to how impossible it was to do these kind of calculations without private property. Absent private property, he quipped, no voluntary exchange will ensue and, consequently, there won’t be prices to determine profit or loss. No knowledge of profit and loss then precludes production plans to discern whether or not the earmarked resources are to be put to their best use or whether they should be allocated towards alternate plans. Pecuniary profit and loss were thus understood as channels through which to realise all entrepreneurial visions of ‘value creation’ and the production’s economic utility so that the undeserving views are discarded and resources are not funnelled to the wrong ideas.

We find an analogous process in the story of evolution. The common denominator is natural selection. Without selection, organisms would burgeon and sprout out exponentially – much like people’s ideas of how scarce resources should be used (which economists consider to be infinite). What selection does is that it makes the undesirable meme/gene variations ebb away. It takes resources away from those more ill-equipped to adapt and directs them towards those who are better fits for the demands of their environment. Here, the common denominator that determines the winners and losers is no longer money but fitness. Put another way, the ability to pass one’s genes/memes onto the next generation. The above market theory can thus be understood as an evolutionary process where production plans serve as genes or memes that, were it to survive in capitalism (procure resources so it could be realised), it must be profitable, i.e. it has to surpass other plans in its ‘value creation’ gauged through monetary metrics of prices.

Later on, more economists emphasized other benefits of the market mechanism or lack thereof in centrally planned economies. Friedrich von Hayek speaks of the process of discovery of new information and Israel Kirzner and Jesus Huerta de Soto of entrepreneurs responsible for its discovery. What the market mechanism brings to the table, they say, is unique new ways of innovation and creativity that, in centrally planned economies, are conspicuously absent. It’s the entrepreneurs who come up with new ideas and ways to produce and what to produce. In socialism, on the other hand, this entrepreneurial discovery is institutionally limited by the ubiquitous coercion that had long replaced decentralized freedoms of management of one’s property rights according to one’s own discretion.

Evolutionary researchers study a similar phenomenon. It is mutation. Mutation is the lynchpin of the proper functioning of evolution, as it guides new changes in organisms’ development. Without mutation, there could be no variation. Genetic mutation is the deciding moment in biological evolution that allows for innovation to emerge out of evolution. An entrepreneur therefore plays the part of a kind of mutation-maker in an economy, without which it would be impossible to generate the steady flow of new ideas and innovation in the economy.

The difference between the two is that mutations in terms of needs’ satisfaction – or entrepreneurial ideas – unlike their genetic doppelganger, don’t come about totally randomly. Some people are prone to consistently having better ideas than others. The clockwork of the market mechanism is reflective of this and reallocates scarce resources to those who have stood the test of time and passed with flying colours in terms of their allocation decision-making. Put another way, they were consistently making profit. The flip side of the coin is a socialist system that invariably rewards mutations that work well in political intrigue and power struggle.

The third common factor of the economic interpretation of the inner workings of the market and evolutionary processes is the system’s memory or inheritance. In the biological sense of the word, inheritance denotes the ability of an organism or a system to store sets of information and bequeath them to posterity over time. Absent memory, the system could not evolve. In biology, it’s the chromosomes that are the carriers of inheritable sets of skills and therefore of the system as a whole. They carry genetic information encoded into a single DNA molecule.

Chromosomes’ economic mirror-image is prices. The price structure in an economy is a collective memory of sorts. It’s a collective memory that reflects the disposition of relative values in a society and, importantly, their future development. Price structure, therefore, allows for a steady culture evolution with respect to production plans and processes. It helps recording the past and past decisions and is also instrumental in forming the future. The cultural DNA phenomenon of the price structure is further alluded to in Juraj Karpis’ book Zle peniaze (The Bad Money).

Common Origin and Mutual Inspiration

Reading Adam Smith’s economic bible, The Wealth of Nations, one can’t miss Smith’s awe and admiration for the spontaneous order of the market economy. It’s precisely these forces that help put scarce resources to their best use, making sure that everyone does that which he can do with the least opportunity cost, with the greatest comparative advantage, and that all economic activity is guided by ‘hard data’ – the availability of resources, people’s preferences and current technologies. Sure enough, it is also the same awe and admiration one finds in Charles Darwin’s On the Origin of Species where Darwin takes stock of how every organism with its purposeful characteristics perfectly adapts to its environment and the whole nature so-called ‘clicks together’. This could all be just a simple coincidence or association but the author of this paper finds it more likely that this is in fact caused by the workings of identical principles. There are even rumours that Darwin’s seminal work was inspired by Smith’s findings.

Economists arguing in favour of the market economy thus merely argue for the creation of the kind of institutional framework that would facilitate an ongoing cultural evolution with respect to the allocation of scarce resources. Bear in mind though that the market economy’s ‘social Darwinism’ is not people-oriented in that the selection does not weed out actual people. Rather, it is the ideas of how best use the limited pool of factors of production in production processes that are subject to it. A frequent critique from the left thus can’t reconcile the discrepancy between the functioning and the purpose of the economic evolution on the one hand, and its biological counterpart on the other. While an individual’s inability to reproduce gets penalized by the extinction of that individual’s genome, a loss in the economic system merely leads to the elimination of his (ineffective) ideas as to how production should be organized.

Equally important, however, is to flag up who’s sifting wheat from chaff in capitalism. It’s the consumers’ choices who by dint of their purchase decisions, or lack thereof, select whose idea (mutation) makes it through the evolutionary sieve of capitalism and whose ends up on the ash-heap of history. The managerial-engineering socialist apparatus doesn’t deal with what it sees as the fripperies of consumer preferences and thus has nothing to reflect upon. The socialist selection is literally arbitrary – based on political decision-making. This is because socialist policymakers do not have the benefit of market prices with which to convert individual production plans’ ideas into a common denominator and subsequently realise only those that are the best fits for the local environment. But socialism also negatively impinges upon the act of idea-mutation, thus impeding innovating processes within the economy. It does so by moving the locus of decision-making from specific micro focal points at a particular time and place and to various steering committees and the heads of few selected organizers who allocate resources on a macro level.

The socialist problem then lies in the attempt at central planning that bogs down the proper functioning of production’s cultural evolution, which therefore can’t adapt to consumers’ preferences, available technologies and scarce resources. It’s reminiscent of the so-called ‘telephone game’. The telephone game has people line up in a long strudel with one whispering a message to the other and so on. Seeing as the message gets distorted with each passing whisper, we see the emergence of a cultural evolution of the original message – various different mutations spring up as imperfections in the process of replication. Perspicuously enough, the game – much like socialism – lacks an effective selection mechanism that would help getting rid of the wrong kind of mutations. The result is that the eventual message has lost its original meaning. In socialism, the denouement is a state of the economy that does not correspond to real-life conditions.

Translated by Andrej Arpas


Robert Chovanculiak