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Scientific American

Evonomics

published January 2008 | comments (9)
Evolution and economics are both examples
of a larger mysterious phenomenon
magazine cover

Living along the Orioco River that borders Brazil and Venezuela are the Yanomamö people, hunter-gatherers whose average annual income has been estimated at the equivalent of $90 per person per year. Living along the Hudson River that borders New York State and New Jersey are the Manhattan people, consumer- traders whose average annual income has been estimated at $36,000 per person per year. That dramatic difference of 400 times, however, pales in comparison to the differences in Stock Keeping Units (SKUs, a retail measure of the number of types of products available), which has been estimated at 300 for the Yanomamö and 10 billion for the Manhattans, a difference of 33 million times!

How did this happen? According to economist Eric D. Beinhocker, who published these calculations in his revelatory work The Origin of Wealth (Harvard Business School Press, 2006), the explanation is to be found in complexity theory. Evolution and economics are not just analogous to each other, but they are actually two forms of a larger phenomenon called complex adaptive systems, in which individual elements, parts or agents interact, then process information and adapt their behavior to changing conditions. Immune systems, ecosystems, language, the law and the Internet are all examples of complex adaptive systems.

In biological evolution, nature selects from the variation produced by random genetic mutations and the mixing of parental genes. Out of that process of cumulative selection emerges complexity and diversity. In economic evolution, our material economy proceeds through the production and selection of numerous permutations of countless products. Those 10 billion products in the Manhattan village represent only those variations that made it to market, after which there is a cumulative selection by consumers in the marketplace for those deemed most useful: VHS over Betamax, DVDs over VHS, CDs over vinyl records, flip phones over brick phones, computers over typewriters, Google over Altavista, SUVs over station wagons, paper books over e-books (still), and Internet news over network news (soon). Those that are purchased “survive” and “reproduce” into the future through repetitive use and remanufacturing.

As with living organisms and ecosystems, the economy looks designed — so just as humans naturally deduce the existence of a top-down intelligent designer, humans also (understandably) infer that a top-down government designer is needed in nearly every aspect of the economy. But just as living organisms are shaped from the bottom up by natural selection, the economy is molded from the bottom up by the invisible hand. The correspondence between evolution and economics is not perfect, because some top-down institutional rules and laws are needed to provide a structure within which free and fair trade can occur. But too much top-down interference into the marketplace makes trade neither free nor fair. When such attempts have been made in the past,, they have failed — because markets are far too complex, interactive and autocatalytic to be designed from the top, down. In his 1922 book, Socialism, Ludwig von Mises spelled out the reasons why, most notably the problem of “economic calculation” in a planned socialist economy. In capitalism, prices are in constant and rapid flux and are determined from below by individuals freely exchanging in the marketplace. Money is a means of exchange, and prices are the information people use to guide their choices. Von Mises demonstrated that socialist economies depend on capitalist economies to determine what prices should be assigned to goods and services. And they do so cumbersomely and inefficiently. Relatively free markets are, ultimately, the only way to find out what buyers are willing to pay and what sellers are willing to accept.

Evonomics helps to explain how Yanomamö-like hunter-gatherers evolved into Manhattan-like consumer-traders. Nineteenth-century French economist Frédéric Bastiat well captured the principle: “Where goods do not cross frontiers, armies will.” In addition to being fierce warriors, the Yanomamö are also sophisticated traders, and the more they trade the less they fight. The reason is that trade is a powerful social adhesive that creates political alliances. One village cannot go to another village and announce that they are worried about being conquered by a third, more powerful village — that would reveal weakness. Instead they mask the real motives for alliance through trade and reciprocal feasting. And, as a result, not only gain military protection but also initiate a system of trade that — in the long run — leads to an increase in both wealth and SKUs.

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9 Comments to “Evonomics”

  1. Jim Bechtel Says:

    As founder of a local skeptics group I’m generally on your side with most things, but be careful. Economics wasn’t called “the dismal science” for nothing. To me, a libertarian’s faith in the Invisible Hand is the same as a fundamentalist’s faith in the Invisible Friend; a superstition. I’ll limit myself to two points.

    1. Consider slave markets. There is nothing in the Invisible Hand of Supply & Demand, no morality inherent in capitalism, that forbids making profit from the buying and selling of human beings. The market’s only commandment is: Buy low, sell high. Therefore it is incomplete as a useful theory of human behavior. And the glut of material goods it produces (Manhattan’s SKUs) is not necessarily a blessing, for the reasons Sut Jhally analyzes: http://www.sutjhally.com/articles/advertisingattheed/

    2. Socialism. This is only a word, and a broad one at that, an umbrella term for various criticisms of capitalism. Consider Fabian socialism, that is, using the power of the vote to make the economic system more humane. Just as Western Europeans have shaken off religion, they have shaken off economic myths popular with Americans, and to many Swedes and English and Germans, “economic democracy” (“socialism” to Americans) not only makes sense but provides higher living standards and an all-round better civilization.

    References:
    On the results of the European versus American approaches, see Do Social Welfare Policies Reduce Poverty? A Cross-National Assessment, by Lane Kenworthy, Luxembourg Income Studies Working paper No. 188, Sept 1998.
    Besides Sut Jhally, also check out primatologist Robert Sapolsky’s thoughts on material comfort versus happiness: http://www.eurekalert.org/bysubject/index.php?kw=16
    And see Stephen K. Sanderson‘s pioneering synthesis of evolutionary psychology and socioeconomics; The Evolution of Human Sociality.

  2. Paul Says:

    Jim Bechtel’s arguments are silly.

    First, the “Invisible Hand” is a simply a short-hand metaphor for self-organizing complex systems, while religious people hardly believe (or act as if) God is a metaphor. The equating of both as “Faith” is absurd, meaningless, distracting and useless.

    Second, slavery existed throughout human recorded history across all kinds of cultures and it pre-dates both modern socialism and capitalism. Its demise has nothing to do with any economic system but rather is a result of the Enlightenment.

    Third, free-market capitalism isn’t supposed to be moral; it’s supposed to be efficient, like an engine or a machine. The Internet isn’t moral either. Just as I don’t want do-gooder right-wingers controlling the Internet (for the good of society, of course) I don’t want do-gooder liberals controlling the marketplace (for the good of society of course). For every socialist-inspired, top-down, government-controlled, wealth-redistribution program there is a better free-market alternative to achieving the same goal – with the inherent efficiency of the market in its favor.

    Fourth, I didn’t realize I merely believed in an “economic myth” – I thought I was practicing self-reliance, personal responsibility, and individual choice. And, once again, we have the absurd “In Europe …” comparison of religion and capitalism. (By the way, isn’t socialism at least a little like religion with its centralized, top-down “we know what’s best for you” posture?)

    Lastly, as to consumerism and happiness, I’ll take the market’s cornucopia, thanks. I guess one man’s “glut of material goods” is another’s treasure of opportunities. Keep the upstart micro-brews coming!

  3. Lenoxus Says:

    “For every socialist-inspired, top-down, government-controlled, wealth-redistribution program there is a better free-market alternative to achieving the same goal.” I have to admit that this is a phrase concerning the free market I’ve heard often but never completely understood. Isn’t the “don’t touch” aspect of a truly free market something that means you aren’t *allowed* bring about changes, period? Apart from new technologies, perhaps? You can’t argue that, say, changes in taxation are allowed in a true free market (for example), because that’s messing with the system. What exactly is a “free-market solution”?

    Note that I don’t mean to say that any of this is as a shortcoming of capitalism or a positive aspect of socialism. I’m simply honestly curious.

  4. Mathew Whitney Says:

    Negentropic Shock Testing of The EM Economy

    or

    “Free Energy Will Ruin the Economy”

    This document outlines how the standard economic model is seriously flawed in both concept and execution if it is to be considered sustainable. This intentionally flawed model is to be known here as the Error-Activated Economy (EAE) and this economy is going to self-destruct under its own weight; it has to, it’s based on planned obsolescence/entropy. A simple and self-similar analog, the Electro-Magnetic laws correspond to elements of the EAE, as discovered by Mayer Amshel Rothschild, where:

    1 – Capacitance = Capital (money, stock/inventory, investments in buildings, durables)

    2 – C.. Goods (production flow coefficients)

    3 – Inductance = Services (the influence of the population of industry on output)

    All of the mathematical theory developed in the study of one energy system (e.g., mechanics, electronics, etc.) can be immediately applied in the study of any other energy system (e.g. economics).

    The first and most obvious flaw is the overlap of a monetary system with an energy infrastructure based on nonrenewable resources. Fossil Fuels are a “sunset” industry, owned and marketed by a cartel with no apparent exit strategy. An orchestrated energy crisis provides the cartel with valuable data that will dictate future actions towards extending the day. An energy crisis is one of many “shock tests,” such as blackouts and NYC transportation strikes…all used to assess and predict social engineering strategies. As these two systems become more disparate in their functioning, the wealth too is being continually divided into the poor have-nots and the rich elitists. Compound interest, Lobbyists, War-Market Based Solutions, Tax Havens, Global deregulation, Anti-Trust Regulations, and No Trickling Down…are compounding the division and impending collapse, never mind the biosphere.

    The Modus Operandi of the Error-Activated Economy is to increase entropy. This entropy is evident in nearly every product and service you can name. How many times have you bought a product that shouldn’t have broken but did? Gotten a bill with unknown fees? Received services from the incompetent or corrupt?

    This is unique to capitalism but communism and socialism are both subject to the energy infrastructure that is itself very entropic (inefficient, wasteful) thus compromising an otherwise effective Social System. These three distinct systems are homogenizing; what is corporate welfare and subsidies? COMMUNISM! What is the military, with its technological standards and code of service? SOCIALISM! They were always intermixed so we’ll just consider the entire world as participants in the EAE. The only way to make the EAE remotely functional is to create war and/or genocide, the exhaust pipe routing debt away from our smoothly running engine.

    Entropy is described as the rate of change within a closed system where degrees of freedom define the limits of change. The Earth may be considered a closed system (it isn’t really) and the Fossil Fuel Industry may be considered a degree of freedom among many in a capitalist free market. In the standard economic theory Entropy is called “diminishing return.” Equilibrium is stability; decay is dominant, it is irreversible so work with it right?

    OKAY, so how does a most entropic industry inside an entropic economy gain record profits? Why do the Arbiters of the EAE do the exact opposite of what is intuitively correct? Where is it written that capitalism must always manifest as its parasitic, competitive aspect? Is there an alternate/opposite aspect? Does, the current EM theory disregard all the negentropic stuff on purpose?

    Capitalism is the most biomimetic of the three aforementioned social systems; it is an economic natural selection. In nature there aren’t thousands of imposed, studied variables, only adaptation, opportunism, and survival. There are no cheaters because there are no rules. In this sense the elitists who wage war with the poor in order to maintain the economy cannot be guilty, cannot be held to silly notions of morality. They are doing what they must to maintain their lifestyle/habitat.

    The problem here is that a few wealthy elitists are dependant on millions of poor and millions of poor ARE NOT dependant on a handful of elitists. The whole idea behind a free market is that it is self-regulating and will produce its own solutions; that’s true if it is actually free, but every aspect of the economy is manipulated – including morality and population. The economy will either fix itself or the standard theory really is a convoluted lie.

    To determine this, an entirely new shock test must be executed…

    When I was in college, a prerequisite class was Economics 101, and I went to it with little interest but I had one question, “What are the economic implications of mass marketing a free energy device?” The professor just laughed.

    This professor did not look at the world around him. He only conformed to some elaborate theory. He assumed the Fossil Fuel Industry had such a hold on consensus reality that it was a given. The current rhetoric concerning our “addiction to oil” and “energy independence” is thirty years old, it is lip service nobody believes, but that won’t stop inventors and entrepreneurs from holding W to his words.

    In the book, COMPLEXITY, Brian Arthur’s thoughts regarding “increasing returns” are expounded with a comparative list: Old Economics vs. New Economics. He never uses the terms Entropy vs. Negentropy and I don’t think he’s familiar with Rothschild’s Analogy or Bearden’s corrections/reminders but it all correlates.

    Decreasing returns

    Much use of increasing returns

    Based on 19th century Physics (equilibrium, stability, deterministic dynamics)

    Based on Biology (structure, pattern, self-organization, life cycle)

    People identical, Family is industrial unit

    Focus on individual life; people separate and different

    If only there were no externalities and all had equal abilities we’d reach nirvana

    Externalities and differences become driving force. No nirvana. System constantly unfolding

    Elements are quantities and prices

    Elements are patterns and possibilities

    No real dynamics in the sense that everything is at equilibrium

    Economy is constantly on the edge of time. It rushes forward, structures constantly coalescing, decaying, changing.

    Sees subject as structurally simple

    Sees subject as inherently complex

    Economics as soft physics

    Economics as high-complexity science

    The main difference here must be in the energy infrastructure. No other variable or degree of freedom so directly affects the world economy. Before proceeding we must reconsider the definition of entropy as it is and how it’s commonly used as a misnomer.

    Entropy, again, is a measure of change within a closed system. This works fine for heat engines and most machines; but modern physics is indicating that, at the sub/quantum level, there ARE NO CLOSED SYSTEMS, and this is exactly the issue COMPLEXITY deals with and exactly why free energy is possible. Negentropy, the opposite of decay and disorder (a product of linear time) is found in emergent phenomena where growth and order is evident. Many scientists have concluded that Negentropy is the more dominant of the two “forces,” else nothing would exist in the first place. This can be put into question by asking whether or not The Big Bang, a supposed explosion, is creative or destructive? The answer is, “It destroyed what preceded it.” The idea of Big Bang – Heat Death is broad and symptomatic of the current paradigm.

    Creative Destruction sounds oxymoronic but this is the result of unrelenting disorder. A seed situation or variable, hidden within or directly spawned by the disorder can and will give way to a spontaneous collapse and regauging of all variables. A convection cell and snowflake are two common examples of how disorder can instantly change to order.

    Of course The Old Economy or The Hard Path doesn’t produce a benevolent trickle down effect because the order and wealth is horded by elitists. In the New Economy individuals possesses their own source of infinite energy, you do the math. Forget the trickle, give me a fountain of my own!

    Yes, free energy will ruin the economy but that is not a problem for poor people, or the people investing in new energy technologies. Further, mounting evidence suggests the economy will decay as surely as its model predicts and if the elitists cannot adapt to the new paradigm they have no right to tout a free market solution.

  5. philip Says:

    wrong title, wrong argument.
    There is nothing “mysterious” about evolution theory, it is simply about facts.

  6. David Says:

    Ok, first of all, it is racist and imperialistic to assume that just because someones lives in a hunter gatherer society that they’re “less evolved”.

    Secondly, the reason someone in New York is more rich is because they most likely spent their entire life specializing to do ONE task (whether it be writing, making art, cooking, etc.)

    While people in hunter gatherer societies have to master several talents in order to be self-sustaining. But most of those talents are not seen as valuable enough to the rest of the world (considering they didn’t spend so much time working on each talent because they have so many.)

    That’s another thing the article misses. While hunter gatherer societies only make 90 bucks, they don’t have to use any money at all for food, shelter, and many other items. While in New York, the majority of your money is dedicated to those things.

  7. Chris Says:

    Matthew, what the h*** are you talking about? You start off saying that the economy is analogous to electromagnetism, provide no support to that claim, and then proceed to argue what these electromagnetic laws mean to our economy. Your premise is unsupported, so there’s no point in even looking at conclusions. Besides “free energy machines” are contradicted by the laws of thermodynamics.

    David, I believe Michael Shermer was saying that their economy is “less evolved” not the people. (I have issues with that, by the way: just as some people describe bacteria as “less evolved”, their economy has just been subjected to different evolutionary pressures.) Secondly, that New Yorkers are specialists and Yanomamö are generalists is actually the whole point. Our economy allows each of us to specialise in what we do best, and use the resultant output to acquire the output of other specialists, instead of spending most of our time doing things we do not do as well. As to your last point, the Yanomamö are not actually making $90 per year. They are producing goods and services (including food and shelter) with a value of $90 per year on the world market. However, since the Yanomamö are not selling their output or trading with the outside world, (or at least they weren’t when those studies were done) it is not really a relevant comparison.

  8. Broughton Says:

    Congratulations, Mr. Shermer. You have proven it is possible to be both atheist and capitalist. Please tell Richard Dawkins.

  9. Dennis Says:

    Check out the Sante Fe Institute “Complexity”, Behavioral Economics (a la Ariely).

    Relativity of these cultures should be kept in mind as a laptop might only be a cutting board to a Yanomamo, whose religious token might be worth a whole village, yet be thrown in the trash in NYC.

    BTW, an Aemeba is as “evolved” as a human (probably need to find a more apt word) but Manhattans exhibit the same evolutionary pressures as the Yanomamo as they have to do MORE running just to stay in the SAME place with regard to shelter, food, etc as does all life on earth.

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