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Evolutionary Economics: Bottom Up Solutions to Business Problems

A new science called evolutionary economics offers fresh insights into how the business landscape isn't controlled from the top.

If the fruit of the Economic Stimulus Act of 2008 hasn't landed in your bank account yet, it's likely just a matter of time before you're throwing $600 on the bed just to see what it feels like to roll around in that much cash. The government, of course, hopes that we won't just pay bills or sock it away in savings but that we'll circulate the money back into the marketplace and thereby jump-start our sagging economy. As I write, the government is also engaged in another kind of largesse, literally printing money and offering it to banks and government-backed mortgage players Fannie Mae and Freddie Mac to stave off the continuing ripple effects of the credit crisis. Leaving aside whether those moves will reverse the current economic slump, the question is: Why do we think they might?

The answer may be found in a new science called evolutionary economics. This discipline looks at the economy as an ever-changing, complex adaptive system — not unlike that of biological evolution. Immune systems, language, the law, and the Internet are all examples of other complex adaptive systems. They learn and grow from the bottom up. Individual elements (organisms in evolution, people in economics) interact and adapt to changing conditions. These systems are so intricate that they often look as though they've been designed from the top down. So our minds naturally infer the existence of an intelligent designer for complex life and a government designer for complex economies. This is why we instinctually look to Fed chairman Ben Bernanke, Treasury secretary Henry Paulson, or Congress and the President to fix the economy.

But there's more to it than that. Both evolution and the economy are autocatalytic, which means they each contain self-driving feedback loops. In evolution, an arms race between predators and prey is a type of feedback loop where, for example, antelopes will get faster in their efforts to escape leopards that in turn will increase leopards' running speeds or else they won't survive as a species.

Similarly, when there is a positive news story about the economy, it causes people to buy more stocks, which drives the stock market higher, thereby stimulating the economy even more. That, of course, triggers more people to jump into the market, fueling further economic growth, and round and round the loop goes — until it goes bust. That thrusts the economy into a negative feedback loop, not unlike the situation when species become endangered because they can't adapt rapidly enough in a changing environment. Think polar bears in a warming Arctic.

In biological evolution, variation is produced by random genetic mutations and the mixing of parental genes. These produce characteristics that are naturally selected by the criteria of survival and reproduction. Out of this process emerge complex and diverse life-forms.

In economic evolution, we generate variation by producing numerous permutations of countless products. Customers then opt for the products they deem most desirable, "selecting" those with the features they want. Technology format wars are a particularly apt example: VHS over Betamax, DVD over VHS, HD DVD over DVD, and now Blu-ray over HD DVD. Those products that are purchased "survive" and "reproduce." Just as the naturalist Charles Darwin showed how complex design and ecological balance are unintended consequences of competition among organisms, the economist Adam Smith demonstrated how national wealth and social harmony are unintended consequences of competition among people.

So, again, why do we desire — indeed, demand — top-down interventions into the economy when it stumbles?

We have little appetite for economic uncertainty, in part because of our roots as hunter-gatherers, where the economy is a zero-sum game in which one's gain is another's loss. The latest evolution of human groups, into large, modern nation-states, has created an expectation that government will balance that zero-sum threat by providing a measure of economic certainty — rebuilding houses destroyed in hurricanes, and so forth. And so we're hardwired to demand political action to smooth out business cycles and level the playing field.

Yet today, the economic game is not zero-sum. A market economy in a modern democracy with the protection of private property, the rule of law, a sound currency, a fair justice system, a reliable infrastructure, and entrenched civil liberties means that the gain of one can be the gain of another. Win-win is the new economics. Still, our deep intuitions about how the world works haven't caught up to our economic reality.

At those moments when we believe in top-down solutions for bottom-up problems, remember the bedrock of Adam Smith's economic theory: "Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer." Government bailouts and handouts are both forms of appeasing producers. If we focus on solving problems for customers instead — encouraging the creation of can't-live-without products — we will have an easier time riding out the natural storm of a down cycle.

Michael Shermer hosts the Distinguished Science Lecture Series at Caltech and is an adjunct professor of economics at Claremont Graduate University. His most recent book is The Mind of the Market.

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  • Jay Tatum

    Dear Steve,

    The German Critical School to which you allude was a genuine outgrowth of the feudal system confronted by the industrializing of Europe during the 1870's and a combination of factors being felt throughout the academic centers of the world, but it actually goes back much further in time. I agree with you that this is some strange journalism as well, but for me, it is very refreshing to blog, converse, and otherwise spar with folks who have something to say, particularly when it comes to economics. It may be one of the few sciences excempt from the social science construct of reality that really is far more theoretical than practical. You're not off target at all here. The challenge, I suspect, is for those of us who are interested enough to open our minds to others in our blogs. Each time we put one of these things out there, we are subject to criticism, good and bad, from a public that may or may not have a clue what's going on.
    For me, the appeal of the post was the engagement of some crtical thinking on the part of Michael Shermer, whom I do not know but appreciate for his insight into economics at the philosophical, theoretical, and practical levels. I am an ordained cleric with a classical education in multiple fields of endeavor and actually enjoy philosophical discourse! My analysis and comparison of Evolutionary Economics to an organic, natural systems theory is just that - an analysis and comparison to a model of thinking (Family Systems) to which I've dedicated a significant portion of my academic and professional careers. A Strange Bit of Journalism is an understatement! We're talking real Space Cadets engaged in Royal Banter. There may be not formal proponents or seminal works in literature yet; probably because it's still being field tested! Can you imagine Adam Smith or Karl Marx floating their ideas out to the global community instead of the academic communities who spoke their language?
    I appreciate your response to this Strange Journalism. It says somebody is engaged in the process with us and for me that is a welcome I embrace graciously. And while I can't speak for Michael Shermer or Fast Company, I'd think the fact that you responded says you have more to say on the topic besides a quick jab. Well done!

  • Steve Sullivan

    This is one of the strangest bits of journalism I've read in a while. There's supposedly a "new science called evolutionary economics" but we hear nothing of its proponents, nothing of the seminal works in the literature. What happened to who-what-when-where-why? Worst of all, what's described doesn't sound at all new to me, as it's very similar to the work of the Austrian School, which has been going strong since 1870 and which has long-standing academic centers at NYU and elsewhere. I didn't see the differentiators in this article. Is the "new science" formalist or model-based? Is that it?

  • Michael Wilson

    It all sounds nice and systematic wherein all the puzzle pieces fit; but here’s the key to economics it’s all a theory based on models. Believe this exemplar stuff if you want to but you still have to come outside and survive in the real world. People are floundering in this current mess that is the handiwork of our markets and government. There’s no invisible hand correcting this. This Professor wants to compare the budget deficits from the Iraqi war and the lives lost, our crumbling infrastructure, the housing crisis, financial speculation fueling higher oil prices, a government that is encroaching on our rights, etc. to a common cold! . The author touts his economic theory from the comforts of a college classroom which is the only place where economic models actually work and is second only to government bureaucracy in paying economists for their models.

  • J. Jeffryes

    Why do we demand top down solutions? Simple. They're easy. We all want someone to magically solve all our problems, and take the responsibility off our shoulders, just like mommy and daddy did when we were 5. That's much easier than trying to figure out how to get everyone to change their behavior.

    BTW, it should be cheetahs, not leopards. Leopards are ambush predators, they don't chase diddly squat.

  • Kathryn Alexander

    It's nice to see systems theory applied to economics. We are still forgetting about the natural world - assuming that it will always be there and always be the same. Systems thinkg would indicate that economics needs to begin to act like the nested system it is - or none of us will be here.

  • Jay Tatum

    The perspective of this article is by far one of the best I have read from Fast Company to date and probably one of the most refreshing pieces in some time. While the social science construct of reality generally tends to view life on this planet based on an antiquated model, economics is one of those disciplines that has evolved beyond the softer sciences grasps. Interestingly, comparing the economy to the immune system is by far the more natural and organic view that demonstrates the writer understands the subtle and not so subtle nuances to "systems thinking."
    In looking at the human immune system and the economy in the same way, as organic systems, each responds to the toxicity in the environment and adapts accordingly. For the longest time the immune system, like the economy, was characterized as the body's natural defense system against invading, foreign agents and the response of the immune system was to create antibodies to innoculate the body from harm. A more organic way to understnd the immune system is to see it as the ability of the system to adapt to changing and sometimes toxic influences. So it goes with the economy. Adam Smith may have had the notion of that "invisible hand" functioning to keep things going or he could have very well meant that the system adapts according to changes and toxicity in the environment. The more challenges there are to the economy and immune system, the more variations the body can produce. And a healthy body is a very good thing.
    Conversely, the present recession may be no more than a common cold that has to run its course. There will be fever and sweats, lack of appetites and motivation, and a general sense of feeling tired. Ultimately, though, when the body politic rebounds, it returns to normal because the immune system is working its magic.
    The Economic Stimulus, despite the heavy political folly, may be more like taking two aspirins, drinking plenty of fluids, and getting some rest rather than taking a shot in the arm! And I just hate shots.