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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.

A version of this article appeared in the June 2008 issue of Fast Company magazine.