Natural Selection and the Invisible Hand

The apparent connection between Darwin's theory of evolution via natural slection and Adam Smith Invisible Hand has long been commented upon. Don Boudreaux recently wondered whether the idea of markets and trading is an "extended human phenotype" that has played a role in human evolution:

In The Extended Phenotype, [Richard] Dawkins pointed out that phenotypes are not limited to things attached to bodies. They include things created by genes but that aren’t attached to bodies – for example, beaver dams and groundhog holes. A bird’s nest is created by bird genes no less than is a bird’s wing; genes ‘program’ birds to build nests; they do so because nests promote bird survival. Therefore, bird nests are an extended phenotype of birds.

Are markets an extended phenotype of humans? A case can be made that they are. We are programmed to trade, to exchange, to seek bargains, all in order to make ourselves better off and, hence, to promote our survival. Markets certainly do promote our survival. By promoting the division of labor, exchange increases the total amount that humans produce and enable those with relatively little in the way of valuable resources to increase the value of their holdings. For sure, without the enormously deep division of labor that now marks much of the globe, and the market institutions that sustain and guide it, billions of us would perish.

The idea, for it to work, is that markets are an extension of some human genes, and that these genes have been selected for by evolutionary processes. This strikes me as implausible. Now, I'm admittedly a little light on the Dawkins (and heavy on the Gould), but I doubt he would buy this either. In the basic theory of natural selection, individuals have genetic variations, nature selects for those individuals whose genetic traits are more adaptive, and the species evolves though differential reproduction. Notice, selection occurs on the individual level, while evolution occurs on the species level.

Now, for Boudreaux's hypothesis to be correct, two tings have to be true:

  • Markets need to be a product of genetic origin, meaning there must be a gene, or more likely, a large group of genes, that direct willingness of an individual to engage in trading and market activity.
  • This trait has to be adaptive for the individual. Specifically, people without such genes need to be selected against.

I'm no paleontologist nor anthropologist, but at least the second one seems very unlikely. For one thing, trading and markets, to the best of my knowledge, is a relatively recent phenomenon; so recent that the human genome has likely hardly evolved since we really got the hang of division of labor. Secondly, even if it had, these behaviors don't seem like they would be adaptive for the individual. Beaver dams and groundhog holes are adaptive for the individual beavers and groundhogs. Economic activity actually is remarkable because it has positive externality, even for those who do not engage in it. Thus, if such genes exist, it is not obvious to me they would be selected for.

I mentioned above that I thought Boudreaux's hypothesis was implausible. I was going to go back and change that because I think I misspoke - but I will leave my mistake. The word "implausible" connotes that a hypothesis is "so unlikely as if to be unworthy of real thought and consideration." This is obviously not the case in this regard. Though I think it highly unlikely to be true, it is by all regards "plausible." At its least it is an interesting thought that can lead to interesting discussions, which is the whole point, right or wrong, of hypothesizing.


I mentioned Stephen Jay Gould above, and since the topic is evolution and economics, I wanted to bring up Gould's thoughts on Adam Smith and the Invisible Hand. All throughout my education, I had been taught that Malthus was the economist who most influenced Darwin's theory. Malthus, of course, famously stated that for a group there is never enough food and shelter to go around. Darwin used this to show that since not all individuals could survive, there had to be differential survival. He went from there to try to explain what was doing the differentiation, and what that meant. (This shows Malthus to be correct, at least, when applied to other species. He was wrong about humans because he did understand that human ingenuity could solve this problem unlike any other species. In other words, he was wrong becuase Julian Simon was born too late.)

While all this is true, Gould has championed the idea (with much evidence) that it was none other than Smith who Darwin most admired and used to guide his theory. But Gould, a Marxist, did not hold very high regard for Smith's economics. From The Structure of Economic Theory:

In fact, I would advance the much stronger claim that the theory of natural selction is, in essence, Adam Smith's economics transferred to nature. We must also note the delicious (and almost malicious) irony residing in such an assertion. Human beings are moral agents and we cannot abide the hecatomb - the death through competition of nearly all participants - incurred by allowing individual competition to work in the untrammeled manner of pure laissez-faire. Thus, Adam Smith's economics doesn't work in economics. But nature need not operate by the norms of human morality. If the adaptation of one requires the death of thousands in amoral nature, then so be it. The process may be messy and wasteful, but nature enjoys time in abundance, and maximal efficiency need not mark her ways....The analog of pure laissez-faire can and does operate in nature - and Adam Smith's mechanims therefore enjoys its finest, perhaps its only, full appreciation in this analogous realm, not in the domain that elicited the original theory itself.

Also, there is this from The Panda's Thumb:

...[I]t is ironic that Adam Smith's system of laissez-faire does not work in his own domain of economics, for it leads to oligopoly and revolution, rather than to order and harmony. Struggle among individuals does, however, seem to be the law of nature.

I'm a big Gould fan, and I think he is really brilliant and talented, but I'm sure that he demonstrates a complete misunderstanding of Smith's science and theories. The Invisible Hand has nothing to do at all with human competition, and has everything to do with human cooperation. And I'm not sure how Gould missed this - especially when you read the very next paragraph from Structure:

The primary argument of laissez-faire rests upon a paradox. One might suppose that the best path to maximally ordered economy would emerge from an analysis conducted by the greatest experts all assembled, and given full power to execute their recommendations..., followed by the passage of laws to implement these rationally-derived, higher-level decisions. Yet, Adam Smith argued that a society should follow the opposite path as a best approach to the desiered end: law makers and regulators should step aside and allow each individual to struggle for personal profit in an untrammeled way - a procedure that would seem to guarnatee the opposite result of chaos and disorder. In allowing the mechanism of personal struggle to run freely, good performaers eliminate the less efficient and strike a dynamic balance among themselves. The "fallout," for society, yields a maximally ordered and prosperous economy (plau a hecatomb of dead businesses). The mechanism works by unbridled struggle forpersonal reward among individuals.

Now, there's not too much to complain about there. Which makes one wonder a) how those two paragraphs could have been written adjacent to one another by the same person, and b) how a really intelligent person like Gould could have missed the boat. Unfortunately, he's no longer here with us to answer that. I'm pretty sure that if he were, he'd have a blog, and we could have this debate.


But, returning to the original topic, are the Invisible Hand and Natural Selection the same thing? Their theoretic structures seem very similar, and it is tempting to say yes, but lets see what Steve Landsburg has to say first. From The Armchair Economist:

In the eighteenth century, Adam Smith described the economic actor who "intends only his own gain" but is nevertheless led "by an invisible hand to promote an end which was no part of his intention," that end being the welfare of society, which economists call efficiency. The metaphor endures, having survived countless misinterpretations. It has been said that Smith was expressing a religious sentiment, a faith that Providence oversees our affairs. It has been said more often... that Smith meant something like this: Individual rationality, coupled with ruthless pressure of natural selection (in the marketplace as in the biosphere) must necessarily serve the social good and the ultimate advancement of the species.

But if Smith meant that, he would have been wrong.. What he did mean was something far more subtle, and far more remarkable: Individual rationality, coupled with competition and prices, leads to efficient outcomes; that is, outcomes in which there remain no unexploited opportunities to improve everybody's welfare. This is so even though individual rationality and competition without prices rarely leads to such desirable outcomes.

...The critical feature in the formulations and proofs of [this theorem] is the existence of market prices. Without prices, there is no reason to expect efficient outcomes. I see no analogue of prices in the origin of species, and conclude that evolutionary biology bears only the most superficial resemblance to the economics of the marketplace. (emphasis mine)

I agree with Landsburg that the two theories are not analogous because of the presence of prices. However, the two are similar, and it is hardly superficial. One cannot overstate the importance of the principle of sponatneous order that pervade both disciplines. Maybe some reader can chime in if Hayek ever had anything to say about evolution and Darwin.

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"Describing the interactions of organisms in nature as an economic system is not new. For example, in 1838 Charles Darwin, making the first mention of the concept that became natural selection, wrote in his notebook that "One may say there is a force like a hundred thousand wedges trying [to] force every kind of adapted structure into the gaps in the economy of Nature, or rather forming gaps by thrusting out weaker ones." But however common it may be to mention the economy of nature, it is novel to construct a full theory that characterizes the history of life and the evolution of ecosystems as an economic system. In Nature: An Economic History, Geerat Vermeij does just that. The book summarizes economic ideas about ecosystems and evolution that he has been developing for several decades. In his representation, the phenomena that make up the forces and connections responsible for the history of life are economy in action. It is a viewpoint that deserves serious study."

Hayek mentioned Darwin on a

Hayek mentioned Darwin on a number of occasions, but I don't have time to dig up the references right now. He mainly mentioned him in the context of the history-of-thought point you were making: that Darwin appears to have been reading Smith's Wealth of Nations at about the time he was formulating his theory of natural selection.

I believe Hayek also makes the following point (but it might just be my own point that I'm attributing to Hayek). While biological evolution and the market process are similar in some important ways, they also differ in an important way: that biological evolution requires the death of individual organisms, whereas the market process (and cultural evolution in general) only requires the death of *practices*.

I think you're right about

I think you're right about the "market as extended phenotype" argument. You could interpret markets as a fortuitous side effect of some traits that are selected for (e.g., self-interest). But to say that markets have been selected for is to commit the fallacy of group selection.

If anything, the primary argument to be made about markets and evolution is that markets are the best fit to "human nature" (rather than the other way around). If we had evolved as selfless, conformist beings with some among us who were extremely wise and had enormous data-processing abilities, centrally planned socialism might have worked out just fine. (As E.O. Wilson said of communism - "Great idea. Wrong species.")

While large economic markets

While large economic markets and money are a relatively recent phenomenon, tribe-sized markets and the coin of status go back to our monkey days. It certainly seems plausible to me that those who were bad at trading favors and status had less evolutionary success. And that those same instincts, coupled with modern technology, gave rise to our marketplaces.

This would explain both why we seem pre-disposed to economic activity, despite not having done it for long enough to have evolved such a disposition, and why we make such puzzling and consistent mistakes. The latter are a relic of habits designed for a different coin and a different marketplace.

In the basic theory of

In the basic theory of natural selection, individuals have genetic variations, nature selects for those individuals whose genetic traits are more adaptive, and the species evolves though differential reproduction. Notice, selection occurs on the individual level, while evolution occurs on the species level.

Dawkins's view of evolution by natural selection was different. He viewed (along with most biologists today, I think) the selection as happening on the gene level. If the gene's interests somehow conflicted with the individual's interests, then the gene survival would prevail and the individual would be sacrificed. Sterile worker ants still contribute to the survival of the queen - they share genes with her. These individuals are sacrificed because they have no hope of reproducing, but their genes pass on via the queen. Often though, the interests of the gene and the individual do coincide.

Economic activity actually is remarkable because it has positive externality, even for those who do not engage in it. Thus, if such genes exist, it is not obvious to me they would be selected for.

Yet, I submit that economic activity is mostly carried out by individuals for their own benefit. The positive externalities, while well and good, are not what motivates individuals to trade. They trade for selfish reasons. Thus, I see no conflict between individual selection and free markets. The emergence of markets does not rely on a group selection explanation.

In Nonzero, The Logic of Human Destiny Robert Wright made the argument that emergence of cooperation and markets is a continuation of the positive direction for evolution by natural selection. Matt Ridley made a similar argument in The Origins of Virtue in which he specifically singled out the Law of Association as the means of cooperative evolution out of the iterated Prisoner's Dilemma. I think this is what Boudreaux was getting at with the extended phenotype argument - that markets are a reflection of individuals recognizing that life is a positive-sum game.

I intuitively find this argument appealing but don't know if I believe it. Isn't reproductive fitness what natural selection favors? What I see is that the people of the world who live with robust markets are having far fewer babies than the people of the world who don't. Maybe it goes back to what Dawkins said about ideas - cultural evolution is more important and happens much more rapidly than does genetic evolution. People in places with robust markets are more concerned with living the good life than passing on their genes as efficiently as possible.

Jonathan, I intuitively find

Jonathan,

I intuitively find this argument appealing but don’t know if I believe it. Isn’t reproductive fitness what natural selection favors? What I see is that the people of the world who live with robust markets are having far fewer babies than the people of the world who don’t. Maybe it goes back to what Dawkins said about ideas - cultural evolution is more important and happens much more rapidly than does genetic evolution. People in places with robust markets are more concerned with living the good life than passing on their genes as efficiently as possible.

More babies isn't necessarily what results in the long term share of the gene pool. Fewer babies with better prospects may well be more effective in transmitting and replicating genetic information. This would especially be true for genetic advantages that can only be expressed in a market economy. At the same time, genetic disadvantages will be propagated in a prosperous, market economy that would otherwise be selected out.

Regards, Don

Johnathan, I do understand

Johnathan, I do understand and agree with Dawkin's position - but I was drawing the line between evolution on a species level, and the selection (of whatever) on a smaller level of scale. Meaning, I think the cultural evolution that has seen the rise of market activity has taken place since the human genome has evolved. (And, I think, this is much what you were saying in your comment).