Wednesday, 2 January 2008


The January 2008 issue of Scientific American includes an interesting article by Michael Shermer, Evonomics: Evolution and economics are both examples of a larger mysterious phenomenon. In it Shermer writes,
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.
SKUs are Stock Keeping Units, a measure of the number of types of retail products available.

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