Saturday, August 6, 2011

The problem with evolution

In was talking earlier (link to come) about how it increasingly makes sense to see the economy as evolving, rather than only a market which returns to equilibrium. So there are books like Adapt: Why Success Always Starts with Failure which see the economy as a process of variation and natural selection.

There is one problem with this approach, however. Biologists have had a long debate over how natural selection actually works. For many years it was actualy difficult to explain why sexual reproduction exists at all, instead of simply asexual budding or splitting of organisms. Any gains from positive mutations might take tens or hundreds of generations to justify themselves.

It turns out the most accepted explanation is that organisms are always in a race with parasites. Species without much natural variability are soon prey to parasites which can unlock somatic or cellular defenses. It is a "red queen" race, according to Matt Ridley in his book The Red Queen: Sex and the Evolution of Human Nature. You constantly need natural variability not because it will lead to evolutionary advantage sometime in the future, but because it keeps one step ahead of parasites. And because parasites are much smaller and have shorter lifespans, they can evolve and adapt sixty times faster than people can. Hence "superbugs" and antibiotic resistance in hospitals.

So applying this to the economy, adaptability is not just a matter of responding to external shocks. It is a race against maladaptions and exploitative diversions which evolve WITHIN e economy.

And there is an unrelated tradition in economics which is relevant to this, most notably Mancur Olson is his books The Logic of Collective Action: Public Goods and the Theory of Groups, Second printing with new preface and appendix (Harvard Economic Studies) and The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities. He argues that the longer societies are stable, the more likely special interest groups are to arise which form "distributional coalitions" to siphon off resources.

They form because small focused groups get more marginal benefit from campaigning for resources for themselves, while the broad majority have little individual interest in stopping that. Steel manufacturers have huge interest in lobbying for limits on steel imports, for example, and will sound a large amount of money to gain what is for them a large benefit. But the average citizen - or legislator- does not have the same intensity of interest in stopping them. Small intense self-interested groups are much easier to from than broad groups which support broad public goods.

This is why, says Olson, even those groups which do campaign for specific policy outcomes often add specific individual benefits to make people join them, like unions offering health insurance or discount cards.

So economies and societies are most often in a race againt their own parasites - distributional coalitions which naturally build up to siphon off resources.

And if that sounds like K Street and Washington lobbying, that's because it IS. Olson notes that societies like Germany or Japan which got devastated in the second world war grew remarkably quickly out of the ruins. Part of the explanation, of course, is that they still retained immense human capital and knowledge. But part of it is also that the pre-war social elite and structure of privilege had been swept away, and with it many of the barnacle-like social rigidities that had impeded growth. Distributional coalitions were set to zero again.

In the past, the US had an advantage in that it had multiple elites spread around the country, with no single centralized privileged class. There was no single elite, like Paris in France or the court in a autocratic monarchy. But that has changed with the growth of the federal government. Resistance by coalitions to public action has grown much stronger. Distributional coalitions always threaten to strangle public goods and growth by diverting resources to their own narrow memberships. And breaking up those coalitions is traditionally one of the real underlying advantages of something like free trade.

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