Darwin & Economics

Book review- The Darwin Economy: Liberty, Competition, and the Common Good.

“It is not the strongest or the most intelligent who will survive but those who can best manage change.”

–    Charles Darwin

My first reaction after reading the title of the book was to ask myself how the theories of Charles Darwin, the famous naturalist, are relevant in economics? The Cornell University professor and The New York Times columnist, Robert H. Frank, begins the book by justifying Darwin’s importance in the subject of economics. The author argues that 100 years from now, Darwin will be recognized as the father of Economics, that is to say the greatest contributor to the modern theory of Economics, and Adam Smith, currently considered the intellectual founder of Economics, will be its great grandfather. Frank says:

“I base my prediction on a subtle but extremely important distinction between Darwin's view of the competitive process and Smith's. Today Smith is best remembered for his invisible-hand theory, which, according to some of his modern disciples, holds that impersonal market forces channel the behavior of greedy individuals to produce the greatest good for all. It's fair to say that the invisible-hand theory's optimistic portrayal of unregulated market outcomes has become the bedrock of the antigovernment activists' worldview. They believe regulation is unnecessary because they believe unbridled market forces can take care of things quite nicely on their own.

Darwin's view of the competitive process was fundamentally different. His observations persuaded him that the interests of individual animals were often profoundly in conflict with the broader interests of their own species. In time, I predict, the invisible hand will come to be seen as a special case of Darwin's more general theory. Many of the libertarians' most cherished beliefs, which are perfectly plausible within Smith's framework, don't survive at all in Darwin's. (p. 17).”

Adam Smith’s theory of the invisible hand states that the collective individual interest will allocate resources in the most effective way to maximize economic welfare. In Smith’s words, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.“ Frank challenges this theory saying that there is a requirement of public intervention in the competitive markets, as what is good for the individual might not be beneficial for society as a whole. Instead of creating a perfect world, economic competition often leads to “arms races,” encouraging behaviors that not only cause enormous harm to the group but also provide no lasting advantages for individuals, since any gains tend to be relative and mutually offsetting.

The author notes that it is all about getting an edge over others. In the natural world, Darwin argued that individual incentives and interests are often at odds with the wider interests of the group. Frank takes a similar example in economics, where a factory worker may be incentivized to choose a higher pay at the cost of safety regulations in order to gain a competitive advantage over his colleagues. But the choice will not make any difference for the worker because his colleagues too would be ready to take risks for a higher pay. Here, the whole group is relatively no better off and far less safe.

The author then talks about positional and non-positional goods. He says that people will be more likely to spend more money on positional goods, such as larger homes, and less money on non-positional goods, such as safety, savings or insurance. As a biological analogy, Frank suggests the difference between running speed and antler size. A faster gazelle is better equipped to outrun a cheetah, and so, he writes, "being faster conferred advantages for both the individual and the species." Antlers, on the other hand, are used for fighting with other males.  

Throughout the book, Frank argues that returning to laissez-faire economics will not solve our economic woes. He suggests that the best method to tame the Darwin economy is not to prohibit harmful behaviors, but to tax them. By doing so, we could make the economic pie larger, eliminate government debt, and provide better public services, all without requiring painful sacrifices from anyone.

This viewpoint will, however, increase opposition from libertarians, who describes that the government should not interfere with individual liberty by compelling citizens to pay more taxes or buy safety insurance via taxation. As mentioned above, without government intervention people are more likely to invest in positional goods rather than non-positional goods. Frank asserts that the recent ‘Great Recession’ could have been avoided though heavy taxation of the ultra rich and tighter monetary policy.

The book inspires readers to look at economics from a different perspective, discussing challenges to conventional economic theory on the basis of evolutionary theory.