Saturday, 20 April 2013

Natural Selection or The Invisible Hand

Now we've had the funeral of Lady Thatcher, it seems appropriate to say that there has been two extreme reactions to Thatcher's death (and legacy).  Some largely unimaginative people (usually from the north of England) assert that her actions ruined their potential for industrial earnings; and some equally largely unimaginative people (usually from the south of England) have asserted that these economic changes in the eighties were necessary because industry and market economics undergoes a kind of Darwinian natural selection where businesses are driven by a kind of 'survival of the fittest' pattern.  I think both sets of individuals are looking at the situation in an unhelpful way that skews too heavily towards their own emotional, occupational, cultural and, in some cases, national biases. 

In market economics, Smith's 'invisible hand' states that competition brings about self-interest for the good of everyone, where prices near-perfectly match supply and demand.  Biological evolution has no mechanism comparable to this.  In natural selection, biological forms acquire traits that better enable them to adapt to specific environmental situations, which results in their improved evolvability due to the perpetuation of those beneficial traits in the generations that succeed them.

The Darwinian model doesn't ideally apply to the invisible hand mechanism. What extremists have done is compared it to "arms races," where on occasions the encouragement of actions can cause harm to the group but also compromise the advantages for individuals.  This can happen when gains are relative and mutually offsetting - but this is rare in the Smithian model (in fact, if anything, the Smithian model suffers only by being too parsimonious for potential niches in the market).  What’s usually the case, as is with Thatcher’s critics, is that they have missed most of the costs, and mistaken the benefits for costs, by having too narrow a vision in supporting the parts of the economy that are not healthy (which coincidentally, always seem to be the particular industries in which they find themselves).  It's no use being emotionally affiliated to an industrial factory that's costing us money just because it happens to be one’s own, or because it happens to be based in one's own country.  That's as ill-conceived as preferring a car-crash on British roads to safe driving in China or India - the quality of the thing under consideration is important, not where it comes from. 

I explained in my last Blog why enhancing the global connectivity is good for all economies.  The argument that supports this is the same argument that supports why market economics on a global scale is more efficient than the Darwinian natural selection model for economics, and why Thatcher's critics have got it wrong - it is the efficiency of the relationship between prices, supply and demand.  It is foolish and impractical to favour bailing out and propping up industries in Britain, when Britain (and the rest of the world) can benefit more greatly (and has benefited more greatly) from the efficiency of the relationship between prices, supply and demand on a global scale.  As I explained in my last Blog, making good use of the efficiency of the relationship between prices, supply and demand on a global scale is the same as making good use of the efficiency of finding improved technology.  Whenever a Government departs from this mandate by trying to artificially improve industries on the basis that they happen to be 'our national industries' (as the Labour Government of the 1970's tried to do) it only succeeds in diminishing the extent to which opportunities to improve everyone's welfare exists.

What those protesting about loss of British industry don't seem to understand is that competitive markets is what brings about the allocation of resources with maximum efficiency.  There is no place for national identity in economics, because to insist so is to say that the different way to allocate resources is contingent on one's national identity, which is manifestly false.  Adam Smith showed in his seminal Wealth Of Nations that the different ways to allocate resources is only maximised to the best effect when competitive markets function freely (this has also been proven mathematically by Debreu and McKenzie). 

The key here is that there is 'supply'; there is 'demand' for that supply, and there are 'prices' that invoke near-maximum efficiency between the supplies and the demand.  There is not such a near-maximally efficient mechanism in natural selection.  In analogical terms, there is supply and demand in natural selection, and there are prices in natural selection - but there is no 'invisible hand' that maximises biological efficiency in the same way that it maximises global economic efficiency through prices that near-perfectly balance the weight of supply and demand, and the capacity to adapt to the continually changing environment. 

There may be plenty of reasons to criticise Mrs Thatcher – but claiming she ruined our industry is not one of them – because, in fact, the opposite is true; she helped enhance our economy in ways that seemed unlikely in 1979.  To criticise her for that is as foolish as criticising all the people driving safely in China and India because you happen to prefer car crashes in Britain.