Economics

Here Is Why Economics Is Built on a Monumental Mistake

It’s time to update the invisible hand

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By Jag Bhalla

This is diablog 8 between the evolutionary biologist David Sloan Wilson (DSW) and me (JB).

JB: You’ve called an idea that’s cherished in economics “a monumental mistake.” Specifically, the belief that Adam Smith’s “invisible hand” ensures markets self-organize for the best overall outcomes.

JB: Biological self-organization — Darwin’s “invisible hand” — often delivers disaster. What can self-organization, or spontaneous order, in biology teach economics?

DSW:  Self-organization isn’t intrinsically good (it can be functional or dysfunctional).

DSW: It is indeed a monumental mistake to think that unbridled self-interest will robustly benefit the common good. Instead, it can cause dysfunctional self-organization.

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DSW: Nevertheless, biology provides breathtaking examples of invisible hand self-organization.  Multicellular organisms and social insect colonies work beautifully as multi-agent societies without their members having the welfare of their society in mind. We can say that confidently because cells and insects don’t even have minds in the human sense!

DSW: Self-organization leads to group-functional outcomes in these examples because the group is the unit of selection. Lower-level behaviors that work well at the group level are winnowed from the much larger set of behaviors that don’t work. But when biological systems are not units of selection, e.g., most ecosystems, they don’t function well as units, as you correctly say.

DSW: Like bodies and beehives, human groups function well to the degree that their properties have been winnowed by between-group selection. [Friedrich] Hayek saw this evolutionary aspect of economics, but few understand it correctly.

DSW: The bottom line: Spontaneous order worth wanting is possible, but it must be selected. That sounds contradictory, but it makes perfect sense, evolutionarily.

JB: I get that that’s how it works in biology. But economists, despite sometimes using biology-like language, are mainly physics-like thinkers. And spontaneous order in physics isn’t “selected.”

DSW: You’re right. Economists will never get it right until they switch their mentality from physics to evolution (see Newton pattern vs. Darwin pattern).

JB: Robert Frank’s The Darwin Economy distinguishes two “invisible hand” types. Sometimes individual incentives combine to generate good group outcomes. Sometimes they undermine group goals. Bad invisible hands create spontaneous disorder, which local incentives can’t cure (see Markets Dumb As Trees?).

DSW: Exactly. Incentives are like mutations. For every one that works, many are counterproductive.

JB: Smith’s invisible hand claims selfish incentives have the unintended consequence of group-level benefits. But Darwin’s invisible hand shows they often don’t. Meanwhile markets shouldn’t be interfered with, because of bad “unintended consequences.”

DSW: Oddly muddled. Complex systems always include indirect effects (which public policy must monitor and mitigate).

JB: Perhaps economists believe people wouldn’t knowingly damage their own long-term interests. But empirically people do, often(sometimes encouraged by economists).

DSW: An evolutionary or empirical/behavioural perspective would never make that error.

JB: And unlike the rest of biology, humans aren’t limited to mindless random trial and error and “selection.” Our evolved learning, foresight, and coordination abilities mean we can intelligently guide systems away from ruin (vigilantly adjusting to mitigate bad, unintended consequences).

DSW: True. But only if we can become wise managers of evolutionary processes.

Earlier diablogs covered: (1) evolution’s score keeping (relative fitness), (2) its built-in team aspects, (3) its self-destructive competitions, (4) its blind logic, (5) how division of labor complications, (6) why economics needs a version of evolution’s “inclusive fitness,” and (7) why whatever your politics, you need needism.

Illustration by Julia Suits, The New Yorker Cartoonist & author of The Extraordinary Catalog of Peculiar Inventions.


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  • Love the idea of diablogs, and I find yours intriguing and provocative!

  • johnschappert

    Sorry, are you arguing for evolution or intelligent design? Because your whole article is premised on the flawed notion that the designers can know what would generate the best outcomes.

  • johnschappert

    I actually threw up in my mouth when I read “wise managers of evolutionary processes”.

  • Robert King

    Adam Smith was far more nuanced than this implies
    “Nor is it always the worse for society that it was no part of his
    intention. By pursuing his own interest he frequently promotes that of
    the society more effectually than when he really intends to promote it. I
    have never known much good done by those who affected to trade for the public good.”
    At no point is he saying “greed is good”–he appears to be saying that it can be incentivised and (further) that direct attempts at centralised economic planning fail. Which is borne out by history

  • Dunbar

    Economics is not a “natural” system at all; it is a human relationship. Economic “organization” reflects the power relationships between people, it’s not something derived from an imaginary “nature”.

    • One can however, increase the truth content of human relations, or one can decrease the truth content of human relations. One can increase the truth content of human relations in times of shock. One can decrease the truth content of human relations in order to accelerate consumption. So human relationships are natural in a natural state any time we improve institutions that improve information by reducing informational asymmetry, or distributing information that was previously unavailable (prices, interests rates, money supply, etc). Human relations are in an unnatural state when we insert disinformation in order to fool people into acting other than they would in the natural state. For this reason it is perhaps more accurate to distinguish not between natural and artificial, but truth and deception, morality and immorality.

      Curt Doolittle
      The Propertarian Institute
      Kiev, Ukraine

  • Mark Brady

    Why 1759? The Wealth of Nations was published in 1776.

  • carmiturchick

    One of the major confusions is about the nature of this “invisible hand.” In fact, markets do self-organize because of healthy competition, and then they self limit…by pushing for government to regulate. As usual, specialization is beneficial and it makes no sense for corporations to govern each other while they engage in business. Far more efficient, and trust can be far higher, if an unbiased third party keeps all sides honest so that they can freely trade without worrying about being ripped off constantly. Regulations ARE the invisible hand in action, and free trade DEPENDS on good regulations.

    David Sloan Wilson, I think you will find that the papers you published with Eldakar are fruitfully explored in relation to this topic. Selfish is self-limiting as a strategy because of selfish interference and punishment directed towards other selfish.

  • fustbariclation

    There are two flaws. One is, as noted already, the notion that evolution is purposeful. The other is that there is group selection.

  • Henrique Brenner

    JB is clearly pushing his own ideas into the conversation, with DSW not pushing back out of politeness, but bringing as many caveats as possible (e.g.: points 17 and 18).

  • Captain Fluttershy

    “Self-organization isn’t intrinsically good (it can be functional or dysfunctional).”
    Wha-
    Planned organization never as efficient or accurate as self organization, economically. No planner can assess the wants and needs of consumers, and meet them better than a market would. Evolution is best. Regulation should be marginal.