Why the Invisible Hand from Biology is Better Than the Invisible Hand from Economics

The notion that economics and business are all about competition and self-interest is alluring but wrong

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By Mark van Vugt

The global financial crisis has shaken the foundations of a long-dominant paradigm in economic theory, Homo economicus. This is the idea that individuals and firms make informed, rational judgments about risks and opportunities so as to maximise their pay-offs. The crisis has sparked the search for more accurate and scientific models to explain how people and firms behave in real life, and how financial markets do, and should, operate.

Bankers, hedge-fund managers, and policy-makers are human beings, so the common-sense idea that human nature might have something to do with their decision-making is taking hold among the wreckage of confidence in the current system and models. Together with a broader community of evolutionarily minded biologists, economists and psychologists, I argue that new light may be shed on the foundations of economics and business from an unlikely source: evolution.

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Competition between firms has often been portrayed as a Darwinian struggle where stronger firms survive and prosper and weaker ones die out. This idea has eminent origins in the work of economists such as Joseph Schumpeter and Milton Friedman, and has been recently revived by the British economic historian Niall Ferguson, who wrote in 2007 that “left to itself, natural selection should work fast to eliminate the weakest institutions in the market, which typically are gobbled up by the successful”.

Bosses are keenly aware of their cut-throat environments as well. When the Android phone emerged, threatening the iPhone’s market dominance, Steve Jobs pledged to wage “thermonuclear war” on his competitors and destroy them. But evolutionary science has moved on a lot in recent decades from the simplistic idea that nature is “red in tooth and claw”. A modern evolutionary perspective suggests the picture is a little more complex.

It is true that the basic Darwinian principles of variation, selection and retention can be invoked to understand the survival of different firms. Although not a purely Darwinian process – due to mitigating factors such as government regulations – the predictions have proven alluring to many economists. That’s because at first sight they bolster three pillars of neoclassical economics: one, that economic actors are self-interested; two, that self-interest leads to public goods (the famous “invisible hand” coined by the father of modern economics, Adam Smith); and three, that together these lead to market optimisation. However, applying this clichéd Darwinian reasoning leads to a paradox: firms are by definition groups of individuals, and therefore competition between firms implies selection among groups, not individuals. This undermines the three pillars above and instead predicts the emergence, at the individual level, of pro-group “altruistic” behaviour instead of selfishness.

Fortunately, a 21st-century understanding of evolutionary biology offers a way out of this paradox. The key is multilevel selection theory (MLS), which recognises that natural selection can operate at multiple levels at once and so provides a more realistic picture of how firms and their employees behave in a competitive market. The core idea is that while individuals may indeed pursue their own self-interest, they also have a suite of evolved psychological adaptations that – as if led by an invisible hand – steer their self interest to align with the good of their firm or even their wider society. But it is the hand of Darwin, not Smith.

MLS is increasingly accepted as a fundamental principle in evolutionary biology. It is essential for understanding the “major transitions” in the evolutionary history of life – the formation of multicellular organisms from groups of cells, for instance. MLS allows us to examine two often-opposing forces simultaneously: the interest of the group/firm as a whole, and the interest of individuals within the group/firm. These two forces are in constant interaction, generating complex outcomes, but these outcomes can be predicted given knowledge of evolutionary processes and psychological adaptations.

MLS generates broad predictions for what kinds of economic behaviour will emerge in different environments. Where selection among firms (that is, group-level competition) is severe, we can expect an increased alignment of interests between organisation and employees, resulting in highly efficient firms with committed workers and low absenteeism and turnover rates. At the extreme, we might see an increase in unethical practices at the firm level such as hostile takeovers, talent-poaching and misinforming customers or regulatory authorities.

On the other hand, where selection among firms is weak, we expect a rise in inefficient firms with uncommitted workers, high rates of absenteeism and voluntary turnover. Here, as group selection is weakened, individual interests will rise to prominence. At the extreme we might see a rise in unethical practices within firms, such as individual fraud, theft, and work-place aggression.

We can also make detailed predictions for what kinds of economic behaviour are likely to emerge from different individual employees. An appreciation of MLS, in combination with empirical findings about our evolved psychological dispositions, allows us to specify conditions under which more selfish or more pro-organisation traits tend to be expressed. These predictions enable firms, managers, and society to design corporate cultures that encourage the expression of the most productive and cooperative instincts that human nature has to offer.

Unlike the classic rational-choice model, which assumes that individuals are guided only by how to maximise their own pay-offs – often at the expense of others – MLS predicts that employees will also be concerned with non-economic social pay-offs such as status and prestige. This is supported by a wealth of findings. Employees work harder, for example, when they perceive that they are being treated fairly, receiving the same rewards as others for the same effort. If, however, employees perceive that co-workers are free-riding with impunity, they will lose commitment and withhold effort. Similarly, workers will be more motivated if their good citizenship behaviours are appreciated in a reputation-enhancing way. A good reputation turns out to be at least as rewarding as a good salary, according to neurological research.

MLS also makes predictions about leadership styles. For instance, when competition between firms is fierce, and competition between co-workers relatively weak, then a more democratic and participative leadership style is likely to ensue. Simply put, people unite behind a shared purpose.

These are just some of the novel insights about the behaviour of businesses arising from a modern evolutionary approach to economics. This approach is an important addition to the field of behavioural economics – a quest to understand economic decision making from a psychological perspective. The fact that people work at all may lie primarily in the selfish motivations of employees, as Adam Smith recognised, but there will often be a vast area of common ground in which the interests of individual employees converge with those of their firm and the wider society. But the hand that guides humans to help each other by helping themselves appears to be the result of evolution – not Homo economicus.

The key to designing effective organisations is not to strike some (inefficient) compromise between the entrenched interests of individuals and their group, but to work with the grain of human nature to bring individual and organisational interests into alignment.

The first step is to appreciate that humans are imperfect products of evolution, not rational utility maximisers. We might like to think we are rational even if everyone else is not. But even if that were the case, playing rationally in a game with madmen is madness itself. This may have been a key underlying cause of the financial crisis that devastated our economies and wallets over the last few years. As John Maynard Keynes observed: “There is nothing so disastrous as a rational investment policy in an irrational world.”

Originally published here at New Scientist

2016 November 25

Mark van Vugt of VU University, Amsterdam, and the University of Oxford specializes in evolutionary psychology and business. This article sprang from a paper he co-authored with Dominic Johnson and Michael Price entitled “Darwin’s invisible hand: Market competition, evolution and the firm

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  • While all of that is true enough in a sense, it fails to take the next step in looking at the strategic context of economic systems generally, and the failure of classical assumptions at that level.

    Evolution is a topic best understood from many domains simultaneously.
    It is important to get a feel for genetic evolution, and the sorts of physical contexts that were present and the frequencies of different classes of high impact events (like meteor strike – size frequency/impact scale, large volcanoes – size frequency/ impact scale, etc), and the roles of such things in the broader strategic mixes that can evolve and stabilise.
    Understanding some of the details of the biochemistry of evolution gives one an appreciation for the profound subtlety and interconnection that can emerge.

    It is also important to understand complexity theory, and the general classes of complexity that can exist, and the cost/benefits of attempting to compute costs and benefits in the different classes of complexity. David Snowden’s Cynefin framework is a simple but very effective approach to understanding complexity, both in terms of the sorts of constraints present in different types of complexity, and the sorts of strategies that are most efficiently applied. He uses four categories, simple, complicated, complex, and chaotic. All living systems seem to contain mixes of all classes of complexity. Sorting out which is which, and how one responds, is important. Our computational resources are finite, don’t waste them on chaotic domains.

    It is also important to understand the exponentially expanding role of cooperation in higher levels of evolved systems. It is, to a good first order approximation, accurate to characterise all major advances in the complexity of living systems as the emergence of new levels of cooperative strategies with attendant strategies to prevent being overrun by cheats. And there is always something of an “arms race” with cheating strategies. Axelrod did some amazing pioneering work in this domain, and Wolfram has pushed the deeper boundaries.

    Competition makes sense when there is genuine scarcity, and real competition cannot be avoided.
    Cooperation always pays higher dividends when genuine abundance is present.
    People are evolved for both modalities.

    It seems clear to me that all modern economics is based in a scarcity modality, with specialisation and trade of surplus.
    Through most of human history scarcity was real, and trade was of genuine benefit.
    We are now in an age of automation that gives us the technical capacity to provide abundance to all.
    Anything universally abundant has zero market value (by definition – just think of oxygen in the air, arguably the single most important substance to any human being, yet of no market value due to universal abundance).
    Automation has the ability to deliver universal abundance of most goods and services to everyone.
    That would break our market based system of values.

    The question becomes:
    What is more important, money or human life and freedom?

    That is the question of our age.
    Right now, the clear answer for most people is money, because they perceive scaricty.
    I suspect that will change, rapidly, as people become aware that the images of scarcity and austerity that are there experiential reality are present purely to keep the market based system of money working, and for no other reason.
    It is the value we give to money that traps us in scarcity – paradoxically.

    Once one is able to see outside the box of money, the view is very different.
    Real abundance, and the cooperation and security that come with it, are a real possibility, and by no means a certainty.

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  • janardhana anjanappa

    Evolutionary biology one of the approaches in optimization technique for identifying economic actors in decision making from a psychological perspective. In fact, the Genetic algorithm is done based on Evolutionary biology concept and one of the well-known techniques in optimization. Similarly, we can also adopt the game-theory which less complex than evolutionary biology. Is it also an effective tool for identifying the irrational behavior of economic actors. Experimental economics is also a good approach solve this problem through a well-designed survey.

  • janardhana anjanappa

    Evolutionary biology one of the approaches in optimization to find decision making of economic actors from a psychological perspective. In fact, the Genetic algorithm is also based on Evolutionary biology concept and one of the well-known techniques in optimization. Similarly, we can also adopt the game-theory which less complex than evolutionary biology and an effective tool for identifying the irrational behavior of economic actors. Experimental economics is also a good approach solve this problem through a well-designed survey.

  • janardhana anjanappa

    Evolutionary biology one of the approaches in optimization to find best optimal solution/strategy. In fact, the Genetic algorithm an iterative process is also based on Evolutionary biology concept and one of the well-known techniques in optimization. Similarly, we can also adopt the game-theory which less complex than evolutionary biology and an effective tool for identifying the irrational behavior of economic actors. Experimental economics is also a good approach solve this problem through a well-designed survey.

  • carolannie

    The author confidently states that MLS is a better tool for understanding individual/organizational behavior but only discusses this intellectually. I would like to see this used to explain various real life outcomes