Economists try to model human motivation in an attempt to understand how markets work. Traditional economic models assume that the satisfaction people take from consumption depends only on the absolute amount of it. Yet compelling evidence suggests that relative consumption also matters. In contrast to the Darwinian narrative, which emphasizes the link between individual success and relative performance, Adam Smith’s ‘invisible hand’ narrative assumes that individual success depends primarily on absolute income, not relative income. Available evidence leads one to question that assumption. The satisfaction an individual derives from a given consumption level depends on its relative magnitude in society (i.e. relative to average consumption) rather than its absolute level. It appears changes from a reference point matters for decisions, not absolute status of wealth. We are emotional beings strongly attached to and affected by our relative position in society who care more about our relative well-being than our absolute well-being.
Isaac Newton (1642-1727) discovered the natural laws of motion which provided the final piece to the puzzle to explain why the Earth revolves around the sun. Newton was aware of specific problems in the solar system that his laws did not explain which included the fact that Saturn was moving away from the sun while Jupiter was moving closer. To account for movements not able to be explained by his formula, Newton proposed the hand of God to guide the planets in various circumstances – providing long-term stability to the universe. Adam Smith’s claim about the ‘invisible hand’ in Wealth, first published in 1776, pertains to a scheme consisting of all the voluntary actions of people who engage in buying, hiring, producing, consuming, and selling, typically mediating these actions by exchanges involving money. Smith’s point is that, if certain conditions are met, these actions will collectively produce a result that a benevolent God would wish for us.
In the 19th century Herbert Spencer popularized the word evolution. Spencer preferred the Lamarckian evolution of adapted characteristics in which he believed that societies like living organisms evolve from simple states into highly complex forms – equating evolution with progress. He saw evolutionary progress as an economic problem, worked out at the level of the individual. This supported the doctrine of social Darwinism promoted to justify laissez-faire economics, thought best to promote unfettered competition between individuals, and the gradual improvement of society through the survival of the fittest. In the 20th century, economics needed to catch up with the advances in science, turned to biology. To achieve this the market is treated as natural which allows natural science metaphors to be integrated into the trickle-down narrative. The economic elite sought strategic interactions of the kind found in social systems which actually constitute Lamarckian evolution. The market was replaced with competition as the defining character of human relations including redefining individuals as consumers.
Over the past 30 years there have been attempts to promote ‘universal Darwinism’, the concept that any complex system can be understood in terms of the same principles that are the core of Darwin’s Theory of Natural Selection, including socio-economic systems. The predictive power of the theory rests on its specification of systemic selective forces, based on the algorithm of variation, selection and retention. Most commonalities between innovation in nature and technology need little explanation. Trial and error in populations become self-evident necessities, once we accept that humans – like nature – are very poor at anticipating successful innovations. Similarly, extinction results inevitably from limited space and resources in both the natural and technological world. Still, detractors suggest replacing the ‘top-down’ approach of universal Darwinism, with ‘bottom-up’ causal theories that explain how the interplay of descent, experience and learning shapes the competitive performance of firms in the evolution of industries.
Stephen Jay Gould pointed out, the parallel between Darwin’s natural selection and Smith’s invisible hand is remarkable. “The theory of natural selection is uncannily similar to the chief doctrine of laissez-faire economics”. In both instances, there is no regulation from on high to govern the individual transactions; neither natural selection nor the invisible hand actually exists as a tangible entity, but each works to benefit the whole system. Just as Smith saw competition leading inevitably to specialization and diversification that enrich the economy of man, so Darwin saw competition leading inevitably to specialization and diversification that enrich the economy of nature. Smith’s fundamental economic insight was that allowing people to compete in the market place allows the inefficient to be weeded out and the best outcomes to arise for all. There is an obvious parallel between this concept and that of ‘natural selection.’ Individuals are struggling for reproductive success, the natural analogue of ‘profit’. In both the appearance of order is actually the result of blind competition.1
As Darwin saw clearly, life is graded on the curve. For a genetic mutation to be favored, it is not sufficient that it enables the individual to generate large numbers of offspring. It must enable him to produce more offspring than rivals who don’t carry the mutation. Robert Frank notes: Life is graded on the curve. It’s not how big you are, how strong you are, how smart you are. It’s how good you are at the things that count relative to the people around you. As you probably know, there is a curve used in many academic settings. This means that one is not graded on how good he or she is but on how good others are in relation to them. Darwinian narrative counters that workers favor safety regulation not because of insufficient competition, but because of the consequences of excessive competition among themselves.
Robert Frank argues that Darwin’s understanding of competition describes economic reality far more accurately than Smith’s. And the consequences of this fact are profound. Indeed, the failure to recognize that we live in Darwin’s world rather than Smith’s is putting us all at risk by preventing us from seeing that competition alone will not solve our problems. Darwin’s insight that individual and group interests often diverge sharply – suggests Smith’s idea was almost an exception to the general rule of competition. The themes of inequality and competition are driving today’s public debate on how much government we need. The reason Frank gives is “Darwin’s wedge” – a term he coins to emphasize a divergence between individual and group interests which in turn causes wasteful competition and collective loss.2
Sheeham and Wahrman describe, in Invisible Hands: Self-Organization and the Eighteenth Century, the emergence of the language of self-organization that grappled with the problems of accident and causality, the mysteries of aggregation, the nature of organic life, and the complexity of modern existence. They observe that Providence initially gave “a shape and language for thinking about and describing nature’s dynamic processes. Providence was also, in turn, a shelter under which the idea of self-organization could grow.” There are two main self-organizational narratives today: Smith’s invisible hand; and Darwin’s invisible hand. These two systems of self-organization are centred on the production of knowledge – basically a disparate attempt at justifying a new faith in the world. These narratives stave off breakdown in order to allow the world to make sense – rendering the crisis (economic, metaphysical, moral, etc.) a narrative point, a turning point in the narrative rather than a breakdown in the narrative as such. If self-organizational systems perpetuate the providential desire for meaning that produces a certain kind of hope, then which of the two is the most meaningful self-organization narrative?3
Darwin, renowned for the theory of evolution, was a naturalist, not an economist, and his view of the competitive struggle was different from Smith’s in subtle but profound ways. Growing evidence suggests that Darwin’s view tracks economic reality much more closely. The central theme of Darwin’s narrative was that competition favors traits and behavior according to how they affect the success of individuals, not species or other groups. The real reason for regulations is to protect ourselves from excessive competition with one another. These regulations to deal with collective action problems are squarely consistent with the Darwinian view that life is graded on the curve. Market failures in Adam Smith’s framework occur only when competition is limited. The Darwinian framework, in contrast, holds that market failures can occur even when everyone has taken full advantage of all available opportunities for potential gain. Darwin’s view of the competitive process will prevail over Smith’s in the end because it offers a far more rigorous explanation of the behaviour patterns observed.2
In 1974 Richard Easterlin observed that self-reported happiness of individuals (i.e. subjective well-being) varies directly with income at a given point in time, but average well-being tends to be highly stable over time despite tremendous income growth. Easterlin argued that these patterns are consistent with the claim that an individual’s well-being depends mostly on relative income rather than absolute income. Consumption creates negative externalities. For example, individuals consume and therefore work to increase their status, then they will tend to work too much relative to their socially optimal level by maintaining two or three jobs. This argues for minimal wage regulation to support a living wage. Social status is important in determining how much control individuals have on their own lives and participation in society. An individual with lower income with respect to his group peers can suffer from psychosocial stress which attacks the immunological system, and individual health might worsen. Thus Newton’s invisible hand narrative is a fundamental paradigm shift from Smith’s ‘invisible hand’ for modeling human motivation.
1Ted Davis on Reading the Book of Nature (06 Oct 2016) Darwin, Free Market Economics, and Evolution by Natural Selection. https://biologos.org/blogs/ted-davis-reading-the-book-of-nature/darwin-free-market-economics-and-evolution-by-natural-selection
2Frank, Robert. Charles Darwin, Economist. https://www.the-american-interest.com/2011/09/28/charles-darwin-economist/
3 Dubilet, Alex. (26 May 2016) Book Review of: Invisible Hands: Self-Organization and the Eighteenth Century. https://tif.ssrc.org/2016/05/26/invisible-hands/