HOW
MARKETS FAIL
In my mid-fifties, I
found myself stranded 400 miles from home on what proved to be a temporary job.
In the long nights away from my loved ones, I began to write a book for the
education of my sons. I called it "To My Sons, Conversations We Never Finished
at the Dinner Table." It began as an attempt to unravel a mystery that haunted
me then and now: Why were perfectly rational and well-educated people employing
irrational and unsustainable means of adapting to their environment?
The answer to my
question appeared when I realized that we are what we adapt to and that how we
adapt to an environment changes that environment. People from the prosperous
West will find it difficult to believe that their adaptations may have dire
consequences. They do. The first great root of our sorrows inhabits the ground
on the dark side of our most compelling success--the ability to create and
employ tools. Presumably, technology can fix anything. Therefore, we overlook
the most dramatic consequence of populating our environment with machines and
chemicals and the other artifacts, like money, developed by industrial
economies. We have begun adapting to our inventions, which is not the same as
adapting to the natural world that formed our genome.
For example, water usage
was once limited to the annual rainfall that filled rivers and lakes. Now we
can pump millions of gallons of ancient water from aquifers thousands of feet
underground. When they dry up the annual rainfall will not be sufficient.
Adapting to the water pump instead of the annual rainfall, a short-term fix,
will be part of our undoing. Adapting to the rainfall would require ever
increasing efficiency, not ever increasing use of energy.
We also assume that nature's adaptations to our
inventions will not harm us. However, nature has its own algorithms, which do
not bow to our welfare. For instance, global warming occurs as a result of
nature's response to our technology. Nature does not view the human race as an
exceptional species, one to whom its rules do not apply. Unfortunately, most people do not
yet appreciate the profound implication of natural selection: A species that
adapts to the wrong thing will not survive. In this context, we can discern an objective purpose for morality and
therefore what values to employ in its application.
The way technology has evolved lies at the heart of
adapting to the wrong thing. Technological designs often ignore natural
selection's algorithm of resource efficiency, and the impact on the environment
that we are adapted to, in favor of designs that produce virtual wealth--such as
money. This surrogate for intrinsic value has gained control of real wealth for
its own purposes, turning resources into cash without reference to the
intrinsic value of what is produced or the real cost of methods of producing
it. Money has become the objective of production rather than simply a medium of
exchange--another example of adapting to the wrong thing. Similarly,
technology's ability to produce surpluses raises the bar on greed. If everyone
produces surpluses, not everyone can sell theirs in the resulting zero-sum
competition. In the desperate capitalist competition that results, ethics just
get in the way.
For thousands of years
people were well, if not perfectly, adapted to their environment. It took
centuries of cultural evolution to work out those adaptations, which, thanks to
technology, we now erroneously view as obsolete. Adaptations the environment
cannot sustain have taken their place. We have traded wisdom for a machine. As
part of the regime that justified reversing evolution, evangelism in America
evolved from God not mammon, to
God and mammon, to God is mammon.
The complexity generated by the
irreducible algorithms that govern the forces we must survive encourages a
reductive analysis of those forces. We have a limited capacity for isolating
and identifying governing algorithms. Assumptions are employed to fill in the
gaps.
For example, Adam Smith's
"invisible-hand" is assumed to redirect a multitude of individual
self-interests in the market place into a coalescence of interests that serve
the general good, as long as the market remains free to "do its thing." Aside
from the fact that no data supports that assumption, Darwin discovered in his
research on natural selection that when individual interests conflict with
general interests, a common occurrence, individual interests usually prevail.
Intra-species competition goes
on all the time. The most dramatic example is the competition for males to mate
with as many females as possible. What attracts females or defeats other males
doe not necessarily produce by way of natural selection a characteristic that
favors the species as a whole. Most of those competitions are based on relative
rankings. The male only has to be better than his competition. Huge antlers may
help the dominant male but they do nothing for the specie's ability to run
faster or through dense bush. The species has nothing to say about those
competitions. All this is set out definitively in The Darwin Economy by Robert H. Frank. The point
to be made here is that the fallacy of the benevolent market parallels, or
could be a result of, the systemic blind side of natural selection I reference
as natural selection's paradox.
Natural selection is probably
the least reductive of all science's memes because it describes how all things
biological, and often social, acquired their design. The forces behind all
human activity appear more clearly if natural selection provides the context
for analysis. Frank even predicts that Darwin will someday supplant Smith in
economics. I hope we can survive that long.
Natural selection fails in one
critical context. It does not, indeed cannot, distinguish a short-term
adaptation from a long term-adaptation in the short term . That algorithm makes the
future. It does not decide it. It makes no value judgments. How science has missed
the paradox amazes me but the concept of natural selection is less than 200
years old and remains poorly understood and not often discussed outside of
academia.
Natural selection (evolution)
and the invisible hand (the market) are both algorithms describing how things
obtain their shape. The paradox embraces both the tendency to go with the
short-term adaptation (profits) and Darwin's observation that competition between
individuals may produce adaptations not in the best interest of survival of the
species. Clearly, the market may evolve adaptations favorable to some
individuals at the expense of a great many other individuals.
The significance of the paradox
remains unrecognized. If the short-term adaptation uses up the resources needed
for the long term, the species will become extinct. Natural selection has done
its thing, which is probably why science has ignored the paradox. That makes
sense in relation to other species whose adaptations are local and fairly
limited. In the case of humans, whose adaptations create world-wide,
earth-shaking consequences, the paradox makes all the difference. Our
short-term adaptations threaten to change our environment to the point where
our genes, which define the ability to adapt, may not survive. The short-term
adaptations, like the individual interests that create market failures, usually
prevail. People do not worry about the long term as much as they do about the
short term. Virtually every decision made today only deals with the short term.
As a matter of survival, the
paradox creates the necessity for ethical constructs based on survival of the
species. No other time frame suffices for curtailing short-term strategies. The
genes know best. If they do not survive, we do not survive. Adam Smith, the
founder of the invisible-hand, acknowledged that ethics are critical for the
success of markets. Ethics can prevent the corruption that self-interest
creates at the expense of public interests. The invisible hand requires a
conscience when individual interests do not coincide with general welfare. The
pretense that some invisible objective force will make everything right merely
justifies the failure to make the difficult choices that the short term verses
the long term creates. The short term prevails, along with other apologies for
greed.
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