Sunday, February 14, 2010

On Natural Selection and Free Markets

Since 4 billion years, life has evolved on this planet by a process called natural selection. Simply put, the individuals and species best adapted to their current surroundings survive and propagate their traits to their offspring, while the other struggle for survival and die out.

I think at some level, the concept of free markets is similar to natural selection. The people or enterprises best suited to the current market conditions survive and thrive. (Note that I am not saying that free market theory = natural selection, but merely that they are similar to some extent). And the one thing we know from our 4 billion year history is that the system works. Give it enough time and space and we might end up with something rich and diverse, like life on planet earth.

Does that mean laissez-faire free markets are the way to go for the various national economies today?

I think this is where we should think about this problem a little bit more. Here are a couple of my thoughts on this.

The first is that natural selection works, but only for the species best adapted to their surroundings. The rest die out. It is estimated that around 99.9% of all the species that ever lived are now extinct. Similarly free markets may not be the kindest to the folks who are least fit to survive in the market: people who are currently unemployed or poor, especially the kids born homeless and poor. Most of us don’t fall in this group, so we might not be the best set of people to decide for them.

Also natural selection kept species interdependent via the food chain i.e. change in the population of one species caused a change in the population of the other species up and down the food chain. This was only true until humans evolved and made all their scientific progresses. Now food can be produced in factories. We don’t need to keep the millions of species around to survive. A parallel can be drawn between invasive species like humans and the big monopolies which are bound to arise in a free market without regulations. A big enough monopoly can take control of the market and bend it to its will. It can kill all the competition exacerbating the problems I mentioned in the paragraph above.

So what’s the best solution if we had the option of choosing one? I’m not sure. Clearly the other extremes (e.g. communism) don’t work either, and have been utter failures wherever employed.

One thing I am fairly confident about is that in the long term, we cannot have a perfect system (economic or otherwise). Perfect systems are a myth. And in spite of the criticisms, I think the current American system is pretty good and ideal results might be achieved by making small incremental changes to it. Obama’s “reforms” might serve as a good experiment to test whether moving to the left of the current system works or not. They might succeed or they might fail, but we will come out wiser on the other side.


Sanjit said...

Free markets, not crony capitalism, are beneficial to the poor. They are not nice to a provider that cannot better his/her competition. They, however, are the best for the consumer. Consumer is king. Not sure why the providers matter, especially when a better one exists.

Nomaswap = Swapneil said...

Wonderful comparison of economics with science coming from an engineer!
A question - when you say current American system - do you intend to say it is a free market economy?
Also, do you feel the system needs minor adjustments or major overhauling?
I feel evolution of US economy has been rather predatory and in that sense you are right about the jungle law analogy.

Nikhil said...

@Sanjit, a consumer needs to be a provider to survive. They are not 2 distinct sets of people.

- American system is mostly right-wing/free market system, but lately Obama's reforms are moving it slightly to the left.
- I think minor adjustments are more measurable. Major overhauls produce too many side effects. So it's tougher to measure what change lead to what effect.

Sanjit said...

Providers won't exist unless there are consumers and usually consumers can choose the provider in a market economy.

Also, any person that is born on the face of this earth, unless oppressed, physically or mentally challenged, can be expected to add value and in return enjoy the power to purchase. Of course, not all have the same purchasing power.

Markets have a lot of opportunity for the unskilled too. One reason why many poor move to the cities.

BTW, the United States doesn't have a free market economy (you must have heard of bailouts, tariffs, subsidies in the US context). It has an economy freer than many in the world :), not a free market economy.