Posted on 03 May 2021 Written by Blair Fix Economic Development and the Death of the Free Market - Part 1 There is perhaps nothing more central to mainstream economics than the belief in free markets. The idea is seductively simple. Guided only by self-interest, individuals can act through the market to benefit the whole of society. This notion of the 'invisible hand' (Smith, 1776) has become foundational to neoclassical economics. The theory proposes that in a perfectly competitive market, the autonomous actions of selfish individuals will lead to an outcome that is 'Pareto optimum' (Mas-Colell et al., 1995). Please share this article - Go to very top of page, right hand side, for social media buttons. In this situation, no person can be made better off without making at
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posted on 03 May 2021
Written by Blair Fix
Economic Development and the Death of the Free Market - Part 1
There is perhaps nothing more central to mainstream economics than the belief in free markets. The idea is seductively simple. Guided only by self-interest, individuals can act through the market to benefit the whole of society. This notion of the 'invisible hand' (Smith, 1776) has become foundational to neoclassical economics. The theory proposes that in a perfectly competitive market, the autonomous actions of selfish individuals will lead to an outcome that is 'Pareto optimum' (Mas-Colell et al., 1995).
Please share this article - Go to very top of page, right hand side, for social media buttons.
In this situation, no person can be made better off without making at least one person worse off.
The neoclassical theory of free markets is not without critics. Heterodox political economists have pointed out many flaws, mostly related to the theory's unrealistic assumptions (Hunt, 2011; Keen, 2001; Keen and Standish, 2006; Lee and Keen, 2004; Means, 1992; Mirowski, 1991; Nitzan and Bichler, 2009; Pullen, 2009; Robinson, 1962; Sraffa, 1960; Veblen, 1898). My goal here, however, is not to revisit this debate, but instead to broaden it. The neoclassical theory of free markets is, at its core, a theory of how human groups should organize. It postulates that groups can organize effectively using decentralized competition, and that the selfish actions of individuals can benefit the group. Yet this theory contradicts, in almost every detail, the modern evolutionary understanding of how social organisms function.
According to the theory of multilevel selection, social organisms face a fundamental dilemma. Actions that are best for the group rarely maximize relative fitness within the group (Sober and Wilson, 1999; Wilson and Gowdy, 2015; Wilson and Sober, 1989, 1994; Wilson and Wilson, 2007). This creates a tension between the self-interest of individuals and the interest of the group. To resolve this tension, social organisms find ways to suppress the self-interest of individuals. How they do so is an open question. But evolutionary history reveals a common trend. As groups become larger and more complex, they tend to become more hierarchical (Sec. 2).
In this evolutionary context, the theory of free markets is an outlier. It posits that, contrary to what we observe among other social organisms, humans need not suppress self-interest to organize in large groups. And we need not use hierarchical organization. We can build complex societies, the theory claims, using decentralized competition.
My goal here is to test this claim. I look for evidence that human societies remain decentralized as they industrialize (Sec. 3). I find little evidence that this is true. Instead, the data suggests that to industrialize, human societies turn to hierarchical organization. As energy use increases, governments tend to get larger and the relative number of managers tends to grow (Sec. 3.4).
To explain this evidence, I develop a formal model of institutional hierarchy (Sec. 3.5). The model assumes that institutions are hierarchically organized, and that they grow larger as energy use increases. After validating this 'energyhierarchy' model, I use it to infer how that the 'degree of hierarchy' (Sec. 3.2) within societies varies with economic development. The results are unambiguous: as societies consume more energy, they appear to become more hierarchical (Sec. 3.6).
This growth of hierarchy seems to contradict the neoclassical theory of free markets. Societies do not (as the theory claims they should) use small-scale competition to develop. Still more puzzling, I find that the growth of hierarchy may be associated with the spread of free-market ideas (Sec. 4). Looking at the United States, I find that as government grew and the number of managers increased, free-market jargon became more popular (Sec. 4.1). Moreover, international evidence suggests that cultures that are more individualistic and more tolerant of deviant behavior are, at the same time, more hierarchical (Sec. 4.3).
To make sense of this paradox, I speculate that free-market theory may actually stoke the growth of hierarchy. It does so, I propose, by treating firms (not individuals) as the unit of competition. This focus legitimizes the firm as an autonomous unit, while leaving the firm's internal structure as a 'black box'. By championing firm autonomy, free-market theory may legitimize the firm's internal chain of command, thereby justifying the accumulation of power.
If this idea is correct, it leads to a radical way of integrating free-market ideas with the theory of multilevel selection. The two schools may not be competing scientific hypotheses. Instead, neoclassical economics may be best treated as a belief system whose existence should be explained using the tools of cultural evolution.
(2) The great debate: hierarchy vs. the free market
Hierarchy is to free markets what light is to darkness: namely, the polar opposite. Free markets decentralized control. Hierarchies centralize it. Free markets promote autonomy. Hierarchies promote subservience. The two forms of organization, it seems, could not be more different.
Economists have long recognized this fact. But rather than study the differences between hierarchy and the market, mainstream economists have opted instead to pass judgment. The dominant school in economics - neoclassical theory - claims that outcomes from perfectly competitive markets are 'optimal', whereas outcomes from centralized control are 'inefficient' (Acemoglu and Robinson, 2001).
I find this response problematic. It is much like if biologists deemed singlecelled organisms to be 'optimal', but deemed multicellular organisms 'inefficient'. This conclusion misses the point. The two forms of life are simply different. What is interesting is not whether one form is 'better' than the other, but why the two forms of life exist, how they evolved, and where evolution is headed.
I propose that by taking this wider evolutionary perspective, we can better understand the debate between free markets versus hierarchy. The question we should ask is - what is the direction of human social evolution? Towards less hierarchy? Or towards more of it?
(2.1) Hierarchy in an evolutionary context
Before we look at the direction of hierarchy among human societies, we should look first at the big picture. Let's review the role of hierarchy in the evolution of life on Earth.
Hierarchical structure is ubiquitous in the natural world - so much so that the social scientist Herbert Simon proposed that hierarchy is the 'architecture of complexity' (1991). The idea is that complex systems are built by merging simpler components, creating a hierarchy of sub-systems (Annila and Kuismanen, 2009). Along with this hierarchy of structure, Simon argued, comes a hierarchy of control. Complex biological systems are generally not composed of autonomous subcomponents. Instead, as complexity grows, subcomponents surrender autonomy to a centralized system of command and control.
The evolution of life on Earth supports Simon's idea that hierarchy is the 'architecture of complexity'. Through a series of 'major evolutionary transitions', life has grown more complex (Smith and Szathmary, 1997). Although different in form, each transition appears to obey the same principle: complex structure grows from the merger of simpler sub-units.
Life began, we presume, when organic molecules assembled into larger entities. The basic structure that emerged - and remains to this day - is that of the cell. In the next major transition, eukaryotic cells evolved (we believe) from the merger of two prokaryotic cells - a bacterium and an archaeon (LopezGarc'a et al., 2017; Lopez-Garc'a and Moreira, 1999; Margulis, 1981; Sagan, 1967). The bacterium became the mitochondria of modern eukaryotes, while the archaeon became the cytoplasm and nucleus.
In the next transition, eukaryotic cells evolved into multicellular organisms - a symbiosis that seems to have happened multiple times (Grosberg and Strathmann, 2007). In the last major transition, solitary organisms evolved into 'eusocial' species that cooperate in large groups (Nowak et al., 2010; West et al., 2015; Wilson and Holldobler, 2005). With their large colonies and intricate caste structure, the social insects (ants, bees, termites) are the most conspicuous example of this eusociality. Some scientists believe that modern humans may be the latest addition to the eusocial club (Gowdy and Krall, 2013, 2014; Richerson and Boyd, 1998; Turchin, 2013).
Looking at these major transitions, we see that they obey the two principles of hierarchy. First, more complex structure is built from simpler components. Second, the growth of complexity seems to involve the centralization of control.
Let's begin with the nesting aspect of hierarchy, which we see everywhere in life. Eukaryotic cells, for instance, are built from simpler organelles (i.e. the nucleus and mitochondria). Multicellular organisms, in turn, are built from simpler cells. And eusocial colonies are built from individual organisms. Each new layer of complexity, it seems, is assembled by merging simpler components.h
This nested hierarchy, Herbert Simon proposes, occurs through a process of evolutionary problem solving (Herbert, 1962). Structures evolve that solve specific problems. The cell, for instance, solves the problem of separating 'living' matter from 'non-living' matter. Once this problem is solved, the newly created structure serves as the building block to solve new problems. Eukaryotic cells built on the structure of prokaryotes to solve a new problem - one of energetics. When bacterium evolved into eukaryotic mitochondria, they shed most of their DNA, freeing up more energy for protein synthesis (Lane, 2011; Lane and Martin, 2010). This free energy may be what allowed eukaryotes to grow more complex than their prokaryotic counterparts (Lane, 2014, 2015).
In addition to hierarchy in the 'nesting' sense, the evolution of life also follows the principle of hierarchy in the sense of centralized control. Large, complex organisms are not composed of autonomous units. Instead, the growth of complexity seems to involve the gradual loss of autonomy among sub-units, and the growth of centralized control. The eukaryotic cell, for instance, is not composed of autonomous organelles. Instead, sub-units are governed by a 'command and control center' - the nucleus (Pennisi, 2004).
Similarly, multicellular animals have evolved centralized control in the form of the nervous system (Arendt et al., 2008). Eusocial insects have elaborate caste systems in which most individuals surrender their reproductive capacity to a single queen (although the queen does not, in turn, directly control workers) (O'Donnell, 1998; Shimoji et al., 2014).
Humans (who are possibly the latest eusocial species) also organize using hierarchy. Evidence suggests that as societies become more populous, they add new layers of administrative hierarchy (Turchin, 2010; Turchin and Gavrilets, 2009). The use of centralized control may arise for two (related) reasons.
First, assembling a larger system from many smaller components requires coordination. Although decentralized coordination may be possible, it seems that organization within (and among) living things usually involves some degree of centralization.
Second, there is the problem of the 'self-interest' of sub-units. The major evolutionary transitions happened by merging sub-units that were previously autonomous. According to the theory of multilevel selection, this merger is not possible unless the 'self-interest'1 of sub-units is suppressed (Okasha, 2005; Wilson, 1997; Wilson et al., 2008). That is because there is often an evolutionary conflict between the 'interest' of the group versus the 'interest' of individuals within the group (Sober and Wilson, 1999; Wilson and Gowdy, 2015; Wilson and Sober, 1989, 1994; Wilson and Wilson, 2007).
To understand this conflict, recall that natural selection rewards differential reproduction - what biologists call 'fitness'. In many scenarios, what is 'fit' for individuals is not 'fit' for the group. Take human warfare as an example. For the group (an army), it is best if all soldiers charge into battle cohesively. But for an individual within the group, the best strategy is to run away from the frontline (Fix, 2019b).
So here we have a conflict between levels of selection. By deserting, an individual soldier can reduce their chance of death (hence, increase their fitness). However, if too many soldiers desert, the army collapses (hence, the group's fitness decreases). To succeed in battle, the group must therefore suppress the self-interest (relative fitness) of deserters.2
Multilevel vs. gene-centric selection
The theory of multilevel selection argues that successful groups must suppress natural selection at lower levels of organization. Since this claim remains controversial, it is worth discussing problems with the alternative view. According to orthodox Darwinism, all aspects of evolution can be reduced to competition between genes.
Popularized by Richard Dawkins (1976), the gene-centric argument is convincingly simple. If an organism outbreeds its competitors, the organism's genes also win. It seems, therefore, that higher levels of selection are not needed to explain the evolution of organized groups. Instead, complex structure arises solely from the 'self-interest' of genes.
While at first convincing, this argument makes a subtle philosophical mistake. It assumes that a successfulreduction (breaking a system into parts) implies a successful resynthesis (using the parts to rebuild the system). Often, however, reduction is a one-way street. Given a complex system, we can break it into parts. But we cannot take the parts (alone) and rebuild the system.
As an example of this asymmetry, consider human travel. If I board an airplane to Tokyo, we know that the atoms in my body did the same thing. To paraphrase Richard Feynman, we can state unequivocally that 'everything that I do, my atoms do'.3 Unfortunately, this reduction tells us nothing about why I went to Tokyo. It turns out that I had a job interview - something that is easy to understand by looking at a higher level of organization (the individual). But if we try to derive 'job interviews' from atomic physics, we will get nowhere.
The same principle holds in evolution. We can always reduce evolution to competition among genes. Often, however, we cannot start with genes (alone) and resynthesize the evolution of higher-level structure. Interestingly, this asymmetry is evident in Richard Dawkin's exposition of gene-centric theory. He notes that organisms are 'vehicles' for genes. But he does not explain how these vehicles came to exist.
On that front, how did multicellular organisms evolve? From the gene's eye view, we are faced with a paradox. Given atomistic competition between cells, one would expect that natural selection would suppress the evolution of multicellularity, and instead favor the evolution of cancer. That is because cancerous cells outreproduce normal cells. Cancer should therefore be favored by natural selection. So multicellularity (as we know it) should not exist.
Since multicellular organisms do exist, this logic must have a flaw. To see it, however, we need to leave the gene's eye view and instead look at higher levels of selection. When cells began to organize in groups, selection at the multicellular level began to override selection at the cell level. That created pressure to suppress cancer. The reason is simple: cancer tends to kill multicellular organisms. Hence at the organism level, cancer is selected against. This higher-level selection allowed mechanisms (such as the immune system) to evolve that suppress somatic (cell-level) evolution (Aktipis, 2016). In this light, cancer is not a 'disease' so much as a failure of the organism - a "failure of multicellular systems to suppress somatic evolution" (Nedelcu, 2020).
To wrap up this discussion, orthodox Darwinism reduces evolution to the spread of genes - something that can always be done in hindsight. In contrast, multilevel selection theory tries to resynthesize complex systems by understanding the tug-of-war between different levels of selection. The key insight of multilevel selection theory is that high-level organization requires high-level selection that suppresses selection at lower levels. Among multicellular animals, organism-level selection suppresses cell-level selection. And among social animals, group-level selection suppresses individual-level selection.
Hierarchy as a tool for suppressing lower-level selection
Multilevel selection theory does not specify the mechanisms that suppress lower levels of selection. But the properties of biological systems suggest that hierarchy may be a common solution.
Looking at the major evolutionary transitions, John Stewart argues that successful groups suppress lower levels of selection by turning to top-down 'management' (Stewart, 2019a,b, 2020). In this sense, large-scale organization (whether of molecules, cells, or organisms) is accomplished by integrating subunits into a hierarchical control structure.
Whether complex organization requires hierarchy is an open question. But it does seem that complexity and hierarchy go hand in hand.
1 Note that the words 'interest' and 'self-interest' do not indicate intent. Rather, they are a Darwinian metaphor for actions that increase relative 'fitness' (differential reproduction).
2 Armies often suppress the motive to desert by making it a capital crime. The certain threat of capital punishment makes the possible threat of battlefield death the lesser of two evils.
3 Speaking about the importance of the atomic theory of matter as the basis of other fields, Richard Feynman remarked: "The most important hypothesis in all of biology, for example, is that everything that animals do, atoms do" (Feynman et al., 2013, emphasis in original).
This article is part of a new research paper draft ("Economic Development and the Death of the Free Market ") being presented serially. Here are the parts:
- Evolution of Free Markets and Hierarchy
- The Growth of Hierarchy with Economic Development
- Energy and Hierarchy
- Rethinking Free-Market Theory
- Conclusions and Methods
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