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How Markets Fail

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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.

The choices engendered by the paradox raise ethical questions, not the least of which is our responsibility to future generations. Those questions often arise in the context of how individuals procure the energy required for survival, including which means of production to employ. Two choices exist at each end of that spectrum. (There are degrees and variances.) One may cooperate in a division of labor based on merit where everyone shares in the production and distribution of the product, or they may appropriate other people's labor by means that may or may not be equitable. Historically, the former has produced the most efficient societies, which may deteriorate by virtue of the conflict between individual and collective interests that Darwin observed, which leads to adaptations through means employing something like the second choice. Without ethics, that will probably happen.

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I practiced law for 30 years as a city attorney. I taught elementary school before that. I became concerned with the many adaptations to our environment that I could not believe could be sustained. How could so many rational people adopt clearly (more...)
 
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... by Carter stroud on Wednesday, Jan 11, 2012 at 9:40:55 PM
What I don't get is how intelligent people can rea... by Thomas Brown on Thursday, Jan 12, 2012 at 9:08:02 PM
Thank you Mr. Brown for such welcomed validation. ... by Carter stroud on Friday, Jan 13, 2012 at 4:58:02 PM
I am very grateful to Thomas Brown for leading me ... by Daniel Penisten on Friday, Jan 13, 2012 at 1:59:18 PM
Thank you for the good words. Sometimes it gets lo... by Carter stroud on Friday, Jan 13, 2012 at 5:07:59 PM