The Mind of the Market
How Biology and Psychology Shape Our Economic Lives
By Michael Shermer
Henry Holt and Company Copyright © 2008 Michael Shermer
All rights reserved.
THE GREAT LEAP FORWARD
Living along the Orinoco River that borders Brazil and Venezuela are the Yanomamö people, hunter-gatherers whose average annual income has been estimated at the equivalent of about $100 per person per year. If you walk into a Yanomamö village and count up the stone tools, baskets, arrow points, arrow shafts, bows, cotton yarn, cotton and vine hammocks, clay pots, assorted other tools, various medicinal remedies, pets, food products, articles of clothing, and the like, you would end up with a figure of around three hundred. Before ten thousand years ago, this was the approximate material wealth of every village on the planet. If our species is about a hundred thousand years old, then 90 percent of our history has been spent in this state of relative economic simplicity.
Living along the Hudson River that borders New York and New Jersey are the Manhattan people, consumer-traders whose average annual income has been estimated at $40,000 per person per year. If you walk into the Manhattan village and count up all the different products available at retail stores and restaurants, factory outlets, and superstores, you would end up with a figure of around ten billion. This is a mind-boggling comparison, first made by the economist Eric Beinhocker in his comprehensive study The Origin of Wealth. Something happened over the last ten thousand years to increase the average annual income of hunter-gatherers by four hundred times.
As remarkable as this jump in income is, it pales in comparison to the differences between hunter-gatherers and consumer-traders in terms of product count, which in modern economics is measured in Stock Keeping Units, or SKUs, a retail measure of the number of types of products available in a store. By one estimate, for example, seven hundred new products are introduced into the market every day, a quarter of a million a year. In 2005, there were 26,893 new food and household products alone, including 187 new breakfast cereals, 303 new women's fragrances, and 115 new deodorants. Between the Yanomamö's three hundred SKUs and the Manhattans' ten billion SKUs is a difference of 33 million times.
This difference of 400 times in income and 33 million times in products almost beggars description. We need analogies to get our minds around this staggering disparity. One contrast of the income difference: at its widest point, Manhattan island is 3.7 kilometers across, a distance you could easily walk in less than an hour while window shopping and skyscraper gazing. Multiply that figure by 400 and you get 1,480 kilometers, or slightly more than the distance from New York to Atlanta, which would take you 261 hours (10.9 days) to walk at a comfortable pace without stopping. Even more dramatic is a comparison of the SKU difference. The length of Manhattan is 21.5 kilometers. Multiply that by 33 million and you get a figure of 709,500,000 kilometers, or the approximate distance between Earth and Jupiter when both planets are in their orbits on the same side of the sun. You can walk the length of Manhattan in a day, but even traveling at the breakneck speed of a little over 51,000 kilometers per hour, it took the Voyager I spacecraft a year and a half to get to Jupiter.
If ever there was a great leap forward, this was it, comparable to the evolution of bipedalism, the big brain, and consciousness, equivalent to the invention of fire, the printing press, and the Internet, and on par with the Agricultural Revolution, the Industrial Revolution, and the Digital Revolution. And this great leap did not happen gradually. It has been estimated that the $100 per person annual income had risen only to about $150 per person by 1000 BCE — the end of the Bronze Age and the time of King David — and did not exceed $200 per person per annum until after 1750 and the onset of the Industrial Revolution. In other words, it took 97,000 years to go from $100 to $150 per person per year, then another 2,750 years to climb to $200 per person per year, and, finally, 250 years to ascend to today's level of $6,600 per person per year for the entire world — and as we just saw, an order of magnitude higher still for the wealthiest people in the richest nations. If we compressed that 100,000-year period into just one year, then the last 250-year period of relative prosperity would represent less than one day out of the year. Or, if we condensed the hundred millennia into one 24-hour day, our epoch of industrial production and market economies accounts for a mere 3.6 minutes. In other words, the age in which we live and take for granted as normal and the way things have always been, in fact constitutes a mere one-quarter of one percent of the history of humanity.
How and why did humans make this great economic leap? We can answer this question by employing the methods and findings of science from a number of related and revolutionary new fields, including complexity theory, evolutionary psychology, evolutionary economics, behavioral economics, neuroeconomics, and virtue economics. We need all of these new fields — along with those from the traditional sciences — brought to bear on this question because it remains one of the greatest unsolved mysteries of our time.
For simplicity's sake, I shall lump all of these sciences under the rubric of Evolutionary Economics — the study of the economy as an evolving complex adaptive system grounded in a human nature that evolved functional adaptations to survival as a social primate species in the Paleolithic epoch in which we evolved. This is a swanky way of saying that the economy is a very complex system that changed and adapted to circumstances as it evolved out of a much simpler system, that we spent the first ninety thousand years of our life as hunter-gatherers living in small bands, and that this environment created a psychology not always well equipped to understand or live in the modern world. In essence, in trying to explain the Great Leap Forward, I am addressing three problems about the mind of the market:
1. How the market has a mind of its own — that is, how economies evolved from hunter-gathering to consumer-trading.
2. How minds operate in markets — that is, how the human brain evolved to operate in a hunter-gatherer economy but must function in a consumer-trader economy.
3. How minds and markets are moral — that is, how moral emotions evolved to enable us to cooperate and how this capacity facilitates fair and free trade.
This is a really hard problem to solve.
* * *
Ever since I took a course in astronomy at the start of my college education, I have noticed a disturbing tendency on the part of both the scientific community and the culture at large to rank the sciences from "hard" (the physical sciences, such as astronomy, physics, and chemistry) to "medium" (the biological sciences, such as anatomy, physiology, and zoology) to "soft" (the social sciences, such as psychology, sociology, and anthropology). History was not even considered a science, and economics was off in its own land in the balkanized world of academia. And as rankings are wont to be, this hierarchy includes an assessment of worth, with the hard sciences being the most worthy and the soft sciences the least, accompanied by corresponding levels of recognition and support. Yet, having had some training in the physical and biological sciences, and extensive education and experience in the social sciences, I have always felt that the rank order is precisely reversed.
The physical sciences are hard in the sense that calculating differential equations is difficult, for example; but the subject matter itself is relatively easy to define and explain when compared to the considerably more complex and interconnected world of life and ecosystems. Yet even the difficulty of constructing a comprehensive theory of biology — which still remains a knotty problem in the life sciences — is pallid in comparison to that of the workings of human brains and societies. In my opinion, the social sciences are the hard sciences, because our subject matter is orders of magnitude more complex and multifaceted.
In the neurosciences, the study of consciousness has come to be known as "the hard problem" because it has been so difficult to explain how the activity of billions of individual neurons generates the collective phenomenon of conscious thought, or what one scientist calls the "society of mind." An even harder problem — what I call the really hard problem — is for science to explain how the activity of billions of individual humans generates the collective phenomenon of culture, or the "society of culture," and what its proper economic and political structure should be to achieve social harmony.
As humans made the transition from hunter-gatherers to consumer-traders, groups have tried hundreds of different social experiments in an attempt to solve the really hard problem. Bands, tribes, chiefdoms, states, and empires have been formed. Theocracies, plutocracies, monarchies, and democracies have been tried. Tribalism, statism, socialism, and now globalism have been practiced. From no trade to fair trade to free trade, endless permutations of economic arrangements have been employed, with greater and lesser success. And for millennia, philosophers and scholars from all walks of life and from around the world have attempted to solve the really hard problem with little consensus. Can modern science do better?
* * *
Evolution is a complex system that emerges out of the simple actions of organisms just trying to survive and provide for their offspring. Economies are complex systems that emerge out of the simple actions of people just trying to make a living and provide for their children. Thus, when we address (1) how economies evolved from hunter-gathering to consumer-trading, (2) how the human brain evolved to operate in a hunter-gatherer economy but must function in a consumer-trader economy, and (3) how moral emotions evolved to enable us to cooperate and how this capacity enables fair and free trade, we are really studying (1) the behavior of markets and economies, (2) the psychology of people operating in markets and economies, and (3) the moral aspects of markets and economies.
Evolution and economics are not just analogous to one another; they are actually two different examples of a larger phenomenon called complex adaptive systems, in which individual elements, parts, organisms, or people interact, process information, and adapt their behavior to changing conditions. These are systems that learn and grow as they evolve from simple to complex, and they are autocatalytic, which means that they contain self-driving feedback loops (as when a PA system develops a feedback loop between speakers and microphone, resulting in an accelerating rise in pitch and volume). Here are some examples of complex adaptive systems and what emerges from them, as the built-in autocatalysis leads to their being self-organized:
Life is a self-organized emergent property of prebiotic chemicals that came together in a manner that allowed them to be self-sustaining and capable of duplication and reproduction.
Complex Life is a self-organized emergent property of simple life, as when simple prokaryote cells coalesced into the more complex eukaryote cells of which we are made, which contain within them organelles that were once prokaryote cells (such as mitochondria, which have their own DNA).
Multicellular Life is a self-organized emergent property of single-celled life forms, which merged together as a cooperative strategy for more successful survival and reproduction.
Immunity is a self-organized emergent property of billions of cells of our immune system working together to combat bacteria and viruses.
Consciousness is a self-organized emergent property of billions of neurons firing in complex patterns in the brain.
Language is a self-organized emergent property of thousands of words spoken in communication among language users.
Law is a self-organized emergent property of thousands of informal mores and restrictions that were codified over time into formal rules and regulations as societies grew in size and complexity.
Economy is a self-organized emergent property of millions of people pursuing their own self-interests with little awareness of the larger complex system in which they work.
Complex adaptive systems appear designed from the top down, but in fact as they evolve they construct objects from the bottom up through functional adaptations — what works survives and reproduces into the future designscape of life or culture. From the simplest forms of life up the chain of complexity, we move from simple cells to complex cells to multicellular organisms, to colonies, to social units, to societies, to consciousness, to language, to the law, and to economies.
In living organisms, the complex adaptive system of evolution is driven by natural selection, or variation plus cumulative selection. The proverbial monkey randomly pecking away at the computer keyboard will not produce Hamlet in a billion years, or even "To be or not to be" any time soon. But add a nonrandom cumulative selection component to the equation that preserves the correct letters and erases the typos, and
In fact, in order to demonstrate the power of cumulative selection, my friend and colleague Richard Hardison designed a computer program to do precisely this, in which randomly typed letters were "selected" for or against this standard, taking less than ninety seconds and only 335.2 trials to produce the famed Shakespearean soliloquy that by chance would have taken 26 number of trials to produce. Simultaneous with and independent of Hardison, Richard Dawkins designed a similar cumulative selection program for a different Shakespearean soliloquy, METHINKSITISLIKEAWEASEL. As Dawkins noted when we later discovered the coincidence,
Once one has grasped (from Darwin) the paramount importance of ratcheted cumulative selection when faced with the Argument from Statistical Improbability, one's thoughts naturally turn to the famous monkeys who have so often been used to dramatise that Argument. It becomes the obvious simulation to do, to get the point across to doubters. It can easily be done with a little BASIC program, and that is what both Hardison and I did, at what must have been almost exactly the same time, 1984 or 1985. As for the superficial details, those pesky monkeys have always typed Shakespeare. Hamlet is his most famous play. "To be or not to be" is the most famous passage from that play. I would probably have chosen it myself, except that I thought the dialogue between Hamlet and Polonius on chance resemblances in clouds would make a neat intro: hence "Methinks it is like a Weasel."
In nature, random genetic mutations and the mixing of parental genes in offspring produce variation, and the selection of this genetic variation through the survival of their hosts is what drives evolution. Out of this process of self-organized directional selection emerge complexity and diversity. This is how evolution is a self-organized emergent phenomenon.
The evolution of our material economy proceeds in an analogous manner through the production and selection of numerous permutations of countless products. Those ten billion products in the Manhattan village represent only those variations that made it to market, so there is already a selection process by the manufacturers themselves as they attempt to correctly predict what the market will prefer. Once these choices are brought to market, there is a cumulative selection for those deemed most useful or desired, with the selection conducted by consumers in the marketplace who vote with their dollars on which will survive: VHS over Betamax, DVDs over VHS, CDs over records, flip phones over brick phones, computers over typewriters, Google over Altavista, SUVs over station wagons, paper books over e-books (still), and Internet news over network news (soon). Those that are purchased "survive" and "reproduce" into the future through repetitive use and remanufacturing. (Continues...)
Excerpted from The Mind of the Market by Michael Shermer. Copyright © 2008 Michael Shermer. Excerpted by permission of Henry Holt and Company.
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