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Entropy and Economics: Fitness

March 20, 2010

In the previous installments, we explained how value is created through irreversible processes, and all economic transactions and transformations involve entropy; that is, a loss of energy or information in the process of creating order. In this entry, we will take a closer look at preferences, in order to define “fit” transactions.

For the introduction to this series, see this article.

Opening the “Black Box”

Understanding why humans prefer certain kinds of order to others is fundamental to the groundwork for a comprehensive theory of value creation. Why do we prefer having cars of individual colors? Why do we prefer crunchy apples over crunchy beetles? Traditional economics simply assumes that humans have preferences, that those preferences are ordered in a logical way, and that people act in ways that maximizes the satisfaction of those preferences.

This is the basis of rational self-interest. Under these assumptions, there is no need to open the “black box”, people’s preferences are revealed as people trade and consume. In the extreme, older Austrian economics states that we can’t know any specific person’s preferences until they make a choice (Mises, Human Action). We will see that this is only approximately correct. Following this logic, wealth would simply be “whatever patterns of order people prefer”. This creates the exogenous “black box” called preferences. Is it possible to open this box, have a look inside, and see if we can connect peoples’ preferences into the larger evolutionary framework of wealth creation? Well, we can certainly try.

Sigmund Freud, possibly the most famous “pop” psychologist, postulated that our material needs are driven by the “animal spirits” of our id and kept in check by our superego — taking this view, our preferences are the result of the battle between “I want an expensive car now!” and “I need to save for my children’s education.” On the other side of the spectrum, B.F. Skinner, who is not nearly as well known as Freud, thought that preferences are learned traits. Someone following this line of logic might claim that we want a expensive car because we have learned from experience in society that expensive cars are desirable. We have learned this ostensibly through both advertisement and experiencing our culture.

Taking the middle road, and the road that I find most plausible, is Abraham Maslow. Maslow claimed that humans have a “hierarchy of needs” (see the image) that start with the basics of food, water, sex, shelter, etc. Beyond those most basic needs, people seek to satisfy more exotic needs like status, and self-esteem. I would add to this that as humans become more satiated in their basic needs, they find more creative ways of fulfilling them — larger, safer, better-designed houses; faster, sleeker cars, etc. The highest level of Maslow’s hierarchy is “self-actualization“. This helps explain why billionaires are very charitable, and mega-movie stars are the ones eating vegan food, driving Prius’ (or Tesla Roadsters?), and going to Buddhist monasteries.

Psychology Meets Biology

While Maslow’s framework is quite useful, his theories still do not answer the deeper question of where those needs come from, and why we prefer some things to others. According to the very fruitful work of evolutionary psychologists. Evolutionary psychology claims that our genes built our brains for a single purpose: replication. However, his does not mean that all nuances of behavior are evolutionarily determined. Nothing in your genes states that you like Pizza Hut, or Snickers bars. Our genes simply shape our behaviors in ways that helped our ancestors survive and reproduce in the ancestral environment (African savanna, 100,000-500,000 years ago).

Human behaviors are very malleable. People are very good at tuning their behaviors to their local environment[1]. If you have ever watched Living with the Mek, you can see how preference behaviors are directly related to thinks that help people survive, compete for status, reproduce, and nurture their children. At the same time, it can be frustrating watching them struggle with tasks we find very routine. This shows the difficulty of seeing the connection through the abstractions of modern life. However, we can take a closer look at the categories modern consumer-traders through US Bureau of Labor Statistics data.

According to the US BLS, roughly 90% of US consumer spending falls into seven major categories. We can relate these categories to the evolutionary needs our ancestors had.

  • Housing (37%)
    The evolutionary benefits of protective shelter that is good for raising children are clear. We value housing that protects us from the elements, provides a good family environment, and shows our social status (size, adornment, location) — all evolutionary linked traits. Housing as a measury of social status goes back as far as ancient human civilizations! MIT cognitive scientist Steven Pinker even claims that some of our modern preferences for what makes housing attractive has a basis in what were evolutionarily successful environments[2].

  • Transportation(16%)
    Transportation of course allows us to provide for ourselves and our family. It is also a keen tool in signalling social status.

  • Food(13%)
    The most basic necessity, of course. However, our particular tastes in foods that are rich, sweet, and fatty evolved because these foods were scarce in the ancestral environment. Our tastes evolved long before these foods were available on every street corner, and most people had sedentary jobs.

  • Life Insurance and Pensions (9.5%)
    Life insurance, of course, allows us to maximize the chances that our offspring will mate and survive if we happen to meet an untimely end. Pensions help us to remain secure and survive after our evolutionary value has severely diminished.

  • Health Care (6%)
    Health and survival/reproduction are quite obviously linked. As evolutionary theory would predict, we are most concerned about the health of ourselves and our close kin.

  • Clothing (3.5%)
    Clothing, of course, protects from the elements. Clothing also fulfills roles in signalling status, membership, and attracting mates. Even today, it is very easy to identify “tribes” simply by the outward appearance of the clothes people wear.

  • Entertainment, Media, and Communications (8%)
    Even our notions of “fun” have connections to evolutionary benefits; such as bonding (through primitive sports, or video games?), building coalitions (over dinner, perhaps), or seeking mates. Modern sports, of course, illuminate our evolutionary characteristics vividly. Even the plethora of communications applications that allow us to build and “groom” our social networks (MySpace, Facebook, Twitter, LinkedIn, Foursquare) have their evolutionary roots in primates, which use physical grooming to build and maintain theirs.

Since this is getting rather long, I’m going to stop here. In the next section, we will link the function of these evolutionary psychological needs to the evolution of the broader economy, and define the overall thesis.

—-

P.S. If you’ve never seen the black box in the first picture before, it is a sculpture created by Caleb Larsen which perpetually sells itself on eBay. Thanks to Tyler Cowen (of course?), who linked to it quite a while ago.
____
[1]Wright (1994)
[2]Steven Pinker, How the Mind Works.
[3]BT Cellnet, Fox 2002.

2 Comments leave one →
  1. Helena permalink
    March 21, 2010 11:51 am

    I would be curious to know what you think of the role of entropy in this oddity: http://www.business-opportunities.biz/2010/03/18/stress-relieving-vending-machine/

    (insert a coin and watch a piece of china slowly slide to its destruction)

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  1. Economics and Entropy: Fitness II « It Don't Mean Much, These Seats are Cheap.

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