In the previous installments, we explained how value is created through irreversible processes, how all economic transactions and transformations involve entropy, and we took a stab into explaining human preferences. In this entry, we will elaborate more on preferences.
For the introduction to this series, see this article.
As we have seen, all of our preferences can be linked to behaviors which helped us maximize our chances of survival and reproduction in the ancestral environment. This is very important, as it lends some level of predictability human consumption patterns. To be sure, Big Macs, Porsches, and mobile phones didn’t exist in our early hunter-gatherer days, but many of the drives that evolved to increase our odds of survival and reproduction in that environment still manifest themselves today. And they help explain why we want things in our modern consumer-trader society.
However, there is another category of consumer good that doesn’t fit very neatly into an evolutionary hole. Steven Pinker refers to these items as “mental cheesecake”, and they include things such as art and music. Why would we spend money on art and music? Indeed, throughout history, it has been the “rich” that have supported high art. And it has only been recently (since the invention of reproducible recordings) that the average person could regularly indulge in professionally orchestrated musicianship.
A cynic may say that these are also related to signals of status. What better way of showing status than buying things that you don’t need for survival? To a point, this is probably true. But how does desiring art connect to evolutionary advantage in the ancestral environment? It doesn’t…and it isn’t clear that they would have had time to fancy such things. According to evolutionary psychologists, art is what is known in evolutionary theory as an exaptation — a side effect of something we evolved for other reasons. Throughout the world, people are attracted to similar pieces of art — art that includes water, mountains, trees, etc. These things could relate to what our ancestors viewed as hospitable environments. For this same evolutionary reason, many “lay people” don’t “get” more abstract paintings by Picasso…instinctively, because of their lack of symmetry, which is a sign of youth and reproductive health.
Humans, of course, have discovered that we are able to push our own “pleasure” buttons. And these activities, in turn, are what creates demand. Traditional economics has tended to focus on differences in preferences. The really interesting question is why there is so much similarity? Why do societies around the world enjoy sweet drinks like CocaCola? Crave Nike shoes? Of course, as we have seen, the logic for making things desirable — sugary drinks, objects that convey status, sexually desirable people — push pleasure buttons that evolved long ago. It is the creation of different ways of satisfying these consumer demands that leads us to create so many different consumer goods.
The Market as an Evolutionary Mechanism
Just like natural selection has a few tools which it combines to create and build upon existing structures, so does the market evolve. A very frustrating thing about traditional economics is the jump between equilibrium states. In doing this (in the Solow-Swan model, using the Cobb-Douglas production function), you start with resources, add labor and capital…and magically end up with a car, or a computer. Of course, there are a lot of evolutionary steps in between walking and driving that you tend to miss (even if you can connect the dots outside of the math).
This co-dependent evolution of Business Plans and preferences is what evolutionary theorists refer to ias niche construction. As organisms evolve, they have impacts on their environment, which in turn influences their evolution. In the economic realm, this co-evolution is between our needs and tastes and the Business Plans that evolve to meet them. For example, hearing evolved as a survival mechanism and was well adapted to picking out useful patterns of sound in our ancestral environment. Music developed around 30,000 years ago as an exaptation (auditory cheesecake), to appeal to our evoloved hearing capabilities. Of course, the desire for an MP3 player is not directly related to survival…nor could we have even had a desire for an MP3 player before they were invented. However, humans evolved a taste for music, and ever since then Business Plans have been developed to compete the satisfy that urge. From bone flutes and skin drums — to Fender guitars, and SiriusXM radio. Our preferences drive the Business Plan evolution, and Business Plan evolution influences the evolution of our preferences.
The G-R conditions that we have outlined show that economic activity is about order creation. Faced with disorder and randomness in the world, humans spend the vast majority of their waking hours ordering their environment in ways in which to make it more hospitable and enjoyable. Indeed, this is the very subject of Tyler Cowen’s recent book, Create Your Own Economy. In it, Cowen explores ways in which the internet has revolutionized the way we order and process information and entertainment, creating a niche for ourselves out of the plethora of content available. But what is the purpose for this order creation? Why do people spend hours creating iTunes playlists, or pruning their RSS feeds? Setting up eBay notices, and managing their social networks?
At this point, Georgescu-Roegen reached into the mysterious ether Jeremy Bentham failed to explore, and claimed that economic activity is aimed at increasing “human happiness”. Georgescu-Roegen call this, “a psychic flux, that constantantly flows through people and is a measure of their instantaneous happiness at a point in time.” This is quite similar to Keynes’ “animal spirits”, in that Georgescu-Roegen was saying, “I haven’t a clue.”
However, we can adapt a concept from biological evolutionary theory to fit our purposes. The universal utility function — the replication of genes. From the point of view of genes, there is a single reason why our bodies were built: as a strategy for replicating themselves. Part of that strategy is our large brains that enabled humans to live in complex, cooperative social environments. Also part of that strategy was our nimble hands, which allow us to build tools that help us increase wealth, and further order creation. As Richard Dawkins has stated, serving the historical replication interests of our genes is not the same thing as serving our current interests in happiness. All evolution gives us is strategies that happened to have served our ancestors survival probability. That is all it can give us. Similarly, markets give us products that serve to create order in our lives by satisfying preferences, and that is all that it can give us. Through niche construction, humans have evolved laws, norms, and other mechanisms for enforcing “good” behavior — creating order out of the chaos evolutions in physical technology can bring.
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In the next part of this series, we will further tie the concepts we have been exploring into model of the market economy.
Klein and Edgar 2002