Galbraith on evolution and the invisible hand

Paul Krugman’s oft-quoted critique of Stephen Jay Gould is one of the more brutal dismissals of his work (it is from a 1996 speech on what economists can learn from evolutionary theorists):

Now it is not very hard to find out, if you spend a little while reading in evolution, that Gould is the John Kenneth Galbraith of his subject. That is, he is a wonderful writer who is beloved by literary intellectuals and lionized by the media because he does not use algebra or difficult jargon. Unfortunately, it appears that he avoids these sins not because he has transcended his colleagues but because he does not seem to understand what they have to say; and his own descriptions of what the field is about – not just the answers, but even the questions – are consistently misleading.

While this statement is usually quoted in reference to Gould, it is also a blunt assessment of John Kenneth Galbraith’s work. I have not read much Galbraith, despite having The Affluent Society on my reading list for a while, so I am not in a position to judge Krugman’s comparison. However, I recently came across an article written by Galbraith in which he considered the invisible hand metaphor from the perspective of Darwinism. He stated that belief in the invisible hand was like belief in intelligent design, under which evolution is guided by an intelligent designer and is not the result of unguided natural selection. Galbraith writes:

Smith’s Creator did not interfere. He simply wrote the laws and left them for events to demonstrate and man to discover. The greatest American economist, Thorstein Veblen, observed that “the guidance of…the invisible hand takes place…through a comprehensive scheme of contrivances established from the beginning.” What is this if not Intelligent Design?

But to Veblen this was, precisely, unscientific. And so he made a mighty effort back in 1898 to move economics into the Darwinian age. In a magnificent essay entitled “Why Is Economics Not an Evolutionary Science?” Veblen pointed out the problems of classical economics: too much preoccupied with classification schemes and higher purposes, too little with material process and “cumulative or unfolding sequence.” Economics could become a science, but only if it detached itself from the idea that change intrinsically led to improvement.

It is an interesting comparison but  Galbraith has lined up the wrong target. He is right that evolution provides a critique of the interpretation of the invisible hand that voluntary interactions between people always result in the optimal social outcome. While voluntary exchange is beneficial for the individual participants, evolution shows us that there is no mechanism to make sure societal benefit is maximised – there is no intelligent designer. With wasteful signalling, winner takes all contests and the potential for sub-optimal equilibria, an emergent economy might be full of waste and inefficient competition.

However, Smith did not state that emergent outcomes were always positive and he recognised a score of ways in which market interactions could lead to sub-optimal outcomes. The invisible hand is an excellent metaphor for the emergent phenomena whereby “selfish” actions by individuals lead to outcomes that they do not intend. They are generally welfare enhancing (which is one reason I lean libertarian) but not necessarily so. Instead of criticizing the invisible hand metaphor, Galbraith should have used the intelligent design comparison to argue that there is no mechanism to make sure that emergent economic outcomes are positive. (Of course, this does not mean government should step in – you still need to show that government can fix the problem without creating other worse problems.)

In attacking neo-classical economics, Galbraith also raises the important issue of variation:

Economists still don’t understand variation; instead they write maddeningly about “representative agents” and “rational economic man.” They still teach the “marginal product theory of wages,” which excuses every gross inequality faced by the laboring poor. Alan Greenspan even recently resurrected the idea of a “natural rate of interest” to justify raising rates, though that doctrine had been extinct for 70 years. Economists still ignore the diversity of actual economic and social life.

Ignoring the specific examples that Galbraith has used (I don’t understand how they line up with his points), natural selection operates on variation. If every firm or agent is the same, you cannot have firm failure or creative destruction. There cannot be comparative advantage and the benefits of specialisation are diminished. Outside of evolutionary economics, few economic models try to capture this. Despite having some trouble getting to grips with Arnold Kling’s “patterns of sustainable specialisation and trade” (I’m still short on details, and am not convinced by many of his examples), I appreciate how it introduces the ideas of variation, exploration and failure. Entrepreneurs vary in their ideas and how they search for them.