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Tuesday, July 14, 2009

The Flaws of Quasi-Darwinist Arguments for a Pure Laissez-Faire System

Adam Smith, having published The Theory of Moral Sentiments, in which the theory of “the invisible hand” first appears, precisely a century before Darwin’s Origin of the Species, created a model involving a “selection process” in the realm of commerce that could be said, from an analogous perspective, to anticipate Darwin’s theory of natural selection in the realm of biology.

Just as sexual selection in Darwin is a force that drives “the survival of the fittest,” Smith’s invisible hand of self-interest in the marketplace could be said to drive a selection process by financially rewarding the most innovative and efficient individuals and organizations, while destroying those that are not effective. The strong businesses survive and the weak fail.

Since Darwin, however, links between laissez-faire and Darwinist thinking have appeared frequently, at least in popular parlance, with the survival-of-the-fittest concept supporting the premise that a pure laissez-faire system is more efficient because it is more natural. In this line of reasoning, pure laissez-faire prevents weaker entities from being propped up artificially by having resources allocated to them based on factors other than their fitness for survival, such as government controlled protections, privileges, subsidies, etc.

The same kind of reasoning is also applied to debate on such issues as minimum wage laws, environmental and safety regulations, union organizing rights, and executive compensation. Those whose opinions lie in the further reaches of the free-market side of the continuum argue that such regulations interfere with the natural ability of the market to maintain efficiency by rewarding the fit and penalizing the unfit.

However, like many attempts to take ideas from the natural sciences and apply them to the social sciences, the use of Darwinist concepts in economics is highly prone to error. In the natural world, the question of which individual organism or species is more fit for survival is context-specific. And the physical contexts are, in effect, immutable. For example, an alligator is not at all fit to survive in an arctic environment, but a polar bear is. Move either of these creatures out of its native environment, and survival is virtually impossible.

If we set aside for a moment the current controversy over the accuracy of the global warming theory and man’s role in causing it, it is for practical purposes an immutable reality that it is very cold in the arctic and very hot in the tropics. These conditions impose hard physical constraints on what determines fitness for survival.

But socioeconomic environments are far from immutable. Free societies have the ability to decide what rules will apply to the economic playing field, and what we ask in return from those who benefit from society’s provision of a marketplace and labor force from which a profit can be made. And -- forgive the cliché -- if you choose not to decide, which is exactly what laissez faire thinking asks society to do in relation to the rules of business, you still have made a choice.

In a market entirely free of regulations, society makes a choice that creates a situation in which he who already has the gold rules. Already-accumulated wealth creates a distinct -- though not entirely insurmountable -- advantage in the competitive playing field and sets up a situation in which, to resort to another cliché, the rich get richer and the poor get poorer.

The problem with all this is that a fully unregulated free enterprise system with no governmentally imposed checks and balances would inevitably end up allocating some rewards to businesses and individuals that are based on factors other than efficiency, effective performance, and fitness for survival.

For example, in a market without minimum wage levels or provision for organizing unions, businesses would be free to pay the lowest wages they could possibly get away with and pay employees a much smaller portion of the value they produce. Businesses that get so large that they become monopolies can drive out any attempts at competition and continue to be rewarded based solely on their size and accumulated capital, even though they may, as they grow in size and power, lose much of their efficiency and ability to innovate.

Large, well financed entities can acquire powers, almost governmental in nature, to control their markets, such as by restricting access to vendor relationships or distribution channels. This can keep inferior products on the market well after they have passed their “natural” life cycles, because would-be innovators have too many barriers to market entry.

Misallocation of rewards can occur on the individual level as well. Some of the earliest people to succeed financially in the American colonies were not among the most successful in their native countries. Otherwise, they would have had no incentive to come to The New World.

Aside from those coming to escape religious persecution, we could make a simple division of the earliest generations of Europeans in the American colonies into three basic categories:

1. People who were wealthy -- but not among the wealthiest of the wealthy -- who had the personal funds, social standing, or connections to acquire the financial backing to come and seek greater fortunes that they hoped would gain them entry to the ranks of the wealthiest of the wealthy. In this category were those, for example, who received the first land grants from the King of England.

2. “Middle class” people, such as merchants and skilled tradesmen, artisans, and craftsmen, who sought opportunities to increase their economic and social status by providing goods and services to those in the first category.

3. People from lower social strata who came as indentured servants or paid workers in more menial categories, expecting to increase their standing by providing labor to those in the first two categories.

By omitting from the discussion those who did not arrive by choice, I mean no offense. The history of slavery in America could be the subject of another, even longer post on how a virtually unregulated market perpetrated a gross abuse of human potential.

Granted, this sketch of the earliest Europeans in the colonies is one that undoubtedly omits many complexities. Nevertheless, I think it’s valuable for illustrating (1) that those in all three categories were not among the most successful of their peers in Europe; (2) that choosing to change their socioeconomic environment -- to a new and more open market -- enabled them to use their native abilities to a greater benefit than they would have achieved in Europe ; and (3) that, therefore, their status in the European hierarchy was determined by factors other than their inherent “fitness for survival,” which could be altered by a change of socioeconomic context.

In other words, in a new market in which basic resources were not controlled by the wealth and power of an existing hierarchy, individuals throughout the food chain could achieve a level of success that would be unlikely in their “native” environment.

But as we moved through subsequent generations, the playing field changed, and a new hierarchy emerged here in the United States. Those whose families were here first, when resources were more freely available, could benefit simply by virtue of connections to those who were here first.

In spite of this, the nation was -- and still is -- a land of opportunity. But the accessibility of opportunity has arguably diminished with each generation as control of resources has become more concentrated. So even though survival of the fittest was likely to have been an important factor among all three categories of the original settlers, as time went on it became less of a factor as various persons and entities gained control over more of the playing field.

If you’re not convinced, let’s look at a very tangible -- and personal -- example of the diminution of opportunity, to which many readers should be able to relate: the declining affordability of higher education.

When my older brothers and sisters went to college in the 1970s, it was very possible for a college-age kid to earn enough from part-time and summer jobs, paying not substantially more than minimum wage, to pay tuition at an above-average state university.

But between their college years and mine, and through all the years since, the wages accessible to a high school graduate by no means kept up with the inflation rate of college tuitions. When my older siblings went to school, “working your way through” without becoming encumbered with loans was entirely feasible. By the time I entered college, it was still feasible, but quite difficult. Tuition, at the same university my older siblings attended, inflated so rapidly that it nearly doubled between my freshman and senior years.

So higher education has become less accessible. It is a major key to success in the competitive world of business, and an important means of measuring, on a basis that is largely independent of one’s initial station in life, one’s ability to succeed.

Today, I believe it would be virtually impossible for a student at my alma mater to complete an undergraduate degree in four years without extensive financial help from family, scholarships, grants, or heavy loan debt. Marked obstacles limiting access to the playing field have been erected, hindering individuals who could otherwise succeed.

Those from less affluent families have fewer opportunities to even enter the game than they did 35 years ago. On the other hand, at certain elite private universities, a mediocre high school student who happens to have a wealthy family can secure admission purely on the basis of an alumnus parent who can pay tuition out of deep pockets. That student, in turn, can gain substantial professional or business advantages over brighter but less affluent peers through the social connections that can come from attending an elite university.

It’s an example of the market allocating rewards based on criteria other than fitness for survival. The heirs of those who truly earned rewards through enterprise and innovation can become complacent and decadent; yet their socioeconomic advantages can allow them to continue reaping benefits in the marketplace, at a cost to society of hindering competition from those who might otherwise be superior innovators. In turn, it’s a clear example of the fallacy of quasi-Darwinist arguments for a pure laissez-faire system.

It’s also an example of the need for some level of government involvement in maintaining a truly level playing field. In the higher education example, the appropriate role of government should of course be the subject of active, constructive debate. I have utmost respect for our elite private universities, which have, indeed, produced some of our greatest leaders in business, science, public service, and other domains. And I hold our top public institutions in similar regard for their aspirations -- often successful, in my view -- to offer education comparable to their elite private counterparts, even though many have in the process become prohibitively expensive.

I don’t necessarily believe in the concept of an unconditionally free, four-year college education. But there are many options that could produce an outcome more equitable and productive than the status quo, including various forms of public-private financing partnerships, or free junior colleges and postsecondary technical schools as an extension of the public school system, followed by various financing options for those with the ability and desire to move on to the junior and senior year -- work study programs, loan forgiveness in exchange for public or military service, and so on.

Natural ability is of course a crucial factor in success, but many people with substantial natural ability are hindered from maximizing their potential. Surely the cost to society is great, and it’s difficult to see a legitimate basis for denying that efforts to find the right model to correct these inequities would be worthwhile. Surely the wealthiest nation on earth has the resources to accomplish this, if only we would work together to find better, more creative ways to allocate them. Sphere: Related Content

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