State of Innovation

Patents and Innovation Economics

Economics and Evolution: How We Think and Grow Rich

I was visiting the Neanderthal Museum in Mettmann, Germany, when I was confronted by a display of a homo sapien sapiens, or a modern man. The display explained that homo sapien sapiens have a brain that is only 2% of their mass, but consumes 20-25% of all the calories they take in. That makes modern man an incredibly risky evolutionary experiment, one that almost failed.[1] Those calories and that brain do not provide any immediate evolutionary advantage, they do not allow humans to run faster, or give them stronger jaws to tear flesh, or a hard shell to protect them from predators. However, the ability to reason allows humans to create all these things and more.

econgrowth.smallIt turns out for all those dieters out there that it does not matter whether we think hard with our brains or just leave them in idle. This means the brain has very high fixed costs, but very low marginal costs. It seems like something that a venture capitalist might invest in. This reminded me of the following connection between economics and evolution:

If humans did not invent, then the study of economics would just be the study of human evolution.

Now this might strike you as odd, however if I can convince you it is true or even plausible, you would have to admit that it would have profound consequences. Some of the most important discoveries are those that connect two areas of knowledge that were thought to be separate, such as electricity and magnetism, or geometry and algebra, or physics and chemistry.

Plants and animals adapt to their environment, while humans adapt their environment to them. In evolution when a plant or animal mutates (changes) so that it is better adapted to the environment, then their population increases (as does their range) until they again reach an ‘equilibrium’ between their food supply or resources and the size of their population. This idea was first proposed by Thomas Malthus with respect to man and Charles Darwin was the one that applied it to evolution.

Once the organism has reached this equilibrium, it either has to change again, or some other organism does so. Less successful organisms go extinct or evolve into other more successful life forms. Evolution is a process for producing those life forms that are best adapted at converting energy into life.

Most free market people have rejected Malthus’ ideas in the realm of economics, however it is important to point out that Malthus was correct for all of human history until the Industrial Revolution. Humans do not evolve biologically to become more successful, instead they create things, i.e., they invent.[2] In many ways a man with a spear or bow and arrow is not the same thing from an evolutionary point of view as a man whose only technology is a stone hand axe, who is not the same organism from an evolutionary point of view as a man whose technology includes agriculture. Our inventions allow us to create a great diversity of beings that can survive in dry hot deserts, wet tropical forests, and frigid antic conditions. We can do this despite the fact that homo sapien sapiens are genetically very non-diverse. The point I am making is that:

Inventions are the equivalent of genetic changes from an evolutionary point of view.

Like other organisms when we changed to become more successful at converting energy into life our population grew. For instance, when man invented agriculture, the population of humans increased exponentially as did the territory over which man spread. This is exactly what would happen with a species that had a positive genetic change.

The sad point is that the humans who were part of the initial agricultural revolution were probably somewhat wealthier than previous generations, however that wealth went into increasing the population until the average person was no wealthier than before the agricultural revolution. This is known as the Malthusian Trap and it is where the average person’s (organism) income is just sufficient to keep them from starving to death or what people call a subsistence income.

This is a depressing perspective. How did humans ever escape the Malthusian Trap? Extrapolating from what we have learned, it is clear that humans had to increase their technology (new inventions) faster than their population grew. In other words, we had to do more thinking (inventing) and less procreating. Modern economic research has confirmed this. Robert Solow won the Nobel Prize in Economics for a paper that showed exactly this. He studied the sources of economic growth in the U.S. economy and found that it was not increases in land, labor, or capital, but increases in the level of technology that increased real per capita incomes.

This has the following implications for economics:

  1. The per capita wealth of a technologically stagnant people will be stagnant or declining.
  2. The only way to increase real per capita incomes sustainably is to increase our level of technology.
  3. The only way to increase our level technology in the long run is to create new inventions.

The first statement has a perfect analogue in evolution, if you replace technology with genetic changes and per capita wealth with increasing population: a species that does not evolve will have a stagnant or declining population. The reason I suggest that that income (population) will fall is because of ‘entropy.’[3]  In my book Source of Economic Growth, I make an analogy between entropy and the classical economics idea of diminishing returns, however that is beyond the scope of this article.

This area of economics is called bioeconomics or thermoeconomics. Most of the economics profession has ignored this area of study, probably because it usually devolves into successive proofs that we are doomed by the Malthusian Trap. Despite this I think there is much to be learned in this area. For instance, Edwin Schrodinger’s failed attempt to tie life to entropy is eye opening. An interesting economist in this area is Gregory Clark, who wrote Farewell to Alms. I do not agree with all his conclusions, but he asks the right questions,[4] which is more important that having the right answers to the wrong questions. Clark’s analysis of the results of economic policies in an economy stuck in the Malthusian Trap is unassailable.

Economies today are hamstrung by absurd regulations and there would be an immense, but one-off benefit in freeing up the economy. Then the question arises—once completely free, how does this economy continue to grow? Statement II follows from I and has an analogy in evolution: The only way for a species to increase its population (in the long run) is for it to evolve (change, mutate). Most economists want to place their emphasis on manufacturing and trade. Manufacturing and trade are about the dissemination of new technologies (or replacement of worn out equipment) they are more similar to increasing the population of a species and spreading out its territory once the species has had a successful mutation.

People can only increase their level of technology by creating new inventions, which means they can only become wealthier by inventing faster than their population increases. Now this is a confusing statement, because population can be counted easily, but what does it mean to say that inventions or technology are increasing and how does that compare to the population. We know that the increases in productivity due to the new technologies must be greater on a percentage level than the increases in the population for per capita incomes to grow. One of the interesting self-correcting outcomes of this proposition is that the more people there are, the more likely someone will come up with a new invention. This means that a declining population or even a stagnant population is not the driver of real per capita increases in wealth. Indeed, declining populations often also lead to a problem in the demographic pyramid—the ratio of the very old and infirm to the productive.

The key question in economics is how do we encourage people to create these positive mutations (inventions)? In the history of the world, the rate at which new inventions were created was roughly proportional to the size of the population and somewhat to population density until the Industrial Revolution. It is also clear that inhibiting peoples’ right to act freely will inhibit the creation of new technologies. It was not until around 1800 that England, and then, the United States, created an explosion in the rate of new inventions on a scale the world had never seen. This resulted in large numbers of people escaping the Malthusian Trap for the first time in history. What these countries had in common is that they created effective property rights for inventors for large numbers of people for the first time in history.

Inventing for humans is analogous to genetic adaptations in other organisms. Originally, human inventions resulted in population increases, just like successful adaptations in other species resulted in population and territory increase for them. A technologically stagnant human civilization is like a genetically static species and in both cases their population (or income) will be flat or declining.[5] The study of economics is about how we create, produce, and distribute these inventions (genetic adaptions). If humans did not invent then the only way for us to become more successful would be genetic adaptation, which would mean that the study of economics would be the same thing as the study of human evolution.

 

Mr. Halling discusses these ideas in more depth in his book, Source of Economic Growth.

 

[1] Other animals have brains with a similar or greater brain to body mass ratio, but humans consume the most energy as a percentage of total calories on maintaining their brains.

[2] The term invention is poorly defined in common usage and in economics and law. An invention is a human creation that has an objective result. A human creation that has a subjective result is art.

[3] The word entropy here is analogous to that used in physics and chemistry, but not exactly the same. In fact, the way entropy is defined in these areas is not perfectly consistent, but that is the subject of another article.

[4] The two most important questions in economics are: 1) What is the cause of increasing real per capita income, and 2) What was the cause of the industrial revolution (the first time people escaped the Malthusian Trap)? I believe I got both of these questions from Professor Clark.

[5] It is hard to find great examples of this in human history but three are the Vikings on Greenland, the Anasazi around Chaco Canyon, and the European dark ages.

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November 9, 2015 - Posted by | -Economics, Innovation, Intellectual Capitalism | , ,

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