01 February 2016

The Evolution of Everything

Matt Ridley
2015, Fourth Estate, 400 pages,
ISBN 9780062296009

Reviewer: Bridget Rosewell, Volterra Partners

This book has an ambitious theme.  It proposes that there should be a general theory of evolution applied to all aspects of life and society, from the universe to the internet, just as the special theory of evolution applies to species.  It has particular relevance to economics since Ridley describes Adam Smith as a proponent of an economic theory of evolution alongside and influenced by Darwin’s theory of species.  In both cases, he views the evolutionary process of variation and selection as essential to driving development.

Of course, the economic training most of us has did not see economics that way.  And I doubt that many of us were even told to read Adam Smith.  Rather than being asked to consider unstable and changing outcomes, we concentrated on processes which generated equilibrium and stability with optimal outcomes.  This book is therefore a powerful antidote to the standard way of thinking in economics and one which challenges our normative assumptions.

Ridley puts his faith in markets as effective search mechanisms, even if they are not necessarily efficient.  He champions the cause of consumerism, in making individual choices visible and influential to firms and compares this to government market management or ability to know best.  He challenges our ability to predict rather than to describe and to understand the suboptimal consequences of apparently optimal decisions.

A core proposition underlying this view is that evolution drives in the direction of increasing complexity, specialisation and effectiveness.  It operates through trial and error, tinkering and fail fast routines.  It is hard to associate this description with the search for optimality inherent in almost all economic literature and policy making.

How can we bring these perspectives together? It’s a particular challenge for me as a member of the new National Infrastructure Commission, charged with creating a long term plan for the nation’s transport, energy, waste and water systems.  Ridley’s stress on market exploration and the core role of exchange and trade leads him to suggest that government supply and market management is almost always misguided.  He cites the contrast between effective private education systems in developing countries and sclerotic and corrupt public ones.  He cites population planning systems which were enormously coercive and probably ineffective.  He could, though he does not, cite the devastatingly unsuccessful scheme to grow ground nuts in Ghana, which impoverished donors and Ghanaians alike.  Or many irrigation schemes which overrode local water management schemes which had been effective in favour of large and centrally funded systems.  The Somerset Levels drainage challenge has some of these features.

Would people left alone create their own collective organisations to manage externalities and produce public goods without the models and policy designs of such as economists?  The record of central planners in designing total systems is of course abysmal, but most of us would say that some kind of rules of the game to create level playing fields are essential.  Untrammelled competition without such rules can lead to monopoly, robber barons and weak consumers rather than strong ones. 

So economists’ training leads them to propose institutions which can come up with answers which are intended to privilege consumers.  From the Competition and Markets Authority, through economic regulators, and the Infrastructure Commission, we conduct increasingly sophisticated analysis to decide what the right answer is to the conundrum of demand and supply.  We attempt to ensure just-in-time delivery of projects which will meet the forecast demand and avoid wasteful competition.  Ridley would argue that competition is not wasteful and that our attempts to forecast are bound to end in failure.  Or at least I hope he would, because I would agree with him.

His challenge that there is an important difference between explanation and prediction is especially important here.  We often miss this.  Econometrics can be a dangerous tool.  The allocation of impacts to different drivers may well be interesting.  It can also be misleading when it is used to predict.  Feedbacks and interdependence of effects can be controlled for in analysis of past data but not necessarily in real life.  A transport investment will not have much effect if planners resist new development near the station, or if productive opportunities do not exist.  On the other hand, there is no guarantee that opportunities will be grasped.  What is clear is that there is interdependence between different investments and no planner will be able absolutely to ensure a given return. Reductionism does not rule.

Planning may be central to human activity and we all have intentionality.  But the activity is distinct from control.  This means that consideration of scenarios, risk analysis and making a judgement call are all central to individual decisions.  Excess capacity is crucial to facilitating competition in a changing world.  Cost minimisation only works in a stable one.

A major focus of Ridley’s work, and indeed of any work on evolution, is innovation.  Evolution is a process of change, incorporating innovations whether large or small into natural or man made systems.  Economics is rather poor at incorporating innovation into its decision models.  It can be treated as exogenous, or incorporated into firms’ growth models.  But innovation is disruptive and hence changes the parameters of decision models.  Will start ups succeed?  Why do large firms fail?  An evolutionary approach addresses these questions, even while it undermines predictability of the economic system.  Perhaps it is time that we were willing as a profession to accept our inability to forecast with any degree of precision and instead began to focus on the limits of possibility and probability.  Ridley’s work is very relevant here.

Ridley challenges evolutionary analysts to avoid the ‘swerve’ – accepting that evolution is how life works, and then nonetheless believing that planning and management whether of the environment, morals or the economy will make it ‘better’.   This is something that we should all bear in mind when tempted to know what is best for others.  We may need to plan, we may try to manage for the greater good but we should also avoid believing that we are likely to be right!