Charles Darwin Vs. Adam Smith: A Clash of Narratives

In a recent New York Times thought-provoking article, economist Robert H. Frank submits that 100 years from now, most economists will cite Charles Darwin instead of Adam Smith as their discipline's founder.

He reasons that Smith's famous (or infamous for some, these days) "invisible hand" theory is but a special case of Darwin's "survival of the fittest" theory, which provides us with a much better model for how the real economy works.

According to Adam Smith, "when greedy people trade for their own advantage in unfettered private markets, they will often be led, as if by an invisible had, to produce the greatest good for all." In this narrative, competition spurs innovation which in turn benefits society at large.

In Darwin's theory of evolution on the other hand, "competition favors traits and behavior according to how they affect the success of individuals, not species or other groups". This competition to improve individual fitness sometimes benefits the group, as for hawks whose eyesight has improved over millions of year benefiting both individual hawks and the hawk species at large. In this case, Darwin's narrative closely mirrors Smith's. But in other cases, "traits that help individuals are harmful to larger groups", as for elks whose antlers have evolved into grotesquely massive and complex appendages, helpful in attracting females and fight other males but quite a handicap when running away from a predator in a dense forest.

As Frank points out, "in Darwin's framework, then, Adam Smith's invisible hand survives as an interesting special case. Competition, to be sure, sometimes guides individual behavior in ways that benefit society as a whole. But not always."

In Darwin's world, we can never be sure that individual and group interests are aligned. Fitness for an individual in a given situation can spell extinction for the group. Similarly, survival for a group can spell extinction for the population as a whole.

Finance, it appears, lives in a Darwinian world, not in a benign invisible-hand-controlled Smithian one. What better illustration of that point than the recent financial crisis? Each participant in the whole subprime mess was really acting to maximize his or her profits given the regulatory, political and economic environment he or she was in. Unfortunately, acting that way wrecked the financial system as a whole so badly it might be extinct as we speak if not for massive government intervention (the jury's still out on the level of damage that has been done and the longer-term consequences).