By Paul Seabright
If the news that 2009 will see worldwide celebrations of Charles Darwin’s 200th birthday has passed you by, you may have spent the last year living on Mars, or being home schooled in Kansas. Or you may just have been hanging out with economists.
The economics profession has paid little attention to the intellectual revolution that followed the publication of Darwin’s Origin of Species, whose 150th anniversary is also celebrated this year.
There have been, it is true, many attempts to draw analogies between economic competition and the struggle for survival that drives natural selection. The current crisis may even bring these back into fashion, though the survivors of the bloodbath in banking may turn out to be the most politically well-connected rather than the fittest in any other sense.
But economics as a discipline, also some two centuries old, sees little use for the insight that human beings share recent common ancestors with the apes. Economic man crunches data like a computer, pursuing private goals that are simply too personal to be worth discussing.
Nowadays, behavioural economics is booming. But it is largely a descriptive science, documenting the way man has short-sighted preferences, or miscalculates risks.
These are conceived as flaws in the make-up of Homo economicus rather than adapted traits in the make-up of Homo sapiens. The methods of evolutionary biology play almost no part in behavioural economics as it is done today.
If Darwin had been around to reflect on the financial crisis, he might have reminded us, in his diffident way, to think of human beings not as inadequate calculating machines, but as remarkably well-adapted apes.
As group living primates, they are intensely competitive, alert to the narcissism of tiny differences in status, navigating their social life through coalition formation.
The way to get ahead is to join powerful groups. The key to social life is not unfettered competition, nor universal cooperation, but a subtle mix of the two: competing fiercely to join up with the most attractive cooperators. And the cognitive capacities they deploy involve a capacity for strategic reasoning of the second, third, even the fourth degree. You have to be impressed how well they have adapted to life in the wild.
The problem is that many primates do not adapt well to life in zoos, and Wall Street is the biggest and strangest zoo of them all.
It presents our large primate brain with vast challenges, of which the greatest has been solving strategic reasoning of the thousandth degree.
Faced with evidence that a housing boom can’t continue forever, we do not unravel it back to the beginning but try to ride the boom till the very end, to do just a little better than the very best of the others. Those differences in status, you see.
Faced with the arithmetic certainty that a chain letter, or a Ponzi scheme, cannot give us an expected gain, we nevertheless calculate two or three steps ahead and give it a punt.
You know your chain letter could reach more than 15,000 readers, and it takes only one per cent of them to reply for you to multiply your investment 150 times. That does not seem so unlikely, does it? Yes, actually: the maths tells us ineluctably that for every one who multiplies the investment 150 times, another 149 get nothing at all.
Nothing. But the hard maths makes little lasting impression on the soft porridge of the primate brain.
Instead, when the maths gets too tough we seek reassurance from the powerful groups to which we belong. If it is okay to them that is fine by us; the group will protect us if things go wrong. We have to trust someone: modern life would collapse if we did everything alone.
So we trust those who seem most like us, which means we trust the folks they trust, and so on in another long chain that stretches our strategic reasoning capacities to the limit.
The big surprise of the last three months to economists has been that professional investors behave with as much of a group instinct as retail investors.
But it would not have surprised Darwin: professional investors are just another primate population. If you want to change their behaviour you have to change the way it feeds back not just into their pay packets, but into the status competition and coalition formation in their chosen peer-group.
Though Darwin’s name is often wrongly associated with admiration for the outcomes of natural selection, the man who wrote “what a book a devil’s chaplain might write on the clumsy, wasteful, blundering, low, and horribly cruel work of nature!” would doubtless have been less than surprised at the kinds of terrible games Homo sapiens gets up to when he spends too much of his time in the zoo.
Paul Seabright is professor of economics at the University of Toulouse I