Saturday, December 05, 2015

The Evonomics of Classical Liberalism and the Illegal Economy

"Evonomics" is the term adopted by David Sloan Wilson and his colleagues for what they call "the Next Evolution of Economics," which they see as economics founded on evolution and complexity science.  Two months ago, they started a website to promote their ideas.  A recent lecture by Wilson summarizing his position is on YouTube.

The term "evonomics" was first coined by Michael Shermer in an article in Scientific American (January, 2008), which Shermer applied to the expanding evolution of trade to explain the economic evolution from hunting-gatherer societies to modern commercial societies.

In one of his first posts at the website, Wilson identified the evolutionists who think about economics as belonging to three groups.  The "Right-leaning evolutionists" include me, Shermer, and Matt Ridley.  The "Left-leaning evolutionists" include Herbert Gintis, Samuel Bowles, and Peter Singer.  Those holding the center in the political spectrum include Jonathan Haidt and Robert Frank.  (Although Haidt has said he's a "centrist," I have claimed in various posts that his moral psychology actually supports classical liberalism.)

I have argued that Darwinian evolutionary science has shown that Adam Smith was right about almost everything.  In his defense of what he called "the natural system of liberty," Smith was right to see that the social orders of morality, markets, law, and politics can arise as largely spontaneous orders, which emerge as unintended outcomes from the actions of individuals pursuing the satisfaction of their individual desires.  The Darwinian science of evolutionary order has confirmed this central idea of Smithian classical liberalism.

Wilson's rejection of the "Right-leaning evolutionists" and of what he calls their "free market fundamentalism" suggests that he thinks I'm all wrong about evolution supporting classical liberalism.  But from my reading of some of the essays posted at his website, it seems that much of what he and his colleagues are saying supports the classical liberal idea that social order emerges best through the largely spontaneous orders of free markets and limited government.

Wilson scorns the Homo economicus model of human nature--the idea that human beings are narrowly selfish in their rational maximization of their utility.  But here Wilson is in agreement with Adam Smith.  Although Smith saw the self-interest side of human nature, especially in The Wealth of Nations, he also saw the natural morality of human beings that arises from their natural desire for a mutual sympathy of sentiments, which he explained in his Theory of Moral Sentiments.  Smith's account of how morality evolves from kinship, reciprocity, and social norms enforced through praise and blame has been confirmed by Darwin (in The Descent of Man) and by recent studies of the evolutionary psychology of morality.  In support of Smith's insight about the mutual dependence of morals and markets, the cross-cultural economic game experiments conducted by Joe Henrich and his colleagues have shown that people tend to have a deeper sense of fairness when their societies show extensive experience with markets.

Wilson might seem to reject classical liberalism when he endorses Bernie Sanders's argument that the United States should adopt the socialist policies of Norway and the other Nordic social democracies.  But in fact the success of the Nordic countries over the past thirty years has come from their moving away from socialist central planning and towards classical liberalism.  The recent history of the Nordic countries has shown a reduction in public social spending, taxation, and government regulation of society and business, beginning in the 1980s.  In doing that, they adopted some of the policies proposed by Milton Friedman, Friedrich Hayek, and other classical liberals for reducing governmental intrusion into social and economic life and for reforming the welfare state in ways that make it compatible with the classical liberal principles of individual liberty and free markets.

In Sweden, for example, public spending as a share of GDP had reached 67% by 1993, but now it's down to 49%.  Public debt as a share of GDP fell from 70% in 1993 to 37% in 2010.  Sweden has cut the marginal tax rate by 27% since 1983 to 57%, and it has cut the corporate tax rate to 22%, much lower than in the United States.  Unemployment compensation was reduced.

Friedman helped the Frazer Institute--a classical liberal think tank in Canada--to develop a method for measuring and ranking "economic freedom" in countries around the world.  They now have ratings for 152 nations.  All of the Nordic countries have high rankings.  Finland is #7, and Denmark is #14.  Thus, they rank higher than the United States, which is #17.  Sweden is #29.  Norway is #31.  Iceland is #41.

The Heritage Foundation--another classical liberal think tank--has a similar "Index of Economic Freedom."  Denmark ranks at #10, ahead of the United States at #12.  The other Nordic countries rank high once again--Finland at #19, Sweden at #20, Iceland at #23, and Norway at #32.

Thus, these Nordic capitalist welfare states survive and flourish only because of their high levels of economic freedom and capitalist institutions.  This is all part of that most momentous turn in human evolution that began in the 17th century and accelerated in the 19th century, first in Holland and then in England and North America--that massive increase in prosperity and population that was made possible by classical liberal institutions and the morality of the bourgeois virtues.

I also see support for classical liberalism in the essay by David Colander and Roland Kupers--"I, Pencil Revisited: Beyond Market Fundamentalism"--that is posted on the Evonomics website.  This essay is an excerpt from their book--Complexity and the Art of Public Policy: Solving Problems from the Bottom Up.

Leonard Read's "I, Pencil" is a famous essay among classical liberals, which presents the ordinary wooden pencil as the product of thousands of people working around the world being coordinated by global markets without any central planning by a single mind or group of minds.  Colander and Kupers agree that this does illustrate how markets create complex order from the bottom up without central planning and control. 

But they also criticize Read as a "free-market fundamentalist," because he does not mention the role of government in providing the "institutional structure" that makes markets possible.  They have the pencil explain:
"Someone had to protect the property rights upon which the market is based, someone had to guarantee that the contracts between individuals would be enforced, and someone had to be on the lookout for lead, for the safety of machines, and similar problems, which is not addressed might well lead a society to undermine the institutional structure that produced me.  Government is one of the important organizations that creative people have set up through which rules are established and maintained.  It is both the referee, and the rules committee.  This means that in our country it is government that is ultimately responsible for enforcing property rights, establishing standards which society believes are acceptable, and providing a court system to adjudicate differences of opinion, as there inevitably will be."
This is a restatement of the classical liberal argument for the coevolution of free markets and limited government.  From Locke and Smith to Hayek and Friedman, classical liberals have emphasized the need for liberal governments that secure the rights to life, liberty, and property, and thus provide the legal framework within which free market can coordinate social order.  Liberal governments must be limited to these ends, so that they do not attempt to centrally plan social order from the top down, and thus leave markets to coordinate life through an evolutionary bottom-up process.

Colander and Kupers agree with this.  They explain: "There are two ways to coordinate--from the top-down, with an established institution such as government doing the coordination, and from the bottom-up, letting new organizations develop to solve collective problems that develop as multiple people interact.  The problem with having the government solve coordination problems is that it often does so in ways that undermine the creative energies of individuals.  Instead of seeing people as having the ability to solve problems on their own, established institutions, such as government may try to solve the problems for them and in the process often create barriers to creativity."

I agree with this.  But I would point out that while they recognize that coordination arises best "from the bottom-up, letting new organizations develop to solve collective problems that develop as multiple people interact," they don't recognize that this applies to the governance of property rights and contracts.  They seem to assume that only a public government acting through a coercive legal system can secure property and contracts,

On the contrary, as I have indicated in my previous post, private governance is often better in enforcing property and contracts than is a public government.  Most of those contracts in international commerce that make possible the production of pencils probably contain clauses that commit the parties to the contract to private arbitration to settle any disputes.  The governmental court systems are simply too costly and inefficient to solve the problems of international commerce, and consequently business people must solve their own problems through systems of private governance, which include private profit-making arbitration firms.

Moreover, while Colander and Kupers recognize that governments trying to solve social problems often create "barriers to creativity," they don't recognize how people get around those barriers by entering the illegal economy and generating a spontaneous order of social norms of property and contract outside the legal system.

What I have here called "the illegal economy" is also called "the informal economy," "the shadow economy," or "the underground economy."  These are the terms for the economic activity of people who are not legally registered with or regulated by a government, who conduct their business in cash, and who don't pay taxes on their income.  These people are often forced to do this because the burdens of onerous government regulations and taxes make it impossible for them to make a living within the legal rules.  For example, taxes in Brazil can make up 90% of the price of some goods; and consequently, many goods are smuggled into Brazil from Paraguay, where taxes are much lower. (One of the best studies of the illegal economy around the world is Robert Neuwith's Stealth of Nations: The Global Rise of the Informal Economy [Anchor Books, 2012].)

In 2009, the Organization for Economic Cooperation and Development (OECD) concluded that over half of all the workers in the world are in the illegal underground economy.  The OECD also predicted that by 2020 over two-thirds of the workers of the world will be working underground.  Economist Friedrich Schneider studies shadow economies, and he has estimated that the total economic value of the activity in shadow economies is over $10 trillion a year.  If this were the economy of an independent nation, this would be second only to the GDP of the United States, which is $14 trillion a year.

Most of the economic development in the developing world--particularly in Latin America, Africa, and many parts of Asia--is through the economic self-development of the illegal economy.  In Lagos, Nigeria, the largest city in Africa, over 80% of the working people are in the underground economy.

Much of the global trade between the developed and developing countries is through the illegal economy.  For example, poor people in Nigeria working in illegal markets can save enough money to travel to China, where they buy Chinese goods illegally and then have them smuggled back into Nigeria for sale, avoiding restrictive trade laws and huge import duties.  There are some estimates that as many as 300,000 Africans are living in Guangzhou, the south China trading city formerly known as Canton.

This confirms Adam Smith's insight that the evolved human propensity "to truck, barter, and exchange" is so strong that it can be expressed in a complex economic life even without the support of a legal system, because people can solve their own economic problems for themselves through self-organizing social orders. 

For example, Neuwith describes how street merchants in Lagos have set up their own private courts for settling disputes between dealers and customers.  One arbitrator explained: "Arbitration is our work.  Most often we arrive at a peaceful solution.  This is how we have harmonized the market."  This is what one should expect from human beings who have evolved natural instincts for cooperation.

Smith thought illegal economic activity could be seen as an expression of the "system of natural liberty" or "natural justice."  So he suggested that we should identify a smuggler as "a person who, though no doubt highly blamable for violating the laws of his country, is frequently incapable of violating those of natural justice, and would have been, in every respect, an excellent citizen, had not the laws of his country made that a crime which nature never meant to be so" (Wealth of Nations, Liberty Fund edition, p. 898). 

Smugglers are part of the greatest evolutionary story of humanity, which is the progressive improvement in human life that comes from human beings asserting their freedom to trade.

David Sloan Wilson disagrees.  He thinks that we need the governmental elites to teach us that what we think we want is not what we "really" want--that we need to be "nudged"--by the government--to want what the elites want us to want.

Some of my posts on David Sloan Wilson can be found here, and here.

My posts on the "Darwinian Left" can be found here and here.

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