Re-framing capitalism as an evolutionary search for solutions to human problems! GDP does not capture changes in the quality of the products (think of mobile phones over the past 20 years) or the value of unpaid labor (caring for an elderly parent in the home). GDP growth does not always correlate with increases in measures of well-being such as health or self-reported happiness. GDP can have deleterious effects on the environment. Some countries have experimented with other metrics to augment GDP, such as Bhutan’s “gross national happiness index.” Our question is whether the activities of our economy that are counted in GDP are truly enhancing the prosperity of our society. Since the field’s beginnings, economists have been concerned with why one thing has more value than another, and what conditions lead to greater prosperity—or social welfare, as economists call it. Adam Smith’s famous diamond-water paradox showed that quite often the market price of a thing does not always reflect intuitive notions of its intrinsic value—diamonds, with little intrinsic value, are typically far more expensive than water, which is essential for life. This is of course where markets come into play—in most places, water is more abundant than diamonds, and so the law of supply and demand determines that water is cheaper. An emerging twenty-first century view of the economy is that it is a dynamic, constantly evolving, highly complex system—more like an ecosystem than a machine. In such a system, markets may be highly innovative and effective, but they can sometimes be far from efficient. And likewise, people may be clever, but they can sometimes be far from rational. So if markets are not always efficient and people are not always rational, then the twentieth century mantra that price equals value may not be right either. If this is the case, then what do terms like value, wealth, growth, and prosperity mean? Prosperity Isn’t Money, It’s Solutions In every society, some people are better off than others. Discerning the differences is simple. When someone has more money than most other people, we call him wealthy. But an important distinction must be drawn between this kind of relative wealth and the societal wealth that we term “prosperity.” What it takes to make a society prosperous is far more complex than what it takes to make one individual better off than another. Growth as the Rate of Solution Creation If the true measure of the prosperity of a society is the availability of solutions to human problems, then growth cannot simply be measured by changes in GDP. Rather, growth must be a measure of the rate at which new solutions to human problems become available. Capitalism: An Evolutionary, Problem-Solving System If prosperity is created by solving human problems, then the key question for society is what kind of economic system will solve the most problems for the most people the fastest? We have centuries of evidence now that capitalist economies do better at delivering high standards of living to their citizens than do economies run by communist, authoritarian, or other nonmarket systems. The explanation for this in standard economics is that capitalism uses price signals to provide incentives to produce and allocate goods in a way that will maximize people’s welfare. But if real-world markets are not the simple mechanistic systems imagined by thinkers of past centuries, but rather are complex, adaptive, and more like ecosystems, then the benefits of capitalism may be both different and greater than we imagined. Capitalism’s great power in creating prosperity comes from the evolutionary way in which it encourages individuals to explore the almost infinite space of potential solutions to human problems, and then scale up and propagate ideas that work, and scale down or discard those that don’t. Understanding prosperity as solutions, and capitalism as an evolutionary problem-solving system, clarifies why it is the most effective social technology ever devised for creating rising standards of living. Confusing Efficiency for Effectiveness The orthodox economic view holds that capitalism works because it is efficient. But viewing the economy as an evolving complex system shows that capitalism works because it is effective. In fact, capitalism’s great strength is its creativity, and interestingly, it is this creativity that by necessity makes it a hugely inefficient and wasteful evolutionary process. Prosperity and Inequality Capitalism may be humankind’s greatest problem-solving system, but this view says little about how the benefits of such problem solving might be distributed. In any complex society, initial advantages and disadvantages abound—where you are born, who your parents are, what education you had, what opportunities and barriers you face, and so on. One of the great attractions of capitalism is that it doesn’t care who your parents are—if you solve a big problem for a lot of people, you can be highly rewarded.
Posted on: Thu, 03 Jul 2014 23:45:02 +0000
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