By ROBERT H. FRANK - LOS ANGELES TIMES
Added: Thu, 27 Oct 2011 04:00:55 UTC

Natural selection explains more about economics than Adam Smith's invisible hand.

With good reason, most contemporary economists regard Adam Smith as the founder of their discipline. But I would instead accord that honor to Charles Darwin, the pioneering naturalist.

Although Darwin had no formal training in economics, he studied the works of early economists carefully, and the plants and animals that were his focus were embroiled in competitive struggles much like the ones we see in the marketplace. His observations forged an understanding of competition that is subtly but profoundly different from Smith's. The celebrated invisible hand theory that Smith developed holds that unfettered markets will ultimately channel self-interest to serve the common good. But this idea is really just an interesting special case of Darwin's more general theory.

Smith did not claim that markets always channel greed in socially productive ways. For him, the remarkable thing was that they often appeared to. Although his account of how that happens lacks the generality that many of his most enthusiastic modern disciples ascribe to it, it will endure as one of mankind's most impressive intellectual achievements.

Consider his description of product design improvements or cost-reducing innovations. The entrepreneurs who introduce them hope to steal sales from rivals. They often succeed spectacularly in the short term, which pressures rivals to mimic the innovations. The ultimate beneficiaries of this competition, Smith explained, are not businesses but consumers, who enjoy ever better products at ever lower prices.
Read more

TAGGED: DARWIN