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Sunday
Nov062011

The Rational Optimist - How Prosperity Evolves

A rational optimist is someone who has "arrived at optimism not through temperament or instinct, but by looking at the evidence". In this book, Matt Ridley does three things: (1) he argues that “human progress has, on balance, been a good thing, and that, despite the constant temptation to moan, the world is as good a place to live as it has ever been for the average human being" and that we are wealthier, healthier, happier, kinder, cleaner, more peaceful, and longer-lived than any previous generation, (2) he explains why and how it got that way and (3) he prognoses that it will most probably continue to get better in the future. To support his case, Ridley goes 200.000 years back into human history to seek the deep roots of our species’ success. Not surprisingly he identifies the division of labour, specialisation, and exchange (of goods, services, and ideas) as the essential keys to progress and prosperity, while self-sufficiency, central planning, and protectionism are identified as the enemies of progress. The optimism argued for here is not unconditional: it is only if the former forces prevail over the latter that the evolution of prosperity is highly likely to continue.

 

Ridley builds on the ideas of Adam Smith and Charles Darwin and interprets human society as a product of a long history of “evolution through natural selection among cultural rather than genetic variations, and as an emergent order generated by an invisible hand of individual transactions, not the product of a top-down determinism.” He compares the free market with biological evolution. Like the latter, the former too “is a bottom-up world with nobody in charge”. He plausibly holds that “Human history is driven by a co-evolution of rules and tools. The increasing specialization of the human species, and the enlarging habit of exchange, are the root cause of innovation in both”. He sees rules and institutions as evolutionary phenomena too,

 

… emerging bottom-up in society rather than being imposed top-down by fortuitously Solomonic rulers. They come through the filter of cultural selection just as surely as do technologies. And if you look at the history of, for instance, merchant law, you find exactly this: merchants make it up as they go along, turning their innovations into customs, ostracizing those who break the informal rules and only later do monarchs subsume the rules within the law of the land.

 

He takes as his concrete historical example of this phenomena the lex mercatoria of the medieval period. (For an in depth study of medieval merchant law see "The Role of Institutions in the Revival of Trade: The Law Merchant, Private Judges, and the Champagne Fairs" in the anthology Anarchy and the Law). Ridley further gives many historical examples where government bureaucracy has impeded the evolution of prosperity and led to the destruction of wealth. “The inherent illiberalism of the bureaucracy, not to mention its tendency to corruption and extravagance” is pointed out and Ridley’s position is summed up in the slogan: “Merchants and craftsmen make prosperity; chiefs, priests and thieves fritter it away”.

 

After having pointed out the “win-win” or positive-sum nature of trade and its essential role in generating human prosperity, Ridley goes on to note that “yet it takes only a few sidelong glances at your fellow human beings to realize that remarkably few people think this way. Zero-sum thinking dominates the popular discourse, whether in debates about trade or in complaints about service providers.” He continues:

 

… this is a shame, because the zero-sum mistake was what made so many -isms of past centuries so wrong. Mercantilism said that exports made you rich and imports made you poor, a fallacy mocked by Adam Smith […] Marxism said that capitalists got rich because workers got poor, another fallacy.

 

Why do so many people continue to commit such obvious economic fallacies? A large part of the reason is most probably that the human mind is not well adapted to grasp the enormous benefits of trade and other positive-sum interactions; Ridley says that “the notion of synergy, of both sides benefitting, just does not seem to come naturally to people.” This, in turn, is probably because most of the Stone Age transactions rarely benefitted both sides. Ridley quotes Michael Shermer saying that “during our evolutionary tenure, we lived in a zero-sum (win-lose) world, in which one person’s gain meant another person’s loss”. This point is argued at length in Paul H. Rubin’s excellent book Darwinian Politics – The Evolutionary Origins of Freedom.

 

Ridley goes on to argue that this might further explain why so many people see the free market as a necessary evil rather than an unmitigated good, and why so many mistakenly tend to think that “free exchange demands selfishness, whereas people were kinder and gentler before their lives were commercialized” (another version of the myth of the "noble savage" so forcefully demolished by Steven Pinker). As Ridley points out in response to this myth:

 

The notion that the market is a necessary evil, which allows people to be wealthy enough to offset its corrosive drawbacks, is wide off the mark. In market societies, if you get a reputation for unfairness, people will not deal with you. In places where traditional, honour-based feudal societies gave way to commercial, prudence-based economies […] the effect is civilizing, not coarsening.

 

This latter argument has also been made by Pinker in his The Better Angels of Our Nature (and there are indeed some similarities between that book and the present one).

 

Progress without planning, or “spontaneous order”, is another thing that people sadly find hard to grasp intuitively (for the same evolutionary reasons). Ridley quotes the Archbishop of Canterbury saying (probably having in mind Adam Smith’s “invisible hand”) that “Marx long ago observed the way in which unbridled capitalism became a kind of mythology, ascribing reality, power and agency to things that had no life in themselves”. A funny thing to come from someone who believes in the existence of a divine being! Regardless, the invisible hand of the free market is (in sharp contrast to god) empirically well-based. The empirical evidence of the impotency and tragedy of a centrally planned economy is equally strong.

 

The comparative benefits of the free market over those of democracy are also pointed out by Ridley:

 

If you don’t like the outcome of an election you have to lump it; if you don’t like your hairdresser, you can find another. Political decisions are by definition monopolistic, disenfranchising and despotically majoritarian; markets are good at supplying minority needs.

 

The book also argues that economic progress and social progress go hand in hand (and that the former often drives the latter). Commenting on contemporary politics, Ridley points toward the “bizarre paradox of a conservative movement that embraces economic change but hates its consequences and a liberal movement that loves the social consequences but hates the economic source from which they come”, he quotes Brink Lindsey saying that “one side denounced capitalism but gobbled up its fruits; the other cursed the fruits while defending the system that bore them.” Bizarre indeed and it is a pattern that repeats in many western democracies. The classical liberalism that renounces government intervention in both the social and the economic spheres makes much more sense.  

 

This is the kind of book that I wish I could buy in large quantities and hand out to all my friends and relatives. It may not offer the deepest or the best analysis of all of the different topics that it touches upon (including climate change, overpopulation, genetically modified crops, and patents and copyrights, among others), but it is accessible and deals with some very important questions in a compelling and credible manner. Indeed, this is the kind of book that everyone ought to read! 

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