Tuesday, June 17, 2008

Book Review: Mind of the Market by Michael Shermer

This book is an attempt by the author to understand the market through the lens of evolutionary theory. Shermer uses the term “evolutionary economics” to describe this enterprise. Shermer is a good story teller and he does a good job of explaining cutting edge science in a way that is both accessible and interesting. Unfortunately, towards the end of the book, Shermer’s narrative peters out into an op-ed piece in favor of libertarianism. Perhaps most surprisingly Shermer introduces what he calls the “principle of freedom”, that we are free to act as long as it doesn’t interfere with the freedom of others, without any argument or justification whatsoever. Instead it is almost presented as some sort of indisputable maxim. When he combines this maxim with his discussion of evolutionary economics what he ends up with is merely an argument for less government control over the economy. I wish instead that he would have ended the book by drawing conclusions from his earlier discussion alone. I think that if he would have done this he could have had something that would have really been useful for trying to understand how the market works.
Throughout the book Shermer argues that there is a moral side to the market as a result of our evolutionary past. While his arguments are interesting as is the science behind them, the same conclusion can be drawn from merely reflecting on the necessary nature of the market. This is because a moral component is necessary for the market to exist at all. Of course the foundation of the market is greed. This is true but it is only half the story. Self interest is what ultimately drives the market but there is something else going on as well. Just as the market could not exist without self interest it could not exist without trust either. Every market transaction entails trust. We must trust the other party to at least some extent to trade with them. Because this trust is absolutely necessary for the market to exist the market is built on trust as much as it is on greed. Without this trust the market would not exist because no one would enter into it in the first place. This is not surprising because it reflects human nature itself. True, we are inherently self interested but we are also inherently moral. Game theory assumes that there is no trust in the transactions. As a result its application to financial markets is limited. Though it elegantly explains how selfishness works it does not account for the other half of the picture. Take for example the prisoner’s dilemma, perhaps the core illustration of game theory. For the dilemma to work you must assume that the prisoners are amoral and that they do not trust each other. This has always been a problem for me as I’ve studied the dilemma. It seems that in the real world the prisoners would likely be friends and therefore would trust each other and want to help each other out. We don’t get into prisoner’s dilemmas with our family and friends. And I do not believe that we completely get in them with our adversaries either. Illustrating this point is the relationship between the U.S. and the U.S.S.R. during the cold war. Even between these two arch-nemeses in the battle for word power there was a degree of mutual trust. This trust is the reason that the world still exists today. Mathematician John Von Neumann was one of the developers of game theory and a believer in the principles of rational self-interest. He was also an adviser to Presidents Truman and Eisenhower. When the Soviets showed the first signs of developing nuclear weapons, he urged the president to bomb the Russians into oblivion. Game theory, he said, required it. It’s easy to see how he arrived at this conclusion. Either the Soviets were going to unleash their arsenal on us or they were not. If they did, at least we would both have been reduced to ashes and therefore on equal footing with each other. And If they did not send the apocalypse our way, then we would have won the cold war and earned the title of “worlds only superpower.” What Von Neumann failed to recognize was the other half of the equation; trust. As a result of this trust the two superpowers were able to resolve the dilemma, at least partially anyway, by choosing the best over all option, mutual preservation. Game theory certainly does describe many of the problems that do exist in the market. The question then is how can we use the moral tendencies of the market to counter its greedy, oppressive, and self-destructive dark side? As usual I digress. This was an entertaining read; it just felt like it could have been much more.

YouTube of the week: All this talk of libertarianism has reminded me of my many encounters with Randian Objectivism (I know they’re not the same thing). This video has been circulating around the various LDS philosophers societies for a few months now. It Synthesizes Ayn Rand, Immanuel Kant, and Mormon Missionaries.

1 comment:

Jerkolas said...

Hey Steven, just found your blog indirectly through Vogeler's. Nice work.