Wednesday, October 28, 2009

The "Williamson- Dawkins" synthesis- the opposite mental shifts that evolutionary biology and economics had to make

This year's Nobel prize for economics was awarded to 2 economist's looking at hitherto under-explored questions in economics- Williamson won it for his work illuminating the conditions under which it is efficient to organize economic activity in the form of a firm (extending the work first done by Ronald Coase) - while Elinor Olstrom was distinctive in her exploration of the mechanisms by which spontaneous bottom up order could solve complex economic problems (such as the "tragedy of the commons") without central fiat by the state, by creating self enforcing rules and free institutions.

Williamson's work is particularly intriguing.An exploration of the way the economy functions shows that its most obvious feature is that people organize themselves into firms. However, the focus of economic theory has largely been on the actions of self-interested individuals and their interactions in the free market.

One of the big shifts in modern economic thinking is to see evolutionary biology as a better analogue to understand the economy as compared to physics (which is where economics borrowed most of its conceptual frameworks from, including the notion of an "equilibrium" et al).

( As an aside "The Origin of wealth" by Eric Beinhocker is a fantastic book to understand how the economy can be best understood with biology rather than physics as an analogue; what he terms as "complexity economics")

To bring out some aspects of the analogy- individuals in an economy work to maximize their own utility (or self-interest). Analogously, genes, in evolutionary biology work to maximize their own interest (i.e. survival)

The fascinating thing is, just as under most circumstances, it is optimal for the "selfish gene" (to use biologist Richard Dawkins evocative term) to organize itself into, well, an organism to ensure its survival (i.e. maximize its selfish interest)- it is also in the interest of utility maximizing individuals to organize themselves into firms to carry on economic activity.

The interesting contrast is that both fields made opposite mistakes historically. Economics got the unit of analysis right- i.e. individuals, but paid scant attention to the emergent phenomenon i.e. the firm. In biology, the emergent phenomenon was well understood (i.e. the study of living organisms), but they got the fundamental unit of analysis wrong (by trying to understand how actions of an organism are in its interest, while the right question to understand was how actions of an organism were in the gene's interest)

Evolutionary biology, has of course now embraced the notion of gene-centered analysis while studying organisms. Post the Williamson award, one would expect economics to pay far more attention to the study of firms, while being rooted in analysis of individual utility maximization

21 comments:

mischievous pen said...

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Now I actually have to read this!

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Anonymous said...

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Karmavimochanam said...

Interesting hypothesis. Williamson is a big advocate of vertical integration in firms (just like the "vertical integration" of genes to form organisms). Nevertheless, vertical integration always puts a monopolistic behemoth that devours smaller companies in mind. The social acceptability of his hypothesis is not a certainty.

The problem with economics is always politics. I think academicians have embraced WIlliamson's ideas for a while. The government still has to catch up.

On a different note I have a problem with analyses that draw parallels between such unconnected fields. The comparison restricts the potential of the field just by its existence.

My two cents or I should say paise.

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