EVOLUTION'S ARROW

The direction of evolution and the future of humanity

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(new) The most recent and refined version of the evolutionary worldview that was first presented in Evolutionís Arrow can be found in the 34 page document The Evolutionary Manifesto which is here

Chapter 16.    Limitations of Markets           

 

In a range of circumstances, markets are immensely superior to government planning at organising economic cooperation. Markets effortlessly organise a highly efficient division of labour between members of the society. But markets will produce cooperation only to the extent they can ensure that individuals (including firms) capture the effects on others of their actions. All effects on others, beneficial and harmful, must be captured. If individuals are not rewarded for all the beneficial effects of a particular action, the action will not be as profitable as other actions that are less beneficial, and the society will miss out on useful cooperation. And if individuals do not bear the full cost of their harmful actions, they will not be deterred from doing things that harm others.

In what circumstances will a market fail in this way? A free market can work effectively only where the full benefits of goods and services go solely to the purchaser, and cannot be enjoyed free by anyone else who does not pay for them. Unless this condition is met, the producer cannot obtain payment for all the benefits he creates for others. In the case of consumer goods such as refrigerators, washing machines and televisions, this condition is clearly met. The purchaser has the sole right to use the goods, cannot gain the full benefits of a good without purchasing it, and is prepared to pay a price that reflects those benefits.

But not all goods and services are like this. Some goods and services have collective effects that cannot be targeted only at those who pay for them. They have effects on many others, and it is impossible to prevent people from enjoying these effects even though they  have not paid for them. It will be in the interests of individuals to free ride on these goods and services by taking them without paying. As a result, the producer will not be able to capture payment for all the beneficial effects on others of his goods or services. Goods and services that would have been profitable if all their effects were captured will not be profitable, and will not be produced in a society that relies only on markets[1].

A classical example of a service with collective effects is the defence of a country. If an entrepreneur organises an army to defend his country against an invader, he will not be able to capture the full benefits of his actions. He will defend all members of the society, whether or not they are willing to pay him for it. There is no way he can parcel up his service so that only those who pay for it are defended. So it will be in the interests of individuals to decline to pay, and to free ride on the service paid for by others. Because entrepreneurs cannot capture all the benefits of providing defence services, a market alone is unable to produce an adequate defence system. The free rider problem can be overcome only by a government or other ruler who has the power to compulsorily raise enough taxes to properly fund defence. Only a manager can ensure that all who benefit from defence pay for it through compulsory taxation.

Another very important example of services that will not be supplied adequately by a free market alone are education and training. The reason for this is that education and training does not benefit only those individuals who consume it. Educated individuals produce collective benefits. This is true both for general education as well as for work-orientated education and training. For example, a democratic society will operate more effectively if its members are well educated about how the social and economic systems function. And work-orientated training benefits not only the individual who is able to earn higher wages with his improved skills, but also all those who work with the individual and who are more productive because they are working with someone with higher skills. So suppliers of education and training will not be able to capture the full benefits that their service provides to society. Free riding will prevent them from capturing benefits that spill over to others. As for defence, this will undermine the provision of an adequate level of education and training unless government intervenes[2].

This failure of free markets to organise an appropriate level of education for members of the society is made significantly worse by a number of additional factors. In a free market, many individuals will not earn sufficient money to buy even the education that is in their own best interests, will be too young when education is of greatest benefit to them to make an informed decision about its value, and will not have sufficient education or information to make sensible educational choices. As a result, a society that leaves the provision of general or work-orientated education to the market will be significantly less productive as a whole. It will be less competitive economically than other societies that educate their members better.

Markets alone will also fail to establish programs and services that can improve the quality of life of all who live in a community or society. Policing, the provision of safe and well-planned public areas such as parks and streets, and programs that reduce crime by rehabilitating drug addicts or by providing satisfying activities for teenagers all have beneficial collective effects that cannot be targeted only at those who are willing to pay for them. No matter how beneficial these sorts of programs may be to a community, a free market will not provide them. A neighbourhood, a city, or a region can disintegrate socially, and the market system will not do anything about it.

Market systems alone will also fail to produce the best outcomes when individuals do not capture all the harmful effects of their actions. Again, this will occur most commonly when the production and use of goods and services have collective effects that go beyond the producer and the consumer. For example, the production of a good might have harmful effects on the environment, disadvantaging many others. But there is nothing in a free market system that requires the producer to compensate those disadvantaged by the pollution he causes. Neither he nor the consumer will pay the price for these harmful effects on others. As a result, the market does not give them any incentive to limit these harmful effects[3].

In fact, if the producer can manufacture an item more cheaply by a process that degrades the environment, he will have to use this process if he is to stay in business. A producer who is bound by a belief system that prevents him from harming others and who therefore refuses to pollute, will go out of business. He will have to use more expensive non-polluting processes and charge higher prices, and will be out-competed in the market place.

It is critically important to note this destructive feature of the way markets operate. It is not just that economic markets fail to produce optimal outcomes in circumstances where they fail to ensure that individuals capture the benefits or harms of their actions. They also actually prevent individuals from behaving in ways that would correct these market failures. Individuals or firms who try to do so will be out-competed and go out of business. The competition that ensures that consumers get goods and services at the cheapest price is a two-edged sword. It destructively ensures that individuals and firms cannot take into account the factors that the market does not, even where it would advantage the community or society greatly if they did so. A firm cannot stay in business in a perfectly competitive market if it refuses to pollute, or if, as a contribution to society, it educates its employees beyond what is needed solely for the operation of the firm, or if it implements programs that produce enormous collective benefits to the community as a whole. Effective free markets make morality impossible. And the only individuals or firms who are able to accumulate great wealth in a competitive market are those who pursue only their own financial interests, and are not prevented from doing so by any conflicting moral code or religious beliefs.

A further major limitation of economic markets is that they satisfy the needs only of those who have money. Markets have an extraordinary ability to efficiently meet the needs and desires of those who have purchasing power. But they will provide absolutely nothing to those who have none. If you do not have sufficient money to buy the food you need to live, the market will do nothing to help you as you starve to death. If you have a curable but potentially fatal illness, and do not have the money to pay for a cure, the market will let you die. Markets do nothing to stop millions dying in these circumstances around the world every year, even though there are enough resources to prevent their deaths. The market’s invisible hand is drenched in blood.

Markets give nothing to those without purchasing power because individuals do not capture any beneficial effects they might have on individuals who cannot pay. There is no profit in providing goods and services to those without purchasing power. Participants capture only the beneficial effects they have on those with money. The market will provide great rewards for an individual who builds a factory and employs hundreds of workers to produce tasty new flavours of ice cream for the children of the wealthy. But the market will not provide a loaf of bread to a starving child whose parents are penniless.

This limitation would not be so serious if markets operated to ensure that all members of a society have sufficient purchasing power. Individuals and the society could still reach their potential if the market ensured all individuals had sufficient money for their material needs and for the education they need to make the best possible contribution to their community and society. But markets do not do this. Instead they tend to produce a distribution of income that concentrates most of the wealth of the society in the hands of a small minority. For example, in the United States of America, the top 1 per cent of the population has about 40 per cent of the total net worth[4]. And this is after the US government has redistributed market income through taxes, minimum wages, welfare programs and other transfers.

In large part markets produce this massively unequal distribution because the income of most workers and producers is driven down by competition in the market. Great wealth can usually be accumulated only by those who find a business opportunity whose profitability is not forced down by competition. Or by those who find employment that is sheltered from full competition.

Competition for work drives down the income for most jobs. When there is an oversupply of potential employees for a particular type of work, and the alternative is unemployment, competition will drive wages down to subsistence levels, and working hours will expand. Those who might miss out on work will be willing to accept less to obtain a job. In a perfectly competitive market, the level of wages for a particular type of labour will tend to equate to the cost of reproducing the labour. For workers without special skills, this means wages that are just  enough to feed and clothe them so that they can continue working. This was the outcome during the industrial revolution before governments legislated minimum wages and the maximum hours that could be worked for those wages[5]. Even the salary levels of jobs that require extensive university qualifications will be driven down by competition if there is free access to obtaining the qualifications. When there is an undersupply, higher salaries will attract more people to get the qualifications. But once this satisfies demand, competition will tend to force salaries down to the minimum level needed to reproduce the employees and their qualifications.

Competition also tends to produce work that is meaningless and unfulfilling for workers. Competition amongst businesses will force employers to organise work and design jobs to maximize efficiency. They will not be able to structure work in ways that produce satisfying and meaningful work for employees where to do so would conflict with maximum efficiency. Competition between potential employees will mean that they have to accept what is offered. The result is that large numbers of employees in market economies spend their working life doing tasks in which they find no meaning, that are achingly boring, and that prevent them from developing their potential as human beings. Many workers in modern market economies have less freedom in their life to pursue their own interests and personal development than slaves in earlier times. Large parts of their life are taken up doing things that they would never freely choose to do[6]. This is an inevitable outcome of ungoverned (unmanaged) markets.

Competition amongst the producers of goods and services drives down their profit margins. No one makes much money out of businesses that are subject to strong competition. In areas of business where anyone can get the knowledge and capital to operate, competition in a free market system will force down profits to subsistence levels. This is commonly the case where there is no regulation of taxi services, corner shops, street vendors and other small businesses. It is only in circumstances where vigorous and open competition does not exist to drive down profitability that great wealth can be accumulated and that the massively unequal distribution of wealth found in modern market economies emerges. It is only when there are business opportunities that most people are unable to exploit that very high incomes are produced.

For example, professionals of various types have been able to obtain high incomes by building themselves shelters from free and open competition. If a licence is required to practice the profession, and barriers are put in the way of gaining the licence, such as by limiting the number of training opportunities, competition can be avoided and high incomes assured.

The wealthy have much greater access to economic opportunities that are sheltered from competition. As a result, it is much easier for the wealthy to perpetuate their wealth or to increase it. Wealth opens up many income-earning opportunities that are not open to those without wealth. For example, it enables a person to get involved in much larger-scale business opportunities because they have much easier access to finance[7]. And the wealthy are able to purchase exclusive educational opportunities for their children that shelter them from strong competition. The great majority of people are in no position to compete with the wealthy for these opportunities. As we will consider in detail later in this Chapter, the wealthy can also use the power that goes with their wealth to get governments and other rulers to manage the society in ways that favour them, including by further sheltering their businesses from competition.

In these cases, it is clear that great wealth can be produced and maintained only because the market fails to work effectively. If the market could organise competition successfully in these circumstances, incomes and prices would fall, and the needs of consumers would be satisfied more efficiently.

Great wealth can also be acquired by those who are able to produce better goods and services, or can produce the same goods and services at much lower prices. If other producers are not able to duplicate quickly and easily what they are doing, there will be no effective competition in the marketplace to drive down profitability.

For example, a manufacturer may be the first to invent an innovative labour-saving kitchen appliance. Before others are able to develop the capacity to make the appliance, the manufacturer is able to earn very high profits. He escapes the competition that would otherwise drive prices and profitability down. Those who do accumulate great wealth in this way, and those who attempt to justify all aspects of the market, often claim that it is due to special talents and hard work that individuals find these golden opportunities. But this ignores the numbers of equally-talented and hard-working individuals who never stumble on such an opportunity. And it ignores the failure of governments to pick and develop economic winners, despite all their resources and access to expertise. Talent and hard work are not enough. There is a significant component of luck in whether or not an individual finds himself in the right place at the right time with the right knowledge and with the right connections to exploit an opportunity that will make him rich. In fact, it is largely because there is a great amount of unpredictability, lack of relevant information, and need for trial-and-error that those who do find these opportunities can escape competition for a sufficient period to accumulate great wealth.

Of course, a major strength of the market is its ability to reward those who discover new and better ways to satisfy the needs and tastes of consumers. But the pure market does not contain an effective mechanism to ensure that the level of the reward is cost effective. Often the rewards are far in excess of what would have been needed to encourage the individual to make and develop the discovery. Bill Gates would no doubt have settled for far less than 60 billion dollars to build up his Microsoft computer software empire. Not only could the market be far more efficient if it included processes that ensured rewards were not excessive, but it would also produce a more equal distribution of wealth. Again, we find that the accumulation of very high incomes is a product of market failure. In this case it results from the inability of the market to organise sufficient competition to ensure that innovations are produced efficiently at the lowest cost to consumers[8].

The extraordinarily unequal distribution of wealth produced by markets is a result of fundamental flaws and failures in the effectiveness of market processes. These are serious deficiencies. The concentration of wealth produced by these flaws has major disadvantages for the competitiveness and effectiveness of the society as a whole. First, it does not make full use of the potential of many members of the society. Many individuals will never have the opportunity or the purchasing power to develop their own or their children’s full potential to contribute to the effective functioning of society.

Second, this unequal distribution of wealth organises most of the productive capacity of the society to serve the desires and tastes of the small minority who have most of the wealth. What a market does very efficiently is satisfy the needs of those who have purchasing power. And if purchasing power is mostly concentrated in the hands of a few, it is largely the wants and whims of these few that the entire economic system will serve. The market will organise the majority to spend their working lives serving the interests of a minority. Technological advances will be organised by the market to satisfy the interests of the extremely wealthy. This is not a noble outcome for a society. And as we shall see in detail, it will not produce a society that will achieve longer-term evolutionary success.

The tendency of market systems to concentrate great wealth and economic power in a small number of individuals and corporations results in a further major limitation in the effectiveness of markets. Enough wealth can give individuals and corporations the power to influence the government or other ruler who manages the society and the market. As we shall see in detail later in this Chapter, even in democratic societies the wealthy are able to play a major role in determining who gets elected to govern and how long they stay in office. This power gives the wealthy the potential to bias the management of the market so that it operates in their favour. Markets include the seeds of their own destruction. They tend to produce individuals and corporations with the power to undermine the effective operation of the market.

The power to influence the government or other ruler opens up immense new opportunities for wealthy individuals and corporations to pursue their own interests. To be able to manage a society effectively, governments must be very powerful. They must be able to raise taxes, use those taxes to promote particular activities in the society, make laws, and punish anyone who does not obey the laws. As we have seen, this power can be used to organise a cooperative and productive society. But it can also be used to enhance the interests of particular individuals and corporations within the society. Individuals and corporations that accumulate sufficient economic power are able to ensure that the power of government is used to benefit themselves. They are able to use the power of government to ensure that the benefits they receive from society are far in excess of what they contribute. They will capture benefits far in excess of the effects on others of their actions. As a result, the effectiveness and efficiency of the society will be undermined.

There are many ways in which economically-powerful individuals and corporations can use the power of government for their own benefit. They can get the government or other ruler to grant and enforce a limited number of exclusive rights to exploit particular business opportunities or to provide particular services. For example, governments often place restrictions on who can use land in particular ways, set up television and radio broadcasting stations, enter particular professions, catch fish commercially in certain areas, run lotteries and casinos, and import particular types of goods. Because the people given these opportunities are protected from full competition, they can make above-normal profits.

Economically-powerful individuals and corporations can get governments to refrain from breaking up monopolies and from promoting competition in areas where the market is not operating efficiently. For example, in areas of the economy where large-scale businesses have entrenched themselves, it can be very difficult for new, smaller businesses to enter the market. Because competition is limited, high profits can be made. The market would deliver products to consumers at much lower prices if competition were stronger. Governments can do a lot to open these areas to greater competition. But economically-powerful individuals and corporations who can influence governments can protect their high profits by ensuring that the government does not do this. Most modern governments have laws and processes that they claim are directed at preventing monopolies and anti-competitive practices, but these are largely ineffective[9].

More directly, economically-powerful individuals, corporations and interest groups can influence governments to give them special tax breaks, more lenient controls on pollution, exemption from laws that set minimum wages and safety requirements, subsidies, and protection from competition by imports. And they can get the government to ensure that the tax system leaves them with many opportunities to avoid tax. Modern governments typically claim that their tax system collects a higher proportion of the incomes of the wealthy. A tax system that does this is essential if governments are to counter the tendencies of markets to concentrate most of the wealth in the hands of a small minority. But the wealthy can use their influence over governments to ensure that the tax laws that are claimed to do this are, in practice, ineffective and unenforceable. Typically in modern countries, the wealthy with their accountants and lawyers can find and exploit loop holes in the tax laws faster than governments close them. Increasingly, modern governments have used this as a justification for moving towards flat rate taxation systems such as consumption taxes. But there is no technical reason why governments cannot reform their legal system in ways that ensure that the wealthy pay the tax it is claimed they should. However, it is not in the interests of governments to do this.

The usefulness to the wealthy of a legal system that can be manipulated by costly lawyers and accountants points to a more general way in which the economically powerful can bias market systems in their favour. If the legal system that enforces the framework of laws that govern markets is very expensive to use, and if persons are more likely to get a favourable result the more money they spend, the legal system will be less effective at regulating and controlling the behaviour of the wealthy. If the economically powerful are able to escape the framework of laws, they will no longer be restricted to pursuing their self-interest in ways that benefit the society. And they will have a competitive advantage over the majority who cannot escape the laws.

A legal system also will be biased toward the economically powerful if the law is extremely complex, there are many opportunities for appeal, the outcome of each step in the legal process is uncertain and unpredictable, and the best legal advice and representation is very costly. Each of these characteristics make it easier for those with the most financial resources to achieve a favourable result from the legal system, and harder for the majority of citizens to do so. With such a system, the economically powerful do not have to bias the legal process in their favour by risky bribery of the judiciary. Instead, the complexity and expense of the system will ensure that only they can afford to do the things that are likely to deliver a favourable result.

It is in the interests of the wealthy for governments to be small, and they can use their influence over governments to achieve this. The less governments spend on welfare and general education, the less tax they will have to raise off the rich. And the wealthy do not need to rely on the services provided by government. It is in their interests to have governments provide the minimum level of support consistent with ensuring there is no widespread dissatisfaction in the society that could threaten the status quo. The level of dissatisfaction they could get away with was much lower when communism competed with capitalism. The possibility of war meant that it was in the interests of the wealthy to ensure that their societies were sufficiently cohesive for sufficient citizens to be willing to fight and die for it. The economically powerful were prepared to support substantial welfare and social security programs in capitalist countries. Now that communism is no longer seen by many as a realistic alternative, these programs are being dismantled throughout the world, and the wealthy are pushing for small government[10]. 

The benefits to the economically powerful of co-opting the power of governments and other rulers in these ways are enormous. Throughout history, alliances with rulers have always been the royal road to riches for those who would be wealthy. It has been far easier to accumulate and preserve great wealth in this way than by continually out-competing others in a fair and vigorous market.

Somewhat paradoxically, the same self-interest that makes markets so efficient also motivates the economically powerful to use the power of governments to undermine markets. As we have seen, participants in a market do not have to care about the interests of others to want to strive to produce goods and services that satisfy the needs of others. Because the market enables them to capture the benefits of their effects on others, self-interested participants will be driven to satisfy others, even though they care only about their own interests. The market can organise complex cooperation even though participants have no interest in being cooperative or in making the market system work. Participants just pursue their own narrow interests wherever they lie, wherever that takes them.

But this strength of the market system is also the source of its greatest weakness. Individuals and corporations that are ruthlessly self-interested will flourish in a market system and will benefit others as they benefit themselves. But when they accumulate sufficient economic power to manipulate governments, they will do so. The fact that this will prevent the market from efficiently exploiting the benefits of cooperation will be immaterial to them. They will not give a dam. Cooperation and the interests of others are not their concern in their business activities. They will not be interested at all in whether or not they undermine the market. Their only consideration in planning where to direct their energies is how to gain the most benefits for themselves. If this is achieved best by manipulating market rules, that is what they will do. Whether they put their energies and talents into following the rules that regulate the market, or by circumventing or biasing the rules, depends only on which alternative produces the greatest returns to themselves.

In fact, individuals or corporation that do not behave in this way will be out-competed in the market, unless they can escape competitive pressures. As we have seen, producers will be competitively disadvantaged if they use their resources to satisfy the interests of those who are ignored by the market, such as citizens who have little purchasing power. For similar reasons, they will also be out-competed if they fail to take advantage of opportunities to use government to bias the market in their favour.

But it is not in the interests of the majority of citizens in a society to allow the economically powerful to manipulate governments and other rulers in this way. The greater the share of the wealth of a society that is taken by the economically powerful, the less there is for the majority. And the manipulation of governments by the wealthy to advance narrow interests undermines the broader interests that governments have in promoting the productivity of the society as a whole.

Individuals and groups who have the capacity to use mental models to understand how their society is manipulated by the wealthy are able to see that it is in their interests to put a stop to it. But to end the manipulation, they have to acquire sufficient power to overcome the power of the ruler and of those who support him. Throughout history, citizens have usually been able to achieve this only when large numbers of them have been willing to band together to overthrow the ruler by force. But individuals have not generally been prepared to risk their lives in this way unless they had little to lose and unless they believed that the revolution could install new rulers and perhaps a new way of organising the society that would significantly advance their interests.

These conditions were not often met. It is in the interests of rulers and those who benefit from their rule to manage the society in a way that makes successful revolt unlikely. A ruler could ensure that poverty would not be experienced by sufficient numbers of the society to threaten his rule. And the ruler could promote ideologies and beliefs that suggested that his rule was the best or even the only practicable way of organising an acceptable society, despite any poverty, misery, and inequality it produced[11]. To the extent that these beliefs were promoted successfully, the mental models of members of society would not enable them to foresee any better way of organising society. And the more widely these beliefs were accepted, the greater the inequalities in wealth that could be suffered without risking revolution. The ruler and his associates could take a greater share of the wealth of the society without endangering their continued power.

But the task of promoting these beliefs became more difficult as members of many human societies developed an improved ability to model and understand more complex processes and systems. As humans accumulated knowledge and shared it through books and education, more individuals were able to mentally model how their society functioned, and could see how it might be organised differently. Increasingly, the members of many societies were able to see that there was no basis for the doctrines that were used by their rulers to justify their absolute power. Their rule was not divinely sanctioned, and they were not infallible. And more and more could see reasonable ways in which their rulers could be controlled to ensure they ruled in the interests of the majority. Revolts and threats of revolts progressively resulted in more effective restrictions on those who managed and governed many human societies. Increasingly, these restrictions realigned the interests of the ruler with those of the ruled, and made it more difficult for narrower interests to manipulate the power of the ruler for their own ends.

The most significant organisational innovation developed to date by humans to align the interests of government with the interests of society is democracy. Through typical democratic processes, the majority of the members of a society are able to install a government that they think will serve their interests best. And they can throw out the government in three or four years if they think there is a better alternative. The need for a violent revolution to overthrow a government that does not act in the interests of the majority is replaced by regular elections.

The development and spread of democratic processes as a means of organising human society was a major evolutionary advance. It made it more difficult for narrow but powerful interests to bias the market and government in their favour. As a result, democracy has produced societies that are better governed and more competitive. And it has ensured better management by aligning the interests of government more closely with those of the society.

As we have seen, in the absence of democratic processes continual competition between societies is essential if the interests of rulers are to be continually and strongly aligned with those of the society. The competition has to be so strong and incessant that it provides immediate feedback to the ruler on the effectiveness of his management. But as human societies have grown larger in scale and fewer in number, competition between societies rarely provides continual and specific feedback of this strength. Democratic processes go some way toward ensuring that the interests of rulers and the society are aligned. Democracy produces governance that is closer to the ideal of ensuring that the benefits captured by members of society reflect their contribution to society.

Of course, in democratic societies as in any other human society, it will be in the interests of the economically powerful to do what they can to get governments to advance the interests of the wealthy. The economically powerful will benefit enormously if they can find ways to do this. But a government in a democratic society can serve the interests of the wealthy only if it can still maintain the support of a majority. If this is to occur, the majority must be convinced that a government that serves the interests of the wealthy is in fact serving the interests of the majority. To achieve this, the wealthy must influence the ideas and beliefs used by the majority to build their mental models of how the society functions. The mental models of the majority must lead them to conclude that the actions of such a government is in their interests.

On the face of it, this is no easy task. But the economically powerful are in a special position to be able to influence the ideas and beliefs that members of a society use in their mental models. Their wealth gives them control over most of the resources of the society. Most of the newspapers, television stations, and other media are owned by wealthy individuals and corporations. The economically powerful are major funders of universities and research institutes, and can determine the reputation of a university by deciding the employability of its graduates. Most of the members of modern societies are dependent directly or indirectly on the economically powerful for continued employment. Individuals who have and promote radically different views on how society should be organised have always had difficulty in obtaining well-paid employment in democratic as well as communist countries. IBM does not employ anybody in a senior position who uses his ‘personal’ time to campaign actively against multi-national companies, warning how they corrupt governments and undermine free markets. And political parties must obtain substantial financial contributions from wealthy individuals and corporations if they are to organise the large-scale election campaigns that are essential for electoral success in large modern nation states. These essential contributions will dry up if a political party promotes ideas and beliefs that offend the economically powerful[12].

The use of these opportunities to influence the nature of the ideas and beliefs that are treated as respectable in a society does not require any coordinated conspiracy on the part of the economically powerful. Any detailed cooperation amongst the wealthy as a group is undermined by free riding and cheating just as it is within any other large group of self-interested individuals. But the wealthy have a common interest in defending the enormously unequal distribution of wealth that has enabled them to accumulate and retain their riches. And they can exercise a substantial degree of influence without any significant self-sacrifice or investment of resources. It requires little extra investment for the wealthy to use their existing economic power to influence public debate. In the ways described, the economically powerful can determine the ideas and beliefs that are repeated and treated seriously in the mass media, that attract research funding, that are supported by expert opinion from universities and research institutes, are adopted by political parties, and are publicly supported by citizens who wish to remain in well-paid employment. And they can determine which ideas and beliefs will be quickly dismissed, ridiculed and, if necessary, demonised[13].

This manipulation of public ideas and beliefs is able to take advantage of the fact that most members of modern societies have not yet developed an effective capacity for systemic modelling. They cannot form complex mental models that enable them to predict how their society functions and how it would change under different conditions. Most members of modern societies have a limited capacity to evaluate for themselves even the simple models that are continually repeated and promoted in the public media. They have even less ability to develop for themselves more complex and more accurate models of how their economic system operates and how it could be improved. The simple economic models that are promoted through the public media serve the same function as the religious and moral beliefs that were used by rulers in earlier times to retain the support of their citizens. Just like a belief that the ruler is a god, or is chosen by the gods, the simple models allow the governors to pay less regard to the interests of the governed.

The economically powerful will ensure that simple models that advance their interests are repeated publicly and treated as authoritative. Typically these models show by simple chains of cause and effect that actions which favour those with economic power also help the less wealthy. They show that actions that would disadvantage the wealthy would also disadvantage the majority. In most democratic nation states at the turn of the 20th century, citizens are continually presented with simple models of these kinds. They are told that the way to reduce unemployment and to increase the living standards of the majority is to reduce minimum wages and working conditions, decrease social security benefits, and provide incentives to business through subsidies and tax concessions.

Citizens are continually shown how globalisation has made it impossible to collect much tax off large corporations and the wealthy without damaging the economy. This would cause a flight of capital that would increase unemployment and reduce living standards. They are told that countries cannot now afford the welfare and social security systems that in the 20th century have prevented the misery and the poverty that unmanaged capitalism produced for many in the 19th century. As the need arises, simple models are rapidly developed and promoted to show that anything done to directly help the poor will in fact harm them, the only way to help the poor is to help the rich, and anything that harms the rich will hurt the poor. And whatever crisis emerges in the society and its economic system, whatever its cause, simple models are soon developed to show that the crisis arose because workers’ wages are too high, or because welfare schemes are too generous.

It is not difficult to develop simple models of this type that have a surface plausibility. In a complex society most actions have a multitude of effects, some of which will advantage a particular group, some of which will not. Any action that advantages the wealthy will probably also have some effects that advantage the poor, as well as some that harm the poor. It is a simple matter to construct models that highlight only the causal chains that suit a particular argument. Such a model will not be wrong because of what it contains, but because of what it leaves out. The logical and causal connections used by the model will be valid. But minds that cannot model the complexity that has been left out of the simple model will not be able to see that the model is inadequate and manipulative.

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Looking back at the major issues discussed in the last two Chapters, we can see that the ability of human societies to exploit the benefits of cooperative organisation has improved considerably in the 10,000 years since external management first emerged. The size of human societies has increased enormously, establishing cooperative organisation over much larger scales. Improvements in the ability of rulers and governments to use systemic modelling has enhanced the evolvability and competence of their management. They now do not have to rely as much on the existence of distributed internal management in the form of moral and religious belief systems. This has further enhanced evolvability: societies with fewer members who are straight-jacketed by inculcated beliefs are better able to adapt and explore new possibilities.

These improvements in management enabled governments to establish and adapt the framework of controls that allow large-scale economic markets to emerge. Economic markets have an extraordinary ability to exploit the benefits of cooperation. They produce cooperation because participants are able to capture the beneficial effects on others of their actions. In a market, cooperation pays. The ability of markets to organise cooperation has enabled them to produce the complex and efficient cooperative division of labour that characterises modern nation states.

Where economic markets work effectively, they are far superior to governments at organising cooperative economic activity. But markets are not able to exploit the benefits of cooperation fully in all circumstances. This is the case for cooperation that has collective effects. Markets are unable to ensure that citizens capture all the effects of actions that have collective effects. So ungoverned markets fail to reward and organise activities that have collective social benefits such as defence, education, and programs that build better communities. And they fail to deter pollution and other activities that cause collective harm.

Markets also fail to develop fully the potential of all members of a society. This is because markets produce a massively unequal distribution of wealth, and then they ignore the educational and other needs of those they leave with little purchasing power. Because income and purchasing power is concentrated in a few hands, markets organise the society to mostly serve the interests of a small minority.

By concentrating wealth, markets also produce a small number of wealthy individuals and corporations who have the power to get governments to bias the market and other government actions in their favour. Democracy has only limited success in countering this manipulation of governments.

So market systems do not make governments redundant. Management by governments is essential to establish and adapt the market framework and to correct the deficiencies in the market system. Where markets fail, government action is necessary to ensure participants capture the full effects on others of their actions, and to ensure participants do not capture greater benefits than they should. Government can use taxes, laws, subsidies and other payments to try to organise the behaviour and activities that would have arisen if the market was not deficient. They can correct market failures by ensuring that citizens capture all their effects on society.

But the forms of government that are currently in existence are seriously limited in their ability to carry out these functions effectively. Governments will never have the detailed information needed to determine accurately how the needs and values of the members of the society are best satisfied. In a large and complex society, governments also have to rely on incompetent and inefficient bureaucracies to plan and implement their management. And the interests of government will not be fully aligned with those of the society. External competition will rarely be strong enough to do this, and democracy has been unable to prevent government from being manipulated in the interests of the economically powerful.

As we shall consider in detail in the next Chapter, humanity must find better ways to build evolvable cooperative societies if we are to participate successfully in the future evolution of life in the universe.

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[1].       For a comprehensive discussion of what economists call public goods see Buchanan, J. and G. Tulloch (1962) The Calculus of Consent. Ann Arbour: University of Michigan Press.

[2].       Brittan, S. (1983) The role and limits of government. Minneapolis: University of Minnesota Press.

[3].       See, for example, Mills, E. S. (1978) The economics of environmental quality. New York: W. W. Norton.

[4].       Thurow, L. (1997) The Future of Capitalism. p243. St Leonards: Allen and Unwin.

[5].       See, for example, Taylor, A. J. (1972) Laissez-faire and State Intervention in Nineteenth Century Britain. London: Macmillan.

[6].       For a fuller discussion see Marcuse, H. (1964) One dimensional man: studies in the ideology of advanced industrial society. London: Routledge & Keegan Paul.

[7].       This argument is made out in detail in Bowles, S. and H. Gintis (1993) The revenge of homo economicus: contested exchange and the revival of political economy. Journal of Economic Perspectives. 7: 83-102.

[8].       For a more detailed discussion of these issues, see Schumpeter, J. A. (1947) Capitalism, Socialism, and Democracy. New York: Harper & Bros.

[9].       See, for example, Bork, R. H. (1978) The Antitrust Paradox. New York: Basic books.

[10].     Thurow: The Future of Capitalism. op. cit.

[11].     A very good analysis of the ways in which ideology can control society is found in Chapter 5 of Mc Murtry, J. (1978) The Structure of Marx’s World-View. Princeton, New Jersey: Princeton University Press.

[12].     Again, a very good analysis of the ways in which the economically powerful can influence ideas and beliefs is to be found in Mc Murtry: The Structure of Marx’s World-View. op. cit.

[13].     Ibid.

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