Market economics
is based on the foundations of Adam Smith theorising the ‘Invisible Hand’. To Smith,
it was an individual’s pursuit of self-interest that lead unintentionally to
collective interest and thus enhances social welfare. Of course, the term
social welfare was an innovation that came decades later after Smith. Many
economists have built their models and theories based on the Invisible Hand
paradigm. There are no doubt many examples of the same. For instance a cab driver
comes to pick up after travelling for 3-4 kilometres not because of his benevolence
but because of his self-interest, his interest in earning daily bread, his
interest in stepping to higher levels of income. A hotelier would keep the
restaurant open even in times of pandemic not because he or she cares for the
hunger of the people but for their own interest in earning and sustaining their
daily bread. E-commerce delivery agents functioned in the pandemic partly
because of their self-interest rather than an altruistic concern of people
running short of groceries. Diffusion of innovation is again an outcome of self-interest
being pursued that ultimately leads to collective interest. The firms innovate
either to save costs or increase revenues, yet their innovations are rapidly
copied by their competitor firms resulting in collectively being the same as
before innovation but societally, the situation is emergence of collectively
being better off.
Yet, while
interests of individuals do coincide with the society, there are many occasions
when these interests conflict. The conflict of interests between the societal
needs and the individual benefits will result in the collapse of the Invisible
Hand paradigm. Instances to the same are many. The paradigm of Tragedy of the
Commons is primarily because of existence of such a conflict. One can take for
instance the problem of overfishing. Fish in the ocean or the river or the
village pond or lake are not owned by anyone in specific. Hence the agents
cannot be excluded from fishing. If the lake were to be private property, the
owner could exclude others from fishing in the lake. Yet if it is supposed to
be collectively owned, the others cannot be prevented from fishing. Yet fish is
rivalrous good. As each agent fishes for his
or her need, the amount of fish needed for others reduces. There is of
course an equilibrium wherein the fishing quantity would be equal to the
reproduction rate of the fish. If the amount of fish being caught is less than
the reproduction rate, there will be surplus fish and vice versa. Each individual’s
interest is best served by capturing maximum fish for himself or herself. Therefore
they seek to capture the maximum fish possible. Every other individual in
action too would do the same thus the depletion of fish would be the outcome. The
property being commonly owned, thus termed common property resources would
ensure the fish being depleted resulting in Tragedy of Commons. This is
something common to pastures where cattle graze to deforestation to many other
environmental issues. The resolution to the same has been suggested to convert into private property yet as Elinor
Ostrom demonstrated, there is a possibility of commons being governed
successfully outside the paradigms of the market principles.
While Adam Smith
might have conceptualised the idea of ‘Invisible Hand’ it was Charles Darwin
who took the idea to the natural world. His theory of Natural Selection was
influenced by the thoughts of Smith and David Ricardo. To Darwin, the
attributes of the animal and the plant kingdom were derived through natural
selection. These selections themselves would have been the outcome of the
invisible hand or rather the pursuit of self-interest. The paradigm of
self-interest definitely exists in the
animal kingdom but not necessarily results into the collective interest. Robert
Frank presents an interesting instance of a conflict that exists between the pursuits
of self-interest that would obviously beneficial to the individual in the short
run but the costs are borne by the tribe as a whole. He observes the behaviour elk
and their outgrown antlers. The elk with their outgrown antlers are relatively
easy prey for their predators like wolves. They get easily noticed even in the
thick undergrowth and makes life easy for their predators. In the Darwinian
paradigm, the natural selection would have led to the development of smaller
antlers or perhaps no antlers. Yet the answer to this puzzle lies in the intersections
of individual behaviour at odds with the collective interest.
Male elks have
to fight with other males to gain access to females. Antlers are the primary
weapon in their fight to glory or death. The one with larger antlers would
obviously win. Thus the incentive for each male elk would be to grow larger
antlers. Thus the outgrowth of large antlers. But these antlers are noticed
easily by the predators and thus susceptible to be killed relatively early. There
is a trade-off something economists talk about. The elk with smaller or no
antlers has a greater chance of escaping the notice of their predators. Therefore,
their survival is likely for a longer duration. Yet in the absence of antlers
or smaller antlers, they will find it impossible to capture the harem, the
critical input in furthering their species. Therefore, the smaller antlers die
down with a single species. The ones with larger antlers get access to the
harem and are able to pass their genes to the next generation which too emerges
with overgrown antlers. Thus Mendel might be proved right but the cost benefit
analysis would be skewed against the tribe. To an individual, the smartness
would be having a larger antler thus the access to the harem and passing the
genes to the next generation. It is no doubt self-interest at best and
concentrated benefits to the individual. Yet the individual is not the only one
to bear the costs. The costs are diffused. The costs are borne by the tribe
since it makes easy for the wolves to find their prey. Thus, what is
individually smart become daft to the tribe to borrow from the words of Robert
Frank.
Therefore,
whether in evolutionary biology or human behaviour, what appears rational in
the short term to the individual might not necessarily be so in the mid to long
run to the society or the community or the tribe. The Invisible Hand works well
when there exists an alignment of interests between the individual self-interest
and societal collective interest. When there is a conflict between the two, the
societal interest would find itself in adversity given the relative skewness in
concentrated benefits and diffused costs.
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