Saturday, November 22, 2008

Evolution of Capitalism

Darwin's theory of evolution showed the world that through variation, reproduction, and selection the traits of a population would change over several generations to adapt to an environment. While Darwin explained this process as it acted on living animals, Joseph Schumpeter saw the same forces acting on capitalism in what he saw as a process of “Creative Destruction.” The same forces of variation, reproduction, and selection affect questions of culture, social stability, and structural change in the global economy. What's more, these forces work on multiple levels through various markets, both domestic and international. Even capitalism itself, as the actualization of an idea, is constantly evolving. The trick is then to ensure that the correct correlations between evolution and economics are made so that a clear picture of there relation can be seen.

Culture is probably the best place to start as it provides a wealth of characteristics that easily correlate with the elements of evolution. We can think of cultures “as systems of symbols and meanings that even their creators contest, that lack fixed boundaries, that are constantly in flux, and that interact and compete with one another.”i These symbols and meanings, whether they are depictions, actions, or behaviors all arise from ideas that are passed down from one generation to the next. They are the components of reproduction that are necessary for an evolving system. As they are passed on or copied, slight changes are made. Rhythms and melodies are altered in music, diverse patterns and styles are applied in art, new actions and behaviors come to represent changing attitudes of trust. All of these provide the necessary variations within culture for it to change. While there are countless variations on the symbols and meanings that make up culture those that are carried on are only the ones that a society finds most appropriate to their current situation. This is the selection part of evolution that provides the judgment of how to adapt to an environment. It causes symbols or meanings that are no longer appropriate to be discarded or destroyed while more appropriate alternatives are created in their place.
Just as there are individuals and traits in the wild that either survive or die from the forces of evolution, there are groups in society that win or lose from the process of creative destruction. This can affect the social stability of a country or region as the losers and the winners continue to interact. This is handled through the use of power and politics as the proponents of specific varieties of policies work to have them selected for development, enlargement, and continuation. In these situations, “The victorious interpretation will be the one whose adherents have the power to translate their opinion into the force of law.”ii As long as those opposed to the winner's opinion feel that the changes enacted into law were justified and do not have some kind of power to change it, the society will remain stable. However, if there is a great resentment on the losing side and some form of power that can be gathered to change the outcome than there will be instability in the society as the two sides clash. This can be seen in post-WWI Germany as the terms of the Treaty of Versailles create resentment and hostility that is backed by a growing German economic base by which to start WWII. To a less dramatic degree it can be seen in the late 19th century U.S. economic policies that created deflation helping those with capital while hurting farmers, laborers, and miners causing them to organize into the progressive movement.

This conflict and competition is not only seen in the social sphere, but also in economic markets. Schumpeter describes how a similar clash between producers and consumers would eventually result in competitive equilibrium if it weren't for the entrepreneurial spirit.iii In this vision of capitalism an entrepreneur is someone who is willing and able to convert a new idea or invention into a successful innovation. They are the force behind the creative destruction which simultaneously creates new products and business models. At this level we can see the variation necessary for evolution in the various firms and companies competing for business. Entrepreneurs and innovation play the pivotal role of adding variation to the system. Those businesses with the most desirable products and best business practices are selected by consumers, investors, and suppliers to continue producing. This process forces companies to continually adapt to the market or be forced out by better adapted firms.

As communication and transportation have advanced the markets of competition have grown now to include the entire planet. In what is termed globalization businesses and cultural ideas are now competing not just with others in their own country, but those from around the world. While many have argued against this process, Tyler Cowen contends that "cross-cultural exchange...creates a plethora of innovative and high-quality creations in many different genres, styles, and media," which, “expands the menu of choice, at least provided that trade and markets are allowed to flourish."iv In this new world there are far more chances for variation as well as more markets that are selecting which variations will continue to exist. This has the potential for far more creation as innovations from one part of the globe can be selected as the best in another part. That means though that there is just as much potential for destruction as the local innovations and cultures are discarded for the ones from overseas. Just as in previous eras we are seeing the disenfranchised losers of that competition attempt to reverse these trends either economically as Frenchmen boycotting McDonald's or even through war as extremist Islamics fighting against the “decadent” Western culture. As the embrace of globalization continues to expand these conflicts will continue to upset the world social stability until an equilibrium of some kind is reached.

The same forces can be seen acting on the concept of capitalism and its role in structural change in the global economy. Rather than a single monolithic doctrine of economic policy, a variety of forms of capitalism have taken root throughout the world. Hall described this variation as arising from the history and culture of the different societies that are based on the market fundamentals of capitalism.v Countries also tend to reproduce an reuse their preferred forms of capitalism until a crisis occurs and they are forced to reconsider their economic policies. Finally, through the economic rise and fall of a countries economy and its citizen's acceptance of the social stability these countries select the forms of capitalism that they will continue to pursue. These decisions have affected and will continue to affect the structure of the global economy as international investors select which countries to invest their capital in, as firms select which countries to outsource their labor needs to, and as consumers select which countries to purchase their goods from.

As cultures and the economies based on them show the same elements of variation, reproduction, and selection that brings about the evolution of species over many generations, it is natural to conclude that the same kinds of results will be seen in them. Cultures and economies have evolved to where they are today and will continue to evolve through the process of “creative destruction.” Whether this will result in the government-backed corporatism of Japan that Schumpeter envisioned or a completely different state of affairs is unclear. These forces act at multiple layers with the results of competition at one level affecting the outcomes of others. With a deeper investigation of these underlying forces we may be able one day to foresee how to improve the creation while making the destruction easier to accept.

i  Findley, Carther Vaughn and John Alexander Rothney, Twentieth-century World. Sixth edition, p. 14

ii  Gourevitch, Peter, Politics in Hard Times, p. 17

iii  Schumpeter, J.A. The theory of economic development: an inquiry into profits, capital, credit, interest, and the business cycle / translated from the German by Redvers Opie (1961)

iv  Cowen, Tyler, Creative Destruction: How Globalization is Changing the World's Cultures (2004)

v  Hall, Peter A. and David Soskice, Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (2001)
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