Evolution, Economics, and Normative Standards

I used to be uncomfortable with how circular Darwinian evolution seems. It had seemed like, by defining fitness as whatever survives, I could reduce Darwinian evolution to a truism. This is indeed possible if you don’t actually delve into the actual implementation details, of understanding the necessity of genotype-phenotype correspondence, and of the mapping of genotypical stability to phenotypical fitness-function proximity. I wonder how many out there have felt like they understand evolution without seeing how it could possibly be wrong, i.e. without the ability to identify the counterfactuals that the idea eliminates. I think this is because the power of evolution as an optimizing process brings it close enough to the optimizer that is our intelligence, such that we cannot decisively shatter it in all scenarios – i.e. we cannot always predict what evolution will come up with, even though we outperform it on most problems.

In the same way, I’ve been struck by how circular standard economic theory is. The argument for allowing all voluntary transactions is this – that if the transaction is voluntary, and both participants agree to it, it must improve both of their well-beings. This seemed like an overwhelmingly powerful argument to me at first glance, so powerful that I realized that my understanding of it must be wrong.

The conditionals on the correctness of this argument are important, because economics is a process of social computation and optimization powerful enough to defeat our ability to predict its results – we must know that it is correct by proof, and not by enumerating all possible scenarios.

I later learned about externalities – not all transactions are voluntary. At one extreme, you have armed robberies, where the transaction can clearly be inefficient because the robber could have less use for an item than the robbee. At the next level, you have the standard tragedy of the commons. At the other extreme, I shift my attention away from the word voluntary and to the word participant. What does it mean to be participant to a transaction?

There are two senses in which a person is a particpant in a voluntary economic transaction. Firstly, his well-being is affected by it, and secondly, he has veto power over it. Every transaction for which these two senses identify the same set of people improves well-being. The problem is, for my well-being to be affected by a transaction, all that is necessary is for me to know about it. I can choose to be unhappy over many transactions controlled by others.

If I witness a person overpaying for a product in a store, it makes me unhappy, yet that is clearly not considered an externality in conventional economics texts. Likewise, people resent the inequality of income, and yet that is not considered an externality in the conventional sense either. The externality concept clearly contains hidden normative assumptions which I have yet to understand.

To Be Continued…

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