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Darwin’s Invisible Hand: Market Competition, Evolution And The Firm
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Economy

In our paper, we argue that multi-level selection theory is more useful than traditional economic theories for understanding behavior in firms—even traditional theories which themselves evoke evolutionary principles. In particular, we critically examine the common idea that competition among firms reflects the ruthless logic of Darwinian selection, whereby a free market is a struggle for survival in which successful firms survive and unsuccessful ones die. This idea has proven popular because it is to a limited extent grounded in reality, and because it appears to bolster three pillars of neoclassical economics: (1) that economic actors are self-interested; (2) that self-interest leads to public goods (Adam Smith’s “invisible hand”); and (3) that together these lead to market optimization. However, this application of Darwinian reasoning to competition between firms (as opposed to between individuals) leads to a paradox: firms are groups, and if the struggle for existence is occurring primarily between groups rather than individuals, then group selection will occur. And group selection leads to exactly the opposite predictions of neoclassical economics with regard to individual behavior, because it favors group-beneficial altruistic behavior and the suppression of individual self-interest.

As an escape from this paradox, we apply an alternative evolutionary model of economic competition—multi-level selection theory—which integrates the effects of selection at both individual and group levels. This approach reveals that, while individuals may generally pursue their own self-interest, they also have evolved traits that—as if led by an invisible hand—steer our self-interest to align with the good of the firm or wider society as well. But it is the hand of Darwin, not Smith.

By considering the effects of selection at both individual and group levels, we can build a more predictive and internally consistent theory of how firms (and the people which compose them) behave. The paradoxical prediction of traditional economic theory—that members of firms will be simultaneously selfish and selfless—is averted by a multi-level selection (MLS) theory which assumes that individuals are adapted to cooperate in groups, but to do so in individually-adaptive ways. This MLS theory is entirely consistent with mainstream evolutionary psychology’s emphasis on individual-level adaptation; it simply assumes that particular strategies for cooperating in groups were adaptive for ancestral individuals.

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The MLS theory we propose makes a host of predictions about behavior in firms that are not made by traditional economic theories, and we review several of these predictions in the paper. Many have to do with individually-adaptive strategies for cooperation in groups (e.g. avoiding free riders, engaging in ‘competitive altruism’), but others have to do with behaviors such as the pursuit of status and prestige, engagement in leadership and dominance, reactions to perceived unfairness, and inter-group competition. By carefully considering the psychological adaptations that govern these behaviors, we will be better able to design corporate cultures that encourage the expression of the most productive and cooperative instincts that human nature has to offer.

Behavior in firms may be motivated by individual-level adaptations, but there will often be a vast area of common ground in which the interests of individual members converge with those of the firm. MLS theory is uniquely helpful for identifying the conditions under which such confluences of interest are likely to occur. As we note in the paper: “The key [to designing an effective organization] is not to strike some (inefficient) compromise between the interests of individuals and their group, but to work with the grain of human nature to bring individual and group interests into alignment”.

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Read the paper: Johnson, D., Price, M., & Van Vugt, M. (2013). Darwin’s Invisible Hand: The Evolution of the Market Competition, Evolution, and the Firm.

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  1. Tim Tyler says:

    The section titled “Summarizing the utility of MLS theory” seems to have no content comparing group selection with kin selection. These theories are widely recognized to make the same predictions. However kin selection is decades-old orthodoxy, while group selection is not. From this showing, one wonders whether the “MLS” folk understand why practically all evolutionists prefer to use kin selection.

    It is frustrating to have all the biology papers using kin selection, while all the humanities papers seem to use group selection. Wasn’t this all sorted out in the 1970s? Surely cultural evolution theories will catch up at some stage. At the moment they seem to be frustratingly lagging behind the times.