The December 20 issue of The Economist has an excellent article "Why we are, as we are". It touches on a fascinating theme: "As the 150th anniversary of the publication of 'On The Origin of Species' approaches, the moment has come to ask how Darwin’s insights can be used profitably by policymakers."
Inspired by the article, I started to reflect on how the lessons of Darwinism can be applied to help us understand the fundamental roots of the ongoing global financial crisis. In addition, given my continuing faith in open markets and free trade, my thoughts also turned to my favorite economist - Adam Smith, - whose views I felt would also be quite relevant in helping us make sense of the situation.
Many have said that the underlying cause of the financial crisis is greed - that is, the pursuit of wealth, possessions and power beyond the need of the individual. That is way too simplistic an answer. To a greater or lesser extent, greed is part of the human condition, along with the other seven deadly sins and other vices. Powerful evolutionary forces drive the quest for money and power, as The Economist article observes
"For a Darwinian, life is about two things: survival and reproduction. Of the two, the second is the more significant. To put it crudely, the only Darwinian point of survival is reproduction."
"Girls have always liked a rich man, of course. Darwinians used to think this was due to his ability to provide materially for their children. No doubt that is part of it. But the thinking among evolutionary biologists these days is that what is mainly going on is a competition for genes, not goods. High-status individuals are more likely to have genes that promote health and intelligence, and members of the opposite sex have been honed by evolution to respond accordingly. A high-status man will get more opportunities to mate. A high-status woman can be more choosy about whom she mates with."
"Status, though, is always relative: it is linked to money because it drives the desire to make more of the stuff in order to outdo the competition. This is the ultimate engine of economic growth. Since status is a moving target, there is no such thing as enough money."
Few of us would leave our teen age children alone for a week while we go on vacation. No matter how well behaved the children are under our watchful eyes, we would rightfully worry what the combination of raging hormones and peer pressure might lead to absent adult supervision. Primal human drives must be factored into our parental responsibilities, as well as into our organizational and management constructs. Greed is clearly one such drive.
While greed is part of the human condition, so is a sense of justice. ". . . ideas of revenge and punishment lie deep in the human psyche," further says the article. Many evolutionary biologists feel that justice and punishment "are among the things that have allowed humans to become such a successful, collaborative species. In the small social world in which humans evolved, people dealt with the same neighbours over and over again. Punishing a cheat has desirable long-term consequences for the person doing the punishing, as well as for the wider group. In future, the cheat will either not deal with him or will do so more honestly. Evolution will favour the development of emotions that make such reactions automatic."
Human behavior - as is the case with all higher social animals - is the result of a very delicate balance between the energies driving the actions of individuals and the controls driving the interests of the group, the community and the larger society.
Adam Smith wrote about a similar balance between the human drives and fierce competition inherent in open free markets, and the sense of justice and community well-being found in properly functioning societies.
In his most famous work, "The Wealth of Nations" published in 1776, Smith wrote about wealth creation in a competitive, free-market economy. He believed that an individual pursuing his own self-interest will also promote the good of his community - "the free market, while appearing chaotic and unrestrained, is actually guided to produce the right results by this so-called invisible hand."
Some people think that Smith was expressing a view of open markets as reflecting a kind of survival of the fittest competition in which anything goes. Nothing could be further from the truth. Adam Smith was a very moral man. In his earlier major book, "The Theory of Moral Sentiments" published in 1759, he wrote that "humans have a natural tendency to care about the well-being of others for no other reason than the pleasure one gets from seeing them happy." He believed that such feelings of sympathy are required to achieve socially beneficial results.
Smith thus advocated a balanced view between self-interest and sympathy in order for individuals and society to both thrive. He felt that individuals in such a society would find it in their self-interest to develop sympathy toward their fellow men, as this would enhance their prestige and power in their communities. This balanced view between the interests of individuals and society is very similar to the Darwinian arguments in The Economist article.
So, under the watchful eyes of Charles Darwin and Adam Smith, how can we best analyze and explain the root causes of our financial crisis? Why didn't the human sense of sympathy and justice temper the worst excesses of greedy individuals? Why didn't the senior financial executives charged with managing their companies, as well as the financial regulators charged with managing the overall financial system stop the party before it got out of hand?
Undoubtedly, some of the worst excesses can be attributed to a few individuals whose actions can only be explained by their lack of sympathy toward their fellow human beings. But, beyond this small number, I am sure that the vast majority of people in the financial community would have been much more careful, if they personally knew those being potentially hurt by their actions. Perhaps sympathy and feelings of community work well at the tribe or neighborhood level, but when communities reach a certain size, the kind of sympathy for our fellow humans that normally tempers our actions begins to decline. When we don't know the people getting hurt by our actions, when such people are beyond our lines of sight and our lines of feelings, - across a whole region and country, let alone around the world, - perhaps any notion of sympathy disappears altogether.
Evolutionary biologists have long known that xenophobia - a fear, aversion and hostility toward strangers and those that look different from you - is a deeply ingrained human characteristic. As The Economist article points out, ". . . it is known from the study of modern hunter-gatherers, and inferred from archaeological evidence about ancient ones, that neighbouring tribes are often hostile."
What that means to me is that there is likely to be a big difference in behavior between the neighborhood banker, and the anonymous trader in a global financial institution. As we keep discovering, managing a global enterprise requires a whole set of additional skills from the ones that have served us well in the past. Furthermore, no matter how strong a belief you have in the power of open markets, you now also need wise regulatory bodies to help control our worst excesses.
Global companies, industries and economies have been with us for many decades. What is new is the degree of global integration over the last ten years, especially the last five. "The World is Flat,", the international best-selling book by Tom Friedman seems to have been with us for a long time, but was only first published in 2005. In chapter one of his excellent book, appropriately titled While I was Sleeping, Tom writes that around the year 2000,
"we entered a whole new era: Globalization 3.0. Globalization 3.0 is shrinking the world from a size small to a size tiny and flattening the playing field at the same time. And while the dynamic force for Globalization 1.0 [1492 - 1800] was countries globalizing and the dynamic force in Globalization 2.0 [1800 - 2000] was companies globalizing, the dynamic force in Globalization 3.0 - the thing that gives it its unique character - is the newfound power for individuals to collaborate and compete globally."
So, why did senior executives and regulators fail to act? There is clearly no one answer to so complex a question. One reason was clearly that the financial world underwent major changes - the transition to Globalization 3.0 - in the last decade, the old rules of the road were no longer sufficient, and those in charge did not notice until the cars started crashing all around them.
To me, what this all means, is that we need to go back to the drawing board and figure out the right management models for our emerging globally integrated, fast changing, unpredictable knowledge economy. The new models need to encompass both the executives charged with managing companies as well as the government officials charged with regulating the economy. We need new management models not only for the financial services industry, but for every other global, fast changing industry as well.
We need to quickly get going and begin to figure out the rules of the road of the 21st Century global economy, so we are in a better position to anticipate and more effectively manage the next global crisis.