# The Evolution of the Market **URL:** **By** Robert Sugden **Published:** January 1, 1989 --- “Perhaps it is a mistake to think of selection operating on groups of people. What we have to explain is the survival and replication of rules, and not of people at all.” The market is a set of practices and institutions that co-ordinate the diverse plans of millions of individuals. These practices are not the product of human design; they have evolved spontaneously. To think that a human designer, however rational and well-intentioned, could construct anything comparable to this spontaneous order, still less improve on it, is the “fatal conceit”. This has been Friedrich Hayek’s message, and it is surely right. However, anyone who presents an evolutionary explanation of the market faces a serious problem if he also wants to argue that we ought not to interfere with its workings. The market certainly is a remarkable example of unplanned order, just as an anthill or a tree is. But in what sense is it good? When we say that a human designer could not hope to improve on this order, what do we mean? Evolutionary processes select things—genes, species, institutions—that are successful at replicating themselves. If we can attribute any purpose to something that is the product of evolution, it is replication. The fact that an entity is successful at replicating itself does not seem an adequate reason for not interfering with it. The problem becomes more difficult still if we follow Hayek (and Hume) in arguing, again I think rightly, that the rules of morality are not the conclusions of our reason. Our sense of morality is itself the product of a process of evolution that has selected moral rules that are successful at replicating themselves in human populations. We seem to be left with no firm ground from which to claim that anything really is good. In _The Fatal Conceit_ Hayek offers a solution to this problem. Cultural evolution, he argues, works mainly through group selection. Different systems of rules may evolve among different groups of human beings, but natural selection will favor those groups that expand most rapidly; other groups will be “superseded” or “absorbed”. Thus the ability of a system of rules to replicate itself depends on its ability to promote population growth. Hayek then argues that the rules of the market are more successful than any other known rules at promoting population growth. Here the argument is essentially that of Adam Smith: the market allows the division of labor, and through the division of labor it is possible to provide subsistence for more people. Thus natural selection favors the market. Hayek admits that no such argument can show that the market is good. But the world can support its present population only because of the workings of the market. If we discard the rules of the market in the pursuit of a supposedly more rational or more just economic order, “we shall doom a large part of mankind to poverty and death.” No one should set about dismantling the market without recognizing the price that will have to be paid. Hayek’s argument depends on the claim that group selection will favor those groups whose economies are capable of sustaining the most rapid growth of population. But is this true? If group A is growing faster than group B, how does A “supersede” B? I can think of two possible ways. > _Perhaps it is a mistake to think of selection operating on groups of people. What we have to explain is the survival and replication of rules, and not of people at all._ First, B-people might be defeated in war and either killed or forced, against their will, to adopt A-rules. But success in war is not necessarily determined by population size. Nor is it clear that market-based societies will tend to be successful in war. Armies are public goods, and military activity is normally based on hierarchies of command rather than on the decentralization of the market. A badly-functioning centrally-planned economy may be compatible with an efficient army. Second, if the economies of the two groups are interlinked, the growth of A might lead to a reduction in the maximum population that B’s traditional practices can sustain, so that A’s growth will eventually cause B to die out. For example, suppose A’s economy is based on agriculture and B’s on hunting. As A’s population grows, more land is enclosed and so there is less game to hunt. But it is just as easy to think of examples which work the other way. Suppose B’s economy is based on hiring migrant workers from A. As the population of A grows, the price of A-labour falls, and this allows the population of B to grow too. Perhaps it is a mistake to think of selection operating on groups of people. What we have to explain is the survival and replication of rules, and not of people at all. What is crucial for the survival of a rule is that, in a situation in which the rule is generally followed by other people, each individual will choose to follow it. If it pays an individual to follow the rule even if only a few others follow it, so much the better (for the rule): this makes the rule well-equipped to spread. If a rule can spread from one group of people to another, its ability to replicate itself may not depend on its promoting population growth in any group. To use a biological analogy, many deadly viruses are successful at replicating themselves in human populations. The point of this is not to show that the market does not promote population growth. Probably it does. But we cannot infer this from the observation that markets evolve spontaneously. If we are to explain how markets evolve spontaneously, I suggest, we should assume that individuals tend to gravitate towards those forms of behavior that best serve their interests. What is in one person’s interest, of course, depends on what other people do, so we need game theory. Once we recognize that each transaction in a market works to the benefit of those people who are parties to it—whatever unwanted consequences there may be for others—a tendency for markets to evolve does not seem surprising. Take an example. Suppose that group A has an economy based on enterprise and trade, while B’s economy is based on subsistence agriculture and fishing. Some A-people see that there are gains from trade with B-people. If a few B-people enter into trade, they will do better than other people in their group; then others may start to imitate them, and the original culture of self-sufficiency will start to break down. (This is perhaps the sort of process Hayek has in mind when he speaks of “absorption”.) As far as the ability of B’s economy to support population is concerned, there may be losses as well as gains. (Suppose that, as a result of trade, fishing increases until the fish are driven to extinction). But the ability of market rules to spread from A to B does not depend on how the balance of gains and losses works out. In the introduction to _The Fatal Conceit_, Hayek says: “Ethics is the last fortress in which human pride must now bow in recognition of its origins.” I wonder if even Hayek has fully recognized the consequences of this disturbing and subversive thought. A little later he says that we cannot be said to have selected the rules and constraints of the market. Rather, he says, “these constraints selected us: they enabled us to survive.” But perhaps the truth is that these constraints selected us because we enabled them to survive.