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A New Take on Economics Jan 1, 2008 (88 of 97 found this helpful)
Anyone who knows who Michael Shermer is knows that he is anything but a neoconservative. He created The Skeptics Society, a non-profit, focused on replacing pseudoscience with good science. He's written extensively on the problems with Intelligent Design, and he acknowledges the existence of man-made global warming. Needless to say, he's no Rush Limbaugh.
Bearing these facts in mind, Shermer's book may come as a surprise to some. The primary points I've seen in his latest work are: 1.) Natrual Selection and The Invisible Hand describe essentially the same phenomena. 2.) Evolution and Economics are both Complex Adaptive Systems that rose from simpler systems. 3.) Too much government intervention into the economy is inefficient, misguided, and immoral. 4.) Adam Smith's and Charles Darwin's ideas weren't so different. 5.) It's ok to be a libertarian.
With all of these comparisons between Capitalism and Evolution, one might think Shermer supports the idea of Social Darwinism. This, of course, would be wrong. Shermer denounces Social Darwinism. He says that "survival of the fittest" is a misleading term that most biologists don't believe in. Later on, he says that corporate culture is overall a good thing. Enron's corrupt model is the exception, and Google's "Don't be Evil" model is the rule. He doesn't rely on many mainstream economists to support his thesis. Instead he turns to psychologists, biologists, etc.
Overall, this book was a GREAT read. Anyone who likes any of Shermer's previous books will probably enjoy this one. You will get to see more of Shermer's political side and the evidence he used to arrive at his ideas. If a fraction of the ideas presented in this book are incorporated into mainstream economics, it will probably change the field forever.
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Great intro to evolutionary economics Mar 7, 2008 (31 of 32 found this helpful)
Michael Shermer has focused his career on differentiating between myths and science. His related books I have read are excellent, including: Why Darwin Matters: The Case Against Intelligent Design, Why People Believe Weird Things: Pseudoscience, Superstition, and Other Confusions of Our Time, and The Borderlands of Science: Where Sense Meets Nonsense. In this book, he advances a unifying theory of evolutionary biology and modern economics that leads to a new discipline: evolutionary economics.
Evolutionary economists knew that Charles Darwin had studied Adam Smith as he modeled his theory of natural selection after Smith invisible hand. Quoting one such evolutionary economist, Thomas Sowell: "Life, like the economy, is about the efficient allocation of scarce resources."
This unifying theory entails that nature and the marketplace evolve over time following similar mechanisms. He calls nature and the market place complex adaptative systems (CAS). Those CAS learn as they evolve from simple to complex. They are autocatalytic, meaning they contain self-driving feedback loops. For nature, the driving feedback loop is natural selection underlying evolution. For the marketplace, the equivalent driving feedback loop is the "invisible hand" or the law of supply and demand. Per Shermer, the geniuses of Charles Darwin and Adam Smith were in uncovering a simple process to explain an incredibly complex outcome (diversity of nature and economies).
Shermer rebuts two concepts: The first one is that the theory of evolution has no place in the social science. Social scientists have fought Darwin (under the misunderstood caption of social Darwinism) with as much energy as creationists. Yet, Shermer shows the multiple connections between natural selection and the law of supply and demand.
The second one is the concept of "Homo Economicus" that human beings are strictly rational. There he cites behavioral economists showing the myriad of ways in which our brains are wired to make irrational choices. For further studies I recommend the excellent books The Psychology of Judgment and Decision Making and Inefficient Markets: An Introduction to Behavioral Finance (Clarendon Lectures in Economics).
He is addressing three problems related to "The Mind of the Market": The first one is how the market has a mind of its own. As mentioned, the law of supply and demand is a driving self-organizing force within the market. One byproduct of Shermer's theory is that the markets are pretty efficient. He mentions that many studies show that professional investors don't perform better than index funds. Market efficiency extends way beyond stocks. And, is applicable to nearly everything as prediction markets have shown recently (betting on sports, politics, and entertainment outcomes). For an excellent treaty on the subject, I recommend The Wisdom of Crowds.
The second one is how minds operate in markets. That's where he rebutts "Home Economicus." We make plenty of irrational market related decisions. Our human biases such as valuing losses twice as much as gains have been tested in laboratories with both humans and monkeys. This loss aversion has been wired into our brains for millennia to enhance our survival. And, it affects our investment decisions often to our disadvantage. This is why the gambling industry makes money off gamblers.
The third one is how minds and markets are moral. The market has embedded economic incentives for participants to behave so as to generate trust and credibility to encourage transactions with each other. Reputation and status is important. This is why reputation metrics such as EBay sellers' ratings have arisen on the Internet as self-governance agents. Trust and credibility lead to greater commerce productivity. They decrease credit risk, liability risk, lower legal and negotiating costs, an
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Interesting and thought-provoking, with Shermer's trademark -- careful analysis Jan 10, 2008 (46 of 51 found this helpful)
I liked this book. Michael Shermer argues that ideas from biology, particularly Darwinian evolution, apply to the financial markets. It's an interesting idea.
Shermer makes his living as a self-proclaimed skeptic. And he does have one of the marks of the skeptic -- careful analysis. Shermer rarely takes things at face value. Instead, he challenges ideas that others take for granted. That trademark Shermer approach makes this book interesting and thought-provoking. Few authors do that as well as Shermer.
One example -- the evolution of the QWERTY keyboard. How often do we hear that the QWERTY keyboard shows a pitfall of standards? People moan that the QWERTY keyboard is terribly inefficient. But it became locked in early on as a standard. So we are stuck with it. Right?
No. Shermer looks back at the history of the QWERTY keyboard. Turns out that the QWERTY keyboard is not so bad after all. In fact, it's actually pretty good. There may be a more efficient arrangement of a keyboard. But it is hard to say -- tests show there is not much difference in typing speed between QWERTY and its top competitors.
That's just an example of the way Shermer approaches his topic. He uses the QWERTY example to show that evolution in the product market tends to produce an optimum. According to Shermer, standards like the QWERTY keyboard and a Windows-like operating system become standards for a reason. They survive evolutionary forces because they work, and work well.
In this book, Shermer pulls together ideas from biology, psychology and neuroscience. He then uses them to analyze the modern capitalist economy. That gets him to some interesting conclusions. Thoughtful conclusions that make a lot of sense.
To sum up his conclusions very briefly, Shermer gives a good theoretical grounding in solid science for two powerful ideas: Market forces usually work. Government intervention in the market usually doesn't work.
So libertarians, take heart. Voters may not support you. But it looks like science does.
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Good biology and psychology, questionable economics Mar 3, 2008 (41 of 49 found this helpful)
Michael Shermer is uniquely gifted, holding a Masters degree in psychology and a Ph.D. in the History of Science, being one of the top science popularizers in the world and the founder of the Skeptic Society, and having been a top professional athlete (cycling). Shermer is a professional skeptic, but this book is a serious outlier---it is Shermer's profession of faith.
Shermer believes in two Big Ideas, free markets and Darwinian evolution, especially as applied to understanding our species (sociobiology, evolutionary psychology). The book conveys Shermer's infectious enthusiasm for both Ideas, and his exposition of sociobiology is accurate and fairly up to date. I would definitely recommend this book to a friend or relative who wanted to know what sociobiology is all about (Shermer does not use the word, though).
In economics, Shermer was weaned on Ayn Rand and objectivist philosophy, which he rejected in favor of the more scientific and less cultish Austrian school of economics (von Mises and Hayek). He draws free market economic theory and evolutionary biology together by treating both as dynamic nonlinear competitive, decentralized systems with emergent properties (he mention Beinhocker's exegesis of complexity economics in support of this view, and stresses the notion of `technological natural selection'). He also treats both as absolutely, beyond a doubt, scientifically grounded doctrines, so that critics of market systems (e.g., many American liberals and all socialists, anarchists, and communalists) have the same status as Creationists and Intelligent Design believers as critics of evolutionary biology.
In a kind of comic way, Shermer's book is a return to Social Darwinism, although his espousal of free markets has none of the strident right-wing tenor of the old order of Social Darwinists. He achieves a warm-fuzzy version of free market economics by simply avoided all the difficult issues. His exposition of economics is purely 19th century in its stress on verbal and philosophical argument, as though there have been no developments in economics since 1920 or so. This is quite a contrast with his treatment of evolutionary psychology, which is almost cutting edge.
I cannot imagine how Shermer teaches in a graduate economics department (Claremont Graduate University), surrounded by high-powered economists, while not having a clue what economics is really all about. The standard arguments against the notion of a free market economy with a minimal state were consolidated from 1950 to 1970, and have not been shaken since. Even Milton Friedman, who was right about so many things, and has much of importance to say about state-market interaction, was no more than an ideological hack in his parrot-like admonitions against the modern state.
Modern economies are intricately interaction systems of market and state, both sets of institutions having grown inexorably and in a unified manner for at least two centuries. There is no example of a high productivity social system without both a highly developed market and a highly developed state. Free marketers are thus like flat Earthers and Creationists---they must deny the fact to preserve their precious ideologies.
Perhaps Shermer has some critique of the standard economic growth model. If so, he spares the reader. This is a strange stance of a man who has always cherished the data and fought for empirical substantiation.
Shermer's embrace both of the aristocratic free marketer von Mises and the brilliant and vitriolic anarchist Kropotkin is refreshing, if bizarre. Of course, there have always been sub rosa libertarians among the evolutionary psychologists (John Tooby, Lida Cosmides, and Vernon Smith surely fit the bill), but evolutionary argument for libertarianism has not often been so clearly articulated. Clearly, yes, but unconvincingly. One cannot trump science with 19th century Cont
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Ecce Homo (Economicus) May 14, 2008 (11 of 11 found this helpful)
This was a very interesting book, but be aware that "Market" in the book's title refers to "marketplace" in general, not the stock market; and the book is about economic behavior in general, not investing. There is some discussion of investing behavior, of course, but not that much, so if you're looking for a book specifically about investing, you might want to look elsewhere.
The book uses the data and principles of complexity theory, game theory, evolutionary biology, behavioral psychology, and neuroscience to explain economic behavior (i.e., the allocation of scarce resources that have multiple uses). Shermer argues that today's economy is a complex adaptive system that evolved out of a much simpler system by adapting to historical contingencies. Adam Smith showed how national wealth and social harmony were unintended consequences of individual competition among people, and Darwin followed in his footsteps by showing how complex design and ecological balance were unintended consequences of individual competition among organisms.
Some of the data (such as the neuroscience data about the roles that different parts of the brain play in different behaviors) are a bit technical, and the jumping around from behavioral psychology to neuroscience to economic theory was hard to follow in some places, but the information was so interesting that it usually more than made up for those drawbacks. (It would have been nice to have had at least a basic diagram of the brain's anatomy though.)
It was particularly interesting reading about the animal behavior studies that showed our primate-relatives reacting to test situations so similarly to the way we ourselves react. The evolutionary implications are obvious, of course. It's fascinating to see that monkeys display the same sensitivity to changes in supply and demand as people, and even display loss aversion, one of the most powerful elements in all of human behavior.
Shermer spent quite a bit of time on primate social behavior. The connection to economic behavior seems a bit tenuous, but the stories and data were still pretty interesting. The studies done by de Wahl, Milgram, Zimbardo, and Asch were really thought-provoking, and the "Man in the Gorilla Suit" study was hilarious.
I wouldn't say this is a great book on economics, but it was certainly interesting.