Evolution and Interdependence

So President Bush has finally taken a complex systems view of the economy:



Stupidity aside, he's entirely correct: our economy is highly interdependent. We discussed this situation last post, now I'd like to give some perspective on how interdependence comes to be.

Our economy, like life, is an evolutionary system, featuring competition, innovation, and adaptation to internal and external challeges. And I think some of the difficulty in understanding the current financial crisis comes from a misconception about evolution.

We usually think of (biological) evolution as a species-level process: each species makes its own incremental improvements in search of competetive advantage. But this is too simple a picture. Species do not evolve in isolation; they co-evolve in concert with all they interact with: plants, animals, microbes, and even minerals. In this co-evolutionary process, species develop relationships with each other; sometimes competitive, but often symbiotic or mutually beneficial in some way.

In the long run, co-evolution seems to produce increasing interdependence. Consider that all life started out as single-celled organisms, and that the co-evolution of these organisms led to multicellularity, which is a form of indterdependence so advanced that the component cells can no longer live on their own. On a larger scale, multicellular organisms co-evolved to form ecosystems. While not as interdependent as a multicellular organism, an ecosystem still has the property that if you remove enough vital components, the whole system fails.

An interesting thing happens now. As interdependence grows, so does the scale at which evolution occurs. Life started with cells competing against cells, grew into organsims competing with organisms, and now, in a sense, we also have ecosystems competing with ecosystems. The rainforest, for example, is competing with the desert in Africa. If the rainforest fails, so do all species that live there.

A similar process happens with economies. They begin with small, relatively self-suffient businesses. These businesses develop relationships with each other, co-evolve, and grow webs of interdependence. In the US, the webs have become so complex that an obscure industry known has mortgage-backed securities has sunk our entire economy.

So here too, evolution has "scaled up." It's no longer just companies competing against companies, it's also our whole nation's economy competing against those of other nations, and indeed the whole world's economy competing against, well, itself.

I don't think interdependence can be avoided, but it certainly needs to be understood. When people speak of the "free hand of the market" correcting our economy's mistakes, they're thinking of individual companies competing idependently, and failing to grasp the reality that, to some extent, our economy lives or dies as a whole.