Professor Niall Ferguson offers an evolutionary approach to financial history. He questions the impeding of 'natural selection' by keeping the financial dinosaurs alive through the life support of monetary injections: "without creative destruction, our economic system cannot be a healthy one."
The view that financial history could be 'evolutionary' in fact pre-dates Darwin, born 200 years ago this year, but the view has been pushed into the hinterlands of contemporary thinking about the worlds of finance and economics. Through the publication of his book, The Ascent of Money, Professor Niall Ferguson brought about a timely re-emergence of the evolutionary approach.
By looking at finance along evolutionary lines, we can relate the long run of financial history to recent events and so illuminate them in a way which will perhaps offer us a clearer sight of how we should pull ourselves out of the current economic crisis.
Niall Ferguson, MA, D.Phil., is the Laurence A. Tisch Professor of History at Harvard University. He is a resident faculty member of the Minda de Gunzburg Center for European Studies.
He is also a Senior Research Fellow of Jesus College, Oxford University, and a Senior Fellow of the Hoover Institution, Stanford University.
Process of raising funds or capital for any kind of expenditure. Consumers, business firms, and governments often do not have the funds they need to make purchases or conduct their operations, while savers and investors have funds that could earn interest or dividends if put to productive use. Finance is the process of channeling funds from savers to users in the form of credit, loans, or invested capital through agencies including commercial banks, savings and loan associations, and such nonbank organizations as credit unions and investment companies. Finance can be divided into three broad areas: business finance, personal finance, and public finance. All three involve generating budgets and managing funds for the optimum results. See alsocorporate finance.
I would like to propose a natural world analogue for financial markets in which commercial banks are viewed as retroviruses. In this analogy Professor Ferguson's example of a merger of banks creating a more dysfunctional entity, is the merger of two retroviruses creating a more lethal virus. Hedge funds, the prodigal sons of the commercial banks, are examples of mutations, distinct but nevertheless related retroviruses any one of which could prove more deadly than its parent (e.g. LTCM). The near collapse of the global economy affected by commercial banks and which nearly led to their own demise, is simply an affirmation that retroviruses take no long term view of their own survival or their hosts - on occasions killing the host and ironically themselves. Regulation is analogous to immunisation, often successful and sometimes with the unintended consequence of creating a more deadly virus, one adapted to survive and prosper within the immunised host. Societies can also enact policies that unintentionally promote the transmission of retroviruses (the low interest rate policies of every central bank being analogous to not teaching safe sex to teenagers) or it can take steps to restrict their transmission (Glass Steagall being the proverbial condom in this analogy). As to the veracity of this model, financial historians and virologists are better placed than I to judge, but perhaps the key benefit of this analogy is that by stigmatizing commerical banks as viruses, we might at last begin to redress the flow of intellectual capital to these morally and, as it turns out, financially bankrupt enterprises.
nice job with your responses, wyq. I appreciate the "enthusiasm" in the previous posts, but their arguments display a misguided understanding of evolution, financial markets, or both.
+1 on the selfish gene , or any of Dawkin's work. Another good read on financial evolution is the origin of wealth , by eric beinhocker. very accessable.
@Harriet: Sure, the economies of those noble savages worked just fine, only they lived no longer than 30 years and certainly didn't produce the Internet you're writing on - perhaps you should throw away your computer (built by the evil westerners who oppressed indigenous people) and everything that makes greedy capitalists actually live better and suffer less than that tribe in central Africa who keeps worrying if there will be enough food tomorrow, unlike you who might be angry that bananas (probably only growing thousands of kilometers away from where you live) are not available today at your neighborhood supermarket.
And for your information, humans are the only species on this planet who are even capable of NOT being greedy with regards to individuals unrelated to them. And the more greedy they are, the more they realize that helping other people in need will usually provide even more benefits to them in the long run than the alternative. The economy is not a zero-sum game. If it works well, it doesn't mean that because someone won, someone else had to lose something. It means that, on the whole, everyone gains something - some more, others less.
You say you feel sorry for the people who suffer as a result of economic growth. I feel even sorrier for our ancestors (and for tribal people today) who died because they couldn't get a rabies vaccine from those pesky capitalist pharmaceutical companies (I'm also no big fan of them sometimes). For the people who had work all day long in the fields just so they could make some bread, instead of simply buying varied foods from lots of greedy capitalists who each specialize and provide huge quantities of just a single type of food just for profit. For the people who had to travel for days just to get to the nearest big city, instead of simply buying a car from the greedy capitalists selling them.
@gzajicek: Financial markets do not evolve, rather they differentiate, and their true nature emerges within them selves. Unlike embryos they are still frail. However ultimately they will evolve into a viable global system, the ultimate embryonic financial market
The biosphere itself doesn't evolve, only the species contained within it. In the same way, the economy itself doesn't evolve, only the firms competing in the market. The uncompetitive ones (the ones who, for some reason, the customers don't buy from) are eliminated while the others that do satisfy the customer remain and thrive.
Also, respectfully I must point out that your understanding of Darwinian evolution is incorrect. I recommend reading The Selfish Gene by Richard Dawkins.
Your understanding of embryonic stem cell differentiation is mixed up. Cell differentiation does not rely on random mutations or any type of mutation. Particular genes/gene networks are silenced via histone acytelation, methylation, and other reversible chemical modifications.
Maybe you're confused with the concept of genomic imprinting, where a parent stem cell passes down it's methylation pattern to its daughter stem cell while the differentiated cell gets a different pattern (its genome actually becomes more methylated, shutting down certain genes and networks that will never be used for the life of that cell).
In any event, what you said about embryonic differentiation is overly simplistic and completely wrong. You should know what you're talking about if you're going to sign off pretentiously with your credentials, as if you're making an argument from authority.
I am inclined to go out and read Ferguson's book (if only to annoy myself further) but at first flush my response to both his television series and this lecture is annoyance given his smarmy (sorry) disregard for all the billions and billions of people and planetary species that have suffered during this "economic evolution". How does he account for the functional production, distribution and consumption of resources (the point of economics isn't it?) within contained indigenous cultures that were doing very nicely (thank-you) participating in the heart of a functional economy way before anyone chose to consider it a science, a mathematical formula or now, by Ferguson, as the fodder for intellectual systems word smithing? Yes, I get the analogies and even track the similarities but it is disingenuous to compare the history of economics to biology if, for no other reason, than they are not truly on the same playing field. Humans, with their tendency towards greed (the tom foolery of which would be revealed more fully in any honest telling of economic history) along with their brutal advantage over the natural world (and any culture that has striven to live within it), has revealed an economic history more rightly compared to the biblical narrative of David and Goliath. The motivation and scale behind industry and trade (and modern economics as we understand it today) is distinctly different from the those of natural world and while there is something intriguing about the theories of the "Glascow Pigmy", I suggest he is wrong headed in assuming you can accurately compare the pattern language of economic systems - linear, exploitive, and generally non-regenerative, to the pattern language of natural systems and thereby evolution. There may be semantical similarities but nothing more. Global warming is a perfect example of a financial market completely unaware of its evolutionary directives to adapt. I think we would be better served to acknowledge the financial industry as a mutant species unwilling to recognize the changing winds of the natural world but that would, more accurately, turn it into a conceited, self absorbed and self-destructing monolith who eats its prey as long as it can and who, in its last dying breath, finds clever ways to justify its existence. Perhaps that is where Ferguson is leading us and if so, I'm sure his book will not annoy me half as much as I imagine.
Darwin's theory of Evolution applies only about 1% of the biomass on earth. Insects and micro organism obviously evolved, yet their mechanism of evolution was not Darwinian. Some believe that the mechanism might be a mixture of Lamarckian and Darwinian mechanisms. In reality neither suffices to account for evolution.
The answer may be found in embryo genesis. Apparently embryos also evolve, and this kind of evolution is known as differentiation. The embryo emerges from a zygote without applying Darwinian or Lamarckian mechanisms. It relies on mutations, however they are not random. As the embryo differentiates, all its organs and functions differentiate within it.
Financial markets do not evolve, rather they differentiate, and their true nature emerges within them selves. Unlike embryos they are still frail. However ultimately they will evolve into a viable global system, the ultimate embryonic financial market
Gershom Zajicek M.D.