Thursday, 10 September 2015

Innovation and Dumb Luck

"The real power of free markets: not efficiency, but innovation and dumb luck" is the title of the article published by Rory Sutherland on The Spectator almost a month ago, and it can be praised for being a true "Hayekian manifesto".

In his note, Sutherland dismisses neo-classical economics and embraces two of the most polemical statements that can be found in Friedrich Hayek's works. The first one: competition has little to do with efficiency. In fact, there are more efficient processes than competition to allocate resources. Competition must be regarded as a discovery process of new goods to meet our needs –which some of them remain unknown to us. Competition could be efficient but in an "artificial way" (as David Hume called "justice" an "artificial virtue"): since the discovery process of competition is guided by the tendency for equalisation of the marginal value of relative scarce resources, the innovations brought about by the entrepreneur, despite threatening the stability of the economic order in the short run, stabilise the system in the long run.

The second statement is about meritocracy: again, here the market contributes to assign results in accordance to merit only in an "artificial way". Since the payrolls are related to the marginal contribution of each agent to the productive process, it is highly probable that, in the short run, we see very lucky people reaping huge unexpected profits, whereas other activities, more important but less scarce, are poorly remunerated. Theses processes work as way to equalise relative scarcities in the long run.

“Innovation” and “dumb luck” are two devices of the market to stabilise itself. They provide the economic order with a negative feed back process that allows it to adapt to the changing environment: new habits and tastes, life expectancy, cultural shifts, etc., etc., and this stabilisation via adaptation to the changes in the environment is nothing more and nothing less than evolution.