Michael Shermer – The Mind of The Market

April 18, 2008

Michael Shermer is the author of ten books, including the bestselling Why People Believe Weird Things and The Science of Good and Evil. An adjunct professor of economics at Claremont Graduate University, he is a columnist for Scientific American, the publisher of Skeptic magazine, and the founder and director of the international Skeptics Society. His latest book is The Mind of The Market: Compassionate Apes, Competitive Humans, and Other Tales From Evolutionary Economics.

In this discussion with D.J. Grothe, Michael Shermer discusses The Mind of the Market, and the new field of neuroeconomics. He explores the implications of Darwinian evolution for how people fare in market capitalism, including how we are naturally irrational when it comes to economics, due to our evolutionary heritage. He argues why market capitalism and liberal democracy are best suited to people’s needs, and discusses socialized medicine and other aspects of social welfare programs, contrasting the economy of the United States with those of northern Europe. He examines how free trade may lead to world peace. He also addresses the growing political and economic diversity when it comes to the skeptical and humanist movements.

This is point of inquiry for Friday, April 18th, 2008. 

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I’m pleased to have Michael Shermer back on point of inquiry. He’s the author of 10 books, including the best selling Why People Believe Weird Things and also The Science of Good and Evil, an adjunct professor of economics at Claremont Graduate University. He’s a columnist for Scientific American and the publisher of Skeptic magazine. He’s also the founder and director of the International Skeptics Society. He joins me on point of inquiry to talk about his new book, The Mind of the Market Compassionate Apes, Competitive Humans and Other Tales from Evolutionary Economics. Welcome back to a point of inquiry, Michael Shermer. 

Well, thanks for having me. Love your show, Michael. 

I appreciate you saying that. First off, you’re on to talk about the mind of the market, and this book is a departure for you. It’s not on skepticism about the paranormal or fringe science or religion. This book is kind of pushing libertarianism. I mean, you’re arguing for a kind of libertarianism based on your understanding of evolution. 

Actually, the book is, if you think about it, it is a natural extension of what I do and of all of skepticism, what we all do. First of all, it’s, you know, deals a lot with behavioral economics, which has shown in the last 20 years that surprise, surprise, people are irrational when it comes to money, just as they are in all other aspects of life. So we shouldn’t be surprised. But, of course, for some reason, we are. And that reason is called homo economicus. That is for centuries. The dominant theory in classical economic theory is that humans are rational calculators maximizing their utility or selfishly maximizing their own benefits and are largely free to do so. That is, they make free, rational, selfish choices. And the research for behavioral economics has shown that all three of these are false. So it’s a myth. So I know in a way the mind of the market is a myth busting book and it’s busting the myth of homo economicus. And so that’s a natural extension of, you know, the whole skeptical analysis of human irrationality. 

But this is an area that the skeptics don’t normally apply their skepticism. 

I know they should. It’s kind of an exciting area, really. I mean, the last couple of Nobel Prizes, actually the last half dozen Nobel Prizes given in economics have been given to psychologists or people who specialize in the psychology of of market behavior. So really, that’s very telling, that that’s where the action is. In economics, it’s in psychology and in the study of human reason and irrationality. So, yeah, that this book is is a way of sort of taking skepticism in a new direction. 

So the main point of the book, everyone’s irrational when it comes to money that’s turning the old view of how we treat money on its head. But you’re saying a little bit more than that. You’re saying that irrationality is evolutionarily determined and that the free market is not only the best way to deal with that universal irrationality, but that the free market itself kind of evolved to fit these human needs, these evolutionarily determined irrationalities. 


So a second level of analysis of the book is evolutionary economics. There’s three main themes neuro economics, behavioral economics and evolutionary economics. So evolutionary economics. We’re looking at the evolutionary origins of market behavior. Now, don’t think of an economy as money and market. Think of economy as any social environment in which the organisms interact with one another. So doesn’t you have to be human? I mean, when Tim A Groomes Chip B in his later attacked by an alpha male, he’s more likely to get help from that chimp that he groomed in a reciprocal, altruistic sense, that is. I’ll scratch your back if you’ll scratch mine. That’s a that’s a form of economic trade. It’s a it’s a way. What trade does. I’ll give this to you and you give that to me. It does more than just swap stuff, products, whatever services it forms, an alliance, a bonding and attachment between two strangers who would normally not be trusting of one another. And in evolutionary theory, this gets at the problem of altruism way and prosocial behavior and cooperation. Why would any of that have evolved? Shouldn’t we be, in a Darwinian sense, selfish, greedy, nasty, cutthroat, brutish? No, because we’re social animals. And in order to get along within the group, you have to be cooperative, prosocial and so on. Now, if you’re related to somebody, your own children, for example, that doesn’t require a big reach of the imagination to figure out why that would work. That’s called kin selection. And that was worked out in the 60s and 70s by Bob Trivers and others. And then be nice to your fellow kind, your fellow group members who are not related to you. Well, that’s reciprocal altruism. You have to do that in order for the group to survive and for people to get along in conflict resolution. We have to be able to to help each other. And so that’s been nice to your kin and kind that we fully understand. The harder part is why people would be. Total strangers in a different group. And the answer is they shouldn’t. The default option is be skeptical. Don’t don’t trust anybody. Intel, they establish trust by giving you something or by you giving them something. And then they and then they reciprocate. 

And that xenophobia is evolutionarily determined. We were learning maybe from the evolutionary psychologists. And that’s where you’re getting this theory of human nature that that your kind of undergirding this theory of the economy that you’re pushing. 

Yes, that’s right. That that what I’m arguing is that free trade, again, don’t think of it as money markets, any kind of open exchange between strangers in strange groups and related groups. That’s a good thing. That’s a way of breaking down the natural, xenophobic anxieties we have about others. And the natural tribalism that exists in our nature. We are naturally tribal. And you only have to look around, read the paper every day. It’s obvious. And so how do we break that down? Well, trade is one way to do it. And if the inputs throw a potlatch for another group, yeah, that seems like on the surface, sort of a nice thing to do. What? Why are they doing that? It’s kind of under winnin. Well, it isn’t actually, because now that other group owes you a favor for doing that and they have to reciprocate. And it’s a way of forming political alliances against yet stronger groups. Now it’s the two of us against that other guy. The enemy of my enemy is my friend. Well, the way you make contact with that former enemy is by doing something nice for them, by opening up the trade routes, exchanging something of any any kind, and that then forms an alliance. Now, some what I’m arguing is that that humans are by nature, capitalistic gulch juristic. What I’m arguing is that people do these for their own selfish reasons. But there’s a unintended consequence, an invisible hand, if you will, that that directs them then to form these alliances as a byproduct, then we all get more stuff. Trade is good for that. But that’s not why people do it. 

You’re making a bigger claim than it’s just good for us. You actually seem to be arguing almost a utopian line that the free market will eventually bring about world peace or something like that. 

It sounds a little utopian, of course. Utopia, by definition means, you know, the unattainable, the nonexistent. And it is that it’s just an order of approximation. It’s better to trade with another group than not trade. I call this Bossidy. Its principle were goods across frontiers. Armies won’t. And we’re good. Don’t cross frontiers. Armies will not. Not always. I mean, this Thomas Friedman calls this is McDonald’s theory of war. I call it the Starbucks theory of war. Pick your company where two countries have a Starbucks or have a McDonald’s or whatever. They’re less likely to go to war with one another. It’s not a perfect correlation. There’s a few exceptions, but as a first order approximation of how the world works, that’s better than not trading. Trading is better than not trading. And so why not extrapolate that principle everywhere? Open up those trade barriers that that we have set up and that makes it less likely that we’ll go to war with another country. 

One problem with your book might be that you take this evolutionary psychology or new fields like neuroeconomics as fully developed hard sciences. But aren’t these fields too new, Michael, too untested to be able to draw these hard and fast conclusions as you do in your book? 

Well, like any science that’s new. Yes, of course, we we should be cautious in how we extrapolate out the findings. And in fact, my my most recent column in Scientific American that just came out today is called The New Phrenology. And where it’s I’m skeptical of a lot of these f MRI brain scan studies, including the other ones I report on in my book. That’s OK. That’s sort of the normal process of how science works, of dialog and debating, conversing about these things and throwing it out there. I think we can cautiously draw some conclusions from them being careful not to over extrapolate. And I try to be cautious in how I do it. And maybe I’m slightly over enthusiastic for evolutionary explanations. My behaviors friends think I’m way over over the line. 

Although evolutionary psychologists would probably think I’m too cautious. There’s a balance to be struck somewhere in there. 

Right. There’s something to be said for getting it from both ends now. 

You can’t. You can’t. I mean, the central premise of evolutionary psychology is is important to consider, even if you ultimately reject it. And that is ninety nine point nine percent of human history has been spent in this Paleolithic environment where we lived in these tiny groups of a couple dozen to a couple hundred individuals as hunter gatherers. It’s, you know, point zero zero one percent has been spent as consumer traders in a modern environment, that there’s no way that that previous environment can’t have had some effect, even if you don’t want to. Over over evolution ize everything and be a hyper adaptation is, as Gould calls it, or a Darwinian fundamentalist, as Gould called it. Yeah. You know, gold made a lot of good points about, you know, the just so story telling done by evolutionary psychologists. OK, fair enough. But but come on. I mean, ninety nine point ninety nine percent of. History has to count for something, right? 

There’s still something to it. So we spent very little of our time on the planet as consumer traders in a modern environment. On the one hand, you seem to be arguing that because that’s true, our morality evolved like other aspects of our nature as a direct result of the way we organize these tribes in our ancient history. This is why we cooperate. You were touching on that. But on the other hand, you seem to be arguing that our modern societies are not compatible with that very evolutionary heritage you just pointed out, because there isn’t this kind of universal sharing in small tribes. Our economies are bigger than just the little tribe here versus the little tribe there. Now we have these massive disparities of wealth, people having stuff that you don’t have that leads to discontent, envy. So shouldn’t you actually be arguing from an evolutionary perspective that we should go back to something more natural, like maybe living in Comune, something that’s more compatible with our deep evolutionary heritage? 

I would argue that it’s too late to do that. We can’t go back. There’s just too many people. That is that would only work with, you know, maybe if the world had a couple hundred million, not six billion. The problem happened in the transition when bands and tribes began to coalesce into chieftain’s and states about five to seven thousand years ago. And the informal means of behavior control, conflict resolution, you know, moral guidance and all that breaks down when the populations are too big, there’s too much chance for freeloading and exploiting the system. 

Then you need laws and stuff and not jobs. 

So government and religion are the two institutions that arose. So we can’t there’s no going back with it. We can only go forward and try to improve our liberal democracy and our market capitalism. I think the best system is a liberal democracy and market capitalism. Market capitalism can’t be completely free like any sport where there’s competition between members of the sport. That has to be rules and guidelines that are clearly defined, strictly enforced, or else the system breaks down. So I’m not a anarcho capitalist. I’m not even sure I’m a libertarian anymore. I really I don’t even like the labels. But clearly trade within certain restrictions works great. But you do need to have certain kinds of rules that in other words, we need some form of government. What kind of government is that? Well, a liberal democracy seems to be the best so far, at least to the least worst of the bunch. 

I think the biggest challenge of your book is that you’re posing a challenge to those whose secularism, whose skepticism really motivates them to push for socialism, almost, you know, to strive for the kind of economies we might find in northern Europe where there’s a really high taxation rate. There’s certainly not a free market in those economies. There’s tight regulation of industry. It’s kind of socialist, in other words. But on the other hand, in these northern European economies, these societies, yes, people are paying massive taxes, but the they have these massive social welfare programs. There’s lots of data out there that shows people are happier there than here in the U.S. They live more fulfilled lives. What they work for days of work each week. They have two months of vacation a year, something like that. So secular humanist social philosophers like, say, Philip Kichwa argued that before we can really make strides against our rationalism and religious extremism in our society, really, you know, fight against the harm that that does to people. We need to offer a replacement, which he sees as this kind of socialistic public welfare program. And as a secular humanist, as a skeptic, you seem to be on completely the other side of that debate or no? 

Well, it depends on the specific thing. Instead of just saying socialized everything. Well, let’s just take them one by one. Healthcare. Yeah, healthcare. Right. So, I mean, at this point, it seems to go back to a total free market. This would be pretty difficult at the point we’re at now, though. I could sort of see how that might have worked before. But it seems like the Northern European countries have done a fairly good job at that. And they they seem to have good models to do it. One of the things that religion does so well in America is to provide the safety net that the government doesn’t. And this is one reason why European countries are probably not as religious. Their government does what our religion. So in a way, religion is the privatization of such social services. 

Is that something you favor that kind of privatization of? I do. Yes, I would. 

I mean, if you compare, say, Katrina to take Katrina and compare the government, FEMA versus the religious organizations that rush down there to help. There’s no question that the government did a lousy job with FEMA and religion did a wonderful job. That’s what they do. So, you know, to my atheist friends, you know, who berate religion. Well, who is it you think is going to do all this stuff that religion does? There are hardly any secular organizations that do that. There’s a few, but not many. And certainly the government doesn’t do it well at all. 

But they do in Europe. Like what? In Northern Europe. 

You know, if there are economic woes, the government’s safety net takes care of people. So they don’t have to have this anxiety about where they fit in society and where they’re going to get their next meal, et cetera. 

Yeah, I guess it would just depend on the specific, you know, the health care system there. I guess they’re OK. Not great, but they work better than those who fall in the cracks. For us, I suppose, something like that. So I guess in each case, this is the point of a liberal democracy, is the people decide that we decide as a group what we want to do and that when I’d be more inclined to lean toward doing any more top down versus bottom up economic solutions, maybe versus a regulation, too much regulation in industry and in commerce. 

All right. You mentioned regulation. You’re against regulation for the most part. 

Yet it tends to slow down the wheels of commerce. 

But isn’t regulation the kind of stuff that prevents meltdowns like Enron? 

Well, no, I. I mean, I don’t think so. It’s hard to anticipate where the next meltdown will be, what the cause will be. Now, say the subprime loan disaster is a different kind. That was harder to anticipate. 

You’re arguing that that wasn’t a function of deregulation of that. 

And you might have been. But so what? I mean, too bad I didn’t go out and buy three or four houses and do that flip this house thing and try to make as much money, because I could see that it was reasonably risky. Right. 

And I felt like, well, you know, I have a daughter to pay for college and I can’t be doing that. Well, if I would’ve known the government was going to bail me out, maybe I would. 

Right. I love this. How you’re such an equal opportunity skeptic. Not only do you take aim as a skeptic against the idea of an intelligent designer in nature, but you’re also skeptical of an intelligent designer when it comes to the economy. You don’t want government control and stuff. 

Yeah, we have to remember, Frederic Bastiat wrote a wonderful essay called What is Seen and What is Not Seen. What is seen is that the government rushes in and does something in the photo ops there and everybody’s happy and the government produces this program and creates as many jobs and all that. What is not seen is where the money came from to do that and where that money might have been spent. So to pick a different subject, you know, the war so conservers that where we have to fight this war, you know, this is we’re going to create a democracy in Iraq. Let’s say we managed to succeed in doing that. That looks like a good thing. What is not seen is where the trillion dollars we’ve spent, maybe as much as three trillion when we’re done, where that money might have been spent. And that’s the problem with all government intervention. Just pick any subject. There’s the money has to come from somewhere. There’s what is seen. And then what does not seem like the bridge to nowhere in Alaska. What you see is the bridge, which you don’t see is the hundred million dollars to build a bridge. What that might have been spent on. 

Right. Before we begin to wind down. Can you just give me some examples of. Well, I want to get into what you say. Evolution tells us about why the free market is best, why it is the best option, or if not the free market. You know, just market capitalism. 

I don’t think you can derive that from evolution. The fact is that’s the system we’re in. It evolved naturally because of population numbers hunted. That hunting gathering lifestyle doesn’t doesn’t work. Our brains are geared into that evolutionary environment, but not our economies. And so we naturally tend toward egalitarianism and therefore resent the extreme wealth disparity. 

But aren’t you arguing that market capitalism is most compatible with how we evolved as social primates? 

Well, break it down. There is the effects of market capitalism and trade. That is is counter-intuitive. That is the unintended consequences. The invisible hand, the you know, the extreme, the higher much higher levels of wealth in the middle class that Marx never predicted, for example. All that is counter-intuitive. We have to sort of pay attention and work to understand that what comes naturally is the resentment of wealth disparity, because we’re largely egalitarian in our thinking, because that was what our ancestors lived in for 99 percent of our history. The only part I would derive from evolutionary theory is the basic neuro biological effect of trade between strangers. And this is, you know, like Paul’s expert work with oxytocin, that, you know, there is an actual secretion trust twittery gland of of neuro hormonal chemicals that affect how we feel about other people who are not our KEINER kind. And trade does that. It really does. And so I want to extrapolate that principle out further and that that we get from. I think our biology. 

I want to finish up, Michael, by talking about labels, you said earlier that maybe you don’t even consider yourself a libertarian anymore. You don’t like labels liberal versus conservative when it comes to the Freethought movement. Skepticism. Most people think of that movement, the movement you’re a leader in as kind of, you know, left of center. The history, the organized humanist movement in the 20th century starts with all these socialist signers of the first Humanist Manifesto. Then groups like the American Humanist Association early on, they were heavily socialist, kind of avowedly. So people even like Paul Kurtz flirted with socialism. But here you are, a skeptic. Kind of a skeptic, rabble rouser coming at all these issues from a very different, almost an opposite political perspective. Yes. So here’s the question. Would you make any guess as to the future of this movement? We’re both a part of when it’s now showing such diversity of economic of political perspectives, even if we’re all still calling ourselves skeptics. 

I think that diversity is healthy. I think it’s good that it’s no longer a left leaning movement. I think that’s dangerous. There are a lot of libertarians, actually. I mean, Penn and Teller to name two, right. In the more prominent part of the movement. And there’s a lot more than that. But I wouldn’t want it to be all libertarian. I think we need conservatives, liberals, libertarians, Ralph Nader, and’s or whatever. 

We need a whole swath there because we’re skeptics. We just want to know really what’s real and what’s not. 

What’s the best way to structure society. And and since these issues are so complex that the data really don’t speak for themselves. You really do need open debate and disputation to come to reasonable conclusions. And you need diversity of thought for that to work. So having it all left leaning is not good, but ever more libertarian wouldn’t be good either. 

Thank you very much for joining me on Point of Inquiry again, Michael Shermer. Oh, thanks for having me. 

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DJ Grothe

D.J. Grothe is on the Board of Directors for the Institute for Science and Human Values, and is a speaker on various topics that touch on the intersection of education, science and belief. He was once the president of the James Randi Educational Foundation and was former Director of Outreach Programs for the Center for Inquiry and associate editor of Free Inquiry magazine. He previously hosted the weekly radio show and podcast Point of Inquiry, exploring the implications of the scientific outlook with leading thinkers.