Econo-Optimism, Evolution, and Markets

Economist Alex Tabarrok (of MarginalRevolution) spoke at Ted in an econo-optimistic way this past February on the future of ideas, trade and markets.

Leaving aside the bulk of Alex’s optimistic argument, which is mostly broad, historical and exhortatory in terms of the economy’s advance, I want to quibble slightly with one of his points.

Alex asks, "Would you rather have a rare disease or a common one?" He says you should prefer to have a common disease. Why? Because there are more drugs for common diseases than for unusual ones. That is true, as far as it goes, but it misses something important that economists also missed in the credit crisis. Biological systems, like economic ones, are adaptive, evolutionary and tightly coupled. More people with a particular disease means more generations of random mutation of that disease, often making treatment more complex and multi-variant than you would expect from market size. Similarly, more people being treated for the same viral or bacterial disorder (let’s leave cancer aside) means a higher likelihood that medications will lose their efficacy through acquired resistance in response to drug-induced selection pressures.

To that way of thinking you might prefer a less common disease (not necessarily rare) to a common one. Why? Because there is a better chance that the condition is understood and addressed, but not so much mutation and drug resistance that treatments don’t work.

Is there an analogy in capital markets? Well, you might argue you want a smaller financial sector, if only because it will serve to shrink the population of adaptive "cells" trying to end-run the immune system. More broadly, however, my point, I suppose, is that we need to be wary of market size arguments in tightly-coupled systems with adaptive tendencies.