The Rational Optimist (P.S.)

by Matt Ridley

In most hunter-gatherers, women spend long hours gathering, preparing and cooking staple foods while men are out hunting for delicacies.

cooking encourages specialisation by sex. The first and deepest division of labour is the sexual one.

The earliest of the great cave painters, working at Chauvet in southern France 32,000 years ago, was almost obsessed with rhinoceroses. A more recent artist, working at Lascaux 15,000 years later, depicted mostly bisons, bulls and horses – rhinoceroses were rare or extinct in Europe by then. At first, modern human beings around the Mediterranean relied mostly on large mammals for meat.

In Australia, almost all larger animal species, from diprotodons to giant kangaroos, became extinct soon after human beings arrived.

Without trade, innovation just does not happen. Exchange is to technology as sex is to evolution. It stimulates novelty.

If you are not self-sufficient, but are working for other people, too, then it pays you to spend some time and effort to improve your technology and it pays you to specialise.

The extraordinary thing about exchange is that it breeds: the more of it you do, the more of it you can do. And it calls forth innovation.

There are still 7,000 languages spoken on earth

Specialisation would lead to expertise, and expertise would lead to improvement. Specialisation would also give the specialist an excuse for investing time in developing a laborious new technique.

Specialisation would therefore create and increase the opportunities for gains from trade.

I have done nothing here but retell, in Stone Age terms, the notion of comparative advantage as defined by the stockbroker David Ricardo in 1817.

The more you do something, the better you get at it.

human beings learn skills from each other by copying prestigious individuals, and they innovate by making mistakes that are very occasionally improvements – that is how culture evolves.

People will only learn a limited set of skills and if there are not enough experts to learn one rare skill from, they will lose that skill.

division of labour was made possible by technology. But it is more interesting than that. Technology was made possible by division of labour: market exchange calls forth innovation.

Tools are in effect a measure of the extent of the division of labour and, as Adam Smith argued, the division of labour is limited by the extent of the market.

Imagine if 4,000 people from your home town were plonked on an island and left in total isolation for ten millennia. How many skills and tools do you think they could preserve? Wireless telephony? Double-entry book-keeping? Suppose one of the people in your town was an accountant. He could teach double-entry book-keeping to a youth, but would the youth or the youth’s youth pass it on – for ever?

The success of human beings depends crucially, but precariously, on numbers and connections. A few hundred people cannot sustain a sophisticated technology: trade is a vital part of the story.

‘population growth leading to diminishing returns is fiction; the induced increase in productivity is scientific fact’.

The argument is not that exchange teaches people to be kind; it is that exchange teaches people to recognise their enlightened self-interest lies in seeking cooperation.

In the game, specialising is risky because the pay-off for ending up with units of only one colour is zero, but specialisation with exchange allows three times the pay-off of self-sufficiency.

So perhaps the first steps to trade with strangers began as individual friendships. A woman could trust her daughter who had married into an allied band within the same tribal grouping. Then perhaps the woman’s husband could learn to trust his son-in-law.

There is no known human tribe that does not trade.

This ability to transact with strangers as if they were friends is made possible by an intrinsic, instinctive human capacity for trust.

People are surprisingly good at guessing who to trust.

Most people, says the economist Robert Frank, can think of an unrelated friend who they would trust to return to them a wallet that had been lost in a crowded concert. Conversely, people acutely remember the faces of those who cheat them.

As a broad generalisation, the more people trust each other in a society, the more prosperous that society is, and trust growth seems to precede income growth.

companies like eBay have enabled their customers to police each other’s reputations by the simple practice of feedback.

The internet, in other words, may be the best forum for crime, but it is also the best forum for free and fair exchange the world has ever seen.

My point is simply this: with frequent setbacks, trust has gradually and progressively grown, spread and deepened during human history, because of exchange. Exchange breeds trust as much as vice versa. You may think you are living in a suspicious and dishonest world, but you are actually the beneficiary of immense draughts of trust. Without that ...

Trust matters, said J.P. Morgan to a congressional hearing in 1912, ‘before money or anything else. Money cannot buy it ... because a man I do not trust could not get m...

A successful transaction between two people – a sale and purchase – should benefit both. If it benefits one and not the other, it is exploitation, and it does nothing to raise the standard of living.

The history of human prosperity, as Robert Wright has argued, lies in the repeated discovery of non-zero-sum bargains that benefit both sides.

Marxism said that capitalists got rich because workers got poor, another fallacy.

‘a classical education teaches you to despise the wealth it prevents you from earning.’

Random violence makes the news precisely because it is so rare; routine kindness does not make the news precisely because it is so commonplace.

we happen to be becoming nicer as we become more irretrievably dependent on markets and free enterprise.

‘the market system makes self interest into something thoroughly virtuous.’ This is the extraordinary feature of markets: just as they can turn many individually irrational individuals into a collectively rational outcome, so they can turn many individually selfish motives into a collectively kind result.

Those of libertarian bent often prove more generous than those of a socialist persuasion: where the socialist feels that it is government’s job to look after the poor using taxes, libertarians think it is their duty.

When the market economy booms so does philanthropy. Ask Warren Buffett and Bill Gates.

Political decisions are by definition monopolistic, disenfranchising and despotically majoritarian; markets are good at supplying minority needs.

The inherent illiberalism of the bureaucracy, not to mention its tendency to corruption and extravagance,

The lesson of the last two centuries is that liberty and welfare march hand in hand with prosperity and trade.

Today there is much argument about whether democracy is necessary for growth, China seeming to prove that it is not.

Like Milton Friedman, I notice that ‘business corporations in general are not defenders of free enterprise. On the contrary, they are one of the chief sources of danger.’ They are addicted to corporate welfare, they love regulations that erect barriers to entry to their small competitors, they yearn for monopoly and they grow flabby and inefficient with age.

Half of the biggest American companies of 1980 have now disappeared by take-over or bankruptcy; half of today’s biggest companies did not even exist in 1980.

most anti-corporate activists have faith in the good will of the leviathans that can force you to do business with them, but are suspicious of the behemoths that have to beg for your business. I find that odd.

On average, when it lands in a town, Wal-Mart causes a 13 per cent drop in its competitors’ prices and saves its customers nationally $200 billion a year. Yet critics of corporate giants, who normally complain about profiteering, still disapprove of Wal-Mart, saying the low prices are a bad thing because smaller businesses can’t compete or that Wal-Mart is ‘the world’s largest sweat shop’ for paying low wages even though Wal-Mart pays twice the minimum wage (and as I was writing this announced $2 billion in bonuses to staff, despite the recession, because of record sales).

Innovation, whether in the form of new technology or new ways of organising the world, can destroy as well as create. A Wal-Mart store drives small general retailers out of business as surely as the computer drove the typewriter out of business. But against this must be balanced the enormous benefits that (especially the poorest) customers reap in terms of cheaper, more varied and better goods.

the competition which keeps a businessman awake at night is not that from his rivals cutting prices, but that of entrepreneurs making his product obsolete.