In his endearingly titled blog, “Michael, we hardly knew ye,” the venerable evolutionary biologist and slayer of creationist dragons Jerry Coyne (author of Why Evolution is True) wonders if I’ve gone ‘round the bend over capitalism and sold my skeptical soul to the Templeton Foundation, the alleged evil subsidizers of religious and capitalist propaganda. Allow me to set the record straight (again) for all my critics out there (and in reading the comments to Jerry’s blog there’s more than I thought, and many of them are darned right caustic!).

First, on the Templeton Foundation, I was invited to write a monthly column for their new magazine, Big Questions Online, and as with my work for them in years past, I’m allowed to write just about anything I like. It is interesting that Jerry and his commentators would hone in on this, my second column, ignoring my first column, which was a stinging rebuke of religion in general and Deepak Chopra’s New Age spirituality in particular. No one could possibly read my list comparing God 1.0 to God 2.0 (omnipresent—nonlocal; fully man/fully God—wave/particle duality; miracle—wave function collapse, etc.) and conclude that I’m the pay of a religious propaganda machine. And if that doesn’t seal the deal for ya, the God critique was originally my second column, but the BQO editors liked it so much that they bumped it up to number 1, and it was, in fact, the most popular article on the site for the entire month. So there!

Second, I think I made a mistake in mentioning “capitalism” at the beginning of the column on markets and morality, because (1) the article is really about trade, not capitalism per se; and (2) that word seems to set some people off into MichaelMoorish-like paroxysms of rage, engaging the limbic system full throttle and governing back the prefrontal cortex, resulting in red-faced, spittle-spewing tirades about Gordon Gekko and Bernie Madoff. In fact, as I depict trade (especially in my book The Mind of the Market, which, curiously, few of my critics have actually read), it should be something embraced by all liberals because trade empowers individuals over corporate entities of all types (from governments and religions to actual corporations). By trade I just mean the exchange of ideas, products, or services between two or more people, and by free trade I just mean that people can engage in such exchanges without hindrance from third parties (thieves, thugs, highwaymen, bribe takers, tax collectors, and the like)—think eBay, or a flea market, or a farmer’s market. My main point in citing all those primate studies is to show the evolutionary continuity between nonhuman primates and ourselves in the evolved sense of fairness in all such exchanges (grooming, food sharing, etc.), and especially that trade helps attenuate the pervasive xenophobia between strangers, the result of our natural-born tribalism. I’m not claiming that trading hunter-gatherers were early capitalists; no, groups traded for assorted reasons having more to do with forming political coalitions against other dangerous groups (the enemy of my enemy is my friend) than in increasing primitive GDP.

Third, as for modern capitalism, I’m not a naïf—I think of it as akin to professional sports—competitors will cheat if they can get away with it, and so in order for the system to work there needs to be a clearly defined set of rules that are strictly enforced with severe consequences for violations. And I agree with Ralph Nader that there is far too much corporate welfare (what Adam Smith called rent seeking), in which companies will try to game the system by getting special privileges, handouts, tax breaks, and the like in order to gain an unfair advantage over competitors, especially over foreign competitors, which Adam Smith warned his readers about in The Wealth of Nations.

Fourth, Coyne raises an important objection when he asks rhetorically: “Is Apple moral? Is General Motors moral? The questions make no sense. These corporations may act morally by donating money to good causes and so on, but it’s ludicrous to claim that selling cars or computers promotes morality.” Therefore, he concludes: “I don’t see capitalism as innately conducive to morality. It is, at best, orthogonal to it. It may make us more prosperous, but it doesn’t make us better people.”

This gets to the point of my work in evolutionary economics (the subject of The Mind of the Market). The evolved psychology behind trade does, in fact, makes us better people. Nonzero exchanges between strangers (“you give me that which I want and I’ll give you this which you want”) has measurably positive effects on subjects in experiments, such as those conducted by neuroeconomist Paul Zak, who discovered a significant boost in oxytocin in subjects making fair exchanges in the Ultimatum Game and other experimental conditions, and even reversed the causal vector by giving some subjects hits of oxytocin through a nose spray (normally used to induce labor), which resulted in those subjects being more generous and fair in exchange games (that involve real money).

Trade makes us less likely to kill our potential trading partners. As Jared Diamond once told me about his research on Papua New Guinea hunter-gatherers: “Should you happen to meet an unfamiliar person in the forest, of course you try to kill him or else to run away. Our modern custom of just saying hello and starting a friendly chat would be suicidal.” And yet something happened in the 1960s to bring about more peaceful interactions. Initially, peace was imposed upon the native New Guineans by fiat from the Western colonial government that ruled over the territory, but officials then insured continued peace by providing goods that the people needed, as well as the technologies to enable them to continue producing more resources on their own. In less than one generation, New Guinean hunter-gatherers who were fighting each other with stone tools were suddenly New Guinean consumer-traders operating computers, flying planes, and running their own small businesses. Where goods crossed New Guinea frontiers, New Guinea armies did not.

This is an example from my book of what I call Bastiat’s Principle, from an observation by the 19th-century French economist Frédéric Bastiat: “Where goods do not cross frontiers, armies will.” Although trade is not a sure-fire prophylactic against between-group conflict (there are exceptions to Thomas Friedman’s observation that two countries with MacDonalds don’t fight, but as a first order approximation it is accurate), it is an integral component to establishing trust between strangers that lessens the potential volatility that naturally exists whenever groups come into contact with one another, especially over the allocation of scare resources that have alternative uses, the very definition of economics.

And that brings us back full circle to trade, markets, and morality.

left to right: Jared Cohen, Dave Morin, John Cusack, Dean Kamen, Bill Gates, Arianna Huffington, Michael Shermer. (All photos in this post were taken by John Brockman.)

No, it wasn’t exactly My Dinner with Andre—the classic 1981 filmed conversation between Wallace Shaun and Andre Gregory (directed by Louis Malle) that ranged across a diversity of existential topics—but listening to Bill Gates hold forth on matters of business, economics, finance, world health, education, and nutrition and physical fitness in a dinner arranged by John Brockman’s Edge.org during last week’s TED gathering in Long Beach was a memorable experience nonetheless.

Richard Dawkins once said that John Brockman has the most stellar rolodex in all of science, and periodically Brockman organizes an Edge.org event that brings them all together for some serious dialogue about the great issues of our time. There were around 80 people in all, which soon broke up into small groups of schmoozing and social networking. Check out the roster and accompanying photos.

When it was time to sit down for dinner there was a spot open at the Gates table (we’ll call it), that included some heavyweights such as Facebook’s Dave Morin, the Segway inventor Dean Kamen, the actor John Cusack, Jared Cohen from the U.S. State Department, Michael Tchao, VP of Apple’s new iPad division, Arianna Huffington of HuffingtonPost, Bill Gates, and your humble servant.

This was unlike any dinner I’ve ever attended. Usually no matter how many heavyweight bigshot superstars are present there always seems to be a relatively fluid conversation around the table that unfolds organically as different people make different contributions. Not so here. Bill Gates was the star and we were tiny planets in orbit around him, sitting there like acolytes at the feet of the guru, asking him questions and listening to his lengthy and thoughtful answers. You can see it in the faces of the guests in the second photo, oriented toward Gates who is just off camera to the right, as Gates (in the third photo) offers his thoughts on the various queries put to him. (All photos by John Brockman. See the entire set.)

left to right: Jared Cohen, Dave Morin, John Cusack, Dean Kamen

Seriously, this was one weird dinner. After spending two hours at this table I can honestly say that I haven’t any idea what the other folks sitting there are like. The actor John Cusack, for example, strikes me as a thoughtful and intelligent man, but I never got to talk to him because there was next to no other conversations. Ditto the others, although Arianna did unlock her Gate-gaze long enough to give me one of her business cards, encouraging me to blog about the dinner at HuffPo (but I’m committed to True/Slant now even though I occasionally hop over to her mostly-liberal site to give them a dose of my libertarian bias).

I knew Bill Gates was smart, but in my estimation after listening to him for two hours is that he is really smart, off-the-charts smart, super bright, even brilliant. He is obviously well-read on those matters important to him, and he seems to have a steel-trap memory for regurgitating what he has read in great detail. Discussing world health and nutrition led me to ask him about diets and health and what he does personally, to which he answered that he runs 90 minutes a day on a treadmill. Since I do a fair amount of exercise myself (cycling is my poison) I asked him if he listens to audio books, which he said he does but is especially keen on listening to Teaching Company courses while working out, most especially the economics courses taught by Professor Timothy Taylor. Since I have taken all of these courses myself (you can download them into an iPhone and listen to them while driving, cycling, running, hiking, etc.), it was interesting to listen to Gates reiterate what was in them in the course of the evening as we asked him questions about the economy. I could tell that he could call forth from memory intricate details from those courses but in a completely different context in answer to a separate question.

Bill Gates and Arianna Huffington

I asked Gates “Isn’t it a myth that some companies are ‘too big to fail’? What would have happened if the government just let AIG and the others collapse.” Gates’ answer: “Apocalypse.” He then expanded on that, explaining that after talking to his “good friend Warren” (Buffet), he came to the conclusion that the consequences down the line of not bailing out these giant banks would have left the entire world economy in tatters.

Arianna Huffington asked Gates about Obama’s various jobs programs to stimulate the economy. Gates answered: “Let me tell you about what leads companies to create more jobs: demand for their products. My friend Warren owns the world’s largest carpet manufacturing company. Their business has dried up because the demand for carpets has declined dramatically due to the drop off in the construction of new homes and office buildings. If you want to create more jobs you need to create more demand for products that the jobs are created to fulfill. You can’t just make up jobs without a real demand for them.” I believe that was the last thing Arianna said for the evening.

This led me to ask Gates this: “If the market is so good at determining jobs and wages and prices, why not let the market determine the price of money? Why do we need the Fed?” Gates responded: “You sound like Ron Paul! We need the Fed to steer the economy away from extremes of inflation and deflation.” He then schooled us with a mini-lecture on the history of economics (again, probably gleaned from Timothy Taylor’s marvelous course for the Teaching Company on the economy history of the United States) to demonstrate what happens when fluctuations in the price of money (interest rates, etc) swing too wildly. I believe that was the last question I asked Gates for the evening! What do I know? I run a tiny nonprofit science education organization with six employees. I’m just hoping to be able to cover my daughter’s college tuition next year. Gates is the world’s richest man who founded a giant multi-national corporation and heads a powerful nonprofit organization that is trying to save the third world. He surely understands economics and business and finance better than I do, right? I sure hope so!

Anyway, thanks to Edge.org for a splendid evening that resulted in a handful of people getting schooled in finance by the smartest guy in the room. Let’s hope he’s right about the bailout and that the economic apocalypse is behind us.

This concept allows me to expand to my blog readers here what I mean by “free trade.” Most of you have pounced on me for using terms like “libertarian” or “capitalism.” But what I mean by free trade is much broader and encompassing: the free exchange of products, services, and ideas between people anywhere in the world anytime they want. To show how broadly I go with this concept, when Chimp A grooms Chimp B, and subsequently when Chimp A is attacked by an alpha male, Chimp B is more likely to come to his aid because they have formed a bond, an attachment, a trading relationship. Grooming in this example is a form of free trade.

Why does this happen? In The Mind of the Market I introduced Bastiat’s Principle, based on an observation by the 19th-century French economist Frédéric Bastiat: “Where goods do not cross frontiers, armies will.” Its corollary elucidates one of the principle steps toward conflict reduction: where goods do cross frontiers, armies will not.

This is a principle, not a law, since there are exceptions both historically and today. Trade — the free exchange of products, services, and ideas between people — will not prevent war, but it attenuates its likelihood. Thinking in terms of probabilities instead of absolutes, trade between groups increases the probability that peaceful and stable relations will continue and decreases the probability that instabilities and conflicts will erupt.

As an example, Yanomamö hunter-gatherers are not only the “fierce people,” as Napoleon Chagnon characterized them, they are also willing traders. Following the political dictum “the enemy of my enemy is my friend,” Yanomamö inter-village trade and reciprocal food exchanges serves as a powerful social glue in the creation of political alliances. As in my Chimp example above, Yanomamö Village A cannot go to Village B and announce that they are worried about being conquered by the more powerful Village C, since this would reveal their own weakness. Instead, Village A forms an alliance with Village B through trade and reciprocal feasting, and as a result they not only gain military protection but also encourage inter-village peace. As a by-product of this politically-motivated economic exchange, even though each Yanomamö band could produce all the products it needs for survival, they often set up a division of labor and a system of trade. The unintended consequence is an increase in both wealth and products. The Yanomamö trade not because they are innate altruists or nascent capitalists, but because they want to form political alliances. “Without these frequent contacts with neighbors,” Chagnon explains, “alliances would be much slower in formation and would be even more unstable once formed. A prerequisite to stable alliance is repetitive visiting and feasting, and the trading mechanism serves to bring about these visits.” Where goods cross Yanomamö frontiers, Yanomamö armies do not.

Bastiat’s Principle holds not only for hunter-gatherers but for consumer-traders as well. Note, for example, that in the modern world of consumer-trading nation states, economic sanctions are among the first steps taken by a nation against another when diplomatic conflict resolution attempts break down. Often such sanctions are imposed for purely economic reasons in a mercantilist mode, as when the United States imposed import tariffs on steel purchased from China and Russia in 2002, which the World Trade Organization declared to be illegal. Economic sanctions are also imposed for political reasons, as when the United States enforced them on Japan after its invasion of China in the 1930s, and these became a prelude (among other factors) to Japan’s retaliatory bombing of Pearl Harbor in 1941 and our involvement in the greatest war in history. Or more recently, economic sanctions were imposed by the U.S. and Japan on India following its 1998 nuclear tests, by the U.S. on Iran because of the latter’s state sponsorship of terrorism, and by the United Nations on Iraq as a tool to force the Iraqi government to comply with U.N. weapons inspectors’ search for weapons of mass destruction.

Economic sanctions send this message: if you do not change your behavior we will no longer trade with you. And by Bastiat’s Principle, where our goods do not cross your frontiers, our armies will. Not inevitably, of course, but often enough in history that the principle retains its veracity. Economic sanctions are not a necessary or even sufficient cause of war, but they are almost always a prelude to war.

In The Mind of the Market I also introduce the Starbucks’ corollary to Bastiat’s Principle: Where Starbucks cross frontiers, armies will not. That is, the free trade of products between peoples, and open access to services across geographic borders, obsoletes the necessity of political borders and thereby decreases the probability that armies will cross them. To the Starbucks corollary I add the Google theory of peace: Where information and knowledge cross frontiers, armies will not. That is, the free trade of information between peoples, and open access to knowledge across geographic borders, obsoletes the necessity of political borders and thereby decreases the probability that armies will cross them.

A stirring example can be seen in Europe. Since the formation of the Treaty of Rome and the European Union — which integrated disparate and historically divided European nations under one economic umbrella — where once invasions and wars were commonplace throughout a thousand years of European history, they are now unthinkable. Try it. Imagine Germany invading France and waging war upon her, or picture France motoring its armies through the Chunnel and then marching them into London to declare the country French. What once made for dramatic literature now sounds like pulp fiction.

The Wikification of the economy adds to the Google theory of peace the entire world economy as practiced by and participated in by billions of people. Wikipedia is the right analogue for this emerging economic phenomenon. It is an open-sourced, peer-produced, mass-collaborated, bottom-up, self-organized, emergent property of millions of people choosing to build the modern equivalent of the Alexandrian library whose purpose it was to make the sum of the world’s knowledge available to everyone in one location. Granted, the ancient Alexandrian Greeks had far less knowledge to store than we do today — by many orders of magnitude — but we have the World Wide Web.

In the long run, no dictator, demagogue, priest, president, or any other pretender to power will be able to control the Googlefication, Wikification, eBayification, MapQuestification, YouTubeification, MySpaceification of information, knowledge, geography, personal relationships, markets, and the economy. Chinese bureaucrats can attempt to put all the firewalls and controls they want on a billion potential Chinese web surfers, but in the long run they will never be able to prevent knowledge, products, and people from finding their way to those who seek them. And to this list we can now add the Twitterfication of information. The revolution will be tweeted. And…

Freedom finds a way.

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Let’s dispense with the “deregulation” myth right here. The list of new regulations called the Federal Register averaged 72,844 pages during the Carter administration, 54,335 pages during Reagan’s presidency, climbed to 59,527 pages for Bush the First, escalated during the Clinton years to 71,590 pages, and set an all-time record during Bush the Second at 75,526 pages, supposedly the era of deregulated markets run amok. So much for the Republicans as the party of government nonintervention.

It gets worse. The number of full-time U.S. government employees in regulatory agencies increased 63 percent between 1980 and 2007, from 146,139 to 238,351, while U.S. government spending on regulating the market tripled from $13.5 billion in 1980 to $40.8 billion in 2008 (in year-2000 dollars for the comparison). During that time the population of the United States rose from 226.5 million to 301 million, an increase of 33 percent (compared to the 63 percent increase in regulatory employees). One final comparison: spending on regulation increased from 0.26 percent of GDP in 1980 to 0.35 percent of GDP in 2007, an increase of 35 percent.

By now your Baloney Detection Devices should be going off. “Hey, wait a minute Shermer, you’re throwing out figures for general regulation and we’re talking about the regulation of the financial industry.” Okay, fair enough. In point of fact, the biggest growth in regulatory spending came in the form of national defense — so called “homeland security” — where spending quintupled from 1980’s $2.9 billion to 2007’s $16.6 billion (again, in year-2000 dollars for comparison).

But the second-largest rate of growth in regulation was in finance and banking, where regulatory spending increased from $725 million to $2.07 billion from 1980 to 2007 (in year-2000 dollars), nearly triple. And there is a cry for more regulation? Please!

If deregulation is not the problem, then what is? The current economic collapse is due to a concatenation of natural business cycles, black swan contingencies, and government intervention into the housing and financial markets — most notably the Clinton administration’s drive to achieve an “ownership society” that forced Freddie Mac and Fannie Mae to lower interest rates on high risk loans — which triggered the collapse of the housing and financial markets, and with them the rest of the economy.

The good news is this: In time the economy will recover. It always does. Don’t regulate. Be patient.

In the midst of our financial crisis it was inevitable that there would be references to the 1987 film Wall Street, in which Michael Douglas’s character Gordon Gekko explains what really drives market capitalism: “The point is, ladies and gentleman, that greed — for lack of a better word — is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms — greed for life, for money, for love, knowledge — has marked the upward surge of mankind. And greed — you mark my words — will not only save Teldar Paper, but that other malfunctioning corporation called the USA.”

Is greed good? Bad? Consider an analogy. Would sports’ writers say that Lance Armstrong, Michael Phelps, and Kobe Bryant are greedy in the same way that pundits describe financial officers, professional traders, and home flippers? Of course not. The whole point of competing in sports is to do the best you can and to win within the rules established by the governing sports organizations. In fact, if you are not greedy in the sense of wanting to succeed in your sport, you will likely be cut from the team. It is in the nature of sports for athletes to greedily desire to succeed and win.

The analogy holds for everyone in the marketplace — from you and I as shoppers and home-buyers looking for the best bargain we can find, to corporate CEOs and Wall Street traders looking for the largest profit they can attain. The whole point of shopping and investing, in fact, is to do your best to succeed and win — defined by finding better deals and making more money — within the rules established by the organizations governing the marketplace. We should no more blame greedy home buyers, loan officers, and stock traders for the current financial crisis than we should blame individual athletes for making so much money playing sports.

Who should we blame? The organization governing the marketplace — the government — for interfering with the normal signals of risk. Let me explain.

People and corporations are normally risk averse. Behavioral economists who study risk aversion have discovered that most people will reject the prospect of a 50/50 probability of gaining or losing money, unless the amount that can be gained is at least double the amount that can be lost. That is, people feel worse about the pain of a loss than they feel better about the pleasure of a gain. Twice as worse in fact.

Since corporations and financial institutions are run by people, they should show the normal risk aversion when investing money and granting loans. Why didn’t they? In short, the risks were removed or delayed by government intervention. Fannie Mae and Freddie Mac, for example, do not make loans directly to customers — they buy loans from banks who make those loans directly. The more removed the direct risk is from the brains of those granting the risk, the less risk averse they will be.

Well, a remarkably prescient September 30, 1999 article in the New York Times, entitled “Fannie Mae Eases Credit To Aid Mortgage Lending,” reported that the Fannie Mae Corporation began a program that spring to encourage banks “to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans.” Why? According to the Times, “Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.” In point of fact, in July of 1999 the Department of Housing and Urban Development insisted that Fannie and Freddie increase their portfolio of loans made to lower and moderate-income borrowers from 44 percent to 50 percent by 2001.

Now, there’s nothing wrong with corporations taking higher risks — whether under political or profit pressure — as long as they adjust for it by charging more. The higher price acts as a risk signal to keep the market in balance. This is what Fannie Mae was doing by only purchasing loans that banks made charging three to four percentage points higher than conventional loans. But under the new program implemented in 1999, higher-risk people with lower incomes, negligible savings, and poorer credit ratings could now qualify for a mortgage that was only one point above a conventional 30-year fixed rate mortgage (and that added point was dropped after two years of steady payments). In other words, the normal risk signal sent to high risk consumers — you can have the loan but it’s going to cost you a lot more — was removed. Lower the risk signal and you lower risk aversion.

When sports governing bodies either relax the rules or fail to enforce them (think of steroids in baseball or doping in cycling), it signals to the athletes that there is little risk in pushing the boundaries of the sport. Lowering the risk aversion encourages gaming the system, and once the top competitors do it, everyone else in the sport has to do it just to compete. The result is a catastrophic collapse in the integrity of the sport.

Analogously, when the government encourages corporations to relax the rules of financial transactions, and then signals to them that if the system fails it will bail them out (as the government did when it rescued the savings and loan industry in the 1980s), it signals to the players in the marketplace that there is little risk in pushing the boundaries of the market. Lowering financial risk aversion encourages gaming the system, and once the top corporations do it, everyone else has to do it just to compete. The result is what we have today.