From Wikipedia, the free encyclopedia
Evolutionary economics is part of mainstream economics as well as a heterodox school of economic thought that is inspired by evolutionary biology. Much like mainstream economics, it stresses complex interdependencies, competition, growth, structural change, and resource constraints but differs in the approaches which are used to analyze these phenomena.
Evolutionary economics deals with the study of processes that
transform economy for firms, institutions, industries, employment,
production, trade and growth within, through the actions of diverse
agents from experience and interactions, using evolutionary methodology.
Evolutionary economics analyzes the unleashing of a process of
technological and institutional innovation by generating and testing a
diversity of ideas which discover and accumulate more survival value for
the costs incurred than competing alternatives. The evidence suggests
that it could be adaptive efficiency that defines economic efficiency. Mainstream economic reasoning begins with the postulates of scarcity and rational agents (that is, agents modeled as maximizing their individual welfare), with the "rational choice" for any agent being a straightforward exercise in mathematical optimization. There has been renewed interest in treating economic systems as evolutionary systems in the developing field of Complexity economics.
Evolutionary economics does not take the characteristics of
either the objects of choice or of the decision-maker as fixed. Rather,
its focus is on the non-equilibrium processes that transform the economy from within and their implications. The processes in turn emerge from actions of diverse agents with bounded rationality
who may learn from experience and interactions and whose differences
contribute to the change. The subject draws more recently on evolutionary game theory and on the evolutionary methodology of Charles Darwin and the non-equilibrium economics principle of circular and cumulative causation. It is naturalistic in purging earlier notions of economic change as teleological or necessarily improving the human condition.
A different approach is to apply evolutionary psychology principles to economics which is argued to explain problems such as inconsistencies and biases in rational choice theory. Basic economic concepts such as utility may be better viewed as due to preferences that maximized evolutionary fitness in the ancestral environment but not necessarily in the current one.
Predecessors
In the mid-19th century, Karl Marx presented a schema of stages of historical development, by introducing the notion that human nature
was not constant and was not determinative of the nature of the social
system; on the contrary, he made it a principle that human behavior was a
function of the social and economic system in which it occurred.
Marx based his theory of economic development on the premise of developing economic systems;
specifically, over the course of history superior economic systems
would replace inferior ones. Inferior systems were beset by internal
contradictions and inefficiencies that make them impossible to survive over the long term. In Marx's scheme, feudalism was replaced by capitalism, which would eventually be superseded by socialism.
At approximately the same time, Charles Darwin developed a general framework for comprehending any process whereby small, random variations could accumulate and predominate over time into large-scale changes that resulted in the emergence of wholly novel forms ("speciation").
This was followed shortly after by the work of the American pragmatic philosophers (Peirce, James, Dewey) and the founding of two new disciplines, psychology and anthropology, both of which were oriented toward cataloging and developing explanatory frameworks for the variety of behavior
patterns (both individual and collective) that were becoming
increasingly obvious to all systematic observers. The state of the world
converged with the state of the evidence to make almost inevitable the
development of a more "modern" framework for the analysis of substantive
economic issues.
Veblen (1898)
Thorstein Veblen
(1898) coined the term "evolutionary economics" in English. He began
his career in the midst of this period of intellectual ferment, and as a
young scholar came into direct contact with some of the leading figures
of the various movements that were to shape the style and substance of social sciences
into the next century and beyond. Veblen saw the need for taking
account of cultural variation in his approach; no universal "human
nature" could possibly be invoked to explain the variety of norms and
behaviors that the new science of anthropology showed to be the rule,
rather than the exception. He emphasis
zed the conflict between "industrial" and "pecuniary" or ceremonial
values and this Veblenian dichotomy was interpreted in the hands of later writers as the "ceremonial/instrumental dichotomy" (Hodgson 2004);
Veblen saw that every culture is materially based and dependent
on tools and skills to support the "life process", while at the same
time, every culture appeared to have a stratified structure of status
("invidious distinctions") that ran entirely contrary to the imperatives
of the "instrumental" (read: "technological") aspects of group life.
The "ceremonial" was related to the past, and conformed to and supported
the tribal legends; "instrumental" was oriented toward the
technological imperative to judge value by the ability to control future
consequences. The "Veblenian dichotomy" was a specialized variant of
the "instrumental theory of value" due to John Dewey, with whom Veblen was to make contact briefly at the University of Chicago.
Arguably the most important works by Veblen include, but are not restricted to, his most famous works (The Theory of the Leisure Class; The Theory of Business Enterprise), but his monograph Imperial Germany and the Industrial Revolution and the 1898 essay entitled Why is Economics not an Evolutionary Science have both been influential in shaping the research agenda for following generations of social scientists.
TOLC and TOBE together constitute an alternative construction on the
neoclassical marginalist theories of consumption and production,
respectively.
Both are founded on his dichotomy, which is at its core a
valuational principle. The ceremonial patterns of activity are not bound
to any past, but to one that generated a specific set of advantages and
prejudices that underlie the current institutions. "Instrumental"
judgments create benefits according to a new criterion, and therefore
are inherently subversive. This line of analysis was more fully and
explicitly developed by Clarence E. Ayres of the University of Texas at Austin from the 1920s.
Schumpeter
Joseph A. Schumpeter , who lived in the first half of the 20th century, was the author of the book The Theory of Economic Development (1911, transl. 1934). It is important to note that for the word development
he used in his native language, the German word "Entwicklung", which
can be translated as development or evolution. The translators of the
day used the word "development" from the French "développement", as
opposed to "evolution" as this was used by Darwin. (Schumpeter, in his
later writings in English as a professor at Harvard, used the word
"evolution".) The current term in common use is economic development.
In Schumpeter's book, he proposed an idea radical for its time:
the evolutionary perspective. He based his theory on the assumption of
usual macroeconomic equilibrium, which is something like "the normal mode of economic affairs". This equilibrium is being perpetually destroyed by entrepreneurs who try to introduce innovations. A successful introduction of an innovation (i.e. a disruptive technology)
disturbs the normal flow of economic life, because it forces some of
the already existing technologies and means of production to lose their
positions within the economy. His vision and economics inspired many economists who wanted to study how the economy develops and lead to a now powerful International Joseph A. Schumpeter Society.
Later development
A seminal article by Armen Alchian (1950) argued for adaptive success of firms faced with uncertainty and incomplete information replacing profit maximization as an appropriate modeling assumption. Milton Friedman proposed that markets act as major selection vehicles. As firms compete, unsuccessful rivals fail to capture an appropriate market shar e, go bankrupt and have to exit.
The variety of competing firms is both in their products and practices,
that are matched against markets. Both products and practices are
determined by routines that firms use: standardized patterns of actions
implemented constantly. By imitating these routines, firms propagate
them and thus establish inheritance of successful practices. Kenneth Boulding was one of the advocates of the evolutionary methods in social science, as is evident from Kenneth Boulding's Evolutionary Perspective. Kenneth Arrow, Ronald Coase and Douglass North are some of the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel winners who are known for their sympathy to the field.
More narrowly the works Jack Downie and Edith Penrose offer many insights for those thinking about evolution at the level of the firm in an industry.
Nelson and Winter (1982) and after
Richard R. Nelson and Sidney G. Winter's book An Evolutionary Theory of Economic Change (1982, Paperback 1985)
was a real seminal work that marked a renaissance of evolutionary
economics. It lead to the dissemination of the evolutionary ideas among
wide strands of economists and was followed by foundations of International Joseph A. Schumpeter Society, European Association for Evolutionary Political Economy, Japan Association for Evolutionary Economics, and Korean Society for Innovation Management and Economics.
Nelson and Winter have focused mostly on the issue of changes in technology and routines,
suggesting a framework for their analysis. Evolution and change must be
distinguished. Prices and quantities constantly change but it is not an
evolution. For an evolution takes place, there must be something that
evolves. Their approach can be compared and contrasted with the population ecology or organizational ecology approach in sociology: see Douma & Schreuder (2013, chapter 11). More recently, Nelson, Dosi, Pyka, Malerba, Winter and other scholars have been proposing an update of the state-of-art in evolutionary economics.
Evolution and change must be distinguished. Prices, quantities
and GDPs constantly change through time but they are not evolution. Pier
P. Saviotti pointed out as key concepts of evolution three ideas:
variation, selection, and reproduction.
The concept of reproduction is often replaced by replication or
retention. Retention is preferred in evolutionary organization theory.
Other related concepts are fitness, adaptation, population,
interactions, and environment. Each item is related to selection, learning, population dynamics, economic transactions,
and boundary conditions. Nelson and Winter raised two major examples of
evolving entities: technologies and organizational routines. Yoshinori Shiozawa listed four entities that evolve: economic behaviors, commodities, technologies, and institutions. Then, mechanisms that provide selection, generate variation and establish self-replication,
must be identified. A general theory of this evolutionary process has
been proposed by Kurt Dopfer, John Foster and Jason Potts as the micro
meso macro framework.
If the change occurs constantly in the economy, then some kind of
evolutionary process must be in action, and there has been a proposal
that this process is Darwinian in nature. Other economists claimed that evolution of human behaviors can be Lamarckian.
Evolutionary economics had developed and ramified into various fields or topics. They include technology and economic growth, institutional economics, organization studies, innovation study, management, and policy, and criticism of mainstream economics.
Economic processes, as part of life processes, are intrinsically
evolutionary. From the evolutionary equation that describe life
processes, an analytical formula on the main factors of economic
processes, such as fixed cost and variable cost, can be derived. The
economic return, or competitiveness, of economic entities of different
characteristics under different kinds of environment can be calculated.
The change of environment causes the change of competitiveness of
different economic entities and systems. This is the process of
evolution of economic systems.
In recent years, evolutionary models have been used to assist
decision making in applied settings and find solutions to problems such
as optimal product design and service portfolio diversification.
Why does evolution matter in economics
Evolutionary economics emerged from dissatisfaction of mainstream (neoclassical) economics.
Mainstream economics mainly assumes agents that optimize their
objective functions, such as utility function for consumers and profit
for firms. Optimization under budget constraint has a solution if the
function is continuous and the prices are positive. However, when the
number of goods is large, it is often difficult to obtain the bundles of
goods that maximize the utility. This is the question of bounded rationality. Herbert A. Simon once stated in Administrative Behavior that whole contents of management science can be reduced to two lines. The same contentions apply to the economics. Most of economics behaviors except deliberated plans are routines which follows satisficing principle. Evolutionary economics is conceived as an economics of large complex system.
Evolutionary psychology
A different approach is to apply evolutionary psychology principles to economics which is argued to explain problems such as inconsistencies and biases in rational choice theory. A basic economic concept such as utility may be better explained in terms of a set of biological preferences that maximized evolutionary fitness
in the ancestral environment but not necessarily in the current one. In
other words, the preferences for actions/decisions that promise
"utility" (e.g. reaching for a piece of cake) were formed in the
ancestral environment because of the adaptive advantages of such
decisions (e.g. maximizing calorie intake). Loss aversion
may be explained as being rational when living at subsistence level
where a reduction of resources may have meant death and it thus may have
been rational to place a greater value on losses than on gains.
People are sometimes more cooperative and altruistic than
predicted by economic theory which may be explained by mechanisms such
as reciprocal altruism and group selection
for cooperative behavior. An evolutionary approach may also explain
differences between groups such as males being less risk-averse than
females since males have more variable reproductive success
than females. While unsuccessful risk-seeking may limit reproductive
success for both sexes, males may potentially increase their
reproductive success much more than females from successful
risk-seeking. Frequency-dependent selection
may explain why people differ in characteristics such as cooperative
behavior with cheating becoming an increasingly less successful strategy
as the numbers of cheaters increase.
Economic theory is at present characterized by strong
disagreements on which is the correct theory of value, distribution and
growth. This also influences the attempts to find evolutionary
explanations for modern tastes and preferences. For example an
acceptance of the neoclassical theory of value and distribution lies
behind the argument that humans have a poor intuitive grasp of the
economics of the current environment which is very different from the
ancestral environment. The argument is that ancestral environment likely
had relatively little trade, division of labor, and capital goods.
Technological change was very slow, wealth differences were much
smaller, and possession of many available resources were likely zero-sum
games where large inequalities were caused by various forms of
exploitation. Humans, therefore, may have poor intuitive understanding
of the benefits of free trade (causing calls for protectionism), the value of capital goods (making the labor theory of value appealing), and may intuitively undervalue the benefits of technological development.
The same acceptance of the neoclassical thesis that demand for labour
is a decreasing function of the real wage and that income differences
reflect different marginal productivities of individual contributions
(in labour or savings) lies behind the argument that persistence of
pre-capitalist model of thinking may explain a tendency to see the
number of available jobs as a zero-sum game with the total number of
jobs being fixed which causes people to not realize that minimum wage
laws reduce the number of jobs or to believe that an increased number
of jobs in other nations necessarily decreases the number of jobs in
their own nation, as well as a tendency to view large income inequality as due to exploitation rather than as due to individual differences in productivity.
This, it is accordingly argued, may easily cause poor economic
policies, especially since individual voters have few incentives to make
the effort of studying societal economics instead of relying on their
intuitions since an individual's vote counts for so little and since
politicians may be reluctant to take a stand against intuitive views
that are incorrect but widely held.
Most non-neoclassical schools of thought would not judge calls for
protectionism necessarily mistaken nor would agree that minimum wage
laws reduce the number of jobs nor would reject the basic intuition
imperfectly expressed by the labour theory of value and now more
rigorously argued by modern Marxian-Sraffian theory (namely, that
exploitation is present under capitalism too), and therefore would judge
this specific evolutionary argument strictly to depend on a
questionable theory of the working of market economies.
Evolution after Unified Growth Theory
The role of evolutionary forces in the process of economic
development over the course of human history has been explored in the
past few decades. Oded Galor
and Omer Moav advanced the hypothesis that evolutionary forces had a
significant role in the transition of the world economy from stagnation
to growth, highlighting the persistent effects that historical and
prehistorical conditions have had on the evolution of the composition of
human characteristics during the development process.
Galor and Moav argued that the Malthusian pressure
determined the size and the composition of the human population.
Lineages whose traits were complementary to the economic environment had
higher income, and therefore higher reproductive success, and the
inevitable propagation of these traits fostered the growth process and
ultimately contributed to the take-off from an epoch of stagnation to
the modern era of sustained growth.
Evolution of predisposition towards child quality
Galor
and Moav hypothesize that during the Malthusian epoch, natural
selection has amplified the prevalence of traits associated with
predispositions towards the child quality in the human population,
triggering human capital formation, technological progress, the onset of
the demographic transition, and the emergence of sustained economic
growth.
The testable predictions of this evolutionary theory and its underlying mechanisms have been confirmed empirically and quantitatively.
Specifically, the genealogical record of half a million people in
Quebec during the period 1608-1800, suggests that moderate fecundity,
and hence tendency towards investment in child quality, was beneficial
for long-run reproductive success. This finding reflect the adverse
effect of higher fecundity on marital age of children, their level of
education, and the likelihood that they will survive to a reproductive
age.
Evolution of time preference
Oded Galor and Omer Ozak examine the evolution of time preference in the course of human history.
They hypothesize and establish empirically that agricultural
characteristics that were favorable to higher return to agricultural
investment in the Malthusian era triggered a process of selection,
adaptation, and learning that increase the prevalence of long-term
orientation among individuals in society. They further establish the
variations in these agricultural characteristics across the globe are
associated with contemporary differences in economic and human behavior
such as technological adoption, education, saving, and smoking.
Evolution of loss aversion
Oded Galor and Viacheslav Savitskiy explore the evolutionary foundation of the phenomenon of loss aversion.
They theorize and confirm empirically that the evolution of loss
aversion reflects an evolutionary process in which humans have gradually
adapted the climatic shocks and their asymmetric effects on
reproductive success in a period in which the available resource was
very close to the subsistence consumption. In particular, they establish
that individuals and ethnic groups that descended from regions that are
characterized by greater climatic volatility tend to be loss-neutral,
whereas those originated in regions in which climatic conditions are
more spatially correlated, tend to be more loss averse.
Evolution of risk aversion
Oded
Galor and Stelios Michalopoulos examine the coevolution of
entrepreneurial spirit and the process of long-run economic development.
Specifically, they argue that in the early stages of development,
risk-tolerant entrepreneurial traits generated an evolutionary
advantage, and the rise in the prevalence of this trait amplified the
pace of the growth process. However, in advanced stages of development,
risk-aversion gained an evolutionary advantage, and contributed to
convergence across countries.
