Criticism of Marxism

From Wikipedia, the free encyclopedia

Criticism of Marxism (also known as Anti-Marxism) has come from various political ideologies and academic disciplines. This includes general intellectual criticism about dogmatism, a lack of internal consistency, criticism related to materialism (both philosophical and historical), arguments that Marxism is a type of historical determinism or that it necessitates a suppression of individual rights, issues with the implementation of communism and economic issues such as the distortion or absence of price signals and reduced incentives. In addition, empirical and epistemological problems are frequently identified.

General criticism

Some democratic socialists and social democrats reject the idea that societies can achieve socialism only through class conflict and a proletarian revolution. Many anarchists reject the need for a transitory state phase. Some thinkers have rejected the fundamentals of Marxist theory such as historical materialism and the labour theory of value and have gone on to criticise capitalism and advocate socialism using other arguments.

Some contemporary supporters of Marxism see many aspects of Marxist thought as viable, but contend that the corpus is incomplete or outdated in regard to certain aspects of economic, political or social theory. They may therefore combine Marxist concepts with the ideas of other theorists such as Max Weber—the Frankfurt School provides one example of this approach.

Conservative historian Paul Johnson wrote: "...It must be said that he [Marx] developed traits characteristic of a certain type of scholar, especially Talmudic ones: a tendency to accumulate immense masses of half-assimilated materials and to plan encyclopedic works which were never completed; a withering contempt for all non-scholars; and extreme assertiveness and irascibility in dealing with other scholars. Virtually all his work, indeed, has the hallmark of Talmudic study: it is essentially a commentary on, a critique of the work of others in his field."

He continues: "The truth is, even the most superficial inquiry into Marx's use of evidence forces one to treat with skepticism everything he wrote which relies on factual data". For example, Johnson stated: "The whole of the key Chapter Eight of Capital is a deliberate and systematic falsification to prove a thesis which an objective examination of the facts showed was untenable".

Historical materialism

Historical materialism remains one of the bases of Marxism. It proposes that technological advances in modes of production inevitably lead to changes in the social relations of production. This economic "base" of society supports, is reflected by and influences the ideological "superstructure" which encompasses culture, religion, politics, and all other aspects of humanity's social consciousness. It thus looks for the causes of developments and changes in human history in economic, technological and, more broadly, material factors as well as the clashes of material interests among tribes, social classes, and nations. Law, politics, the arts, literature, morality and religion are understood by Marx to make up the superstructure as reflections of the economic base of society. Many critics have argued that this is an oversimplification of the nature of society and claim that the influence of ideas, culture and other aspects of what Marx called the superstructure are just as important as the economic base to the course of society, if not more so. However, Marxism does not claim that the economic base of society is the only determining element in society as demonstrated by the following letter written by Friedrich Engels, Marx's long-time contributor:

According to the materialist conception of history, the ultimately determining element in history is the production and reproduction of real life. More than this neither Marx nor I ever asserted. Hence if somebody twists this into saying that the economic element is the only determining one he transforms that proposition into a meaningless, abstract, senseless phrase.

According to critics, this also creates another problem for Marxism. If the superstructure also influences the base then there is no need for Marx's constant assertions that the history of society is one of economic class conflict. This then becomes a classic chicken or the egg argument as to whether the base or the superstructure comes first. Peter Singer proposes that the way to solve this problem is to understand that Marx saw the economic base as ultimately real. Marx believed that humanity's defining characteristic was its means of production and thus the only way for man to free himself from oppression was for him to take control of the means of production. According to Marx, this is the goal of history and the elements of the superstructure act as tools of history.

Marx held that the relationship between material base and ideological superstructure was a determination relation and not a causal relation. However, some critics of Marx have insisted that Marx claimed the superstructure was an effect caused by the base. For instance, Anarcho-capitalist Murray Rothbard criticized historical materialism by arguing that Marx claimed the "base" of society (its technology and social relations) determined its "consciousness" in the superstructure.

Historical determinism

Marx's theory of history has been considered a variant of historical determinism linked to his reliance on dialectical materialism as an endogenous mechanism for social change. Marx wrote:

At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or – this merely expresses the same thing in legal terms – with the property relations within the framework of which they have operated hitherto. From forms of development of the productive forces these relations turn into their fetters. Then begins an era of social revolution. The changes in the economic foundation lead sooner or later to the transformation of the whole immense superstructure.

The concept of the dialectic first emerged from the dialogues of the ancient Greek philosophers, but it was revived by Georg Wilhelm Friedrich Hegel in the early 19th century as a conceptual framework for describing the often-opposing forces of historical evolution. Historical determinism has also been associated with scholars like Arnold Toynbee and Oswald Spengler, but in recent times this conceptual approach has fallen into disuse.

Terry Eagleton writes that Marx's writings "should not be taken to mean that everything that has ever happened is a matter of class struggle. It means, rather, that class struggle is most fundamental to human history".

Academic Peter Stillman believes Marx's status as a determinist is a "myth". Friedrich Engels himself warned about conceiving of Marx's ideas as deterministic, saying: "According to the materialist conception of history, the ultimately determining element in history is the production and reproduction of real life. Other than this neither Marx nor I have ever asserted. Hence if somebody twists this into saying that the economic element is the only determining one, he transforms that proposition into a meaningless, abstract, senseless phrase." On another occasion, Engels remarked that "younger people sometimes lay more stress on the economic side than is due to it". While historical materialism has been referred to as a materialist theory of history, Marx does not claim to have produced a master-key to history and that the materialist conception of history is not "an historico-philosophic theory of the marche generale, imposed by fate upon every people, whatever the historic circumstances in which it finds itself". In a letter to editor of the Russian newspaper Otetchestvennye Zapiskym (1877), he explains that his ideas are based upon a concrete study of the actual conditions in Europe.

In an effort to reassert this approach to an understanding of the forces of history, Prabhat Ranjan Sarkar criticised what he considered the narrow conceptual basis of Marx's ideas on historical evolution. In the 1978 book The Downfall of Capitalism and Communism, Ravi Batra pointed out crucial differences in the historical determinist approaches of Sarkar and Marx:

Sarkar's main concern with the human element is what imparts universality to his thesis. Thus while social evolution according to Marx is governed chiefly by economic conditions, to Sarkar this dynamic is propelled by forces varying with time and space: sometimes physical prowess and high-spiritedness, sometimes intellect applied to dogmas and sometimes intellect applied to the accumulation of capital (p. 38). [...] The main line of defence of the Sarkarian hypothesis is that unlike the dogmas now in disrepute, it does not emphasise one particular point to the exclusion of all others: it is based on the sum total of human experience – the totality of human nature. Whenever a single factor, however important and fundamental, is called upon to illuminate the entire past and by implication the future, it simply invites disbelief, and after closer inspection, rejection. Marx committed that folly, and to some extent so did Toynbee. They both offered an easy prey to the critics, and the result is that today historical determinism is regarded by most scholars as an idea so bankrupt that it can never be solvent again.

Suppression of individual rights

Various thinkers have argued that a communist state would by its very nature erode the rights of its citizens due to the postulated violent revolution and dictatorship of proletariat, its collectivist nature, reliance on "the masses" rather than individuals, historical materialism and centrally planned economy. These points have also been debated by various thinkers, who argue that we currently exist in a Dictatorship of the Bourgeoisie and that Marxism is not deterministic.

The American neoclassical economist Milton Friedman argued that the absence of a free market economy under socialism would inevitably lead to an authoritarian political regime. Friedman's view was shared by Friedrich Hayek, who also believed that capitalism is a precondition for freedom to flourish in a nation state. David Harvey has responded to such claims by suggesting that socialism enables individual freedom, stating that "the achievement of individual liberties and freedoms is, I argued, a central aim of such emancipatory projects. But that achievement requires collectively building a society where each one of us has adequate life chances and life possibilities to realize each one of our own potentialities." In contrast, Jonathan Chait writes that "Marxist governments trample on individual rights because Marxist theory does not care about individual rights. Marxism is a theory of class justice... Unlike liberalism, which sees rights as a positive-sum good that can expand or contract for society as a whole, Marxists (and other left-wing critics of liberalism) think of political rights as a zero-sum conflict. Either they are exercised on behalf of oppression or against it."

Anarchists have also argued that centralized communism would inevitably create coercion and state domination. Mikhail Bakunin believed Marxist regimes would lead to the "despotic control of the populace by a new and not at all numerous aristocracy". Even if this new aristocracy were to have originated from among the ranks of the proletariat, Bakunin argued that their new-found power would fundamentally change their view of society and thus lead them to "look down at the plain working masses".

Economic

Marxian economics have been criticized for a number of reasons. Some critics point to the Marxian analysis of capitalism while others argue that the economic system proposed by Marxism is unworkable.

There are also doubts that the rate of profit in capitalism would tend to fall as Marx predicted. In 1961, Marxian economist Nobuo Okishio devised a theorem (Okishio's theorem) showing that if capitalists pursue cost-cutting techniques and if the real wage does not rise, the rate of profit must rise.

Labor theory of value

Main article: Labor theory of value

The labor theory of value is one of the most commonly criticized core tenets of Marxism.

The Austrian School argues that this fundamental theory of classical economics is false and prefers the subsequent and modern subjective theory of value put forward by Carl Menger in his book Principles of Economics. The Austrian School was not alone in criticizing the Marxian and classical belief in the labor theory of value. British economist Alfred Marshall attacked Marx, saying: "It is not true that the spinning of yarn in a factory [...] is the product of the labour of the operatives. It is the product of their labour, together with that of the employer and subordinate managers, and of the capital employed". Marshall points to the capitalist as sacrificing the money he could be using now for investment in business, which ultimately produces work. By this logic, the capitalist contributes to the work and productivity of the factory because he delays his gratification through investment. Through the law of supply and demand, Marshall attacked Marxian theory of value. According to Marshall, price or value is determined not just by supply, but by the demand of the consumer. Labor does contribute to cost, but so do the wants and needs of consumers. The shift from labor being the source of all value to subjective individual evaluations creating all value undermines Marx's economic conclusions and some of his social theories.

Shimshon Bichler and Jonathan Nitzan argue that most studies purporting to show empirical evidence of the labor theory of value often make methodological errors by comparing the total labor value to total price of multiple economic sectors, which results in a strong overall correlation but this is a statistical exaggeration; the authors argue that the correlations between labor value and price in each sector are often very small if not insignificant. Bichler and Nitzan also argue that because it is difficult to quantify a way to measure abstract labor, researchers are forced to make assumptions. However, Bichler and Nitzan argue these assumptions involve circular reasoning:

The most important of these assumptions are that the value of labour power is proportionate to the actual wage rate, that the ratio of variable capital to surplus value is given by the price ratio of wages to profit, and occasionally also that the value of the depreciated constant capital is equal to a fraction of the capital's money price. In other words, the researcher assumes precisely what the labour theory of value is supposed to demonstrate.

Distorted or absent price signals

The economic calculation problem is a criticism of socialist economics or, more precisely, of centralized socialist planned economies. It was first proposed by Austrian School economist Ludwig von Mises in 1920 and later expounded by Friedrich Hayek. The problem referred to is that of how to distribute resources rationally in an economy. The free market solution is the price mechanism, wherein people individually have the ability to decide how a good should be distributed based on their willingness to give money for it. The price conveys embedded information about the abundance of resources as well as their desirability which in turn allows on the basis of individual consensual decisions corrections that prevent shortages and surpluses. Mises and Hayek argued that this is the only possible solution and, without the information provided by market prices, socialism lacks a method to rationally allocate resources. The debate raged in the 1920s and 1930s and that specific period of the debate has come to be known by economic historians as the socialist calculation debate. In practice, socialist states like the Soviet Union used mathematical techniques to determine and set prices with mixed results.

Reduced incentives

Some critics of socialism argue that income sharing reduces individual incentives to work and therefore incomes should be individualised as much as possible. Critics of socialism have argued that in any society where everyone holds equal wealth there can be no material incentive to work because one does not receive rewards for work well done. They further argue that incentives increase productivity for all people and that the loss of those effects would lead to stagnation. In Principles of Political Economy (1848), John Stuart Mill said:

It is the common error of Socialists to overlook the natural indolence of mankind; their tendency to be passive, to be the slaves of habit, to persist indefinitely in a course once chosen. Let them once attain any state of existence which they consider tolerable, and the danger to be apprehended is that they will thenceforth stagnate; will not exert themselves to improve, and by letting their faculties rust, will lose even the energy required to preserve them from deterioration. Competition may not be the best conceivable stimulus, but it is at present a necessary one, and no one can foresee the time when it will not be indispensable to progress.

However, he later altered his views and became more sympathetic to socialism, particularly Fourierism, adding chapters to his Principles of Political Economy in defence of a socialist outlook and defending some socialist causes. Within this revised work, he also made the radical proposal that the whole wage system be abolished in favour of a co-operative wage system. Nonetheless, some of his views on the idea of flat taxation remained, albeit in a slightly toned-down form.

The economist John Kenneth Galbraith has criticised communal forms of socialism that promote egalitarianism in terms of wages or compensation as unrealistic in its assumptions about human motivation:

This hope [that egalitarian reward would lead to a higher level of motivation], one that spread far beyond Marx, has been shown by both history and human experience to be irrelevant. For better or worse, human beings do not rise to such heights. Generations of socialists and socially oriented leaders have learned this to their disappointment and more often to their sorrow. The basic fact is clear: the good society must accept men and women as they are.

Edgar Hardcastle responds to this by saying: "They want to work and need no more inducement than is given by the knowledge that work must be done to keep society going, and that they are playing their part in it along with their fellow men and women." He continues by criticising what he sees are the double standards of anti-socialists: "Notice how they object to the unemployed receiving a miserly dole without having to work, but never object to the millionaires (most of them in that position through inheritance) being able to live in luxurious idleness." Authors like Arnold Petersen argue that arguments such as these are inaccurate as hunter-gatherers practiced primitive communism without problems such as these.

Inconsistency

Vladimir Karpovich Dmitriev writing in 1898, Ladislaus von Bortkiewicz writing in 1906–1907 and subsequent critics have alleged that Karl Marx's value theory and law of the tendency of the rate of profit to fall are internally inconsistent. In other words, the critics allege that Marx drew conclusions that actually do not follow from his theoretical premises. Once those errors are corrected, Marx's conclusion that aggregate price and profit are determined by—and equal to—aggregate value and surplus value no longer holds true. This result calls into question his theory that the exploitation of workers is the sole source of profit.

The inconsistency allegations have been a prominent feature of Marxian economics and the debate surrounding it since the 1970s. Andrew Kliman argues that since internally inconsistent theories cannot possibly be right, this undermines Marx's critique of political economy and current-day research based upon it as well as the correction of Marx's alleged inconsistencies.

Critics who have alleged that Marx has been proved internally inconsistent include former and current Marxian and/or Sraffian economists, such as Paul Sweezy, Nobuo Okishio, Ian Steedman, John Roemer, Gary Mongiovi and David Laibman, who propose that the field be grounded in their correct versions of Marxian economics instead of in Marx's critique of political economy in the original form in which he presented and developed it in Capital.

Proponents of the temporal single system interpretation (TSSI) of Marx's value theory, like Kliman, claim that the supposed inconsistencies are actually the result of misinterpretation and argue that when Marx's theory is understood as "temporal" and "single-system", the alleged internal inconsistencies disappear. In a recent survey of the debate, Kliman concludes that "the proofs of inconsistency are no longer defended; the entire case against Marx has been reduced to the interpretive issue".

Relevance

Marxism has been criticized as irrelevant, with many economists rejecting its core tenets and assumptions. John Maynard Keynes referred to Capital as "an obsolete textbook which I know to be not only scientifically erroneous but without interest or application for the modern world". According to George Stigler, "Economists working in the Marxian-Sraffian tradition represent a small minority of modern economists, and that their writings have virtually no impact upon the professional work of most economists in major English-language universities". In a review of the first edition of The New Palgrave Dictionary of Economics, Robert Solow criticized it for overemphasizing the importance of Marxism in modern economics:

Marx was an important and influential thinker, and Marxism has been a doctrine with intellectual and practical influence. The fact is, however, that most serious English-speaking economists regard Marxist economics as an irrelevant dead end.

A 2006 nationally representative survey of American professors found 3% of them identify as Marxists. The share rises to 5% in the humanities and is about 18% among social scientists.

Social

Social criticism is based on the assertion that the Marxian conception of society is fundamentally flawed. The Marxist stages of history, class analysis and theory of social evolution have been criticised. Jean-Paul Sartre concluded that "class" was not a homogeneous entity and could never mount a revolution, but continued to advocate Marxist beliefs. According to the book Reflections on a Ravaged Century by the British historian Robert Conquest, Marx was unable to put the Asian society in the development stages of slave, feudal, capitalist, socialist, and as a result, Asian society where much of the world's population lived for thousand of years was "out of the balance".

Epistemological

Arguments against Marxism are often based on epistemological reasoning. Specifically, various critics have contended that Marx or his adherents have a flawed approach to epistemology.

According to Leszek Kołakowski, the laws of dialectics at the very base of Marxism are fundamentally flawed: some are "truisms with no specific Marxist content", others "philosophical dogmas that cannot be proved by scientific means", yet others just "nonsense". Some Marxist "laws" are vague and can be interpreted differently, but these interpretations generally fall into one of the aforementioned categories of flaws as well. However, Ralph Miliband countered that Kolakowski had a flawed understanding of Marxism and its relation to Leninism and Stalinism.

Economist Thomas Sowell wrote in 1985:

What Marx accomplished was to produce such a comprehensive, dramatic, and fascinating vision that it could withstand innumerable empirical contradictions, logical refutations, and moral revulsions at its effects. The Marxian vision took the overwhelming complexity of the real world and made the parts fall into place, in a way that was intellectually exhilarating and conferred such a sense of moral superiority that opponents could be simply labelled and dismissed as moral lepers or blind reactionaries. Marxism was – and remains – a mighty instrument for the acquisition and maintenance of political power.

Many notable academics such as Karl Popper, David Prychitko, Robert C. Allen, and Francis Fukuyama argue that many of Marx's predictions have failed. Marx predicted that wages would tend to depreciate and that capitalist economies would suffer worsening economic crises leading to the ultimate overthrow of the capitalist system. The socialist revolution would occur first in the most advanced capitalist nations and once collective ownership had been established then all sources of class conflict would disappear. Instead of Marx's predictions, communist revolutions took place in undeveloped regions in Latin America and Asia instead of industrialized countries like the United States or the United Kingdom.

Popper has argued that both the concept of Marx's historical method as well as its application are unfalsifiable and thus it is a pseudoscience that cannot be proven true or false:

The Marxist theory of history, in spite of the serious efforts of some of its founders and followers, ultimately adopted this soothsaying practice. In some of its earlier formulations (for example in Marx's analysis of the character of the 'coming social revolution') their predictions were testable, and in fact falsified. Yet instead of accepting the refutations the followers of Marx re-interpreted both the theory and the evidence in order to make them agree. In this way they rescued the theory from refutation; but they did so at the price of adopting a device which made it irrefutable. They thus gave a 'conventionalist twist' to the theory; and by this stratagem they destroyed its much advertised claim to scientific status.

Popper believed that Marxism had been initially scientific, in that Marx had postulated a theory which was genuinely predictive. When Marx's predictions were not in fact borne out, Popper argues that the theory was saved from falsification by the addition of ad hoc hypotheses which attempted to make it compatible with the facts. By this means, a theory which was initially genuinely scientific degenerated into pseudoscientific dogma. Popper agreed on the general non-falsifiability of the social sciences, but instead used it as an argument against central planning and all-encompassing historiographical ideologies. Popper devoted much attention to dissecting the practice of using the dialectic in defence of Marxist thought, which was the very strategy employed by V.A. Lektorsky in his defence of Marxism against Popper's criticisms. Among Popper's conclusions was that Marxists used dialectic as a method of side-stepping and evading criticisms, rather than actually answering or addressing them:

Hegel thought that philosophy develops; yet his own system was to remain the last and highest stage of this development and could not be superseded. The Marxists adopted the same attitude towards the Marxian system. Hence, Marx's anti-dogmatic attitude exists only in the theory and not in the practice of orthodox Marxism, and dialectic is used by Marxists, following the example of Engels' Anti-Dühring, mainly for the purposes of apologetics – to defend the Marxist system against criticism. As a rule critics are denounced for their failure to understand the dialectic, or proletarian science, or for being traitors. Thanks to dialectic the anti-dogmatic attitude has disappeared, and Marxism has established itself as a dogmatism which is elastic enough, by using its dialectic method, to evade any further attack. It has thus become what I have called reinforced dogmatism.

Bertrand Russell has criticized as unscientific Marx's belief in progress as a universal law. Russell stated: "Marx professed himself an atheist, but retained a cosmic optimism which only theism could justify". Marxists like Thomas Riggins have claimed that Russell misrepresented Marx's ideas.

Neuroeconomics

From Wikipedia, the free encyclopedia

 

Cerebral hemisphere
Human brain seen from front.
Right cerebral hemisphere   Left cerebral hemisphere
Details
Identifiers
Latin	Hemisphaerium cerebri
Anatomical terms of neuroanatomy

Neuroeconomics is an interdisciplinary field that seeks to explain human decision-making, the ability to process multiple alternatives and to follow through on a plan of action. It studies how economic behavior can shape our understanding of the brain, and how neuroscientific discoveries can guide models of economics.

It combines research from neuroscience, experimental and behavioral economics, and cognitive and social psychology. As research into decision-making behavior becomes increasingly computational, it has also incorporated new approaches from theoretical biology, computer science, and mathematics. Neuroeconomics studies decision-making by using a combination of tools from these fields so as to avoid the shortcomings that arise from a single-perspective approach. In mainstream economics, expected utility (EU) and the concept of rational agents are still being used. Neuroscience has the potential to reduce the reliance on this flawed assumption by inferring what emotions, habits, biases, heuristics and environmental factors contribute to individual, and societal preferences. Economists can thereby make more accurate predictions of human behavior in their models.

Behavioral economics was the first subfield to emerge to account for these anomalies by integrating social and cognitive factors in understanding economic decisions. Neuroeconomics adds another layer by using neuroscience and psychology to understand the root of decision-making. This involves researching what occurs within the brain when making economic decisions. The economic decisions researched can cover diverse circumstances such as buying a first home, voting in an election, choosing to marry a partner or go on a diet. Using tools from various fields, neuroeconomics works toward an integrated account of economic decision-making.

History

In 1989, Paul Glimcher joined the Center for Neural Science at NYU. Initial forays into neuroeconomic topics occurred in the late 1990s thanks, in part, to the rising prevalence of cognitive neuroscience research. Improvements in brain imaging technology suddenly allowed for crossover between behavioral and neurobiological enquiry. At the same time, critical tension was building between neoclassical and behavioral schools of economics seeking to produce superior predictive models of human behavior. Behavioral economists, in particular, sought to challenge neo-classicists by looking for alternative computational and psychological processes that validated their counter-findings of irrational choice. These converging trends set the stage for the sub-discipline of neuroeconomics to emerge, with varying and complementary motivations from each parent discipline.

Behavioral economists and cognitive psychologists looked towards functional brain imaging to experiment and develop their alternative theories of decision-making. While groups of physiologists and neuroscientists looked towards economics to develop their algorithmic models of neural hardware pertaining to choice. This split approach characterised the formation of neuroeconomics as an academic pursuit - not without criticism however. Numerous neurobiologists claimed that attempting to synchronise complex models of economics to real human and animal behavior would be futile. Neoclassical economists also argued that this merge would be unlikely to improve the predictive power of the existing revealed preference theory.

Despite the early criticisms, neuroeconomics grew rapidly from its inception in the late 1990s through to the 2000s. Leading many more scholars from father fields of economics, neuroscience and psychology to take notice of the possibilities of such interdisciplinary collaboration. Meetings between scholars and early researchers in neuroeconomics began to take place through the early 2000s. Important among them was a meeting that took place during 2002 at Princeton University. Organized by neuroscientist Jonathan Cohen and economist Christina Paxson, the Princeton meeting gained significant traction for the field and is often credited as the formative beginning of the present-day Society for Neuroeconomics.

The subsequent momentum continued throughout the decade of the 2000s in which research was steadily increasing and the number of publications containing the words "decision making" and "brain" rose impressively. A critical point in 2008 was reached when the first edition of Neuroeconomics: Decision Making and the Brain was published. This marked a watershed moment for the field as it accumulated the growing wealth of research into a widely accessible textbook. The success of this publication sharply increased the visibility of Neuroeconomics and helped affirm its place in economic teachings worldwide.

Major research areas

The field of decision-making is largely concerned with the processes by which individuals make a single choice from among many options. These processes are generally assumed to proceed in a logical manner such that the decision itself is largely independent of context. Different options are first translated into a common currency, such as monetary value, and are then compared to one another and the option with the largest overall utility value is the one that should be chosen. While there has been support for this economic view of decision-making, there are also situations where the assumptions of optimal decision-making seem to be violated.

The field of neuroeconomics arose out of this controversy. By determining which brain areas are active in which types of decision processes, neuroeconomists hope to better understand the nature of what seem to be suboptimal and illogical decisions. While most of these scientists are using human subjects in this research, others are using animal models where studies can be more tightly controlled and the assumptions of the economic model can be tested directly.

For example, Padoa-Schioppa & Assad tracked the firing rates of individual neurons in the monkey orbitofrontal cortex while the animals chose between two kinds of juice. The firing rate of the neurons was directly correlated with the utility of the food items and did not differ when other types of food were offered. This suggests that, in accordance with the economic theory of decision-making, neurons are directly comparing some form of utility across different options and choosing the one with the highest value. Similarly, a common measure of prefrontal cortex dysfunction, the FrSBe, is correlated with multiple different measures of economic attitudes and behavior, supporting the idea that brain activation can display important aspects of the decision process.

Neuroeconomics studies the neurobiological along with the computational bases of decision-making. A framework of basic computations which may be applied to Neuroeconomics studies is proposed by A. Rangel, C. Camerer, and P. R. Montague. It divides the process of decision-making into five stages implemented by a subject. First, a representation of the problem is formed. This includes analysis of internal states, external states and potential course of action. Second, values are assigned to potential actions. Third, based on the valuations, one of the actions is selected. Fourth, the subject evaluates how desirable the outcome is. In the final stage, learning, includes updating all of the above processes in order to improve future decisions.

Decision-making under risk and ambiguity

Most of our decisions are made under some form of uncertainty. Decision sciences such as psychology and economics usually define risk as the uncertainty about several possible outcomes when the probability of each is known. When the probabilities are unknown, uncertainty takes the form of ambiguity. Utility maximization, first proposed by Daniel Bernoulli in 1738, is used to explain decision-making under risk. The theory assumes that humans are rational and will assess options based on the expected utility they will gain from each.

Research and experience uncovered a wide range of expected utility anomalies and common patterns of behavior that are inconsistent with the principle of utility maximization – for example, the tendency to overweight small probabilities and underweight large ones. Daniel Kahneman and Amos Tversky proposed prospect theory to encompass these observations and offer an alternative model.

There seem to be multiple brain areas involved in dealing with situations of uncertainty. In tasks requiring individuals to make predictions when there is some degree of uncertainty about the outcome, there is an increase in activity in area BA8 of the frontomedian cortex as well as a more generalized increase in activity of the mesial prefrontal cortex and the frontoparietal cortex. The prefrontal cortex is generally involved in all reasoning and understanding, so these particular areas may be specifically involved in determining the best course of action when not all relevant information is available.

The Iowa Gambling Task developing in 1994, involved picking from 4 decks of cards where 2 decks were riskier, containing higher payoffs accompanied by much heftier penalties. Most individuals realise after a few rounds of picking cards that the less risky decks have higher payoffs in the long run due to the small losses, however individuals with damage to the ventromedial prefrontal cortex continue picking from the riskier decks. These results suggested the ventromedial prefrontal region of the brain in strongly associated with recognising the long term consequences of risky behavior as patients with damage to the region struggled to make decisions that prioritised the future over the potential for immediate gain.

In situations that involve known risk rather than ambiguity, the insular cortex seems to be highly active. For example, when subjects played a 'double or nothing' game in which they could either stop the game and keep accumulated winnings or take a risky option resulting in either a complete loss or doubling of winnings, activation of the right insula increased when individuals took the gamble. It is hypothesized that the main role of the insular cortex in risky decision-making is to simulate potential negative consequences of taking a gamble. Neuroscience has found the insular is activated when thinking about or experiencing something uncomfortable or painful.

In addition to the importance of specific brain areas to the decision process, there is also evidence that the neurotransmitter dopamine may transmit information about uncertainty throughout the cortex. Dopaminergic neurons are strongly involved in the reward process and become highly active after an unexpected reward occurs. In monkeys, the level of dopaminergic activity is highly correlated with the level of uncertainty such that the activity increases with uncertainty. Furthermore, rats with lesions to the nucleus accumbens, which is an important part of the dopamine reward pathway through the brain, are far more risk averse than normal rats. This suggests that dopamine may be an important mediator of risky behavior.

Individual level of risk aversion among humans is influenced by testosterone concentration. There are studies exhibiting correlation between the choice of a risky career (financial trading, business) and testosterone exposure. In addition, daily achievements of traders with lower digit ratio are more sensitive to circulating testosterone. A long-term study of risk aversion and risky career choice was conducted for a representative group of MBA students. It revealed that females are in average more risk averse, but the difference between genders vanishes for low organizational and activational testosterone exposure leading to risk-averse behavior. Students with high salivary testosterone concentration and low digit ratio, disregarding the gender, tend to choose risky career in finance (e.g. trading or investment banking).

Serial and functionally localized model vs distributed, hierarchical model

In 2017 March, Laurence T. Hunt and Benjamin Y. Hayden argued an alternative viewpoint of the mechanistic model to explain how we evaluate options and choose the best course of action. Many accounts of reward-based choice argue for distinct component processes that are serial and functionally localized. The component processes typically include the evaluation of options, the comparison of option values in the absence of any other factors, the selection of an appropriate action plan and the monitoring of the outcome of the choice. They emphasized how several features of neuroanatomy may support the implementation of choice, including mutual inhibition in recurrent neural networks and the hierarchical organization of timescales for information processing across the cortex.

Loss aversion

One aspect of human decision-making is a strong aversion to potential loss. Under loss aversion, the perceived cost of loss is experienced more intensely than an equivalent gain. For example, if there was a 50/50 chance of either winning $100 or losing $100, and a loss occurred, the accompanying reaction would emulate losing $200; that is the sum of both losing $100 and the possibility of winning $100. This was first discovered in Prospect Theory by Daniel Kahneman and Amos Tversky.

Prospect Theory model originally from Daniel Kahneman and Amos Tversky demonstrating how losses are felt more than gains.

One of the main controversies in understanding loss aversion is whether the phenomenon manifests in the brain, perhaps as increased attention and arousal with losses. Another area of research is whether loss aversion is evident in sub-cortices, such as the limbic system, thereby involving emotional arousal.

A basic controversy in loss aversion research is whether losses are actually experienced more negatively than equivalent gains or merely predicted to be more painful but actually experienced equivalently. Neuroeconomic research has attempted to distinguish between these hypotheses by measuring different physiological changes in response to both loss and gain. Studies have found that skin conductance, pupil dilation and heart rate are all higher in response to monetary loss than to equivalent gain. All three measures are involved in stress responses, so one might argue that losing a particular amount of money is experienced more strongly than gaining the same amount. On the other hand, in some of these studies, there was no physiological signals of loss aversion. That may suggest that the experience of losses is merely on attention (what is known as loss attention); such attentional orienting responses also lead to increased autonomic signals.

Brain studies have initially suggested that there is increased medial prefrontal and anterior cingulate cortex rapid response following losses compared to gains, which was interpreted as a neural signature of loss aversion. However, subsequent reviews have noticed that in this paradigm individuals do not actually show behavioral loss aversion casting doubts on the interpretability of these findings. With respect to fMRI studies, while one study found no evidence for an increase in activation in areas related to negative emotional reactions in response to loss aversion another found that individuals with damaged amygdalas had a lack of loss aversion even though they had normal levels of general risk aversion, suggesting that the behavior was specific to potential losses. These conflicting studies suggest that more research needs to be done to determine whether brain response to losses is due to loss aversion or merely to an alerting or orienting aspect of losses; as well as to examine if there are areas in the brain that respond specifically to potential losses .

Intertemporal choice

In addition to risk preference, another central concept in economics is intertemporal choices which are decisions that involve costs and benefits that are distributed over time. Intertemporal choice research studies the expected utility that humans assign to events occurring at different times. The dominant model in economics which explains it is discounted utility (DU). DU assumes that humans have consistent time preference and will assign value to events regardless of when they occur. Similar to EU in explaining risky decision-making, DU is inadequate in explaining intertemporal choice.

For example, DU assumes that people who value a bar of candy today more than 2 bars tomorrow, will also value 1 bar received 100 days from now more than 2 bars received after 101 days. There is strong evidence against this last part in both humans and animals, and hyperbolic discounting has been proposed as an alternative model. Under this model, valuations fall very rapidly for small delay periods, but then fall slowly for longer delay periods. This better explains why most people who would choose 1 candy bar now over 2 candy bars tomorrow, would, in fact, choose 2 candy bars received after 101 days rather than the 1 candy bar received after 100 days which DU assumes.

Neuroeconomic research in intertemporal choice is largely aimed at understanding what mediates observed behaviors such as future discounting and impulsively choosing smaller sooner rather than larger later rewards. The process of choosing between immediate and delayed rewards seems to be mediated by an interaction between two brain areas. In choices involving both primary (fruit juice) and secondary rewards (money), the limbic system is highly active when choosing the immediate reward while the lateral prefrontal cortex was equally active when making either choice. Furthermore, the ratio of limbic to cortex activity decreased as a function of the amount of time until reward. This suggests that the limbic system, which forms part of the dopamine reward pathway, is most involved in making impulsive decisions while the cortex is responsible for the more general aspects of the intertemporal decision process.

The neurotransmitter serotonin seems to play an important role in modulating future discounting. In rats, reducing serotonin levels increases future discounting while not affecting decision-making under uncertainty. It seems, then, that while the dopamine system is involved in probabilistic uncertainty, serotonin may be responsible for temporal uncertainty since delayed reward involves a potentially uncertain future. In addition to neurotransmitters, intertemporal choice is also modulated by hormones in the brain. In humans, a reduction in cortisol, released by the hypothalamus in response to stress, is correlated with a higher degree of impulsivity in intertemporal choice tasks. Drug addicts tend to have lower levels of cortisol than the general population, which may explain why they seem to discount the future negative effects of taking drugs and opt for the immediate positive reward.

Social decision-making

Main article: Social preferences

While most research on decision-making tends to focus on individuals making choices outside of a social context, it is also important to consider decisions that involve social interactions. The types of behavior that decision theorists study are as diverse as altruism, cooperation, punishment, and retribution. One of the most frequently utilized tasks in social decision-making is the prisoner's dilemma.

In this situation, the payoff for a particular choice is dependent not only on the decision of the individual but also on that of another individual playing the game. An individual can choose to either cooperate with his partner or defect against the partner. Over the course of a typical game, individuals tend to prefer mutual cooperation even though defection would lead to a higher overall payout. This suggests that individuals are motivated not only by monetary gains but also by some reward derived from cooperating in social situations.

This idea is supported by neural imaging studies demonstrating a high degree of activation in the ventral striatum when individuals cooperate with another person but that this is not the case when people play the same prisoner's dilemma against a computer. The ventral striatum is part of the reward pathway, so this research suggests that there may be areas of the reward system that are activated specifically when cooperating in social situations. Further support for this idea comes from research demonstrating that activation in the striatum and the ventral tegmental area show similar patterns of activation when receiving money and when donating money to charity. In both cases, the level of activation increases as the amount of money increases, suggesting that both giving and receiving money results in neural reward.

An important aspect of social interactions such as the prisoner's dilemma is trust. The likelihood of one individual cooperating with another is directly related to how much the first individual trusts the second to cooperate; if the other individual is expected to defect, there is no reason to cooperate with them. Trust behavior may be related to the presence of oxytocin, a hormone involved in maternal behavior and pair bonding in many species. When oxytocin levels were increased in humans, they were more trusting of other individuals than a control group even though their overall levels of risk-taking were unaffected suggesting that oxytocin is specifically implicated in the social aspects of risk taking. However this research has recently been questioned.

One more important paradigm for neuroeconomic studies is ultimatum game. In this game Player 1 gets a sum of money and decides how much he wants to offer Player 2. Player 2 either accepts or rejects the offer. If he accepts both players get the amount as proposed by Player 1, if he rejects nobody gets anything. Rational strategy for Player 2 would be to accept any offer because it has more value than zero. However, it has been shown that people often reject offers that they consider as unfair. Neuroimaging studies indicated several brain regions that are activated in response to unfairness in ultimatum game. They include bilateral mid-anterior insula, anterior cingulate cortex (ACC), medial supplementary motor area (SMA), cerebellum and right dorsolateral prefrontal cortex (DLPFC). It has been shown that low-frequency repetitive transcranial magnetic stimulation of DLPFC increases the likelihood of accepting unfair offers in the ultimatum game.

Another issue in the field of neuroeconomics is represented by role of reputation acquisition in social decision-making. Social exchange theory claims that prosocial behavior originates from the intention to maximize social rewards and minimize social costs. In this case, approval from others may be viewed as a significant positive reinforcer - i.e., a reward. Neuroimaging studies have provided evidence supporting this idea – it was shown that processing of social rewards activates striatum, especially left putamen and left caudate nucleus, in the same fashion these areas are activated during the processing of monetary rewards. These findings also support so-called "common neural currency" idea, which assumes existence of shared neural basis for processing of different types of reward.

Sexual decision-making

Regarding the choice of sexual partner, research studies have been conducted on humans and on nonhuman primates. Notably, Cheney & Seyfarth 1990, Deaner et al. 2005, and Hayden et al. 2007 suggest a persistent willingness to accept fewer physical goods or higher prices in return for access to socially high-ranking individuals, including physically attractive individuals, whereas increasingly high rewards are demanded if asked to relate to low-ranking individuals.

Cordelia Fine is most well known for her research on gendered minds and sexual decision-making. In her book Testosterone Rex she critiques sex differences in the brain and goes into detail on the economic cost and benefits of finding a partner, as interpreted and analysed by our brains. Her showcases an interesting sub-topic of neuroeconomics.

The neurobiological basis for this preference includes neurons of the lateral intraparietal cortex (LIP), which is related to eye movement, and which is operative in situations of two-alternative forced choices.

Methodology

Behavioral economics experiments record the subject's decisions over various design parameters and use the data to generate formal models that predict performance. Neuroeconomics extends this approach by adding states of the nervous system to the set of explanatory variables. The goal of neuroeconomics is to help explain decisions and to enrich the data sets available for testing predictions.

Furthermore, neuroeconomic research is being used to understand and explain aspects of human behavior that do not conform to traditional economic models. While these behavior patterns are generally dismissed as 'fallacious' or 'illogical' by economists, neuroeconomic researchers are trying to determine the biological reasons for these behaviors. By using this approach, researchers may be able to find explanations for why people often act sub-optimally. Richard Thaler provides a prime example in his book Misbehaving, detailing a scenario where an appetiser is served before a meal and guest accidentally fill up of it. Most people need the appetiser to be completely hidden in order to stop themselves from the temptation, where as a rational agent would simply stop and wait for the meal. Temptation is just one of the many irrationalities that have been ignored due to difficulties of studying them.

Neurobiological research techniques

There are several different techniques that can be utilized to understand the biological basis of economic behavior. Neural imaging is used in human subjects to determine which areas of the brain are most active during particular tasks. Some of these techniques, such as fMRI or PET are best suited to giving detailed pictures of the brain which can give information about specific structures involved in a task. Other techniques, such as ERP (event-related potentials) and oscillatory brain activity are used to gain detailed knowledge of the time course of events within a more general area of the brain. If a specific region of the brain is suspected to be involved in a type of economic decision-making, researchers may use Transcranial Magnetic Stimulation (TMS) to temporarily disrupt that region, and compare the results to when the brain was allowed to function normally. More recently, there has been interest in the role that brain structure, such as white matter connectivity between brain areas, plays in determining individual differences in reward-based decision-making.

Neuroscience does not always involve observing the brain directly, as brain activity can also be interpret by physiological measurements such skin conductance, heart rate, hormones, pupil dilation and muscle contraction known as electromyography, especially of the face to infer emotions linked to decisions.

In addition to studying areas of the brain, some studies are aimed at understanding the functions of different brain chemicals in relation to behavior. This can be done by either correlating existing chemical levels with different behavior patterns or by changing the amount of the chemical in the brain and noting any resulting behavioral changes. For example, the neurotransmitter serotonin seems to be involved in making decisions involving intertemporal choice while dopamine is utilized when individuals make judgments involving uncertainty. Furthermore, artificially increasing oxytocin levels increases trust behavior in humans while individuals with higher cortisol levels tend to be more impulsive and exhibit more future discounting.

In addition to studying the behavior of neurologically normal individuals in decision-making tasks, some research involves comparing that behavior to individuals with damage to areas of the brain expected to be involved in decision-making. In humans, this means finding individuals with specific types of neural impairment. These case studies may have things like amygdala damage, leading to a decrease in loss aversion compared to controls. Also, scores from a survey measuring prefrontal cortex dysfunction are correlated with general economic attitudes, like risk preferences.

Previous studies investigated the behavioral patterns of patients with psychiatric disorders, such as schizophrenia, autism, depression, or Neuroeconomics of Addiction, to get the insights of their pathophysiology. In animal studies, highly controlled experiments can get more specific information about the importance of brain areas to economic behavior. This can involve either lesioning entire brain areas and measuring resulting behavior changes or using electrodes to measure the firing of individual neurons in response to particular stimuli.

Experiments

As explained in Methodologies above, in a typical behavioral economics experiment, a subject is asked to make a series of economic decisions. For example, a subject may be asked whether they prefer to have 45 cents or a gamble with a 50% chance to win one dollar. Many experiments involve the participant completing games where they either make one-off of repeated decisions and psychological responses and reaction time is measured. For example, it is common to test peoples relationship with the future, known as future discounting, by asking them questions such as "would you prefer $10 today, or $50 in a year from today?"  The experimenter will then measure different variables in order to determine what is going on in the subject's brain as they make the decision. Some authors have demonstrated that neuroeconomics may be useful to describe not only experiments involving rewards but also common psychiatric syndromes involving addiction or delusion.

Criticisms

From the beginnings of neuroeconomics and throughout its swift academic rise, criticisms have been voiced over the field's validity and usefulness. Glenn W. Harris and Emanuel Donchin have both criticized the emerging field, with the former publishing his concerns in 2008 with the paper 'Neuroeconomics: A Critical Reconsideration'. Harris surmises that much of the neuroscience-assisted insights into economic modelling is "academic marketing hype" and that the true substance of the field is yet to present itself and needs to be seriously reconsidered. He also mentions that methodologically, many of the studies in neuroeconomics are flawed by their small sample sizes and limited applicability.

A review of the learnings of neuroeconomics, published in 2016 by Arkady Konovalov, shared the sentiment that the field suffers from experimental shortcomings. Primary among them being a lack of analogous ties between specific brain regions and some psychological constructs such as "value". The review mentions that although early neuroeconomic fMRI studies assumed that specific brain regions were singularly responsible for one function in the decision-making process, they have subsequently been shown to be recruiting in multiple different functions. The practice of reverse inference has therefore seen much less use and has hurt the field. Instead, FMRI should not be a standalone methodology, but rather be collected and connected to self-reports and behavioral data. The validity of using functional neuroimaging in consumer neuroscience can be improved by carefully designing studies, conducting meta-analyses, and connecting psychometric and behavioral data with data from neuroimaging.

Ariel Rubinstein, an economist at the University of Tel Aviv, spoke about neuroeconomic research, saying "standard experiments provide little information about the procedures of choice as it is difficult to extrapolate from a few choice observations to the entire choice function. If we want to know more about human procedures of choice we need to look somewhere else". These comments echo a salient and consistent argument of traditional economists against the neuroeconomic approach that the use of non-choice data, such as response times, eye-tracking and neural signals that people generate during decision-making, should be excluded from any economic analysis.

Other critiques have also included claims that neuroeconomics is "a field that oversells itself"; or that neuroeconomic studies "misunderstand and underestimate traditional economic models".

Applications

Currently, the real-world applications and predictions of neuroeconomics are still unknown or under-developed as the burgeoning field continues to grow. Some criticisms have been made that the accumulation of research and its findings have so far produced little in the way of pertinent recommendations to economic policy-makers. But many neuroeconomists insist that the potential of the field to enhance our understanding of the brain's machinations with decision-making may prove highly influential in the future.

In particular, the findings of specific neurological markers of individual preferences may have important implications for well-known economic models and paradigms. An example of this is the finding that an increase in computational capacity (likely related to increased gray matter volume) could lead to higher risk tolerance by loosening the constraints that govern subjective representations of probabilities and rewards in lottery tasks.

Economists are also looking at neuroeconomics to assist with explanations of group aggregate behavior that have market-level implications. For example, many researchers anticipate that neurobiological data may be used to detect when individuals or groups of individuals are likely to exhibit economically problematic behavior. This may be applied to the concept of market bubbles. These occurrences are majorly consequential in modern society and regulators could gain substantial insights into their formulation and lack of prediction/prevention.

Neuroeconomic work has also seen a close relationship with academic investigations of addiction. Researchers acknowledged, in the 2010 publication 'Advances in the Neuroscience of Addiction: 2nd Edition', that the neuroeconomic approach serves as a "powerful new conceptual method that is likely to be critical for progress in understanding addictive behavior".

German neuroscientist Tania Singer spoke at the World Economic Forum in 2015 about her research in compassion training. While economics and neuroscience are largely spilt, her research is an example of how they can meld together. Her study revealed a preference change toward prosocial behavior after 3 months of compassion training. She also demonstrated a structural change in the grey matter of the brain indicating new neural connections had formed as a result of the mental training. She showed that if economists utilised predictors other than consumption, they could model and predict a more diverse range economic behaviors. She also advocated that neuroeconomics could vastly improve policymaking as we can create contexts that predictably lead to positive behavioral outcomes such as prosocial behavior when caring emotions are primed. Her research demonstrates the impact neuroeconomics could have on our individual psyches, our societal norms and political landscapes at large.

Neuromarketing is another applied example of a distinct discipline closely related to neuroeconomics. While broader neuroeconomics has more academic aims, since it studies the basic mechanisms of decision-making, neuromarketing is an applied sub-field which uses neuroimaging tools for market investigations. Insights derived from brain imaging technologies (fMRI) are typically used to analyse the brain's response to particular marketing stimuli.

Another neuroscientist, Emily Falk contributed to the neuroeconomics and neuromarketing fields by researching how the brain reacts to marketing aimed at evoking behavioral change. Specifically, her paper on anti-smoking advertisements highlighted the disparity between what advertisements we believe will be convincing and what the brain responds to most positively. The advertisement the experts and trial audience agreed on as being the most effective anti-smoking campaign actually elicited very little behavioral change in smokers. Meanwhile, the campaign ranked least likely to be effective by the experts and audience, generated the strongest neural response in the medial prefrontal cortex and resulted in the largest number of people deciding to quit smoking. This revealed that often our brains may know better than us when it comes to what motivators lead to behavioral change. It also emphasises the importance of integrating neuroscience into mainstream and behavioral economics to generate more wholistic models and accurate predictions. This research could have impacts in promoting healthier diets, more exercise, or encouraging people to make behavioral changes that benefit the environment and reduce climate change.

Evolutionary economics

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. Some scholars prefer to call their evolutionary theory by a different names. Samuel Bowles named it "evolutionary social science"  and Joachim Rennstich called it "evolutionary systems theory".

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

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.

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 emphasized 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);

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 share, 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.

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.

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

See also: Behavioral economics and Neuroeconomics

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.

Evolution after Unified Growth Theory

Main article: 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.

Evolution of predisposition towards child quality

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.

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.

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. Some scholars prefer to call their evolutionary theory by a different names. Samuel Bowles named it "evolutionary social science" and Joachim Rennstich called it "evolutionary systems theory".

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

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.

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 emphasized 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);

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 share, 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.

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.

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

See also: Behavioral economics and Neuroeconomics

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.

Evolution after Unified Growth Theory

Main article: 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.

Evolution of predisposition towards child quality

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.

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.