Evolutionary economics

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Evolutionary economics is 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.

Mainstream economic reasoning begins with the postulates of scarcity and rational agents (that is, agents modeled as maximizing their individually-given welfares). With the foregoing stipulations, the determination of the "rational choice" for any agent becomes a straightforward exercise in mathematical optimization.

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 processes that transform the economy from within and their implications for firms, institutions, industries, employment, production, trade, and growth. 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 on the evolutionary methodology of Charles Darwin. It is naturalistic in purging earlier notions of economic change as teleogical or necessarily improving the human conditon.[1]


[edit] Predecessors

Karl Marx began in the mid-19th century with his schema of stages of historical development, by introducing the notion that "human nature" was not constant and was not determinative of the nature of the social system; on the contrary, he made it a principle that human behavior was a function of the social and economic system in which it occurred.

At approximately the same time, Charles Darwin developed a general framework for comprehending any process whereby small, random variations could be accumulated and selected over time into large-scale changes that resulted in the emergence of wholly novel forms ("speciation").

This was followed shortly after by the work of the American pragmatic philosophers (James, Peirce, Dewey) and the founding of two new disciplines, psychology and anthropology, both of which were oriented toward cataloging and developing explanatory frameworks for the variety of behavior patterns (both individual and collective) that were becoming increasingly obvious to all systematic observers. The state of the world converged with the state of the evidence to make almost inevitable the development of a more modern framework for the analysis of substantive economic issues.

Thorstein Veblen 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 the newly-minted 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. His singular analytical contribution was what came to be known as the "ceremonial / instrumental dichotomy"; Veblen saw that every culture is materially-based and dependent on tools and skills to support the "life process", while at the same time, every culture appeared to have a stratified structure of status ("invidious distinctions") that ran entirely contrary to the imperatives of the "instrumental" (read: "technological") aspects of group life. The "ceremonial" was related to the past, and conformed to and supported the tribal legends; "instrumental" was oriented toward the technological imperative to judge value by the ability to control future consequences. The "Veblenian dichotomy" was a specialized variant of the "instrumental theory of value" due to John Dewey, with whom Veblen was to make contact briefly at the University of Chicago.

The most important works by Veblen include, but are not restricted to, his most famous works (Theory of the Leisure Class; Theory of Business Enterprise), but his monograph Imperial Germany and the Industrial Revolution and the essay entitled Why is Economics not an Evolutionary Science have both been influential in shaping the research agenda for following generations of social scientists. TOLC and TOBE together constitute an alternative construction on the neoclassical marginalist theories of consumption and production, respectively. Both are clearly founded on the application of the "Veblenian dichotomy" to cultural patterns of behavior, and are therefore implicitly but unavoidably bound to a critical stance; Veblen's theories cannot be well understood unless one grasps that the dichotomy is at its core a valuational principle. The ceremonial patterns of activity are not bound to just any past, but rather to the one that generated a specific set of advantages and prejudices that underlie the current structure of rewards and power. Instrumental judgments create benefits according to an entirely separate criterion, and therefore are inherently subversive. This line of analysis was more fully and explicitly developed by Clarence E. Ayres of the University of Texas at Austin from the 1920s.

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 by their sympathy to the field.

More narrowly the works Jack Downie[2] and Edith Penrose [3] are the sources of many insights for those thinking about evolution at the level of the firm in an industry.

[edit] Schumpeter's "Entwicklung"

The evolutionary economics can not be understood without the contribution of Joseph Schumpeter, who lived in the first half of 20th century. He was the author of the book The Theory of Economic Development (1911, transl. 1934). It is important to note that for the word development he used in his native language, the German word "Entwicklung", which can be translated as development or evolution. The translators of the day used the word "development" from the French "développement", as opposed to "evolution" as this was used by Darwin. However it makes more sense to look at the economy as "evolution" (or Entwicklung) than "development", which refers more to bring something to a fixed state, instead of a process that can go anywhere. Schumpeter, in his later writings in English as a professor at Harvard, used the word "evolution", but the damage by the first translators was done. People kept referring to economic development.

In Schumpeter's book he proposed an idea radical for its time: The evolutionary perspective. He based his theory on the assumption of usual macroeconomic equilibrium, which is something like "the normal mode of economic affairs". This equilibrium is being perpetually destroyed by entrepreneurs who try to introduce innovations. A successful introduction of an innovation disturbs the normal flow of economic life, because it forces some of the already existing technologies and means of production to lose their positions within the economy.

[edit] Present state of discussion

One of the major contributions to the emerging field of evolutionary economics has been the publication of 'An Evolutionary Theory of Economic Change' by Richard Nelson and Sidney Winter. These authors have focused mostly on the issue of changes in technology and routines, suggesting a framework for their analysis. If the change occurs constantly in the economy, then some kind of evolutionary process must be in act, and there has been a proposal that this process is Darwinian in nature. Then, mechanisms that provide selection, generate variation and establish self-replication, must be identified.

It has been proposed that markets act as the 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.

Ulrich Witt has proposed that an appropriate tool set for socio-economic evolution analysis is provided by the range of self-organization and complexity theories, that deal with phenomena of emergence and increasing complexity.

Howard Aldrich, Geoffrey Hodgson, David Hull, Thorbjoern Knudsen, Joel Mokyr, Viktor Vanberg and others have argued that the general Darwinian principles of variation, inheritance and selection apply to social as well as biological entities, despite important detailed differences in the mechanisms and processes involved.

[edit] Axiomatization of evolutionary economics

A number of authors have aimed to outline common features of evolutionary schools in economics. In particular, such attempts were made by Kurt Dopfer, Carsten Herrmann-Pillath and Hardy Hanappi. According to their proposals, empirical axiomatics could be built on three propositions:

  • (1) real phenomena are actualizations of ideas,
  • (2) actualizations are matter-energy manifestations in space and time,
  • (3) real phenomena evolve.

Ideas are articulated in language and thus transported into the social domain. Generic ideas, in particular, can bring about cognitive and behavioral processes, and in this respect they are practical and associated with the notion of ‘productive knowledge’. It is generic ideas that evolve and form causal powers underlying the change. Evolutionary economics is essentially about changes in generic knowledge, and involves transition between actualized generic ideas. Actual phenomena, being manifestations of ideas, are seen as ‘carriers of knowledge’.

Three analytical concepts corresponding to ontological axiomatics are thus:

  • (1) carriers of knowledge,
  • (2) generic ideas as components of a process, and
  • (3) evolutionary-formative causality.

The latter implies that no law that could apply universally in space and time, could be formulated. Instead, a ‘variable law’ (in terms of Charles Peirce) could be speculated about, that is a generic idea that shapes the social dynamics but changes over time.

The logic of the invariant of evolutionary process in social science is seen as the following sequence, described as an ‘ evolutionary regime’:

  • In the first phase, generic ideas originate.
  • In the second phase, macroscopic (population-level) adoptions governed by various mechanisms (selection, path dependence, learning effects etc.) occur.
  • In the third phase, stabilization based on high-frequency adoption, happens.

Thus, evolutionary process is essentially irreversible, and it is seen as a transition from one state of generic idea dominance to another. Evolution represents a genealogy of regimes, that come into existence through adoption by populations of economic agents. This can be achieved either through Darwinian evolution (as considered by Nelson and Winter), or through emergence of ‘critical masses’ as suggested by Witt.

Thus, evolutionary economics is concerned with the transformation of generic ideas, or social and technical knowledge, that determine states of socio-economic system, and dominating economic phenomena (products, technologies, institutional arrangements) within these. Every possible state, form and determining idea is a passing one, but its emergence is no occasion, it is guided by the logic of evolutionary laws.

[edit] See also

[edit] Notes

  1. ^ Ulrich Witt, (2008). "evolutionary economics." The New Palgrave Dictionary of Economics, 2nd Edition, v. 3, pp. 67-68 Abstract.
  2. ^ Jack Downie (1958) The Competitive Process
  3. ^ E. Penrose (1959) The Theory of the Growth of the Firm

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