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Evolutionary economics is part of mainstream economicsas well as a heterodox school of economic thought that is inspired by evolutionary biology. Much like mainstream economics, it stresses complex interdependencies, competition, growth, structural change, and resource constraints but differs in the approaches which are used to analyze these phenomena.
Evolutionary economics deals with the study of processes that transform economy for firms, institutions, industries, employment, production, trade and growth within, through the actions of diverse agents from experience and interactions, using evolutionary methodology. Evolutionary economics analyses 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.[ citation needed ]
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 theoryand 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.
In the mid-19th century, Karl Marx presented a schema of stages of historical development, by introducing the notion that human nature was not constant and was not determinative of the nature of the social system; on the contrary, he made it a principle that human behavior was a function of the social and economic system in which it occurred.
Marx based his theory of economic development on the premise of developing economic systems; specifically, over the course of history superior economic systems would replace inferior ones. Inferior systems were beset by internal contradictions and inefficiencies that make them impossible to survive over the long term. In Marx's scheme, feudalism was replaced by capitalism, which would eventually be superseded by socialism.
At approximately the same time, Charles Darwin developed a general framework for comprehending any process whereby small, random variations could accumulate and predominate over time into large-scale changes that resulted in the emergence of wholly novel forms ("speciation").
This was followed shortly after by the work of the American pragmatic philosophers (Peirce, James, Dewey) and the founding of two new disciplines, psychology and anthropology, both of which were oriented toward cataloging and developing explanatory frameworks for the variety of behavior patterns (both individual and collective) that were becoming increasingly obvious to all systematic observers. The state of the world converged with the state of the evidence to make almost inevitable the development of a more "modern" framework for the analysis of substantive economic issues.
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 emphasised the conflict between "industrial" and "pecuniary" or ceremonial values and this Veblenian dichotomy was interpreted in the hands of later writers as the "ceremonial/instrumental dichotomy" (Hodgson 2004);
Veblen saw that every culture is materially based and dependent on tools and skills to support the "life process", while at the same time, every culture appeared to have a stratified structure of status ("invidious distinctions") that ran entirely contrary to the imperatives of the "instrumental" (read: "technological") aspects of group life. The "ceremonial" was related to the past, and conformed to and supported the tribal legends; "instrumental" was oriented toward the technological imperative to judge value by the ability to control future consequences. The "Veblenian dichotomy" was a specialized variant of the "instrumental theory of value" due to John Dewey, with whom Veblen was to make contact briefly at the University of Chicago.
Arguably the most important works by Veblen include, but are not restricted to, his most famous works ( The Theory of the Leisure Class ; The Theory of Business Enterprise ), but his monograph Imperial Germany and the Industrial Revolution and the 1898 essay entitled Why is Economics not an Evolutionary Science have both been influential in shaping the research agenda for following generations of social scientists. TOLC and TOBE together constitute an alternative construction on the neoclassical marginalist theories of consumption and production, respectively.
Both are founded on his dichotomy, which is at its core a valuational principle. The ceremonial patterns of activity are not bound to any past, but to one that generated a specific set of advantages and prejudices that underlie the current institutions. "Instrumental" judgments create benefits according to a new criterion, and therefore are inherently subversive. This line of analysis was more fully and explicitly developed by Clarence E. Ayres of the University of Texas at Austin from the 1920s.
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.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 Downieand Edith Penrose offer many insights for those thinking about evolution at the level of the firm in an industry.
Joseph Schumpeter, who lived in the first half of the 20th century, was the author of the book The Theory of Economic Development (1911, transl. 1934). It is important to note that for the word development he used in his native language, the German word "Entwicklung", which can be translated as development or evolution. The translators of the day used the word "development" from the French "développement", as opposed to "evolution" as this was used by Darwin. (Schumpeter, in his later writings in English as a professor at Harvard, used the word "evolution".) The current term in common use is economic development.
In Schumpeter's book, he proposed an idea radical for its time: the evolutionary perspective. He based his theory on the assumption of usual macroeconomic equilibrium, which is something like "the normal mode of economic affairs". This equilibrium is being perpetually destroyed by entrepreneurs who try to introduce innovations. A successful introduction of an innovation (i.e. a disruptive technology) disturbs the normal flow of economic life, because it forces some of the already existing technologies and means of production to lose their positions within the economy.[ citation needed ]
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 G. 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 action, 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. The authors introduced the term 'steady change' to highlight the evolutionary aspect of economic processes and contrast it with the concept of 'steady state' popular in classical economics.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.
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. A general theory of this process has been proposed by Kurt Dopfer, John Foster and Jason Potts as the micro meso macro framework.
Economic processes, as part of life processes, are intrinsically evolutionary. From the evolutionary equation that describe life processes, an analytical formula on the main factors of economic processes, such as fixed cost and variable cost, can be derived. The economic return, or competitiveness, of economic entities of different characteristics under different kinds of environment can be calculated.The change of environment causes the change of competitiveness of different economic entities and systems. This is the process of evolution of economic systems.
In recent years, evolutionary models have been used to assist decision making in applied settings and find solutions to problems such as optimal product design and service portfolio diversification.
The role of evolutionary forces in the process of economic development over the course of human history has been explored in the past few decades.Oded Galor and Omer Moav advanced the hypothesis that evolutionary forces had a significant role in the transition of the world economy from stagnation to growth, highlighting the persistent effects that historical and prehistorical conditions have had on the evolution of the composition of human characteristics during the development process.
Galor and Moav argued that the Malthusian pressure determined the size and the composition of the human population. Lineages whose traits were complementary to the economic environment had higher income, and therefore higher reproductive success, and the inevitable propagation of these traits fostered the growth process and ultimately contributed to the take-off from an epoch of stagnation to the modern era of sustained growth.
Galor and Moav hypothesize that during the Malthusian epoch, natural selection has amplified the prevalence of traits associated with predispositions towards the child quality in the human population, triggering human capital formation, technological progress, the onset of the demographic transition, and the emergence of sustained economic growth.
The testable predictions of this evolutionary theory and its underlying mechanisms have been confirmed empiricallyand 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.
Oded Galor and Omer Ozak examine the evolution of time preference in the course of human history.They hypothesize and establish empirically that agricultural characteristics that were favorable to higher return to agricultural investment in the Malthusian era triggered a process of selection, adaptation, and learning that increase the prevalence of long-term orientation among individuals in society. They further establish the variations in these agricultural characteristics across the globe are associated with contemporary differences in economic and human behavior such as technological adoption, education, saving, and smoking.
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.
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.
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.
Another argument is that humans have a poor intuitive grasp of the economics of the current environment which is very different from the ancestral environment. The 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 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.
There may be 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. Large income inequality may easily be viewed as due to exploitation rather than as due to individual differences in productivity. This 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.
Joseph Alois Schumpeter was an Austrian political economist. He later emigrated to the US and, in 1939, he obtained American citizenship. He was born in Moravia, and briefly served as Finance Minister of German-Austria in 1919. In 1932, he became a professor at Harvard University where he remained until the end of his career.
A Malthusian catastrophe occurs when population growth outpaces agricultural production, causing population to be limited by famine or war. It is named after Thomas Robert Malthus, who suggested that while technological advances could increase a society's supply of resources, such as food, and thereby improve the standard of living, the resource abundance would enable population growth, which would eventually bring the per capita supply of resources back to its original level. Some economists contend that since the industrial revolution, mankind has broken out of the trap. Others argue that the continuation of extreme poverty indicates that the Malthusian trap continues to operate. Others further argue that due to lack of food availability coupled with excessive pollution, developing countries show more evidence of the trap.
Neoclassical economics is an approach to economics focusing on the determination of goods, outputs, and income distributions in markets through supply and demand. This determination is often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production, in accordance with rational choice theory, a theory that has come under considerable question in recent years.
One can define economic growth as the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. Statisticians conventionally measure such growth as the percent rate of increase in real gross domestic product, or real GDP.
Thorstein Bunde Veblen was an American economist and sociologist, who during his lifetime emerged as a well-known critic of capitalism.
Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behavior. Its original focus lay in Thorstein Veblen's instinct-oriented dichotomy between technology on the one side and the "ceremonial" sphere of society on the other. Its name and core elements trace back to a 1919 American Economic Review article by Walton H. Hamilton. Institutional economics emphasizes a broader study of institutions and views markets as a result of the complex interaction of these various institutions. The earlier tradition continues today as a leading heterodox approach to economics.
The idea of convergence in economics is the hypothesis that poorer economies' per capita incomes will tend to grow at faster rates than richer economies. As a result, all economies should eventually converge in terms of per capita income. Developing countries have the potential to grow at a faster rate than developed countries because diminishing returns are not as strong as in capital-rich countries. Furthermore, poorer countries can replicate the production methods, technologies, and institutions of developed countries.
The overlapping generations (OLG) model is one of the dominating frameworks of analysis in the study of macroeconomic dynamics and economic growth. In contrast, to the Ramsey–Cass–Koopmans neoclassical growth model in which individuals are infinitely-lived, in the OLG model individuals live a finite length of time, long enough to overlap with at least one period of another agent's life.
Macrohistory seeks out large, long-term trends in world history in search of ultimate patterns by a comparison of proximate details. It favors a comparative or world-historical perspective to determine the roots of changes as well as the developmental paths of society or a historical process.
Geoffrey Martin Hodgson is a Professor in Management at the London campus of Loughborough University, and also the editor-in-chief of the Journal of Institutional Economics.
Giovanni Dosi is Professor of Economics and Director of the Institute of Economics at the Scuola Superiore Sant'Anna in Pisa. He is the Co-Director of the task forces “Industrial Policy” and “Intellectual Property” at the Initiative for Policy Dialogue at Columbia University. Dosi is Continental European Editor of Industrial and Corporate Change. Included in ISI Highly Cited Researchers.
The European Association for Evolutionary Political Economy (EAEPE) is a pluralist forum of social scientists that brings together institutional and evolutionary economists broadly defined. EAEPE members are scholars working on realistic approaches to economic theory and economic policy. With a membership of about 500, EAEPE is now the foremost European association for heterodox economists and the second-largest association for economists in Europe.
Institutionalist political economy, also known as institutional political economy or IPE, refers to a body of political economy, thought to stem from the works of institutionalists such as Thorstein Veblen, John Commons, Wesley Mitchell and John Dewey. It emphasizes the impact of historical and socio-political factors on the evolution of economic practices, often opposing more rational approaches. In the political sense, this implies the influences actors like the state have on socio-economic practices and the shaping of institutions via political decision-making.
Cultural economics is the branch of economics that studies the relation of culture to economic outcomes. Here, 'culture' is defined by shared beliefs and preferences of respective groups. Programmatic issues include whether and how much culture matters as to economic outcomes and what its relation is to institutions. As a growing field in behavioral economics, the role of culture in economic behavior is increasingly being demonstrate to cause significant differentials in decision-making and the management and valuation of assets.
Oded Galor is an Israeli economist who is currently Herbert H. Goldberger Professor of Economics at Brown University. He is the founder of unified growth theory. Galor has contributed to the understanding of process of development over the entire course of human history and the role of deep-rooted factors in the transition from stagnation to growth and in the emergence of the vast inequality across the globe. Moreover, he has pioneered the exploration of the impact of human evolution, population diversity, and inequality on the process of development over most of human existence.
Innovation economics is a growing economic theory that emphasizes entrepreneurship and innovation. In his 1942 book Capitalism, Socialism and Democracy, economist Joseph Schumpeter introduced the notion of an innovation economy. He argued that evolving institutions, entrepreneurs and technological changes were at the heart of economic growth. However, it is only in recent years that "innovation economy," grounded in Schumpeter's ideas, has become a mainstream concept".
Unified growth theory was developed in light of the failure of endogenous growth theory to capture key empirical regularities in the growth processes and their contribution to the momentous rise in inequality across nations in the past two centuries. Unlike earlier growth theories that have focused entirely on the modern growth regime, unified growth theory captures the growth process over the entire course of human existence, highlighting the critical role of the differential timing of the transition from Malthusian stagnation to sustained economic growth in the emergence of inequality across countries and regions.
Neo-classical economics has come under critique on the basis of its core ideologies, assumptions, and other matters.
Universal Darwinism refers to a variety of approaches that extend the theory of Darwinism beyond its original domain of biological evolution on Earth. Universal Darwinism aims to formulate a generalized version of the mechanisms of variation, selection and heredity proposed by Charles Darwin, so that they can apply to explain evolution in a wide variety of other domains, including psychology, economics, culture, medicine, computer science and physics.
Scientific socialism is a term coined in 1840 by Pierre-Joseph Proudhon in his Property is theft! to mean a society ruled by a scientific government, i.e. one whose sovereignty rests upon reason, rather than sheer will:
Thus, in a given society, the authority of man over man is inversely proportional to the stage of intellectual development which that society has reached; and the probable duration of that authority can be calculated from the more or less general desire for a true government, — that is, for a scientific government. And just as the right of force and the right of artifice retreat before the steady advance of justice, and must finally be extinguished in equality, so the sovereignty of the will yields to the sovereignty of the reason, and must at last be lost in scientific socialism.