Evolutionary Economics

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.Paul H. Rubin and C. Monica Capra. The evolutionary psychology of economics. In

Predecessors

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

Marx based his theory of economic development on the premise of developing economic systems; specifically, over the course of history superior economic systems would replace inferior ones. Inferior systems were beset by internal contradictions and inefficiencies that make them impossible to survive over the long term. In Marx's scheme, feudalism was replaced by capitalism, which would eventually be superseded by socialism.''Gregory and Stuart''. (2005) ''Comparing Economic Systems in the Twenty-First Century'', Seventh Edition, South-Western College Publishing,

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

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

Veblen (1898)

Thorstein Veblen (1898) coined the term "evolutionary economics" in English. He began his career in the midst of this period of intellectual ferment, and as a young scholar came into direct contact with some of the leading figures of the various movements that were to shape the style and substance of social sciences into the next century and beyond. Veblen saw the need for taking account of cultural variation in his approach; no universal "human nature" could possibly be invoked to explain the variety of norms and behaviors that the new science of anthropology showed to be the rule, rather than the exception. He emphasis
zed the conflict between "industrial" and "pecuniary" or ceremonial values and this Veblenian dichotomy was interpreted in the hands of later writers as the "ceremonial/instrumental dichotomy" (Hodgson 2004);

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

Arguably the most important works by Veblen include, but are not restricted to, his most famous works ('' The Theory of the Leisure Class''; ''The Theory of Business Enterprise''), but his monograph ''Imperial Germany and the Industrial Revolution'' and the 1898 essay entitled ''Why is Economics not an Evolutionary Science'' have both been influential in shaping the research agenda for following generations of social scientists. TOLC and TOBE together constitute an alternative construction on the neoclassical marginalist theories of consumption and production, respectively.

Both are founded on his dichotomy, which is at its core a valuational principle. The ceremonial patterns of activity are not bound to any past, but to one that generated a specific set of advantages and prejudices that underlie the current institutions. "Instrumental" judgments create benefits according to a new criterion, and therefore are inherently subversive. This line of analysis was more fully and explicitly developed by Clarence E. Ayres of the University of Texas at Austin from the 1920s.

Schumpeter

Joseph A. Schumpeter , who lived in the first half of the 20th century, was the author of the book ''The Theory of Economic Development'' (1911, transl. 1934). It is important to note that for the word ''development'' he used in his native language, the German word "Entwicklung", which can be translated as development or evolution. The translators of the day used the word "development" from the French "développement", as opposed to "evolution" as this was used by Darwin. (Schumpeter, in his later writings in English as a professor at Harvard, used the word "evolution".) The current term in common use is economic development.

In Schumpeter's book, he proposed an idea radical for its time: the evolutionary perspective. He based his theory on the assumption of usual macroeconomic equilibrium, which is something like "the normal mode of economic affairs". This equilibrium is being perpetually destroyed by entrepreneurs who try to introduce innovations. A successful introduction of an innovation (i.e. a disruptive technology) disturbs the normal flow of economic life, because it forces some of the already existing technologies and means of production to lose their positions within the economy. His vision and economics inspired many economists who wanted to study how the economy develops and lead to a now powerful International Joseph A. Schumpeter Society.

Later development

A seminal article by Armen Alchian (1950) argued for adaptive success of firms faced with uncertainty and incomplete information replacing profit maximization as an appropriate modeling assumption. Milton Friedman proposed that markets act as major selection vehicles. As firms compete, unsuccessful rivals fail to capture an appropriate market shar e, go bankrupt and have to exit. The variety of competing firms is both in their products and practices, that are matched against markets. Both products and practices are determined by routines that firms use: standardized patterns of actions implemented constantly. By imitating these routines, firms propagate them and thus establish inheritance of successful practices. Kenneth Boulding was one of the advocates of the evolutionary methods in social science, as is evident from Kenneth Boulding's Evolutionary Perspective. Kenneth Arrow, Ronald Coase and Douglass North are some of the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel winners who are known for their sympathy to the field.

More narrowly the works Jack Downie and Edith Penrose offer many insights for those thinking about evolution at the level of the firm in an industry.

Nelson and Winter (1982) and after

Richard R. Nelson and Sidney G. Winter's book An Evolutionary Theory of Economic Change (1982, Paperback 1985)Richard R. Nelson and Sidney Winter (1982) An Evolutionary Theory of Economic Change. Cambridge: Mass, Harvard University Press. Paperback edition: Belknap Press of Harvard University Press. 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.Saviotti, P.P. (1996) Technological Evolution, Variety and the Economy. Edward Elgar, Cheltenham, UK. pp.42-48. 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.Shiozawa, Y. (2004) Evolutionary Economics in the 21st Century: A Manifesto. Evolutionary and Institutional Economics Review 1(1): 5-47. Then, mechanisms that provide selection, generate variation and establish self-replication, must be identified. A general theory of this evolutionary process has been proposed by Kurt Dopfer, John Foster and Jason Potts as the micro meso macro framework.

If the change occurs constantly in the economy, then some kind of evolutionary process must be in action, and there has been a proposal that this process is Darwinian in nature. Other economists claimed that evolution of human behaviors can be Lamarckian.

Evolutionary economics had developed and ramified into various fields or topics. They include technology and economic growth, institutional economics, organization studies, innovation study, management, and policy, and criticism of mainstream economics.

Economic processes, as part of life processes, are intrinsically evolutionary. From the evolutionary equation that describe life processes, an analytical formula on the main factors of economic processes, such as fixed cost and variable cost, can be derived. The economic return, or competitiveness, of economic entities of different characteristics under different kinds of environment can be calculated. The change of environment causes the change of competitiveness of different economic entities and systems. This is the process of evolution of economic systems.

In recent years, evolutionary models have been used to assist decision making in applied settings and find solutions to problems such as optimal product design and service portfolio diversification.

Why does evolution matter in economics

Evolutionary economics