A note on evolutionary economics

Hodgson (1999b) reviews the problems with orthodox economics which led to the development of evolutionary economics, so named because, at least initially, it progressed by finding analogues for many aspects of modern economic systems in the neo-Darwinian synthesis of Mendelian and Darwinian ideas.  This synthesis was the dominant paradigm for biological evolution during the middle decades of the 20th century.  It has since been challenged by a rather messy evolutionary paradigm (no settled name to date) which, as well as natural selection, uses a range of other factors to explain what is found in the evolutionary record, factors such as natural catastrophes, self-organisation of the genome, chaos theory, population dynamics and co-evolution with other species and with the environment.  Evolutionary economics is similarly developing to recognise analogues or metaphors for some of these ‘new’ evolutionary processes in its quest to understand economic aspects of societal change (Foster 2000; Hodgson 2002).

Orthodox economics conceptualises the economy as a system which is adjusting to a given set of supply and demand conditions known exactly by all market participants for an indefinite period into the future.  Such an equilibrium-seeking system populated by omniscient actors is plainly unreal.  To this basic difficulty, we can add others such as the assumption that all market participants have unchanging preferences for the goods they buy or the difficulty that models of such systems have highly unstable equilibrium-solutions, suggesting they could not exist in reality. 

There have been two responses to these and other difficulties.  A massive effort has gone and is going into elaborating the orthodox model to better approximate reality and an increasing effort has gone into developing an alternative ‘evolutionary’ approach.  The essential difference then between evolutionary economics and orthodox economics is that the former sees the economy as dynamic (ever-changing) and the latter sees it as ultimately static.  Also, evolutionary approaches see competition as a process associated with imperfect (cf. perfect) markets characterised by cost, quality and scarcity advantages gained through innovation (Metcalfe 1998).

As descendants of Joseph Schumpeter and his ideas about capitalism being driven by 'gales of creative destruction' (see p 138), evolutionary economists see innovation and technical change creating constant structural change in the economy.  In the evolutionary model, at least as first developed by Nelson and Winter (1982), the individual firm is still motivated by a search for increased profits but only when profits fall below some acceptable ‘satisficing ‘ level.  When that happens, the firm searches for increased profits by searching for new routines which Nelson and Winter liken to genes in biological evolution.  Routines are the firm’s standard ‘recipes’ for doing things (eg production technologies) and making decisions.  In particular, the term covers capabilities and decision rules for making day-to-day production decisions, for making investment decisions and, very importantly, for seeking new or improved routines (routines for making routines).

Like genes, although not nearly as reproducible or as durable, routines are heritable.  Organisations use learning-by-imitation and instruction of their members to pass on and sustain their successful routines and patterns of thought and action.  Routines are said to ‘mutate’ when the organisation actively seeks to replace them by embarking on a test-and-evaluate search process.  Finding a plausible way of modeling the search for new routines turns out to be a major difficulty for evolutionary economists.  How do you simulate (deliberately generate) a creative, innovative act lacking obvious antecedents?

Expanding the evolutionary economics perspective beyond the firm to an industry, a population of firms (cf. population of organisms) evolves as individual firms either maintain current routines or seek to increase profits by searching for and selecting new routines when time, competition and change erode the value of existing routines.  At any time, market prices and outputs in an industry are determined by the routines of all its member firms.  While firms are not obsessive profit maximisers under an evolutionary perspective (they are followers of routine), it is still the more profitable which tend to survive---a form of natural selection.

In an example of how evolutionary economics is now questioning its acceptance of neo-Darwinism as a metaphor for economic change, Foster (2000) argues that neo-Darwinism is ultimately as much about equilibrium-seeking as orthodox economics.  Evolutionary economics should rather be looking for a metaphor from contemporary evolutionary theory where there is debate about the best ways of representing the joint contributions of natural selection and self-organisation.