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The Evolution of Evolutionary Economics
The Evolutionary Foundations of Economics, edited by Kurt Dopfer. Cambridge:
Cambridge University Press, 2005.
The evolution and self-organisation of socio-economic systems is now a major
theoretical field; and the principal aim of this volume is to explore its ‘underlying
intellectual dynamic’ (p. 3). There is a primary division between ‘Ontological
Foundations’, discussed in two chapters each on evolutionary physics, evolutionary
biology and evolutionary history, and ‘A Framework for Evolutionary Analysis’
comprising three chapters each on microeconomics, mesoeconomics, and
macroeconomics; the editor provides a substantial introduction. The authors are so
distinguished and the contents so rich (despite substantial delays in publication) that
an adequate review is scarcely possible; what follows is an indication of scope,
concepts and potential. Its orientation reflects the editorial decision to give
expositional, and implicitly logical, priority not to familiar evolutionary concepts, but
to non-classical thermodynamics. This provides a fundamental reason for the
emergence of evolutionary processes while simultaneously directing attention to the
creation and maintenance of order, and suggests that in evolving complex systems this
requires multi-level and quasi-decomposable structures; therefore I have chosen to
give most attention to processes and problems of order.
Ontological Foundations
The significance of thermodynamics is elaborated in a relatively brief but very
effective essay by Ilya Prigogine. Cartesian dualism assigned the physical universe to
scientific explanation, exemplified by Newtonian physics, in which determinism and
time-reversibility produced certainty. Mental operations were excluded from science;
but the comprehensive physical explanation of the universe left no room for them
anywhere else. Prigogine (p. 63) quotes Alexander Koyré’s conclusion that ‘although
there is a place for everything, there is no place for man’, and cites an equivalent
comment by Einstein. However, the development of thermodynamics created a
problem: dissipative systems must maintain themselves by importing energy and
exporting entropy, but may then draw on this energy to create new structures. Order in
nature is created and maintained by self-organisation (p. 65); and because these
processes must operate under conditions of Knightian uncertainty, they must rely on
variation and selection.
It is thus no accident that the self-organisation of living systems through evolutionary
processes is the basic principle of biology, and subsequently of the development of
human societies and human knowledge. We have to deal with possibilities, not
inevitabilities; our choices are influenced by remembrances of the past and imagined
futures (as Shackle eloquently argued), and have consequences for further choices. In
Prigogine’s terms, social and biological systems are always far from equilibrium –
and this is what preserves a role for human thoughts and human values.
In the following chapter, Hermann Haken extends this perspective to consider the
importance of synergistic relationships, which may be positive or negative according
to the initial configurations of each subsystem (as is demonstrated by the diverse
effects of mergers). Parameters such as language, fashion, and ethics are crucial in
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establishing and maintaining order, and the opportunity cost of their stabilising
constraints is the powerful resistance which they oppose to attempts to change them
from inside. Mokyr (p. 199) cites Mancur Olson’s (1982) comparable analysis of
communities locked into systems which their members recognise as fundamentally
flawed, but does not explore its relevance to self-organisation.
Geoff Hodgson surveys the historically uneasy relationship between evolutionary
biology and economics, mediated by the uneasy relationship of both with psychology.
He draws attention to the importance of metaphor in shaping attitudes, and notes that
economists’ attempts to escape from psychology led them into formulations that were
remarkably similar to behaviourism, not least in failing to eliminate references to
mental phenomena such as ‘revealed preference’.
Herbert Simon examines human motivation as a product of biological evolution that
greatly enhances collective human capabilities, and shows how intentionality and
intelligence effectively bypass the proposition that altruism is biologically non-viable.
Everyone can benefit by supplementing direct experience with the experiences of
others – in effect using them as resources – not least because most actions must be
governed by routine to economise on cognition; it is therefore often appropriate to
treat others in a way that might be labelled altruistic. This propensity Simon labels
‘docility’; but it is better described as the ready acceptance of authority, thus
indicating its significance while reminding us of Simon’s work. As Ménard (1994)
has pointed out, authority is often non-hierarchical. Because the growth of knowledge
is primarily a consequence of the division of labour, it entails a continuing diminution
in the proportion of useful knowledge which is directly accessible to each individual;
therefore every modern society relies on second-hand knowledge, taken on trust, as
Adam Smith noted. Although opportunism is a fact of life, loyalty to a group (perhaps
a genetic inheritance from a lengthy period in which fellow-members were primarily
kin-related) is even more familiar, and often confers substantial advantages.
The arguments of Prigogine and Haken carry the unstated inference that the present
biological order can be understood only through its history. Paul David concludes his
chapter on path dependence by citing Francis Crick’s argument that ‘the mechanisms
that constitute “nature’s solution”, having evolved by natural selection, are usually too
accidental and too intricate’ to be uncovered by operations of thought (p. 188), and
transfers this argument to economics. The best way of explaining modern economies
is to show how they got there, rather than postulating rational agents. This, of course,
was the perspective of the Scottish Enlightenment, with its twin recognition of human
limitations and the unintended consequences even of intendedly rational actions.
Although recognising that some processes may lead to a predictable equilibrium,
David argues that, through a combination of positive and negative feedback across
interconnected networks and chance effects at crucial points, actions may deliver
outcomes – good or bad – which were no part of anyone’s intention. Specific public
policy interventions at strategic points may therefore deliver major benefits; but
David recognises that the content and timing of such beneficial interventions requires
a degree of understanding which cannot lightly be assumed.
Joel Mokyr argues that economic history is ‘vastly bigger’ than economic theory
because it ‘is anchored in facts’ (p. 196). History is not inexorable (p. 212), and
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systems that work by selection tend to amplify rare events (p. 214); therefore each
historical episode must be explained by reference to relevant contingencies, perhaps
with the aid of counterfactual analysis. By linking this argument with David’s
observation that small systems are liable to lock-in, we may arrive at Marshall’s
proposition that the tendency to variation is a chief cause of progress; this may be a
more useful guide to feasible policy that most other economic propositions. Its value
is enhanced by Mokyr’s observation that new and apparently successful options can
migrate between systems, a possibility that is greatly enhanced by the human
characteristics emphasised in Simon’s chapter.
A Framework for Evolutionary Analysis
Sidney Winter opens the first chapter on microeconomics by noting that neoclassical
economists define productive knowledge as unproblematic in order to explain the
distribution of productive activities by the incentives that agents face. He does not
make the contrast with Adam Smith’s association of the growth of productive
knowledge with the ways in which activities are organised, but adopts the same
viewpoint, together with Smith’s concern throughout his work with the quality and
distribution of knowledge. He points out that the range and applicability of what
individuals know how to do, either individually or within particular relationships, is
usually ill-defined and often misunderstood even by the individuals themselves, and
its transferability, even within a single organisation, is rarely straightforward. That
apparently similar firms, and even establishments within a single business, do not
have identical production sets is traceable fundamentally to the limitations of human
cognitive capacity and the extraordinary and path-dependent variety of ways in which
this limited capacity may be deployed. It is also a prime foundation for the continued
generation of variety, which must be at the core of evolutionary production theory.
Giovanni Dosi, Luigi Marengo and Giorgio Fagiolo take up the theme of evolving
productive knowledge with the twin propositions that learning is ubiquitous and that
in complex environments many problems are not solvable in principle by formal
analysis. As suggested by Crick, Darwinian evolution may be interpreted as a means
of searching extensively for limited and provisional solutions to non-computable
problems, and the evolved human brain as a means of generating widely-distributed
searches for further provisional solutions. (In an evolving self-organising system all
solutions are provisional.) Priority to pattern-formation over logical processing, a
strong motivation to search, and a systematic overestimation of the chances of
individual success (all incorporated in Smith’s vision) contribute to fitness; and they
support the features discussed by Dosi et al., such as framing and heuristics, reliance
on what seems to work, and local adjustment or recombination when something goes
wrong. A long chapter concludes with a list of open questions which suggest
opportunities for many academic careers.
Firms have become essential means of creating, co-ordinating and deploying
productive knowledge. But as Penrose (1952) insisted in criticising a direct
application of Darwinism to human behaviour, firms are much more than suppliers of
variety for external selection; and Ulrich Witt follows Penrose in exploring what goes
on within an individual business where people have objectives and seek to behave in
reasoned ways. Like Penrose, he focuses on the evolutionary process that takes place
inside the organisation, but complements her analysis by discussing the origin of a
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firm, its interaction with other firms, and the co-evolution of firm and market, relating
these to the importance of cognitive coherence, the changing role of the entrepreneur
as the organisation evolves, and the problems, often unresolved, of maintaining
creativity.
The importance of intermediate structures within a quasi-decomposable economic
system is a distinguishing mark of evolutionary thinking. However, this is not a novel
feature; indeed the three chapters labelled mesoeconomics, which focus on industrial
economics, are not surprisingly the most Marshallian of the volume. John Foster
draws a Marshallian contrast between the spheres of application of the first (closedsystem) and second (open-system) laws of thermodynamics to develop the theme of
self-organisation as applicable across disciplines and indispensable to a
comprehensive theory of economic evolution. Even the maintenance of a social and
economic system which is already far from thermodynamic equilibrium, requires a
continuing growth of knowledge; the demands of increasing complexity are obviously
greater. All economies are knowledge economies, because they reflect the
organisation of the knowledge-producing capacities of humans; ‘knowledge itself
constitutes structure that is complex and self-organised’ (p. 378), and is intimately
connected, as cause and effect, with the self-organisation of industry. Foster cites
Allyn Young’s (1928) bold elaboration of this idea, but does not mention Smith’s
superb account of the co-evolution of self-organised knowledge and of a selforganised knowledge-generating system in his History of Astronomy, which provided
the evolutionary foundations of his economics.
Stanley Metcalfe investigates some of the important details of evolutionary
competition. This requires populations which are identifiable by their similarities, yet
differ in some of their attributes, because economic selection works by changes over
time in the relatively frequency of these attributes within the population. This
selection mechanism leads naturally to the proposition that each population should be
defined by ‘common environmental and selection pressure’ (p. 398). This seems
reasonable, but in modern economies a single business may be a member of many
such populations, so it may be difficult to decide what attribute is being selected for
(or against), and who is influencing the selection – a neglected topic in evolutionary
economics. Time-scales may also be important: as Metcalfe notes, selection tends to
reward present success rather than potential (p. 418), but innovations typically require
early protection, and so may new firms. How important is it that U.S. entrepreneurs
are apparently allowed more opportunities to learn from failure than European
entrepreneurs? Moreover, although inertia is necessary to stabilise the candidates for
selection and also the environment against which they are matched, continuing
evolution requires the continuing generation of variety, either by new entry or by
internal change within some of its members. The former directs attention to the
importance of ‘outsiders’ (who may not, of course, be newcomers to the economy);
the latter to adaptability as an attribute (p. 414).
Peter Allen presents models that are intended to simulate some characteristics of
complex systems. Among the important features are the emergence of communities
which develop positive interactions (p. 442) – a spontaneous order within a particular
domain, and the possibility (or likelihood) that attempts at imitation may produce
different outcomes, because the context may be different (p. 451). Perhaps most
important for observers of evolving economies is his reminder (echoing Prigogine’s
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argument) that it is the impossibility of ensuring optimal outcomes and the
pervasiveness of uncertainty which gives the freedom to explore and experiment
which is essential to the sustainability of the total system (p. 450). There seems to be
no reason why this proposition should be restricted to economic systems.
The final section, on macroeconomics, opens with a relatively brief chapter in which
Dick Nelson examines the evolution of technology as a category of cultural evolution.
He discusses different views on selection criteria and mechanisms, which tend to be
associated with different disciplines, and suggests that their applicability is
differentially relevant, but does not consider the likelihood that the development and
application of a prospective new technology (and even its continued existence) may
be influenced by the interaction of many selection processes. However he does
consider the coevolution of technological understanding and technological practice,
which are subject to different selection criteria, having earlier noted that business
practice seems to be much less well connected to understanding.
Ping Chen is severely critical of neoclassical attempts to model phenomena which he
includes in the category of economic dynamics, notably business cycles, the product
life cycle, competition for market share and entrepreneurship. From competition
between ‘technological species’ he moves on to risk attitudes and then to individualist
and conservative cultures and the interaction between such cultures in a single
society, leading to a trade-off between stability and opportunity which suggests a link
to Schumperian creative destruction. Chen uses the phrase but does not refer to its
author.
In the final chapter, Gerald Silverberg and Bart Verspagen review evolutionary
growth models, beginning with those which focus on selection or on innovation and
learning, and then offering an extended discussion of micro and macro models of
growth. They conclude by acknowledging (like other contributors) that the
possibilities of prediction are limited, but suggest that by making specific allowance
for contingency it is possible to identify and analyse systematic factors, and in
particular to demonstrate what is highly unlikely, or even impossible. David ends his
chapter with a similar argument; the authors would probably also agree that among
the impossibilities are a number of neoclassical accounts of the working of economic
systems.
Concluding observations
Since many of these chapters were written some years ago, one may reasonably ask
what might be different in a current survey. An obvious candidate is a substantial
treatment of cognitive issues, closely linked to motivation, which is still a seriously
under-researched topic despite its Smithian foundations. Greater confidence about
method would also now be appropriate. Although it was important to emphasise the
differences from neoDarwinism and from the ‘equilibrium always’ basis of standard
economics, using mechanical reasoning about closed systems, evolutionary
economists should now be confident enough to follow Simon’s example and use
biological reasoning to explain why socioeconomic evolution is not neoDarwinian,
and to use equilibrium ideas where convenient. Replicator dynamics relies on a
closed-system formulation which could also be used to derive equilibria; like other
equilibrium related models it is useful but insufficient (as indicated earlier.)
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As Schumpeter insisted, change is always disruptive; yet all change requires
substantial elements of continuity. This is not just true of economies: in Darwinian
evolution, driven by genetic mutations, substantial stability in both genetic inheritance
and the selection environment are necessary if selection is to be meaningful.
Evolution and self-organisation depend on regularities; the brain constructs patterns;
knowledge is structure; rules and institutions provide premises and procedures. To
study any of these it may be very helpful to pose Hayek’s (1937, p. 36) question about
which elements ‘stand in an equilibrium relationships to each other’ and to adapt
Hahn’s ([1973] 1984, p. 59) conception of an equilibrium in which people continue to
rely on an unchanging theory and policy to interpret new phenomena and make fresh
decisions – but to apply it not to complete systems but to limited domains. Such local
equilibria are then liable to disturbance from external events or through the effects of
applying theory and policy. Marshall knew that general equilibrium promised to
encompass whole-system interdependence, but he understood that change is always
partial, and from an established position, and so partial equilibrium is a more
appropriate apparatus. Moreover, partial equilibrium generates disequilibrium through
experimentation and novelty.
Perhaps the central question for evolutionary economists (and for economic policy) is
the possibility – and the perils – of combining the production and diffusion of novelty
and the maintenance of coherence; and this seems to require the Hayekian
conceptions of competition as a discovery procedure and of the emergence (which is
not guaranteed) of spontaneous order. As Foster observes, competition is ‘an
enlightened alternative to power struggles’ (p. 387) – a very Hayekian comment. In
the final paragraph of the final chapter, Silverberg and Verspagen suggest the
desirability of incorporating Keynes’ demand theory into evolutionary reasoning.
Hodgson and Foster indicate the potential relevance of Keynes, but an unexploited
opportunity remains. Self-organisation works by trial and error – which implies
frequent failures; and it is not difficult to think of ways in which self-organisation
fails to occur, or is disrupted. Schumpeter (1934) argued that co-cordination is not
sustained by rational choices but by a network of intersecting routines; however, a
routine-based system, though supremely economical of cognitive effort, is vulnerable
to unforeseen events. (Programmed activity tends to drive out non-programmed
activity.) Because order depends on complementarities, failure may sometimes be
contagious, within a firm, a network of firms, or a wider system. It is therefore
important to maintain substantial degrees of freedom, and to be wary of calls for
uniformity. Decomposability, differentiation and variation, disconnection and new
combinations are simultaneously the sources of problems and the elements of their
solution, leading to new problems; but humans are a problem-solving species.
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References
Hahn, Frank H. (1984) Equilibrium and Macroeconomics. Oxford: Basil Blackwell.
Hayek, Friedrich A. (1937) Economics and knowledge. Economica 4: 33-54.
Ménard, Claude (1994) Organizations as co-ordinating devices. Metroeconomica 45:
224-47.
Olson, Mancur (1982) The Rise and Decline of Nations. New Haven, CT: Yale
University Press.
Penrose, Edith T. (1952) Biological analogies in the theory of the firm’, American
Economic Review, 42 (4): 804-19.
Schumpeter, Joseph A. (1934) The Theory of Economic Development. Cambridge
MA: Harvard University Press.
Young, Allyn (1928) Increasing returns and economic progress. Economic Journal
38: 527-42.
25 May 2006
Brian J. Loasby
University of Stirling