Evolutionary Theory

The evolutionary approach emerged as a distinct branch of economic theory in the 1980s, although it was inspired by Schumpeter's early work (1912, 1934). In standard neoclassical economics, competition in an exchange market near equilibrium is mainly driven by some inherent comparative advantage, attributable to climate, soil, mineral deposits or a harbor; for instance, capital invested or knowledge and skills due to past experience. In Schumpeter's world, by contrast, competition is driven by competitive advantage resulting from innovation by 'first movers', taking advantage of returns to adoption, imperfect information transfer to competitors, and (in some cases) legal monopolies during the life of a patent. The neoclassical picture is consistent with equilibrium; the evolutionary picture is not.

Neoclassical economists like Alchian and Friedman argued that Schumpeterian competition is consistent with profit maximization, because only maximizers will be 'selected' (in the Darwinian sense) by the market (Alchian 1950; Friedman 1953). This might be true in a static environment. But even in the case of biological evolution, where the environment changes relatively slowly, the work of Moto Kimura has shown that some mutations can spread through a population by random drift, without possessing any selective advantage (Kimura 1979). His theory of so-called selective neutrality is now conventional wisdom in population genetics. The evolutionary view in economics is more consistent with 'satisficing' or 'bounded rationality' in the sense introduced by Herbert Simon (1955, 1959).

In other words, if the selection mechanism is fairly slow and not very efficient, it is not necessary to optimize in order to survive, at least for a great many generations or in an isolated niche. Meanwhile, the environment and the conditions for competitive advantage can change enough to modify the conditions for comparative advantage. If this is so in population genetics, why not in economics? We all know of inefficient firms that survive in isolated locations or specialized niches, simply because there is no nearby competition. In any case, Sydney Winter argued as long ago as 1964 that variation and selection need not bring about either optimality or equilibrium, whence predictions made on the basis of these postulates need no hold in the real world (Winter 1964). In later work Winter, working with Richard Nelson, pointed out that the Darwinian 'selection' analogy is imperfectly relevant to economics because of the lack of an inheritance mechanism to assure perpetuation of whatever strategic behavior is successful at a point in time. However, Nelson and Winter introduced the notion of inheritable 'routines' as a crude analog of genes (Winter 1984; Nelson 1982; Nelson and Winter 1982a, 1982b).

The main difference between evolutionary economics, as it has developed so far, and the neoclassical mainstream has been characterized as follows: that neoclassical theory postulates 'representative' firms operating on the boundary of a well-defined region in factor space, whereas evolutionary biology - and evolutionary economics - lays primary stress on the existence of diversity (Boulding 1981; Nelson and Winter 1982a and b; Hanusch 1988; Silverberg and Verspagen 1994; Van den Bergh 2003). In fact, the mechanism that drives the economic system, in the evolutionary view, is a kind of conflict between diversity and selection. In biology, diversity of populations and species is assured by mutation combined with diversity of environments. In economics, diversity among firms is the result of a wide range of talents and ideas among entrepreneurs operating in a heterogeneous environment of competitors, institutional constraints, cultures and other external circumstances.

The selection mechanism in biology has been called 'survival of the fittest', although the details of what constitutes 'fitness' are still very unclear, even a century and a half after the publication of Origin of Species. In economics competitiveness seems to be the common term for whatever quality or strategy is effective in assuring survival and growth. It is generally assumed that one of the explicit strategies for survival is product or process innovation. Innovation is modeled as a search and selection process. Selection, in evolutionary economics, is essentially equated to survival into the next period as a viable competitor in the market (Nelson and Winter 1982 a and b). Nelson and Winter have shown that a plausible growth process can be simulated by postulating a population of firms (not in equilibrium), displaying bounded rationality, and interacting with each other on the basis of probabilistic rules.

However, most evolutionary theorists share with mainstream economists a simplistic view that the specific features of technological change are essentially unpredictable, except in the statistical sense that investment in R&D can be expected to generate useful new ideas. The contemporary orthodox view is reasonably well summarized by Heertje among others:

Technical knowledge, being the product of a production process in which scarce resources are allocated, can be produced. We do not know exactly what will be produced, but we are certain that we will know more after an unknown period. (Heertje 1983)

The Nelson-Winter model of technological progress is consistent with the view quoted above. In brief, it assumes (for convenience) that the probability of a successful innovation is a function of R&D investment and is more or less independent of past history or other factors. If discovery, invention and innovation were really so random, technological progress would be much smoother than it actually is. Our contrasting view of the process of technological change has been summarized in Chapters 1 and 2. In brief, we insist that some innovations, especially those contributing to energy (exergy) efficiency, are much more pervasive and economically potent than the vast majority of innovations which affect only a single firm or a small market segment. (Innovations in information technology may have a comparable potential for universal application.)

Evolutionary theory has yielded a family of models that simulate many of the important features of structural change and economic dynamics. However, they have not, up to now, produced an explicit quantifiable model to explain past macroeconomic growth or forecast the future.

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