Evolutionary economics is a branch of economics which views the economy through a dynamic model of constant change, adaptation, chaos and revival. Evolutionary economics was coined by radical economist Thorstein Veblen (1857-1929). Veblen was interested in psychological factors that often gave better explanations for economic behaviour than traditional rational choice theory. For example, Veblen noted the role of social hierarchy and how individuals could be motivated by conspicuous consumption (showing off you could afford designer clothes).
Another important economist in developing evolutionary economics was Joseph Schumpeter. Schumpeter offered a model of creative destruction. This theory said that a capitalist economy was in a perennial state of change. When firms failed, this was important for freeing resources to be taken by entrepreneurs for more efficient and productive processes.
Aspects of evolutionary economics
- Like behavioural economics, economic agents are influenced by a complex set of factors – For example rather than just profit, a firm may be motivated by:
- A desire to survive
- A desire to be free to innovate and create products/service they feel inspired to produce.
- The Influence of local customs and legal/cultural institutions.
- The economy is in a constant state of flux. The economic model of equilibrium is only a partial snapshot and understanding of the constant dynamic of changing demand and production.
- Historical factors. We cannot look at economies in isolation. Economic development will depend very much on past developments.
- For example, a culture of state regulation and uniformity may lead to low creativity in post-Communist states.
- The same economic policy can have different effects in different countries. For example, a sugar tax may lead to greater tax evasion in countries with history of poor tax collection.
View of Micro-Meso and Macro levels in evolutionary economics
This states behaviour depends on routines and rules, such as repition of past behaviour. These rules and routines are more changeable than neoclassical economics suggests.
The Meso level is a population which falls between micro and macro levels. It could be an influential segment of the population which is developing new behaviours. Evolutionary economics realises any macro population is diverse and there is not a uniformity of approach. It is this diversity which allows the economy to develop at both micro and macro levels.
The macro level is much more than just an aggregation of micro economics (like neoclassical economics) assumes. For example, aggregate labour supply does not behave like a uniform population, but there are many subcategories – self-employment, public sector, ambitious workers, manual labour e.t.c.
Recent trends in Evolutionary theory of economic change
In 1982, Richard Nelson and Sidney Winter offered a new interpretation of previous works on evolutionary theory in a paper
An Evolutionary Theory of Economic Change.
They suggested a link between evolutionary economics and evolutionary biology.
- Variation. Economic agents (firms/entrepreneurs) offer different products at different prices.
- Selection. In a market place, consumers are free to choose the various products they deem to be the best. This means that some firms grow, make profit and expand, but others who offer inferior products cannot survive in the market place.
- Retention. Only the successful (profitable) survive. There are constant evolutionary pressures to increase efficiency and offer better choices to consumers.
In a free market, over time we get the ‘survival of the fittest’ – or survival of the most profitable.
Differences with evolutionary biology
- Other economists argued the comparison with evolutionary biology is partly misplaced. Entrepreneurs are not throwing out random variations. But, offering innovative ideas and products springing from their imagination and creativity.
- Another aspect of modern evolutionary theory is that success or failure is magnified by network effects and self-reinforcing loops. When a firm is profitable, it gains more resources to buy up rivals and invest in new products. This can create barriers to entry.
- Network effects are particularly strong for new tech industries. Being the first mover in the industry gives a strong advantage as people join the social network with the widest following. Therefore, evolutionary economics explains how a few firms come to dominate markets, with a few small firms meeting certain niches.
- For modern evolutionary economists, the economy is a series of networks where individuals and firms make connections through different behavioural rules
Importance of evolutionary economics
- Failure of firms is as important as the success. The willingness to tolerate failure is essential for dynamic efficiency and the development of new products/services.
- The development of economies relies on variety. In economic terminology this involves competitive markets, but also conditions that encourage innovation, imagination and creativity. Therefore, governments could support education, training and entrepreneurs.
- Stable legal and political systems are important for enabling creativity.
- Competitive prices are only one aspect of competition. More important is offering more attractive products/service. Companies who can offer a new variety which is desirable will do well.
- Luddite fallacy – is that a fallacy
Related branches of economics
- Laissez-faire economics. By focus on competition and allowing failure, evolutionary economics has a broad sympathy with laissez-faire. Though like Adam SMith, they may be concerned with the monopoly power of those firms who come to dominate
- Behavioural economics. Evolutionary economics stresses a wider range of factors in agent motivation.