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Evolutionary Economics

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"Evolution" is a very popular notion these days. It is applied in all sorts of social contexts, so why not economics?  It certainly is alluring.  The very concept "evolution" brings to mind precisely the sorts of things that every ambitious and wide-eyed scholar would want in his theory -- struggle, change, history, dynamism, creation, destruction, variety, etc.  As a result, the narrow, formal definition it enjoys in biology  has been a bit lost in the  transfer to economics (and other social sciences).   Indeed, the term "evolutionary" has been bandied about so freely that perhaps the only real definition of it is the following: a theory is said to be "evolutionary" if it is my theory, it is said to be "mechanical" if it is your theory.(!)

Early Evolutionary Economics

The most popular conception of evolution is Charles Darwin's famous 1859 theory of "natural selection" applied to species of living organisms.  The basic idea is that organisms whose innate features are better suited to their environment will generally live longer and reproduce more often than less well-suited creatures.  Consequently, over time, by sexual reproduction and competition for resources, the number of the former will increase while the number of the latter will decrease to the point of extinction.  Of course, the process never ends because genetic mutations mean that new organisms with completely new and perhaps "better-suited" sets of attributes recurrently appear and challenge the older species.

A competing theory of evolution is Jean-Baptiste de Lamarck's 1809 theory of "adaptive selection".   Lamarck's argument similarly contends that species with features better-suited to their environment features outdo those worse-suited.  However, unlike Darwin, Lamarck argued that species could "adapt" to their environment during their lifetimes, and that these "adaptations" will be carried over through reproduction.   Changes in behavior or features, not random "mutations", are what create variety in the Lamarckian scheme.  

Modern biology embraces only the Darwinian process, but in the context of social sciences, like economics, the Lamarckian process may actually be better suited than the Darwinian.   In the latter part of the 19th Century, economists and other social scientists began appealing to analogies between organisms in an environment to people in society.  The most prominent of these "Social Darwinists" (more accurately, "Social Lamarckians") was Herbert Spencer.  Spencer inspired economists like William Graham Sumner and Simon Nelson Patten to use the "evolutionary" analogy to apologistic ends -- arguing that the capitalist economy was a "delicate organism" formed by "free contract" and that attempts by government or trade unions to interfere with its "natural evolution" would be disastrous.

Other economists were more excited by the theoretical possibilities of replacing the mechanical "equilibrium" analogy, borrowed form physics, that underpinned virtually all of contemporary economics with an evolutionary analogy, borrowed from biology.  Alfred Marshall (1890) famously called biology "the Mecca of the economist" (but himself did little about it).  In a famous paper, Thorstein Veblen (1898) exhorted his fellow economists to embrace an evolutionary approach.  Although Veblen left out most of the details of what such a theory was, he outlined what it should look like. Veblen chastised equilibrium theory for assuming that individual agents are purposeful "prime movers" and that the economic process "ends" in a glittering equilibrium.   Individuals, he argued, are governed by all sorts of instincts, habits, tropisms and what not, some purposeful, some not, some autonomous, some endogenous.   Agents create social institutions and their own volitions and desires are in turn influenced by them.   The result is not an "equilibrium state", but a process of continual and eternal co-evolution between individual agents and socio-economic institutions.  

"The evolution of social structure has been a process of natural selection of institutions. The progress which has been and is being made in human institutions and in human character may be set down, broadly, to a natural selection of the fittest habits of thought and to a process of enforced adaptation of individuals to an environment which has progressively changed with the growth of the community and with the changing institutions under which men have lived.  Institutions are not only themselves the result of a selective and adaptive process which shapes the prevailing or dominant types of spiritual attitude and aptitudes; they are at the same time special methods of life and of human relations, and are therefore in their turn efficient factors of selection.  So that the changing institutions in their turn make for a further selection of individuals endowed with the fittest temperament, and a further adaptation of individual temperament and habits to the changing environment through the formation of new institutions." (Veblen, 1899: p.131)

Many members of the American Institutionalist School embraced Veblen's vision, but specifying the details of an evolutionary process proved to be devilishly difficult.  As a result, much of the resulting research remained lop-sided -- emphasizing the part about institutions affecting behavior, but a lot less clear about how these institutions were actually created. Frank H. Knight (1935), while accepting Veblen's ideas about men and society, nonetheless felt that modeling the evolutionary process explicitly to be an impractical and fruitless task, best left outside the scope of economic analysis. "History is to be sensed, not plotted.", he famously concluded.  

One economist who attempted to "plot history" was Karl Marx (1866-92).  However, while Marx had a theory of history, he did not have one rooted in the biological analogy.  For Marx, history was a progress of developmental stages punctuated by sudden dramatic shifts.  These were not exogenous, of course, but  "generated" by the internal contradictions of the previous stage. The exact details of how the change occurred are more slippery.  Joseph Schumpeter (1912, 1942) followed Marx in his "evolutionary" theory.  Schumpeter's system never quite settles down, but is punctuated by waves of technical innovation.  As the Marx-Schumpeter theory of evolution is unconnected with the Darwinian or Lamarckian, we may place it as a "third" and distinctly economic type of evolutionary theory.  A fourth, distinctive type of evolutionary theory was promoted by Friedrich Hayek (1967, 1988).  Hayek's approach is distinctive because it uses societies and groups as units of selection.  

Modern Evolutionary Theory

The topic was not really broached again until the 1950s.   A series of studies finding that the managers of firms did not consciously adopt "profit-maximization" as their guide when running their firms led to a small debate in which some economists asked that the profit-maximization hypothesis be discarded. Some  Neoclassical economists appealed to the evolutionary analogy to defend the old view, arguing that firms need not be a consciously profit-maximizing.  Because profits translate into growth, there is a process of "natural selection" in the economy where firms which profit-maximize or have the profit-maximizing formula will flourish and survive, while those which do not will die out.   Milton Friedman (1953) took the more Lamarckian route that firms will be forced to adapt the profit-maximizing routines by this evolutionary pressure; Albert Alchian (1950) took the Darwinian route, arguing simply that we will see the composition of industry change towards the profit-maximizing solution as those with the right (i.e. profit-maximizing) routines grow in size, while those with different routines disappear into bankruptcy

Alchian can be credited as introducing (or rather, re-introducing) the "behaviorism" into modern economics.  Behaviorism is the view that behavior alone, and not the motives for behavior, are susceptible to analysis, had been making substantial inroads in American psychology and was beginning to affect economics.  Economic concepts, such as "utility-maximization" and "profit-maximization", are not only questionable, but unnecessary. 

An "evolutionary" theory in economics must satisfy at least the following three conceptions:

  • (1) Units of Selection: there are several types of "units" proposed in different evolutionary economics theories.  The most popular are the following alternatives: people's  behaviors are selected, people's rules of behavior are selected; society's rules of conduct are selected.
  • (2) Process of Selection:
  • (3) Source of Variation:

As the term "evolutionary" in economics is elusively defined, there is not what one can call an "evolutionary school". There are, however, several quite unique economists whose work is difficult to classify into the better-known and clearly-defined "schools". The following, then, is not a coherent school but just a collection of original and distinct thinkers who, in large or in part, had "evolutionary" elements in their theories. Naturally, there are important predecessors we have omitted from this list (such as Adam Smith, Thomas Malthus, Bernard de Mandeville, Carl Menger and Alfred Marshall) who had evolutionary "elements" in their theories but whose contributions were more fundamental in other directions.

(to be completed)



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Resources on Evolutionary Economics


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All rights reserved, Gonçalo L. Fonseca