Why is Economics not an Evolutionary Science?

The alternative of the mainstream economic vision of the economy based around equilibrium with one of continual evolution can be traced back to Marx’s Capital with his analogy of the economic system as a biological entity that is ever changing, in contrast to a chemical reaction, tending towards equilibrium. Although, Marx viewed technological change as something that capitalists reacted to, rather than drove, he has been credited with providing one of the first glimmers of the theory of competition through innovation which was developed later by Schumpeter.

Indeed, in delivering his graveside eulogy, Engles claimed, “Just as Darwin discovered the law of evolution in organic nature, so Marx discovered the law of evolution in human society” . However, Marx was not the only late nineteenth century scholar with an interest in applying evolutionary ideas to the social sciences.

Thorstein Veblen (1898) posed the question, “Why is economics not an evolutionary science?” Prescient for his time, the essence of his criticism was that economic theory centred too heavily on static equilibrium analysis and offered little insight into the mechanics of change.

As one of the forefathers of institutional economics, he remarked, “All economic change is a change in the economic community – a change in the community’s methods of turning material things into account. The change is always in the last resort a change in the habits of thought”. While aside from the notable exceptions of the Austrian economists Joseph Schumpeter  and 1954[1994]) and Freidrich Hayek (1974) and a few others others, including John Kenneth Galbraith (1958), for much of the twentieth century evolutionary theory remained very much on the edge of economic thought.

Get quality help now

KarrieWrites

Verified

Proficient in: Economics

5 (339)

“ KarrieWrites did such a phenomenal job on this assignment! He completed it prior to its deadline and was thorough and informative. ”

+84 relevant experts are online

Hire writer

More recently, the earlier doubts which had been expressed regarding the ability of the standard model to adequately explain change in the economy exploded into a full-fledged crisis during the near-collapse of the financial system in 2008-2009 which was underpinned by a regulatory system based on the theoretical foundations of equilibrium and competitive markets (see conclusion). Schumpeter, for example, was adamant that not only did perfect competition not actually exist outside the world economic models, but that it was also undesirable from policy standpoint: Thus it is not sufficient to argue that because perfect competition is impossible under modern industrial conditions – or because it always has been impossible.

The large scale establishment or unit of control must be accepted as a necessary evil inseparable from economic progress which it is prevented from sabotaging by the force inherent in its productive apparatus. What we have got to accept is that it has come to be the most powerful engine of the progress and in particular of the long- run expansion of total output not only in spite of, but also to a considerable extent through, this strategy which looks so restrictive when viewed from the individual case and from the individual point of time. In this respect, perfect competition is not only impossible, but inferior, and has no title to being set up as a model of ideal efficiency. It is hence a mistake to base the theory of government regulation of industry on the principle that big business should be made to work as the respective industry would in perfect competition (Schumpeter, 1975[1942]:106).

Here Schumpeter makes the point that institutions built on the notion of perfect competition have within them sown the seeds of “sabotaging the force inherent in its [the economy’s] productive apparatus”. He argues that a degree of monopolistic competition (large-scale unit of control) is a desirable market structure in order to enable the firm to accrue the funds to invest or recoup the cost of innovative research and development. Schumpeter’s argument is that this means that there is a logical incompatibility between entrepreneurial activity and perfect competition, as perfect competition implies the immediate elimination of excess profits through imitation. This underpins his idea that firms compete primarily through innovation, rather than through prices.

Because firms in most markets (which are beset with market imperfections in practice) realise the destructiveness of price competition on profits and tacitly tend to avoid it if at all possible. In this area, one of the most prominent recent notions about how the economic landscape evolves over time has been the theory of path dependence. Indeed, Martin goes so far to suggest that the spread of this concept, can be seen as part of a more general “evolutionary turn” across the social sciences reflecting a growing interest in how socio-economic systems change over time. This has involved a corresponding exploration of ideas, models, and metaphors drawn from modern evolutionary sciences, including evolutionary biology, complexity theory, and panarchy.

Notions including: variety, novelty, selection, fitness retention, mutation, adaption and population dynamics thinking have been taken from evolutionary biology; the notions of far from equilibrium adaptive systems, emergence, self organisation, fitness landscapes and hysteresis have been taken from complexity theory; and adaptive cycles and resilience from panarchy. What these various strands of theory all have in common is that, in a non-trivial sense, history matters. Within economic geography, this evolutionary turn has had a significant influence and the concept of path dependency identified as “one of the most exciting ideas in contemporary economic geography”. Ron Boschma and Koen Frenken, major exponents in the emerging paradigm of evolutionary economic geography, see path dependency (along with generalised Darwinism and complexity theory).

As a defining characteristic of their approach: … that it explains a current state of affairs from its history…. Thus the current state of affairs cannot be derived from current conditions only, since the current state of affairs has emerged from and has been constrained by previous states of affairs. Evolutionary theory deals with path dependent processes, in which previous events affect the probability of future events to occur. Boshma and Martin (2007) echo the same question Veblen asked some 100 years earlier: “why is economic geography not an evolutionary science?” Here they argue for an economic geography which studies the processes and mechanisms by which the economy transforms itself from within. Three of the main criteria they list for research in this area include that firstly, there must be a focus on change rather than a static or comparative static analysis.

Secondly, it must deal with irreversible processes, rather than ‘dynamic’ in the neoclassical sense where markets frictionlessly and instantaneously adjust up and down demand and supply curves. Thirdly, they argue that it should focus attention on the generation and impact of novelty as the ultimate source of self-transformation. It is the creative capacity of economic agents and the creative function of markets that drive economic evolution and adaptation. 3.6 What is path dependency? While the notion of path dependency has had a profound effect in the social sciences, it has benefited, or suffered (as you may), from a plurality of interpretations, so, as to not to misunderstand, misuse or abuse the notion, it is important to be clear what it is we mean by it.

Therefore, if the very concept of equilibrium is inconsistent with the theory and nature of an evolutionary (historical) system as Martin (2010) seems to suggest, then where does this leave the whole of neoclassical theory? If not some sort of (albeit transient) equilibrium, what is the evolutionary theorist’s governing metaphor for the economic system? While we have defined technology as being nested within the economic and social system, to properly answer these questions, we need to first more clearly explain what we mean by the “economic system” and by “change”.

With the theory of path dependency we have seen how decisions in the past may influence our decisions today, but to take the next step to understand what moves the system from one pathway to another we need a framework which can draw out in greater detail the forces of change stylised in Figure 3.3, whether they be continual and incessant in nature; characterised by stability; once-off gales of creative destruction; or simply destruction, with no creation. We also need a theoretical concept which can better explain the reality of continual change in the economy which addresses the problems inherent in lock-in and punctuated equilibrium as well as agency and the scope of individuals, firms or citizens to shape the process of technological change.