NOT FOR For the first time in this century, the world economy is recovering from the crisis. The new normal is different from the old normal. Pandemics have moved resources, destroyed businesses, and subtly adjusted habits. In other words, the economy has evolved. Curiously, most economic models do not treat the economy as evolving and are constantly changing. Instead, they describe it in terms of its equilibrium: a stable state in which prices balance supply and demand, or a way for the economy to return to stability when a shock disrupts rest. Such strategies have sometimes proved useful, but economics is poor because they ignore the evolutionary nature of the economy.
Evolutionary economics seeks to explain real-world phenomena as a result of the process of continuous change. Although the concepts are often similar in the field of biological evolution, evolutionary economists have not attempted to strictly map biological theory to economic theory. The evolutionary approach allows the past to inform the present. Economic choices are made in a historical, cultural and institutional context and are informed. Appropriately, the customs of today’s economics professionals can only be understood by examining the history of the field itself. In the 19th century, the field of economics was evolutionary science in several ways. Thinkers of diverse backgrounds competed to provide theories that best explain economic activity, but at the same time, their practitioners saw the purpose of their research as an extension of biological science.
Indeed, social science thinking has informed the views of naturalists such as Charles Darwin. Rev. Thomas Malthus, who explained how population growth leads to life-and-death competition for resources, influenced Darwin when he sketched how natural selection would lead to the emergence of new species. And Alfred Marshall analyzed economic behavior using simultaneous equations that can solve “equilibrium” among the most responsible persons in setting economics in modern mathematical courses. But I did so as a necessary measure. He thought the “mechanical analogy” was useful, but “[t]The economist’s mecca is in economic biology. “
At the beginning of the 20th century, an intellectual tug of war arose between more evolutionary-minded people and their equilibrium-focused peers. Thorstein Veblen complained that economists wanted to treat individuals like ignorant particles. He instead thought that people’s choices were informed by complex emotions, and the history and traditions of the communities around them. “Evolutionary economics must be the theory of the process of cultural growth,” he adventurized. Joseph Schumpeter was probably the most famous index of evolutionary worldview. A perspective shaped by his observations of entrepreneurial activity. He described creative destruction as “a process of industrial mutation that, although I may use that biological term, constantly revolutionizes the economic structure from within.”
In the post-war west, the neoclassical approach built around the equilibrium model won. Such models shared mathematical rigor and elegance with well-known disciplines such as physics, making it easier to make the predictions demanded by the government. Milton Friedman argued that it doesn’t matter if the model made unrealistic assumptions about the behavior of people and institutions. As long as the economy as a whole “as if” the individual made rational decisions and the model provided accurate predictions, that was enough.
They didn’t do so so often that the evolutionary approach sneaked into the profession. One of the key contributions was made in 1982, when Richard Nelson of Columbia University and Sydney Winter of the University of Pennsylvania now published “The Evolution of Economic Change.” They thought that the neoclassical model of economic growth could not capture the forces that played an important role in creating technological change, such as Schumpeter’s creative destruction. In theory, for example, executives knew strategies to maximize profits and were often expected to adopt them soon. In reality, practices can vary widely across the industry, reflecting clear beliefs and the persistence of a company’s unique culture and customs. As these approaches competed, several ways of doing things became widespread throughout the economy, until other “industrial mutations” changed the dynamics of competition again.
Nelson and Winter influenced the entire literature on corporate structure and competition between industries. Empirical studies across other parts of economics appear to increasingly reflect the effects of evolution. For example, recent influential research on innovation has focused on childhood inventor exposure and beliefs given by academic leaders as contributors to individual creative outcomes (” In addition to previously more noticeable factors such as the achievement of education) and financial incentives for innovation).
Perhaps most intriguing is the recent study of the role of culture in the formation of economic outcomes. Accepting that culture influences behavior is to acknowledge that people are not visionary utility computers, but social creatures that rely on norms and traditions in making decisions. However, culture changes slowly and is often transmitted across generations, making it incomprehensible outside the framework of evolution. Evolutionary economics stepping into the door can be difficult to push back.
This is all good. Theories built on unrealistic assumptions have proven to be less bright than what economists a century ago wanted. Attempting to understand the world as it is can provide insights and ultimately better predictions. Economists who are still dealing with equilibrium models from habit should consider the destructive potential of the new but old approach. ■■
This article was published in the printed version of the Treasury and Economy section under the heading “All Changes.”
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