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Descent With Modification-Continuity and Change in Evolutionary Economics

Posted on: Friday, 24 March 2006, 09:00 CST

By Redmond, William H

Descent with Modification-Continuity and Change in Evolutionary Economics An extended review of The Evolutionary Foundations of Economics, edited by Kurt Dopfer. Cambridge: Cambridge University Press. 2005. Cloth, ISBN 0521621992, $110.00.592 pages.

Evolutionary concepts are much in evidence these days, appearing in conference sessions, journal articles, and a variety of books. The Evolutionary Foundations of Economics is a welcome addition to this stream as it gathers in one place the observations of a number of scholars in the vanguard of this movement. This is a substantial volume of sixteen chapters by nineteen stalwarts representing two scholarly disciplines. Happily, there are three natural scientists included among the economists in order to supply a broad foundation to the theories. Surprisingly, given the topic, the natural science contributors are not biologists but rather physicists, and this combination lends the book something of the flavor of a report from the Santa Fe Institute. The contributions, in some cases derived from earlier publications or lectures, encompass a range of current and future research challenges. This review aims to give a sense of the breadth and depth of ideas being applied to the evolutionary approach, rather than a critical appraisal of this very diverse set of essays.

In chapter 1 Kurt Dopfer provides a comprehensive philosophical/ theoretical framework for evolutionary economics. Here, the foundations of the title are given attention in an effort to furnish a systematic and integrated conceptual frame for evolutionary economics. There is much discussion of axioms, categories, phases, trajectories, philosophy of science, and ontology-not entirely reminiscent of Richard Nelson and Sidney Winter's seminal Evolutionary Theory of Economic Change. But times do change, and scholarly underpinnings need to be secured. Such discussion is and must be part of the development of a still youngish subdiscipline; the entire June 2004 issue of the Journal of Economic Methodology was devoted to ontological issues in evolutionary economics. Dopfer's explication is admirable and thorough, yet some readers may find a bit of a challenge in this chapter (which, in fairness, is styled as a prologue rather than an introduction). However, the first half of the book isn't overly linear, so that the chapter might be read with equal profit last as well as first. Indeed affinity may well dictate sequence so that a reader with, say, a preference for institutionalism over philosophy could choose to start with history.

An interest in evolutionary processes implies an interest in how things get to be the way they are, which is to say it implies an interest in history. Geoffrey Hodgson (chapter 5) has written an interesting historical account of the use of biological metaphors in economics. This chapter sketches the rise, fall, and revival of biological analogies-particularly of evolution-from the 188Os to the 1980s. While drawing a sharp focus on American institutionalism, the analysis does not neglect neoclassical economics in the United States or Britain and starts with a brief look at pre-war German social sciences. The time line of the rise and fall will be familiar to institutionalists who have traced the parallel rise and fall of the use of instinct psychology. However, the revival of the biological metaphor started earlier and is much more pronounced than that of instinct psychology to date. The treatment is more informative than a simple time line: Hodgson provides a rich context for the discussion, noting shifts in approaches to the social sciences, the freighting and unfreighting of concepts with ideology, the change of intellectual fashions and the change in the general tenor of the times. This story is peopled not only with economists but also with the philosophers and social scientists who influenced the thought and science of their times. There is also discussion about metaphors generally and how they affect the thinking of the people who use them-and we all use them. The use of evolution in evolutionary economics is not just a label; it is a complex of assumptions, presumptions, perspectives, and meanings, all relating to what happens in an economy and what is important in analyzing an economy. As an intellectual history this chapter serves to put the book in proper context and also appears to be the first one published on its topic.

History is also the subject matter of Joel Mokyr (chapter 7), but this is history of rather a different sort. Economic history, and the theories used to examine it, are the focus of this chapter. After discussing the limitations of various theories in accounting for economic phenomena, Mokyr proposes that evolutionary models are desirable for understanding economic history, particularly the parts dealing with developments in knowledge and technology. Interestingly, he disputes that this is a biological analogy, on the grounds that Darwinian models transcend biology. That is, Darwinian biology is really a special case of a more general set of models that apply to a broader class of systems (a.k.a. universal Darwinism). In any event the chapter outlines a procedure which will be familiar to those versed in the biological metaphor, which includes sources of variation, selection mechanisms, and multiple levels of selection. The approach has advantages over other theories for questions such as why the Industrial Revolution didn't originate in China (it also turns out that some economic historians deny that there was an Industrial Revolution). Mokyr concludes with the sensible caveat that economic history is too vast and too varied to admit of explanation by any single theory or approach, so exercise care in the selection of your tools.

In chapter 6 Paul David presents yet a different perspective on history. If a system is path dependent, its history is the critical element in understanding its present state. Simple enough, but it is the implications which make this interesting. For path dependency to obtain, multiple equilibria must be present. By contrast, if a system has only a single equilibrium point its history isn't important, which means that cause and effect aren't important. So the salience of history is that causality is a central part of the analysis. This is, of course, more readily apparent in Veblen's alternative to the term path dependence: cumulative causation. David's exposition is substantially focused on technological standards, which is one example of a more general problem of coordination equilibria. Institutions are another example, so that the material in this chapter is insightful from an institutional perspective.

Time for some physics. Both the late Ilya Prigogine (chapter 2) and Hermann Haken (chapter 3) observe that recent developments in physics have resulted in modes of analysis which make it more applicable to the social sciences than previously. In particular, research on systems characterized by openness, complexity, and self- organization has revealed a number of parallels between physical systems and economic systems. The older physics, as exemplified by Newtonian mechanics, was about deterministic, universal laws in closed systems-and served as a model for neoclassical economics. The newer physics, as exemplified by path dependence, self- organization, and multiple system states (i.e., multiple equilibria), is about dynamics and uncertainty-and is compatible with the evolutionary approach. Why don't most mainstream economists have an interest in history? Prigogine points out that under deterministic assumptions the present is the focus: past and future are straightforward extensions from the current state of the system, so time doesn't matter much. The new physics, however, involves systems which are complex, open, and path dependent, in which the present can only be understood through the past and the future can only be projected probabilistically: macroscopic tendencies interact with microscopic events to determine future states of the system. Haken discusses self-organizing systems in which an order parameter determines the behavior of the system's components, which in turn maintain the order parameter. One has simply to substitute the word institution for order parameter and the word individual for component to see the point. Once these order parameters become established, they are said to be difficult to change-a physics of ceremonialism!

The second half of The Evolutionary Foundation of Economics is organized into three sections: micro-, meso-, and macroeconomics, consisting of three chapters each. Winter (chapter 8) leads off the micro section with a discussion of evolutionary production theory. The chapter includes a historical sketch of production theory from its classical and neoclassical roots to provide a contrast with evolutionary perspectives and assumptions. Two aspects of evolutionary theory are developed in detail here: the nature of productive knowledge and the problem of replication of knowledge. Issues include (but are not limited to) dynamic frontiers of knowledge, distributed knowledge, practiced versus unpracticed knowledge, and the establishment versus the firm as unit of analysis. After identif\ying topics in need of further research at the micro level, Winter raises the stakes to issues connected with global climate change and regulation. This is not a significant issue for mainstream economics because of its inward looking and generally self-contained investigatory sphere. The comparison to mainstream approaches yields a guiding principal for evolutionary economics at all levels of analysis:

By contrast, evolutionary theory has few, if any, commitments that are put seriously at risk by ideas or facts from other disciplines.. . . [I]t has open frontiers, lives with other disciplines in what is recognizably the same world, and has much to gain from trade, (p. 252)

As if on cue Giovanni Dosi, Luigi Marengo, and Giorgio Fagiolo (chapter 9) argue that evolutionary theorists should make more use of concepts from the cognitive and social sciences to advance our knowledge of learning processes. Two processes-which the authors note are not altogether independent-are fundamental to the evolution of economic systems: selection and learning. This chapter is about learning, specifically about the benefits which might accrue to evolutionary theory of an expanded and more fully specified conceptualization of learning. The authors cast a wide net, bringing together concepts such as cognitive categories, framing and embeddedness, heuristics, and collective learning. They caution, however, that it is not enough to import some "stylized facts" and leave it at that. The goal is a unified model of learning which incorporates different models of learning as specific variants of the unified model. This formalized model accounts for, among other things, stochastic elements, self-reinforcement, population-level learning, and, of course, technological learning. The chapter concludes with several open research questions, one of which concerns the imperfect adaptation of agents to institutions and the resultant potential for institutional change.

In chapter 10, Ulrich Witt develops useful insights on two distinct, but interrelated, aspects of the theory of the firm. First, Witt distinguishes two types of biological metaphors applicable to the understanding of firms. The one in general use is the population-based selectionist metaphor in which firms adapt or die. The other is the developmental approach, which sees firms as analogous to individual organisms, with stages of birth, growth, and decline. As would be expected, the developmental perspective has much to contribute with respect to the entrepreneurial origins of firms. Although the selectionist and developmental approaches are separate analyses with respect to biological entities, firms are a different matter and understandings from both can be combined in the analysis of organizational change. second, Witt employs the combined biological metaphors to develop a research agenda that is a clear alternative to the new institutional economics: Don't ask why firms exist-ask how they come into being. Don't ask what determines a firm's boundaries-ask how firm and market co-evolve and how that process shifts boundaries. Don't ask what determines structures and incentives in a firm-ask about determinants of change and the resultant transformations. Such a program clearly directs attention away from static analyses and toward the dynamic and path-dependent issues more compatible with the evolutionary approach.

Although not positioned in the micro section of the volume, the late Herbert Simon's contribution is highly relevant to behavior in the firm. Chapter 4 is qualitatively different from the other chapters: instead of using evolution in the metaphorical sense to gain perspectives on economic systems, Simon uses it in its original biological sense to understand human characteristics. As one would expect, Simon starts with bounded rationality. We don't have perfect information, cannot make maximizing calculations, and do rely on framing to deal with most issues. Given these limitations, evolution would favor individuals who were willing and able to learn from others' experiences. Part of what is learned is of an altruistic nature, that is, one learns to spend some effort on the goals of the group instead of 100 percent on individual goals. The focal aspect of altruism here is group loyalty. Simon argues that employment cannot be fully understood as a narrowly economic contract because employment, particularly of managers, engages loyalty to the organization's goals and results in levels of motivation and productivity that are otherwise inexplicable. This engagement, called organizational identification, literally changes how people think by altering their mental frames and information intake. This concept can explain, for example, why mergers often fail to operate smoothly-individuals from the two organizations have not formed a common identification and simply do not think alike.

Mesoeconomics is positioned to play a pivotal role in evolutionary economics, and not simply because it connects the micro and macro levels. Of the three levels, meso is the less developed and the more likely to benefit from the newer developments in physics. Accordingly John Foster's contribution (chapter 11) is centered on self-organization in economic systems. In physical systems the dynamics of energy and entropy are fundamental; in economic organizations the dynamics of information and complexity are parallel keys to self-organization and transformation. Creative combinations of skills and knowledge are the fuel of innovation, while diffusion processes serve to proliferate the change. Diffusion, which plays a central role here, is similar to processes of population ecology and features institutional constraints as well as individual incentives. Indeed Foster finds common ground between institutionalism and the Austrian school in terms of their affinity for self-organization and related concepts. In chapter 12, Stanley Metcalfe pursues the meso theme by noting, as does Witt, two perspectives on evolution: the adaptation of populations of entities and the internal unfolding of individual entities. This chapter examines standard concepts in some detail, with an eye for their application to economic systems generally and to business units in particular. Topics include unit of selection, variation, frequency distributions, competition and interaction, adaptation, and coordination. Metcalf echoes Mokyr's assertion that evolutionary thinking transcends biology and represents a generalized approach to understanding change and development. In chapter 13, Peter Alien makes considerable use of concepts and techniques of complex systems to examine a broad range of evolutionary systems. In doing so, he lays out principles of simulation modeling for evolutionary systems, which include boundary conditions, levels of description, taxonomy of components, and interactions. At the core of the modeling effort are the interactions and the capability of the unit to explore and experiment, which is crucial to the evolutionary dynamic. The models are characterized by cooperation and competition, positive feedback, emergence, and structural attractors. Alien's discussion also includes one of the volume's few inclusions of non-Darwinian biological concepts, in this case a classic of classificatory biology known as cladistics.

The section on evolutionary macroeconomics begins with chapter 14 by Nelson. The chapter focuses on technological change and, among other things, contrasts the economics approach to technological evolution with those pursued by historians of technology, sociologists, and evolutionary epistemologists. Each group has its own assumptions about selection mechanisms and who the relevant actors are and, of course, each has something to learn from the others. In contrast to many writers on technology, Nelson does not look upon technology as a story in itself but rather as an embedded element of the broader suite of cultural apparatus. Further, he appreciates that technology is not just the practice itself but also involves knowledge and beliefs about it. Here is a wider research perspective than most:

I want to argue that an important feature of many aspects of human culture, and most certainly technology, is that what evolves is both a body of practice and a body of understanding.. . . [Hjuman practice is generally supported by a rather elaborate body of reasons, or rationalizations, (p. 463)

Hence economic evolution is not a simple process of change but an interactive process of coevolution between practice and knowledge, potentially with different selection criteria and dynamics for each strand.

Time again for physics. Models from physics (both old and new) including complexity science are part and parcel of Ping Chen's analyses in chapter 15. Brownian motion, the Loschmidt paradox, Maxwell's demon, and the Wigner transform are all employed to debunk the notion that business cycles result from exogenous shocks. Instead, Ping develops nonlinear dynamic models to explain cycles as well as to explore the division of labor. Specific modeling results shed light on disruptive technologies, market share competition, and the failure of both firms and industries. Indeed Chen reifies the biological analogy: business cycles are living rhythms. In the final chapter of the macro section, Gerald Silverberg and Bart Verspagen (chapter 16) review and compare various models of evolutionary change. These models follow one of two basic approaches: some models build up to macro results from micro behavioral foundations in the tradition of Nelson and Winter, while others model macro results directly. The former class tends to rely on simulations while the latter may be either simulation or analytical approaches. A by- product of the simulation approach is that they produce a trace of the evolutionary path, that is, histories. Silverberg and Verspagen conclude their chapter with an inte\resting discussion of the relationship between "chance and necessity" in evolution. Evolution has a central role for unpredictable novelty, hence the fundamental property of chance. However, the outcomes are not uniformly distributed across their range of possibilities. Thus there is direction but not determinism in the concepts of multiple equilibria (in economics) and attractors (in complex systems): some histories are more likely than others. The chapter also makes one of the few references to a historian (Henry Adams in this case) to be found in a literature that fairly bristles with historicism.

The author is a Professor at Bousing Green State University, Ohio, USA.

Copyright Association for Evolutionary Economics Mar 2006

Source: Journal of Economic Issues

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