NOTOT FOR for the first time this century, the world economy is emerging from the crisis. The new normal will be different from the old. The pandemic has displaced resources, destroyed businesses and subtly adjusted habits. The economy has evolved, in other words. Oddly enough, most business models don’t treat the economy as an evolving, ever-changing thing. Rather, they describe it in terms of equilibrium: a stable state in which prices balance supply and demand, or the path taken by the economy to return to stability when a shock disrupts its rest. Although such strategies have sometimes proved useful, the economy is the poorest because it neglects the evolving nature of the economy.
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Evolutionary economics seeks to explain real world phenomena as the result of a process of continuous change. Its concepts often have analogues in the field of biological evolution, but evolutionary economists do not attempt a rigid mapping of biological theories to economic theories. An evolutionary approach recognizes that the past informs the present: economic choices are made and informed by historical, cultural and institutional contexts. Rightly, the habits of today’s economic profession can only be understood by examining the field’s own history. In the 19th century, the discipline that would become economics was an evolutionary science in several respects. Thinkers from diverse backgrounds competed to come up with the theories that best explained economic activity while, at the same time, its practitioners viewed the object of their study as an extension of the biological sciences.
Indeed, social science thought informed the views of naturalists such as Charles Darwin. Reverend Thomas Malthus, who explained how population growth must lead to a life and death competition for resources, influenced Darwin by outlining how natural selection could lead to the emergence of new species. And while Alfred Marshall – among the figures most responsible for putting the economy on its modern, mathematical course – analyzed economic behavior using systems of equations that can be solved for “equilibrium.” , he did so as a necessary expedient. “Mechanical analogies” were useful, he felt, but “[t]The economist’s mecca lies in economic biology.
At the start of the 20th century, an intellectual standoff took place between more evolutionary-oriented characters and their balance-oriented peers. Thorstein Veblen complained that economists wanted to treat the individual like a foolish particle. Rather, he believed that people’s choices were influenced by complex emotions, as well as by the history and traditions of the communities around them. “An evolutionary economy must be the theory of a process of cultural growth,” he ventured. Joseph Schumpeter was perhaps the most famous representative of an evolutionary worldview: a perspective shaped by his observations of entrepreneurial activity. He described creative destruction as a “process of industrial change – if I can use that biological term – which continually revolutionizes the economic structure from within.”
In the post-war West, the neoclassical approach built around models of equilibrium prevailed. Such models shared a mathematical rigor and elegance with prestige fields like physics, and lent themselves more easily to making the predictions required by governments. Milton Friedman argued that it didn’t matter if the models made unrealistic assumptions about the behavior of people and institutions. As long as the economy seemed, on the whole, “as if” people were making rational decisions, and models were thus producing accurate predictions, that was enough.
Because they didn’t do it very often, an evolutionary approach crept into the profession. An important contribution came in 1982, when Richard Nelson, now of Columbia University, and Sidney Winter, now of the University of Pennsylvania, published “An Evolutionary Theory of Economic Change”. Neoclassical models of economic growth failed to capture the forces – like Schumpeterian creative destruction – that played a pivotal role in generating technological change, they believed. Theories often assumed, for example, that executives knew and would immediately adopt profit maximization strategies. In reality, practices can differ considerably from sector to sector, reflecting distinct beliefs and the persistence of unique cultures and habits of companies. As these approaches competed with each other, certain ways of doing things became mainstream in an economy, until another “industrial transformation” again altered the competitive dynamics.
MM. Nelson and Winter have inspired a whole body of literature on business structures and competition between industries. Empirical work in other areas of economics increasingly appears to reflect an evolutionary influence. Recent and influential studies on innovation, for example, focus on things like exposure to inventors in childhood or the beliefs transmitted by academic mentors, as contributors to the creative production of individuals (in addition factors that have already received more attention, such as educational attainment and the financial incentive to innovate).
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Perhaps the most intriguing is recent work on the role of culture in shaping economic outcomes. To accept that culture influences behavior is to admit that people are not far-sighted utility calculators, but rather social creatures who rely on norms and traditions to make decisions. But culture, which changes slowly and is often passed down through generations, cannot be understood outside an evolutionary framework. Evolutionary economics, having gotten its foot in the door, can prove difficult to push back.
It’s better this way. The theory based on unrealistic assumptions has turned out to be less enlightening than economists might have hoped a century ago. Trying to understand the world as it is might give some clues and perhaps, possibly, better predictions. Economists who still work with equilibrium models out of habit should consider the disruptive potential of a new, but old, approach. ■
This article appeared in the Finance & Economics section of the print edition under the title “Tout change”