Evolutionary Economics

By Khushi Gaur

Evolutionary Economics is a field that draws inspiration from Darwinian principles of evolution and finds practical implications in industry and government today. It looks at the economy as an evolutionary model rather than the traditional view of the economy as a system constantly in or tending towards equilibrium.

In 1859, Charles Darwin published The Origin of Species, a book that redefined the world’s understanding of the origins of life. Darwin described evolution as a theory of endogenous change which requires three mechanisms- variation, selection and retention. This is colloquially called “survival of the fittest”. This idea is at the heart of both evolutionary biology and evolutionary economics.

This field traces its origins to Thorstein Veblen (1857-1929) who coined the term ‘Evolutionary Economics’ and whose work was later expanded on by Joseph Schumpeter (1883-1950). Veblen was an economist and sociologist who was interested in the relationship between society, economy and culture. He was a nonconformist who rejected neo-classical economics, Marxism and laissez-faire economics.

Thorstein Veblen

One of the foundational theories in this field is ‘Creative Destruction’ given by Schumpeter in his 1942 book, ‘Capitalism, Socialism and Democracy’. It is the process of industrial mutation that destroys the old economic structure and simultaneously enables the creation of a new one. He explained that the decline of certain industries and the consequent rise in unemployment should be tolerated as it paves the way for entrepreneurial innovation and experimentation, new equilibriums and higher standards of living. There is abundant evidence that supports Schumpeter’s theory in today’s context. In the US job market, over ten percent of the existing jobs are destroyed each year and about the same amount is created within the same year. These findings indicate that job creation and destruction flows are large, ongoing and persistent. They are an integral part of the process by which an economy upgrades its technology. Hence, capitalism is seen as an instrument of evolution within the economic and social hierarchy.

Joseph Schumpeter

Evolutionary economists hold a very positive view towards market capitalism. It is seen as a process of evolutionary change that produces growth because it fosters the knowledge of growth. A liberal market structure is the best way of harnessing the creative enterprising drive in the economy because we work together for our own individual gains and solve economic problems as we go. The fundamental impulse that drives the capitalist engine includes new consumer goods, new methods of production and transportation and that is precisely why capitalism is described as an evolutionary process. It is a restless and dynamic process of endogenous change.

Modern contributions to the field of Evolutionary Economics are attributed to Richard Nelson and Sidney Winters through their monumental work, ‘An Evolutionary Theory of Economic Change’ (1982). They explain how the primary mechanisms of evolutionary theory are applied to economic systems. Their work offers practical advice on policy and market functioning to the governments and industries.

It puts forward two fundamental ideas, first, failure is as essential to markets as success and an economic system without the freedom to fail is unhealthy and unfavourable for growth. It is only when society fails that certain goods are selected for retention and others for rejection. Governments should refrain from intervening in the market to prevent failure as it hinders the emergence of variety. It’s a fairly simple idea; if there’s no variety in the market, there are no better options, so the economy doesn’t develop and stays static. The more a government tries to control things, the greater is the loss of innovation and expansion in the economy.

Second, the competition between firms should not be on the basis of who has cheaper prices but on the basis of product innovation. It is the development of new technology and innovative techniques that generates variation amongst selection units in the economy.

Therefore, the key to maximize chances of being selected by the evolutionary process to survive and earn a living is to maximize knowledge, creativity and adaptability.

The study of the economy as an evolutionary science has gained importance over the last few decades and has spread to contemporary domains like evolutionary psychology and evolutionary politics. It offers a radically different view of the economy and tries to look into ‘why’ rather than the ‘how’ of economics.

References

http://evonomics.com/imagine-economics-evolutionary-science/

https://economics.mit.edu/files/1785

https://www.investopedia.com/terms/e/evolutionary-economics.asp