evolutionary economics

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Conventional, or neo-classical, economics has its roots in physics. Its assumptions and attributes include scarcity, rational agents, perfect information, deterministic laws, exogenous impacts to equilibrium, and that single equilibrium points are ultimately achieved in competitive situations.

Evolutionary economics arises from what can now be characterized as a systems science or complexity theory heritage. Its roots are in biological systems, evolutionary theory, social systems, and studies of human behavior and decision making.

Classical or neoclassical economics both take a systemic view of economics where the system tends towards equilibrium. Changes to the system come from outside the system. The system readjusts to a new equilibrium resulting from the change. The dynamic of economic growth is considered a move toward equilibrium.

Evolutionary and complexity economics makes the radical departure from classical and neoclassical economics in that the dynamic of growth is a continuous disequilibrating process where innovations continually disturb equilibrium states. This requires organizations to adapt or evolve in order to survive.

Both evolutionary and complexity economics brings innovation into the economic system and its effect of keeping the system in disequilibrium rather than equilibrium.

  • Evolutionary economics causality is both adaptionist/formative for the macro system, or an organization, and rationalist, with the innovator at the micro level.
  • Complexity economics opens the door for transformative causality, which brings the innovator into the system itself. In transformative causality there is no distinction between the individual and the group. With transformative teleology, innovation no longer depends on the intuition of the entrepreneur, but results from micro-diversity of the ongoing interactions within the organization.

Creative destruction --
Perhaps the most memorable challenge to neo-classical economics from an evolutionary perspective is Joseph Schumpeter's theory that macroeconomic equilibrium is a dynamic state, where value is perpetually created and simultaneously destroyed by entrepreneurs who introduce innovations into the economy. This creation of new technologies essentially destroys the value of the previously existing technologies. The common descriptive phrase for this is creative destruction.

Evolutionary algorithm --
Evolutionary economics explains the constant change and the state of the results of change based on an evolutionary algorithm. This evolutionary process includes three key mechanisms - generation of variety, selection, and replication. Entrepreneurs provide variety. Decision makers, especially in the form of markets, provide for selection. The selected technologies thrive while the rejected technologies fail, as well as the companies wedded to rejected technologies. Selected technologies, those enabling survival and prosperity are then copied and imitated throughout the economic system.

Knowledge --
Knowledge, or accumulated intelligence, is a key aspect of evolutionary economics. Knowledge in economics is analogous to DNA in biological evolution. In evolutionary economics ideas become actual phenomena. Actual phenomena, for example the processes of a business organization, become manifestations of ideas, which contain or embody knowledge.

Fonseca on evolutionary economics (Fonseca, 2002, pp 14 - 16) --
A very different way of thinking about innovation is to be found in what has come to be called evolutionary economics, most notably in the work of Schumpeter (1934). He was interested in explaining why economic growth occurs, rather than simply ascribing it to an unexplained residual; his main contribution was to place innovation inside the economic system rather than considering it as an exogenous shock to which economic systems reacted. He argued that an economy could not be understood as an entity independent of society as a whole and that economic growth had to be explained in terms of the dynamics of scientific and technological innovation and the roles of entrepreneurs in organizations. For him, innovation was to be understood in terms of both social/organizational dynamics and individual psychology. Schumpeter distinguished between the entrepreneur who performed a role, and innovation, which was the outcome of entrepreneurial activity in organizations that possessed characteristics making it possible for individuals to take the role of entrepreneur. For him, the ""entrepreneur"" played a central role in the process of economic development. Several people could take this role and none would play it all the time. He therefore thought about economic growth in terms of dynamic processes, rather than in terms of the mechanisms that featured in neoclassical economics. Furthermore, Schumpeter addressed the issue of innovation within a systemic framework. An innovation could thus be a new output that the organization placed in its environment, a new input it received from the environment, or a new way of arranging its internal relations, including the psychological attributes of individuals.

Schumpeter was also the first to address the issue of knowledge creation, knowledge transfer and knowledge use, as underlying the process of innovation. In fact this is a central tenet of his views, making of the process of knowledge creation, particularly when embodied into some technological artifact, an endogenous phenomenon of economic realities. Even though he understood innovation as a linear path from basic science to a commercial application of scientific knowledge, he did not restrict innovation to purely scientific ventures. His definition of innovation comprised all ways of doing things differently.

Schumpeter's view of economic activity differs from that of neoclassical economics at a fundamental level to do with the nature of movement into the future and the purpose of such movement. As mentioned above, neoclassical economics is a way of thinking in terms of both Natural Law Teleology, in which innovation is ascribed to unexplained external shocks, which are adjusted to according to the laws of the market, and Rationalist Teleology, in which rationally calculating individuals choose how to operate on, or respond to, the external shocks. Schumpeter took a position based on Darwinian evolutionary theory and argued that the movement of an economy into the future was unpredictable because innovation made the future different from the past rather than just a repetition. For him, the dynamic of economic growth was not a move to equilibrium but a continuous disequilibrating process. Chance innovations continually disturbed equilibrium states requiring organizations and individuals to adapt in the present in order to survive.

Stacey et al. (2000) have called this way of thinking Adaptionist Teleology. Movement here is toward an unknowable future driven by chance variation and competitive selection, in order to survive. As I have already said, Schumpeter also understood innovation in systemic terms when he talked about organizations having characteristics that made it possible for individuals to take up entrepreneurial roles. This implies that innovation is the unfolding of patterns of behaviour already enfolded in particular organizational dynamics. In the classification of ways of thinking about causality suggested by Stacey et al. (2000), this unfolding of enfolded pattern is typical of systems thinking and they have called it Formative Teleology. Here, movement of the phenomenon is the unfolding of what is already enfolded in it in order to realize a mature state of itself. A shift from neoclassical economics to evolutionary economics as a way of thinking about innovation therefore amounts to a shift from thinking about causality in terms of Natural Law Teleology to a way of thinking in terms of Adaptionist and/or Formative Teleology. In the former novelty and freedom are pure chance and in the latter there is neither novelty nor freedom. However, in his emphasis on the autonomous individual as entrepreneur, Schumpeter retained a place for thinking in terms of Rationalist Teleology. In other words, innovation was also caused by the choices autonomous individuals made about the goals of innovations and the actions required to bring them into being. He did not think about the autonomous individual as a rational calculator but rather as an intuitive, visionary entrepreneur. Schumpeter's thought, therefore, retains a dual theory of causality, namely, both Adaptionist/Formative Teleology of the macro system and the Rationalist Teleology of the individual innovator at the micro level. Once again there is the elimination of paradox, this time the paradox of innovation arising in the operation of competitive selection on chance changes, or innovation as the unfolding of enfolded conditions, and also the purposeful, deliberate choices of individuals. In the end, the origin of novelty lies in individual heads.

Nelson and Winter (1982) (as described in Barney, 2001) --
Evolutionary economics has a long history in the field of economics. However, the most influential work in this area is undoubtedly Nelson and Winter (1982). Like all evolutionary theories, Nelson and Winter's theory examines the implications of three fundamental processes: variation, selection, and retention. Indeed, this is what makes Nelson and Winter's work evolutionary in character.

In the Nelson and Winter framework, firms vary in the routines they have developed to conduct their business. In this sense, routines become the fundamental unit of analysis in Nelson and Winter's work. In the face of competition---Nelson and Winter's selection mechanism-some of these routines are revealed to be more efficient and effective than others. The least efficient and effective routines are either abandoned or changed or a firm is likely to not be able to survive in the long run. The most efficient and effective routines generate competitive advantages for firms.

Unlike neo-classical microeconomics, this evolutionary theory does not apply equilibrium analysis. Instead, through the use of simulations and other methods, Nelson and Winter are able to demonstrate the conditions under which some routines will provide more sustainable competitive advantages than other routines. In this sense, the performance that a routine generates ensures its survival, and thus a routine within a firm is also the mechanism through which retention occurs.