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Political Economy: Evolutionary Economics

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Title: Political Economy: Evolutionary Economics


1
Political Economy Evolutionary Economics
  • Early contributions

2
Recap
  • Modern evolutionary theory much richer than
    survival of the fittest
  • Feedback between organism environment
  • Positive as well as negative feedbacks
  • Symbiosis as well as competition
  • Interdependence of firms/sectors as well as raw
    competition
  • Collective behaviour as well as individual
  • Web of life/ Web of commerce
  • Directed evolution
  • Essential concepts variation environment/organis
    m feedback

3
Darwins influence
  • Darwins Origin published 1869
  • Influence substantial on Victorian mindset (from
    primogenesis to science to explain species)
  • Some influence on economics, but generally
    developing under its own steam
  • Marxs Das Kapital 1867 final, anti-capitalist
    Classical economics
  • Collapse Classical school, development of
    neoclassical

4
The new economics circa 1870
  • Dominant analytic techniques static
  • Jevons marginal optimisation of utility
  • Walras General Equilibrium
  • Marshalls profit maximising firms
  • Mathematical functions for maximising
    utility/profit
  • Work out point at which change stops
  • No evolution from the optimum
  • Some recognition of superiority of
    dynamic/evolutionary approach

5
The new economics circa 1870
  • Aware of importance of evolutionary dynamics
  • If we wished to have a complete solution ... we
    should have to treat it as a problem of dynamics.
    But it would surely be absurd to attempt the more
    difficult question when the more easy one is yet
    so imperfectly within our power. (Jevons 1871
    1911 93)
  • The Mecca of the economist lies in economic
    biology rather than in economic dynamics. But
    biological conceptions are more complex than
    those of mechanics a volume on Foundations must
    therefore give a relatively large place to
    mechanical analogies and frequent use is made of
    the term equilibrium, which suggests something
    of statical analogy (Marshall, Principles, 8th
    edition, p. 19)

6
And since then
  • Clear expectation that theory would develop
    dynamical/evolutionary approach from static
    beginnings
  • The main concern of economics is thus with human
    beings who are impelled, for good and evil, to
    change and progress. Fragmentary statical
    hypotheses are used as temporary auxiliaries to
    dynamicalor rather biologicalconceptions but
    the central idea of economics, even when its
    Foundations alone are under discussion, must be
    that of living force and movement. (Marshall
    22)
  • But thats not what happened
  • Hence Veblens Why? paper

Skip warning
7
Reading Veblen
  • Yep, hes a verbose bastard
  • But theres a certain poetry to his prose
  • Read on and youll see gems of wisdom amongst the
    words

8
Why is economics not an evolutionary science?
  • Veblen dominant tendency in economics is to
    uncover natural law
  • This natural law is felt to exercise some sort
    of a coercive surveillance over the sequence of
    events, and to give a spiritual stability and
    consistence to the causal relation at any given
    juncture Any causal sequence which is
    apprehended to traverse the imputed propensity in
    events is a disturbing factor.
  • A scientist, on the other hand
  • is unwilling to depart from the test of causal
    relation or quantitative sequence. When he asks
    the question, Why? he insists on an answer in
    terms of cause and effect

9
Neoclassical economics as non-evolutionary
  • Evolution based on variation and adaptive
    selection
  • Economics uses ideals (General Equilibrium/Pareto
    Optimality) from which by definition their can
    be no adaptive improvement
  • Economic theory is a projection of the accepted
    ideal of conduct. This ideal of conduct is made
    to serve as a canon of truth, to the extent that
    the investigator contents himself with an appeal
    to its legitimation for premises that run back of
    the facts with which he is immediately dealing,
    for the controlling principles that are
    conceived intangibly to underlie the process
    discussed, and for the tendencies that run
    beyond the situation as it lies before him.

10
Neoclassical economics as non-evolutionary
  • Heavy criticism of role of equilibrium metaphor
    in which the concept of normality and propensity
    to an end has reached an extreme attenuation
  • it is this facile recourse to inscrutable
    figures of speech as the ultimate terms of theory
    that has saved the economists from being
    dragooned into the ranks of modern science By
    their use the theorist is enabled serenely to
    enjoin himself from following out an elusive
    train of causal sequence. He is also enabled,
    without misgivings, to construct a theory of such
    an institution as money or wages or
    land-ownership without descending to a
    consideration of the living items concerned,
    except for convenient corroboration of his
    normalised scheme of symptoms.

11
Neoclassical economics as non-evolutionary
  • Economic vision of humans also unamenable to
    change
  • People are conceived in hedonistic terms that
    is to say, in terms of a passive and
    substantially inert and immutably given human
    nature. The psychological and anthropological
    preconceptions of the economists have been those
    which were accepted by the psychological and
    social sciences some generations ago.
  • And now, the greatest ever put-down of the
    neoclassical utility-maximising/budget
    constraint view of human behaviour

12
Neoclassical economics as non-evolutionary
  • The hedonistic conception of man is that of a
    lightning calculator of pleasures and pains who
    oscillates like a homogeneous globule of desire
    of happiness under the impulse of stimuli that
    shift him about the area, but leave him intact.
    He has neither antecedent nor consequent. He is
    an isolated definitive human datum, in stable
    equilibrium except for the buffets of the
    impinging forces that displace him in one
    direction or another. Self-imposed in elemental
    space, he spins symmetrically about his own
    spiritual axis until the parallelogram of forces
    bears down upon him, whereupon he follows the
    line of the resultant. When the force of the
    impact is spent, he comes to rest, a
    self-contained globule of desire as before

versus the evolutionary view...
13
Neoclassical economics as non-evolutionary
  • it is the characteristic of man to do something
    the desires under whose guidance the action takes
    place are elements of the existing frame of
    mind of the agent, and are the products of his
    hereditary traits and his past experience, and
    they afford the point of departure for the next
    step in the process. The economic life history of
    the individual is a cumulative process of
    adaptation of means to ends that cumulatively
    change as the process goes on, both the agent and
    his environment being at any point the outcome of
    the last process. His methods of life today are
    enforced upon him by his habits of life carried
    over from yesterday and by the circumstances left
    as the mechanical residue of the life of
    yesterday.

14
Neoclassical economics as non-evolutionary
  • One difference (?) w.r.t. biological evolution
  • Human action is purposeful (teleological from
    Greek Telos meaning end)
  • Economic action is teleological, in the sense
    that men always and everywhere seek to do
    something. What, in specific detail, they seek,
    is not to be answered except by a scrutiny of the
    details of their activity but, so long as we
    have to do with their life as members of the
    economic community, there remains the generic
    fact that their life is an unfolding activity of
    a teleological kind.
  • However, its ends arent necessarily those
    assumed by economists (utility maximisation,
    profit maximisation, optimal allocation of
    resources)

15
Neoclassical economics as non-evolutionary
  • It may or may not be a teleological process in
    the sense that it tends or should tend to any end
    that is conceived to be worthy or adequate by the
    inquirer The question of a tendency in events
    can evidently not come up except on the ground of
    some preconception or prepossession on the part
    of the person looking for the tendency. In order
    to search for a tendency, we must be possessed of
    some notion of a definitive end to be sought The
    notion of a legitimate trend in a course of
    events is an extra evolutionary preconception,
    and lies outside the scope of an inquiry into the
    causal sequence in any process. The evolutionary
    point of view, therefore, leaves no place for a
    formulation of natural laws in terms of
    definitive normality

16
Neoclassical economics as non-evolutionary
  • What should evolutionary economics be?
  • the theory of a process of cultural growth as
    determined by the economic interest, a theory of
    a cumulative sequence of economic institutions
    stated in terms of the process itself.
  • Why cant neoclassical economics achieve this?
  • Evolutionary economics would attempt to trace
    the cumulative working out of the economic
    interest in the cultural sequence. It must be a
    theory of the economic life process a
    hedonistic psychology does not afford material
    for a theory of the development of human nature
    It is therefore not readily apprehended or
    appreciated in terms of a cumulative growth of
    habits of thought

17
Neoclassical economics as non-evolutionary
  • Why has academic economics failed to become
    evolutionary?
  • Because the taxonomic (equilibrium) approach
  • is the easiest, gives the most gratifying
    immediate results, and best fits into the
    accepted body of knowledge of the range of facts
    in question The well worn paths are easy to
    follow and lead into good company. Advance along
    them visibly furthers the accredited work which
    the science has in hand. Divergence from the
    paths means tentative work, which is necessarily
    slow and fragmentary and of uncertain value.

18
Neoclassical economics as non-evolutionary
  • Taxonomic? Foundations of neoclassical
    economics
  • are certain very concise assumptions concerning
    human nature, and certain slightly less concise
    generalisations of physical fact These
    postulates afford the standard of normality
    whenever a departure from this normal course of
    things occurs, it is due to disturbing causes
    Such departures are constantly present in the
    facts but have no place in the body of the
    science The science is, therefore, a theory of
    the normal case, a discussion of the concrete
    facts of life in respect of their degree of
    approximation to the normal case. That is to say,
    it is a taxonomic science. (1919 163-164)

19
Neoclassical economics as non-evolutionary
  • Economics has evolved into a dead end
  • Like other men, the economist is a creature of
    habits and propensities given through the
    antecedents, hereditary and cultural, of which he
    is an outcome Methods of observation and of
    handling facts that are familiar through habitual
    use in the general range of knowledge, gradually
    assert themselves in any given special range of
    knowledge. They may be accepted slowly and with
    reluctance where their acceptance involves
    innovation but, if they have the continued
    backing of the general body of experience, it is
    only a question of time when they shall come into
    dominance in the special field.

20
Veblens alternative cumulative causation
  • The sciences which are in any peculiar sense
    modern take as an (unavowed) postulate the fact
    of consecutive change. Their inquiry always
    centers upons some manner of process a sequence,
    or complex, of consecutive change in which the
    nexus of the sequence, that by virtue of which
    the change inquired into is consecutive, is the
    relation of cause and effect. (1919 32)
  • This is post-Darwinian versus pre-Darwinian
    science as taxonomic (classification rather
    than causation) which still continues in
    economics
  • The scientists of that era looked to a final
    term, a consummation of the changes which
    provoked their inquiry. (1919 36)

21
Veblens alternative cumulative causation
  • Pre-Darwinian thought considers how things had
    been in the presumed primordial stable
    equilibrium out of which they, putatively, had
    come, and how they should be as the outcome of
    the play of forces which intervened between this
    primordial and the definitive stable equilibrium
    (1919 37)
  • Anyone for comparative statics?
  • In post-Darwinian science, the interval of
    instability and transition has come to take the
    first place of the inquiry Questions of a
    primordial beginning and a definitive outcome
    have fallen into abeyance (1919 37)
  • This makes true science fundamentally dynamic,
    not static

22
Veblens alternative cumulative causation
  • They occupy themselves with dynamic relations
    and sequences. The question which they ask is
    always, What takes place next and why? (1919
    84)
  • Versus economics where the pure theory deals
    not with the dynamics, but with the statics of
    the case The process is rated in terms of the
    equilibrium to which it tends or should tend, and
    not conversely. (1919 165)
  • Professor Marshalls work remains an inquiry
    directed to the determination of the conditions
    of an equilibrium It is not an inquiry into
    institutional development it is the movement of
    a consummately conceived and self-balanced
    mechanism, not that of a cumulatively unfolding
    process or an institutional adaptation to
    cumulatively unfolding exigencies. (1919 173)

23
Veblens alternative cumulative causation
  • originator of marginal productivity theorys
    view of dynamics is The more dynamic the
    society, the nearer it is to the static model
    until in an ideally dynamic society, with a
    frictionless competitive system the static
    state would be attained (1919 190)
  • Economics of the line represented by Mr Clarke
    has never entered this field of cumulative
    change. It does not approach questions of
    genesis, growth, variation, process hedonistic
    economics does not, and cannot, deal with
    phenomena of growth (1919 192)

24
Veblens alternative cumulative causation
  • Pessimism that post-Darwinian thinking will ever
    dominate economicsan inability to break away
    from final ends type thinking
  • Even the evolutionary process of cumulative
    causation as conceived by the adepts of these
    sciences is infused with a preternatural,
    beneficent trend trend so that evolutionary is
    conceived to mean amelioration or improvement
    Whether such a shifting of the point of view in
    these sciences shall ever be effected is still an
    open question (1919 55)

25
Veblens contribution
  • Cogent criticism of neoclassical theory
  • Conviction that truly evolutionary economics
    cannot be built upon neoclassical foundations
    but
  • No developed technical means to embody
    evolutionary thinking in economics
  • Strong contrast with Schumpeter
  • Acceptance of neoclassical economics
  • Analysis of change/instability complements, not
    contradicts statics
  • Processes of growth and disturbance coexist with
    processes of movement towards equilibrium

26
Schumpeter
  • what is missing in the static apparatus and what
    accounts for the dissatisfaction with it and for
    the attempts to force such phenomena into its
    cracking frameinstead of, as we think it natural
    to do, recognising and explaining this as a
    distinct process going along with the one handled
    by the static theory.' (1928 379/65)
  • But at the same time, instability
  • Fundamental to capitalism
  • A good thing leads to change growth
  • Explains cyclical nature of capitalism

27
Schumpeter
  • In contrast to neoclassical belief in stability
    equilibrium
  • the economic structure and the social and
    political structure which were based upon it,
    therefore also that civilisation or system of
    values, were inherently unstable there can be no
    such thing as a stable social system. Any system
    transforms itself simply by its mere working and
    if history teaches us nothing else it teaches
    that. (Lowell Lectures 342)
  • Transformational Growth Creative Destruction
  • Growth leads to social change
  • Progress causes destruction of old means of
    production/social arrangements
  • A dialectical vision of cyclesprosperity
    contains the seeds of its own destruction

28
Schumpeter
  • While a new thing is being built and financed,
    expenditure is on a supernormal level When such
    a period of advance has gone on for a time, the
    products of these new constructions begin to
    pour out and these products compete with the
    products of the old methods. In fact, thats the
    way in which progress is accomplished in
    capitalism and the old eliminated. (349)
  • Cycles out of phase expectations inevitable
  • when everyone observes value and profits to
    increase, he is likely more or less to project
    this rate of increase into the future and to
    enter into commitments which will turn out to be
    ill-conceived and untenable as soon as that rate
    of increase is interrupted. (349)

29
Schumpeters model
  • Conventional interpretation of neoclassical
    economics
  • Utility analysis of consumer behaviour
  • Marginal productivity theory of income
    distribution
  • Says Law in static equilibrium
  • somewhere in the economic system a demand is
    ready awaiting every supply, and nowhere in the
    system are their commodities without complements
    the sellers of all commodities appear again as
    buyers in sufficient measure to acquire those
    goods which will maintain their consumption and
    their productive equipment in the next economic
    period' (1936 8)

30
Schumpeters model
  • Semi-Austrian roundaboutness theory of
    production
  • All means of production reducible to land
  • we finally come to the ultimate elements in
    production for our purposes labour and the gifts
    of nature or land But the remaining products,
    the produced means of production, are, on the
    one hand, only the embodiment of those two
    original production goods we have no reason
    why we should see in them an independent means of
    production. We resolve them into labour and
    land. (1936 16-17)
  • Subject to Cambridge critique of aggregate
    capital (see History of Economic Thought lectures)

31
Schumpeters model
  • No profits in static equilibrium
  • Hence, in an exchange economy, the prices of all
    products must, under free competition, be equal
    to the prices of the services of labour and land
    contained in it... Consequently, net profit
    cannot exist, because the value and price of the
    original productive services will always absorb
    the value and price of the product (1936
    30-31)
  • Money only a veil over barter in static
    equilibrium
  • 'To employ a customary expression, we can say
    that money thus far represents only the cloak of
    economic things and nothing essential is
    overlooked in abstracting from it.' (1936 51)
  • Money as gold equivalent no net credit

32
Schumpeters model
  • Profits come from discontinuous disequilibrium
    forces, which statics cant explain
  • static analysis can neither explain the
    occurrence of such discontinuous productive
    revolutions nor the phenomena which accompany
    them. It can only investigate the new equilibrium
    position after the changes have occurred.' (1936
    61-62)
  • To explain change, an evolutionary approach
    needed

33
Schumpeters model
  • Evolutionary basis to thinking
  • the evolutionary idea is now discredited in our
    field with all the hasty generalisations in
    which the word evolution plays a part, many of
    us have lost patience. We must get away from such
    things then two facts still remain first the
    fact of historical change... and that These
    changes constitute neither a circular process nor
    pendulum movements about a centre. (1936 57-58)
  • Economic evolution hence development is
  • spontaneous and discontinuous change in the
    channels of the flow, disturbance of equilibrium,
    which forever alters and displaces the
    equilibrium state previously existing.' (1936 64)

34
Schumpeters model
  • Development occurs when an entrepreneur seeking
    profit either
  • Introduces a new good
  • Introduces a new method of production
  • Opens up a new market
  • Introduces a new source of supply
  • Reorganises an industry
  • Assumes
  • entrepreneurs not involved in existing firms
    (treats intra-firm innovation as negligible)
  • Reorganisation of employment of existing
    resources rather than employment of previously
    unemployed (treats latter as negligible)

35
Schumpeters model
  • To be able to develop, entrepreneur needs credit
  • the possessor of wealth ... must resort to
    credit if he wishes to carry out a new
    combination, which cannot like an established
    business be financed from returns from previous
    production. To provide this credit is clearly the
    function of that category of individuals we call
    capitalists (1936 69) and The banker has
    himself become the capitalist par excellence
    (1936 74)
  • Entrepreneur as agent of evolutionary change
  • The carrying out of new combinations we call
    enterprise the individuals whose function it
    is to carry them out we call entrepreneurs.
    (1936 74)

36
Schumpeters model
  • Net profit emanates from development
  • he has, if everything has gone according to
    expectations, enriched the social stream with
    goods whose total price is greater than the
    credit received and than the total price of the
    goods directly and indirectly used up by him...
    Furthermore, the entrepreneur can now repay his
    debt (amount credited plus interest) at his bank,
    and normally still retain a credit balance
    (entrepreneurial profit) that is withdrawn from
    the purchasing power of the circular flow.
    (110-111)

37
Schumpeters model
  • Net credit (credit in excess of asset backing)
    arises from development
  • money, and other means of payment perform an
    essential function, processes in terms of means
    of payment are not merely reflexes of processes
    in terms of goods (95) in real life total
    credit must be greater than it could be if there
    were only fully covered credit (101)
  • Disruption to equilibrium, net entrepreneurial
    profit, net credit, leading ultimately to a new
    equilibrium

38
Schumpeters model
  • But now comes the second part of the drama. The
    spell is broken and new businesses are
    continually arising under the impulse of the
    alluring profit. A complete reorganisation of the
    industry occurs, with its increases in
    production, its competitive struggle, its
    supercession of obsolete businesses, its possible
    dismissal of workers, and so forth the final
    result must be a new equilibrium position
    Consequently, the surplus of the entrepreneur in
    question and his immediate followers disappears
    Nevertheless, the surplus is realised And their
    profit, the surplus, to which no liability
    corresponds, is an entrepreneurial profit.
    (131-132)
  • This process occurs in cycles

39
Schumpeters model the business cycle
  • Cycles occur because the new combinations are
    not, as one would expect according to general
    principles of probability, evenly distributed
    through time but appear, if at all,
    discontinuously in groups or swarms. (223)
  • Three circumstances increase the effect of the
    swarm-like appearance of new enterprises
  • the vast majority of new combinations will not
    grow out of the old firms but compete with
    them
  • the fact that entrepreneurial demand appears en
    masse starts a secondary boom
  • errors must play a considerable role at the
    beginning of the boom and during the course of
    the depression. (225-227)

40
Schumpeters model the business cycle
  • Why do entrepreneurs appear, not continuously
    but in clusters? Exclusively because the
    appearance of one or a few entrepreneurs
    facilitates the appearance of others, and these
    the appearance of more, in ever-increasing
    numbers. (228)
  • Reality also discloses that every normal boom
    starts in one or a few branches of industry But
    the pioneers remove the obstacles for the others
    not only in the branch of production in which
    they first appear, but, owing to the nature of
    these obstacles, ipso facto in other branches
    too Hence the first leaders are effective beyond
    their immediate sphere of action (229)

41
Schumpeters model the business cycle
  • Boom leads to bust
  • During boom, financing of new innovations expands
    net credit, general business activity, increases
    wages rents
  • Once innovations produced
  • new/cheaper goods undercut existing enterprises
  • Repayment of net credit (with entrepreneurial
    profit deducted) contracts credit system
  • Both deflate prices, causing financial distress
  • The average time which must elapse before the
    new products appear fundamentally explains the
    length of the boom. This appearance of the new
    products causes the fall in prices, which on its
    part terminates the boom, may lead to a crisis,
    must lead to a depression, and starts all the
    rest. (233)

42
Discordant fathers
  • Two different foundations for evolutionary
    economics
  • Veblen
  • Evolutionary view incompatible with neoclassical
    statics
  • Evolutionary perspective needed for everything
    from consumer behaviour up
  • But no systematic alternative developed
  • Schumpeter
  • Evolution can be pasted onto neoclassical statics
  • Statics suitable for consumer behaviour, circular
    flow
  • Evolution needed for growth development
  • Attempt at systematic analysis

43
Discordant children
  • Main branch of evolutionary economics combines
  • Veblens scepticism re statics
  • Non-neoclassical theory of value
  • Simons satisficing vs neoclassical optimising
  • Markup pricing vs marginal cost pricing
  • Schumpeters creative destruction and focus
    upon
  • Business cycle dynamics
  • Role of entrepreneur
  • Evolution of technology
  • Some evolutionary approaches not considered
  • Evolutionary game theory
  • Austrian economics (Hayek/Mises/Rothbard)

44
References
  • Schumpeter, J.A.
  • (1928). The instability of capitalism, Economic
    Journal 361-386, reprinted in Essays of J.A.
    Schumpeter, Addison-Weslay, Cambridge MA 47-72.
  • (1936). The Theory of Economic Development,
    Harvard University Press, Cambridge MA.
  • Veblen, T.
  • (1904). The Theory of Business Enterprise,
    Augustus M. Kelley, New York, 1965.
  • (1919). The Place of Science in Modern
    Civilisation, B.W. Heubsch, New York.
  • The evolution of the scientific point of view,
    32-55. (1908)
  • The preconceptions of economic science, I, II
    III, 82-113, 114-147, 148-179. (1899, 1899, 1900)
  • Professor Clarkes economics, 180-230. (1908)
  • The limitations of marginal utility, 231-251.
    (1909)
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