Title: Political Economy: Evolutionary Economics
1Political Economy Evolutionary Economics
2Recap
- 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
3Darwins 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
4The 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
5The 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)
6And 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
7Reading 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
8Why 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
9Neoclassical 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.
10Neoclassical 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.
11Neoclassical 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
12Neoclassical 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...
13Neoclassical 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.
14Neoclassical 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)
15Neoclassical 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
16Neoclassical 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
17Neoclassical 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.
18Neoclassical 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)
19Neoclassical 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.
20Veblens 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)
21Veblens 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
22Veblens 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)
23Veblens 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)
24Veblens 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)
25Veblens 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
26Schumpeter
- 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
27Schumpeter
- 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
28Schumpeter
- 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)
29Schumpeters 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)
30Schumpeters 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)
31Schumpeters 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
32Schumpeters 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
33Schumpeters 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)
34Schumpeters 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)
35Schumpeters 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)
36Schumpeters 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)
37Schumpeters 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
38Schumpeters 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
39Schumpeters 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)
40Schumpeters 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)
41Schumpeters 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)
42Discordant 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
43Discordant 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)
44References
- 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)