Evolutionary Economics

Summarised by Rizal K.

In the beginning 1980s, Nelson and Winter (1982)  published their seminal work: An Evolutionary Theory of Economic Change, which becomes one of the building blocks of evolutionary thinking in economic geography. What precisely distinguish evolutionary thinking from orthodox neoclassical economics is the assumptions of maximizing behaviors and equilibrium. They argue that to develop a more realistic theory of economic change one should put aside the methodological individualism of maximizing behaviors and equilibrium. Alternatively, they proposed the term ‘routine’ as decision rules used by firms to deal with temporal complex situations. These routines, which are also defined as operating characteristic of firms, play crucial roles in evolutionary theory particularly in determining the behavior and inheritance capacity of firms as objects on which selection forces work. As Nelson and Winter (1982) put it:

“These routines play the roles that genes play in biological evolutionary theory. They are a persistent feature of the organism and determine its possible behavior (though actual behavior is determined also by the environment); they are heritable in the sense that tomorrow’s organism generated form today’s (for example, by building a new plant) have many of the same characteristics, and they are selectable in the sense that organism with certain routines may do better than others, and, if so, their relative importance in the population (industry) is augmented overtime (p. 14)”.

Another important concept introduced by Nelson and Winter (1982) is the notion ‘search’ for new routines. Searching for new routines, according to them, is equivalent to mutation in biological evolutionary theory, which in part is determined by genes. Thus, by applying these two notions of ‘routine’ and ‘search’ (or equivalent to genes and mutation in biology, respectively) into the dynamic process of firms and its market environments, they developed their evolutionary theory of which “firm’s behavior patterns and market outcomes are jointly determined over time (p. 18)”.

The typical logic of an evolutionary process is illustrated in Figure 1. At each point of time, the routines of firms determine aggregate input and output at industry levels. These routines, together with market condition which are exogenous to firms, define the market price of input and output. As the market price changes, it affects the profitability of firms. Profitability is one major determinant that affects the capacity of firms to expand, for example, through re-investments. More/less profit means high/low possibility to expand in the future. This, in turn, determines the size of firms which proportionally limits its capacity of searching for new and better routines. With different size of firms now, and probably with new routines of new entrants, the level of input and output in the next cycle will also change. Consequently, the level of price changes signaling a shift in profitability. Selections forces start to kick-in again, and so on.

Thus, the key elements of evolutionary theory is the presence of variety (in this case the firms’ routines), inheritance (temporary persistence on routines), and selection to routines of firms. These key principles of evolutionary theory (variety, inheritance, selection) are then termed by many scholars as Universal or Generalized Darwinism (Cziko, 1997; Dawkins, 1985; Essletzbichler and Rigby, 2007; Hodgson, 2002). Generalized Darwinism operates at high level of abstraction so that the basic principles of variety, inheritance/retention, and selection can be generally applied to a wide range of phenomena by leaving rooms for domain-specific explanations (Hodgson, 2002, p. 271).

In terms of prediction over economic development paths, evolutionary economics envisages a diverging outcome because evolutionary forces vary across space.

Evolutionary economics

 

References

Cziko, G., 1997. Without Miracles: Universal Selection Theory and the Second Darwinian Revolution, New Ed edition. ed. MIT Press, Cambridge, Mass. London.

Dawkins, R., 1985. Universal Darwinism, in: Evolution from Molecules to Men. Cambridge Univ. Press, Cambridge, p. 594.

Essletzbichler, J., Rigby, D.L., 2007. Exploring evolutionary economic geographies. J. Econ. Geogr. 7, 549–571.

Hodgson, G.M., 2002. Darwinism in economics: from analogy to ontology. J. Evol. Econ. 12, 259–281.

Nelson, R.R., Winter, S.G., 1982. An evolutionary theory of economic change, digitally reprinted. ed. The Belknap Press of Harvard Univ. Press, Cambridge, Mass.

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