Evolutionary Economics

In contrast to orthodox economics, evolutionary economics has constant change and bounded rationality as the foundation of all its analysis. This implies that one studies the processes of markets with innovation instead of the equilibria of markets with a fixed set of goods, and adaptive routine behavior instead of individual utility or profit maximization. Evolutionary economics thus leaves space to study evolving societies whose legal and other framework has not been stable long enough to let it reach equilibrium—as is the case in all existing societies.

Evolutionary economics traces its roots back to Adam Smith's (1723–1790) invisible hand, which coordinated the wills and actions of many market participants. Evolutionary biology as it has developed since the nineteenth century fertilized the development of evolutionary economics. Before the marginalist revolution in economics, it was an unresolved issue whether orthodox twentieth-century economics was to become equilibrium analysis as prevalent in mechanical physics or process analysis as predominant in evolutionary biology.

During much of the twentieth century, evolutionary economics existed in only small niches. Even Joseph Schumpeter's (1883–1950) hypothesis of competition as “creative destruction,” despite being one of the most cited ideas in economics, failed to propel evolutionary economics into the center of economic research. However, during the last third of the twentieth century, evolutionary economics regained ground by explaining routine behavior and its change in large firms (and other organizations). A second breakthrough was innovation research, in which orthodox economic theory struggles with the impossibility of optimizing the content of inventions, which is unknown by definition. Since then, evolutionary economics has itself evolved and differentiated into a number of competing and complementary methodological standpoints and objects of research.

With respect to methodology, economists debate the relevance of the Darwinian structure of evolution. To be sure, no serious economist in the field follows crude neo-Darwinism in the sense that human individuals are objects of physical selection as are members of other species in biology. However, an important group of evolutionary economists derives its concepts mainly from an analogy to biological concepts of variation, selection, and retention. To derive further inspiration from biological insights, these economists take behavioral routines as genotypes subject to variation, actual behavior as phenotypes subject to selection, and imitation as analogy to retention in biological inheritance. Although this analogy is inspiring, it is criticized for ignoring the fundamental differences between biology and economics, that is, social evolution. Critics claim that evolution is a concept broader than biology and that it thus covers any kind of emergence and dissemination of novelty.

Besides this controversy, the methodology of evolutionary economics covers a wide field of approaches, ranging from purely verbal arguments to sophisticated mathematical models of evolutionary dynamics. Evolutionary game theory supplements these methods. It describes how strategies of behavior may spread or decline in a population of individuals who adapt to the behavior of other individuals. A relatively new variant of evolutionary game theory that is likely to become popular for evolutionary economics is the indirect evolutionary approach developed by Werner Güth, since it allows the combination of the evolution of adaptive behavior with elements of rationality from orthodox economics.

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