Evolutionary Economic Theory

garden of forking pathsThe Science of Choice ...

think opportunity costs ... the genes do cost benefit analysis!

Evolutionary economic theory originated outside the orthodox neo-classical tradition, however that tradition was enriched not contradicted. Neo-classical theory became a special case in a much more complex reality.

Evolutionary Economics is the science of choice, survival choice ... and the co-operative institutions which have evolved to guide choices ... think opportunity costs ...

How do we choose between alternatives? Apples and pears? Guns or butter? Save or consume? Buy or rent? Debt or equity? Work or play? Arts or science? Cricket or football? Cynthia or Jane? Jesus or Mohamed? Good or evil?

Go left or go right at the fork in the path, what is best for you and for other folk in the long term?

To buy or not to buy, that is the question … and the dilemma is compounded by blind ignorance, uncertainty & risk in a world of scarcity, complexity, change & conflict ... how can we acquire 'know how' to guide decisions when Darwin suggests the future was unknowable?

There are fundamental truths about all decisions -

nobody can foresee the emergent future of intended nor unintended consequences and 

nobody knows how other folk will respond to interactions ... 

The only way to proceed is by trial & error and remembering what worked ... is that a dismal prospect?

When push comes to shove these questions are so fundamental, so hugely profound, that understanding involves many disciplines, I suggest 10 topics with ethics, law and scientific methodology thrown in a vain attempt to avoid loose ends? Evolutionary economics is the science of sciences? E O Wilson 'consilience', everything is contemporaneous, interconnected, interactive, interdependent & emergent in a whole shebang & caboodle - 

Thermodynamics - Non-Linear Emergence - Agent Based Computer Simulation - Molecular Biology - Neuroscience - Evolutionary Psychology - Economic Anthropology - Game Theory - Biological History - Complex Adaptive Systems.

A mighty task and my own ignorance precludes any detailed answers here ... but I do know where to find some experts! Start with 1,000 references listed in 'The Evolutionary Foundations of Economics', edited by Kurt Dopfer ... but remember Evolutionary Economics is an ex post explanation of the immense complexity of life - 'a garden of forking paths' - it can never be an ex ante prediction of outcomes.

1. Thermodynamics & evolutionary stable structures

Temperature gradients always increased entropy.

The driving force involved in all economic survival tricks comes from the dissipating energy flows associated with the laws of nature which have been working their magic since at least the big bang ...

Dissipating energy flows in local open complex systems produce novel structures and some survive - those structures in turn interact and increase complexity as energy flows are intensified - history unfolds as a series of emergences ... but work is involved ... there's no free lunch ...

Perhaps the most relevant example for economic decisions & the human brain is the capture of dissipating energy by photosynthesis which powers metabolism. All economic costs ultimately result from the loss of useful energy gradients due to the spontaneous action of the 2nd law of thermodynamics ...

NB It is the 2nd law that guarantees change ... stuff happens ... ice melts ... iron rusts ... roofs leak ... proteins are synthesised ... and there's something rather than nothing ...

2. Emergence & hierarchies of evolutionary stable structures

Physical, chemical & biological structures emerged & interacted increasing the complexity & diversity of structures.

On the edge of chaos energy streams can 'work' to counter the corrosive effect of the 2nd Law of Thermodynamics such individual 'tricks' can interact with others resulting in self organised patterns. A trick is an activity achieving an unpredictable end.

Traditional economics was unwittingly modeled by closed systems and the 1st Law of Thermodynamics which predicted non existing stable equilibriums.

Evolutionary economics is based on open systems and the 2nd Law of Thermodynamics predicting emergent structures, patterns and novelty associated with dissipative systems far from equilibrium.

Interactions will result in stochastic events which can push non-linear systems towards attractors - local niches which are stable, impossible to predict and difficult to change - characterised as - 

dynamic, changing, irreversible and history dependent

non-linear, sensitive to initial conditions and path dependent

chaotic, deterministic (cause & effect) but bounded and never repeating, unpredictable (effects become ccauses)

complex mixes of stocks & flows with multiple positive & negative feedback loops with different delays & timescales

Emerging structures constantly interact & feedback and the process constructs a hierarchy with further interactions and further emergence -

material & energy (physical tricks)

elements & molecules (chemical tricks)

metabolism & morphology (biological tricks)

unconscious neural networks (instinctive tricks)

conscious generate & test in the imagination (imaginative tricks)

self conscious cultural learning from others (cultural tricks).

A multiplicity of hierarchical symbiotic loops of different origins from different times and places, which interact, overlap and repeat whenever and wherever there is energy and synergy. 

Only a very few interactions result in survival synergies, the vast majority result in useless failure, but stable structures will emerge.

Economics is real complexity science not a description of supernatural social myth and magic.

NB no one is 'in charge' of the design ... an evolving whole shebang & caboodle just happens ... self consistent, self organisation emerges ... institutions emerge ... Chris Langton drew a picture ...

3. Computer Simulation & non-linear mathematics

Evolutionary equations produced non-linear bifurcation patterns not neat solutions.

The science involved in economic survival tricks is based on non-linear mathematics.

The availability of cheap computing power from around the 1980s enabled the investigation of evolutionary equations which when iterated can result in unpredictable irreversible bifurcations and patterns, the emergence of counter intuitive order.

Traditional scientific reductionism inevitably excludes emergent concepts which simply vanish when you focus on the individual constituent interactions. Undoubtedly there is some complex chemical cause and effect for economic behaviour but it is meaningless. 

Interesting equations are of the type - the value of x at time 'n+1' = a function of x*(1-x) at time 'n' ... 'x' is multiplied by itself involving interaction, feedback and non-linearity. A nonlinear system is one whose behaviour is not simply the sum of its parts.

These equations don't have easy solutions and the emerging tricks are only possibilities, being dependent of history and supersensitive to the initial conditions which can never be pinned down, being massively diverse and recursive. 

Overwhelmingly most physical systems are inherently non-linear ... Newton's maths can't describe complex, emergent, unpredictable, novel, patterns of economic activity ...

NB look at the maths ... look into the telescope ... old linear maths has dominated neo-classical economics, new non-linear maths is illuminating evolutionary economics.

4. Molecular Biology & the copy/vary/select neo-Darwinian synthesis

Some structures survived & replicated when interactions resulted in survival synergies, natural selection,

The economic process is Neo-Darwinian adaptation, the differential survival of inherited variants as competing alternatives. Understanding starts with biological evolution, where most work has been done and where Darwin and Mendel's theories originated. However the basic copy/vary/select process can be applied quite generally, the entity being copied, the source of variation and the laws governing selection needn't be detailed to understand the process.

The focus of economics is on the evolution of 'know how', this is not some biological analogy but real emergent structures, real science. An evolutionary process takes place, not one that selects genes and organisms and takes millions of years, but one that occurs within each individual brain within a lifetime, replicated and mediated in social cultural environments.

'Know how' is valuable production, energy dissipation is the cost (a sort of entropy cost of producing 'know how').

The 'know how' 'trick' is survival, evolutionary tricks are random variants which prove better at surviving than their parents and the reproductive success of individual variants is seen in changing populations. Learning how to survive is relentless discovery & accumulation from trial & error experiment.

It's an awful stretcher but genes do cost/benefit analysis ... it is 'as if' marginal utility and opportunity costs were calculated ...

Darwin offered 4 breakthroughs -

inheritance from surviving species produced stable accumulations of tricks

natural selection of random mutations produced directional change towards increasing complexity

imaginative grasp of the delusion of design

public education through scientific evidence - observation, theory, hypothesis, experimental validation & peer review ... and 'The Origin of Species' ...

NB economics is not knee jerk hysteria about predicting the future, complex design is unplanned.

NB long necked giraffes result from the death of the short necked variety ... design is not intention but rather, weeding out.

(level 1 - selfish genes - a few genes survive because their physics and chemistry help survival that's why they survive!)

(level 2 - epigenetic evolution - genes are not alone in the universe, they interact and compete for survival in an environment of nutrients and poisons, nature and nurture are the same soup!)

5. Neuroscience & individual decision making

Economic 'know how' as survival synergies emerged from biological neural heuristic interactions.

Understanding the process of decision making whether unconscious or conscious, is at the heart of economics. Scientists are beginning to understand how neural networks & circuits do cost/benefit analysis which is far too complex for computers.

Darwinian processes in the brain discover & accumulate tricks when perceptions of the environment are associated with neural networks & circuits. A motor ability to 'wiggle' the environment means animals can generate and test ideas and their effects.

Layer upon layer of complexity is constructed by this trial & error feedback process of copy/vary/select and eventually, late in the evolutionary day, consciousness and self-consciousness emerge. 

We perceive a behaviour as rational purposeful and intentional when it appears 'as if' planned and is performed with skill and awareness. But it is hindsight and extrapolation that deludes us into a belief about 'good judgment' and knowledge of the future.

A conscious plan for the future is brain chemistry. For sure choices are mediated by hard wired survival instincts, but intelligent design is nothing more than a process of trial & error, discovery & accumulation. Innovation involves generating & testing new loops, imitation involves remembering successful loops from the past.

Matt Ridley is good with words - it is nature via nurture, nurture turns on nature - as encoded genes are expressed and result in behaviour and such behaviour then becomes a part of a complex environment which feeds back and has an effect on how genes are expressed and the survival chances of those genes.

Individual decision making behaviour results from neural networks and circuits in the brain adapting to their environment. We generate & test and rules of thumb emerge guiding behaviour and decisions.

Economics is wary of simplistic cause & effect models and does not involve a rational, calculating, commanding & controlling economic man ... what will survive is unknowable until the fat lady sings ...

NB tricks survive because they help survival that's why they survive ...

(level 3 - instinctive behaviour - biology builds neural systems which generate & test survival behaviours, like short necked giraffes, birds which don't build nests die out!)

6. Evolutionary Psychology & hierarchies of survival 'know how'

Layer upon layer of 'know how' accumulated and eventually self consciousness emerged.

Once learning networks & circuits are in place in the brain, a hierarchy of yet more new tricks becomes possible -

speed learning tricks - individual intentions (Maslow's hierarchy). Testing ideas in the imagination dramatically speeds up the discovery & accumulation of potential individual survival tricks. 

interaction tricks - beliefs about someone else (Robin Dunbar's 'Sally Ann Test' and empathy). People are different and there is a social 'problem' because other folks wiggles can help and harm. Individual brains discover and accumulate specialist 'know how' but useful production results from sharing and fairness in functional groups.  

language tricks - establishing reciprocal communication (Steven Pinker and shared attention). The penny has to drop in another brain, all you can do is sense and wiggle (generate & test) but communication involves symbolic coding and decoding. 

synergy tricks - cooperation & trust (Robert Axelrod and establishing credentials). Persuading folk you're a cooperator and not a parasite is easier with the benefit of a shared history and experience.

morality tricks - social instincts (Herbert Gintis, John Robinson, Arthur Peacocke, Bishop Spong and emotional 'social capacities' for cooperation in groups). Altruistic behaviour will tend to grow in populations whenever long term synergies outweigh the 'sucker' costs. Eventually a hard wired propensity or belief emerges from deep down in the skull mediating decisions. The peahen perhaps needed more cooperative psychological propensities from her mate, rather than material excess, if more of her pea chicks were to survive.

cheat detection tricks - defensive immunities (Matt Ridley and tit for tat strategies). The propensity for cooperation in trustworthy groups and the associated benefits opens up opportunities for parasites and predators. Counter strategies must co-evolve to protect benefits. Immune systems and cognitive cues identify selfish parasites & predators and altruistic groups protect themselves by confronting violence and threats.

cultural economic tricks - group enlargement (Adam Smith and specialisation & scale). Democratic communities which tolerate different lawful ideas tend to establish trust in strangers which brings more opportunities to discover synergies. Markets and companies evolve as tricks which encourage and extend cooperative economies of scale and division of labour between more and more strangers. A local focus on discovering 'profit' results in the production of global survival value in excess of costs for all folks in the long term.

 All these 'tricks' - intentions, empathy, fairness, cooperation, trust and cheat detection really exist as instincts honed by aeons of evolution. As neural networks reinforced by oxytocin and dopamine which can now be investigated with the techniques of neural science.

The science underpinning moral sentiments as a universal expression of biological cognitive & emotional emergent phenomena has been recently summarised by The Brights. Moral sentiments are an expression of biology, they are universal throughout the globe & not confined to self conscious folk but also apparent in infants and animals. Remember the peahen needed cooperative psychological propensities from her mate if her pea chicks were to survive.

We are ignorant of what it is we do not know even though we know more than we can ever say ...

Economics does not involve Freudian slips but deep down in the skull survival networks & circuits mediate decisions ...

NB an invisible hand promotes an end which was no part of intention ...

7. Anthropology & economic culture

Universal human social behaviour involved the emergence of a cognitive bias, empathy as innate moral sentiments.

Technological and organisational 'know how' are evolutionary survival tricks, too vast for individual experience or perception. Individuals specialise and cooperate enabling 'know how' to accumulate in emergent social institutions.

Folk have a genetic propensity to 'use their imaginations' and innovate and imitate, and successful behavioural traits will emerge from several sources -

biological history and instincts

individual innovative experiments, real and imaginary

peers and imitative experience

ancestors and cultural learning

It is cultural social learning that has become the dominant process enabling the survival of human activity systems. Cultural coherence emerges from individual interactions at the lower level but, somewhat confusingly, at the same time, the emerging coherence effects the survival chances of the individual interactions.

Economies of specialisation & scale are embodied as survival 'know how' in cultural institutions ...

NB society is not a 'thing' but a tapestry, an emergent property of lower level interactions ... we are dwarfs standing on the shoulders of giants ... most of them far away and long dead ...

(level 4 - cultural 'know how' - the brain generate ideas, imaginations and memory leading to symbolic learning and communication with others, there's no discontinuity!)

8. Game Theory & economic cooperation

Universal human social behaviour involved the opportunity costs of 'tit for tat' cooperation.

Game Theory has refocused economics on Adam Smith's 'moral sentiments' and the cooperative synergies of specialisation & scale underpinning interactions of social animals & trade ... the myth of the dismal science of selfishness was destroyed.

Cooperation is a behavioural survival trick which has exploded in all evolved economic systems.

Man is a clever animal but more important man is a social animal because synergy benefits can emerge from economic interactions. Game Theory is an area of science studying economic iterations and Evolutionarily Stable Strategies through computer simulation.

Economic output is survival 'know how' from the synergies of cooperation.

Again the peahen needed cooperative psychological propensities from her mate, not material excess, if her pea chicks were to survive.

NB it is profitable to cooperate ... and uneconomic to beggar my neighbour ...

9. Biological History & evidence of social animal synergies

From moral & cooperative interactions emerged science & the arts and wealth creation and the ideas of comparative advantage  and total factor productivity.

Human behavioural traits are tricks that survive to become 'rules of thumb' or 'know how'.

Historical 'success' unfolds as, at each level, as structures & behaviour that fails die out. Self consistent coherence emerges from a sifting process involving rewards and punishments but at the same time new experiments create new diversity.

Most experiments fail and most new evidence is likely to be wrong ... but some are fruitful, spreading patterns of behaviour whenever tests and the rigors of time find reinforcement from the environment. Such behaviours are 'path dependent' and become 'locked into' successful history and as survivors they become part of the future environment.

Economics explains current decision making by learning from the past and imagining the future ...

NB chasing profits & cutting losses ... creative destruction ... an arms race ... a man's gotta eat or be eaten ... if you don't the Japanese will ...

10. Complex Adaptive Systems & Universal Darwinism

The whole shebang & caboodle was evolving nothing else was going on just Darwin's process of natural selection - copy - vary - select. Anthropomorphic reasoning suggested folk interpreted what was not human in terms of human characteristics.
Anthropic reasoning suggested the cookie must have crumbled that way and it was no surprise that folk only observed the survivors.  

Economics cannot be separated out from the evolving multi level 'whole shebang & caboodle' of Universal Darwinism. The power of explanations is revealed by understanding economics as a integral part of complex interactive interdependent system of human behaviour which is itself part of a complex environment. At every level stable structures emerge from interactions at a lower level creating complex dissipative open systems.

Understanding ontology comes from the interactive whole shebang & caboodle - energy, matter, chemistry, biology, immune systems, neural networks & circuits, instincts, language, social behaviour and culture - choices at one level are always tested against alternatives at other levels. Self consistency is guaranteed as everything effects everything else, economics is embedded in an historical trajectory of a nested set of sets -

Morality evolves, altruism is a trick which encourages and extends social learning and economic interactions between different individuals. 

Law evolves, tort law is a trick which encourages and extends social learning and economic interactions between groups of different strangers. 

Science evolves, scientific methodology is a trick which encourages and extends social learning and economic interactions between groups of different strangers where knowledge is tacit, incomplete and dispersed.

Economics evolves, evolutionary economics is a trick which encourages and extends social learning and economic interactions between groups of different strangers where knowledge is tacit, incomplete and dispersed by a scientific explanation of behavioural choice. 

It emerges from neo-classical economics as all these disciplines lead to deeper understanding of decision making. As the copy/vary/select process continues instincts, learning and culture construct niches in the environment which feed back and influence the survival chances of future variants. The process is not random, statistical uniformities emerge and the uniformities of evolutionary economics can be investigated. But beware, statistical uniformities in Complex Adaptive Systems aren't what they seem to be.

The latest work confirms these concepts as plausible ... but more to come ...

Santa Fee Institute is a leading light - 

even if all possible long term behaviors of a system are simple, determining which one will occur for an imprecisely known initial state can be essentially impossible.

Conclusion - While mathematical models can force us to quantify our understanding of the causal relations among the various components of a complex issue and while the ability to analyze these models with the tools of modern nonlinear dynamics can sharpen our perceptions what may occur, the fundamental limitations caused by the very COMPLEX nature of, and the inherent UNCERTAINTY, these problems mean that these models must always be interpreted, to paraphrase Dickens, as images of what might be, rather than what must be. They can never substitute for human analysis, collective wisdom, and political will. Nonetheless, coupled with these attributes, mathematical modeling of environmental and socio-political issues can contribute vitally to the development of a new and more stable world order.

Human Activity Systems -

 Human activity systems are non-linear systems, deterministic (causes & effects), but unpredictable (imprecise initial

 System trajectories will start to diverge slowly, some predictability is possible but then they will bifurcate. Emergent end
states are impossible to predict. The long term future is unknowable.

 Behaviour tends to be planned on the initial trajectory which is temporary maybe a few seconds (particle physics), or maybe millennium (cosmology).

 Behaviour tends to be planned assuming the environment doesn't change as a result of planned behaviour. But every action of everybody changes the environment which changes planned response (effects are causes).

Uncertainty,  -

 Everybody must plan not only to respond to the reaction of others to your plan but also to the reaction of others to your
response to the reaction of others to your plan and their plan ... and more.

 Attack the forces in the field or better attack the plan of the forces in the field ... etc ... etc ...

The brain can't cope so we just try something and see what happens and immediately try something else before competitors work out what has happened!

However all is not lost there are implications -

experiment with care - awareness of the networks of interconnections and understanding the limits to knowledge about the global consequences of local actions may lead to more care & restraint?

patterns emerge - universality of nonlinear systems implies that we can hope to understand many apparently disparate systems if we observe a few simple behavioural rules of thumb resulting in patterns in one system we can use similar reasoning to interpret another system.

responsive adaptation - experiment and learn from market outcomes and planning failures

business entrepreneurs drive economic change through creative destruction

small errors in demand micro management can result in cycles of instability

competitive diversity, mergers & acquisitions and bankruptcy encourage faster adaptation; monopoly, regulation and debt & high tax stultify innovation

Economics is no longer about rational 'economic man' in stable equilibrium ... institutionalised technology is endogenous and no longer an exogenous 'black box' ...

What is passed on to the next generation is an overall package, warts and all ... a whole shebang & caboodle where systems are impossible to isolate for tidy analysis ... 

Evolved Complex Adaptive Systems are intensely economic. An insightful paper from Paul Krugman in 1995 made the link -

Economics emerges from interactions among intelligent, self-interested individuals. Suggesting folk are very smart about finding the best strategy.
Biology emerges from the interactions of self-interested individuals, genes 'trying' to propagate as many copies of themselves as possible. Suggesting folk are very myopic about finding the best strategy.
But both Economics & Biology explain behavior in terms of an equilibrium among maximizing individuals.
Needing to simplify to make models that are comprehensible. neo-classical economists entirely correctly adopted the useful fiction of maxima and equilibrium.
Reading John Maynard Smith's 'Evolution and the Theory of Games' is a startling experience. The field does look like, to a remarkable degree, neoclassical economics.

There are at least seven difficult questions often left out of orthodox economic teaching & discussion and if economics is the science of choices the silence is deafening -

origins (Darwin's Dangerous Idea) - universal Darwinism, the study of moral sentiments and not intelligent design.
Why is there no evidence of a successful designer? Paul Krugman's biology was intensely economic.

liberal democracy (Jeffersonian Democracy) - economic anthropology, the study of co-operating communities & synergies, 2 + 2 = 5. Synergies illuminated the debate about Plato's conundrum of mob rule & emasculation of the wise.
Why does liberal democracy involve moral sentiments and not 'winner takes all' as 51% voted out 49%?

opportunity costs (Free to Choose) - Theory of Mind glimpsed the impossible difficulties of working out how the alternative cookie would have crumbled ... and there were always different interpretations of how it did, in fact, crumble!
Why is the Theory of Mind so difficult?

comparative advantage (Globalisation of Trade) - Paul Krugman's difficult ideas were counterintuitive.
Why are 'natural selection' and 'comparative advantage' so difficult to grasp?

money measurement (Central Bank Balance Sheets) - business ethics, fake money & seigniorage.
Why can't money be 'created out of nothing'?

XS tax burden (Coin Clipping) - economic inefficiency, distortions, irrecoverable losses and gluts & queues.
Why do gluts & queues always cost money?

average tax burden (Total Factor Productivity) - survival know how and technological innovation.
Why does technological innovation solve problems and not the traditional factors of production?

Bottom Line

Ten topics contribute to the seminal concepts of evolutionary economics - tit for tat cooperation and justice, satisficing decision making and market coordination 'as if' a control loop - but the evolutionary process describes a whole shebang & caboodle which not simply too complex for megalomaniacs to intelligently design but impossible to design because of randomness, uncertainty, emergence and accumulation over deep time ...

PS Distinguish between 'know how' and 'events'. Events are happenings, bits of information sometimes factual, sometimes opinion, but there is no meaning, no understanding, no clarity, no 'knowhow' ... until disputed evidence is placed into an historical context of scientific theory. 

PPS Don't despair. Education and learning are not elitist privileges ... division of labour, scale economies and empirical scientific method will guarantee that some self conscious individuals will participate and absorb cultural 'know how' ... and ensure survival tricks cannot be on the secrets list ...

NB Universal Darwinism ... everything else is myth, magic & mirrors ... and the danger of a belief in magic is that the learning process is slowed down ... adaptation is slowed down ...

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