Economics Meets Evolution – in a Fantastic Setting

Posted on September 16, 2013 by


Over the last two weeks I did not have any time left for blogging. First, I have moved from Connecticut to Aarhus, where I will be for the next several months. Or, at least, this is where I will be based – I already have a lot of trips planned, all over Europe. Second, I have already gone and returned from the first of these trips. Hopefully, now things will start to settle down and I will be able to resume my regular schedule of blogging (roughly, twice a week).

The trip was to Ringberg Castle in the Bavarian Alps to participate in a conference on evolutionary economics.

Ringberg

(Photo by the author)

What is evolutionary economics? I posed this question to Ulrich Witt, the director of evolutionary economics group at the Max Planck Institute for Economics and the organizer of the meeting.

According to Ulrich, there are two main currents in evolutionary economics, which have developed largely independently of each other. One research direction, within which Ulrich himself has been working, begins by questioning the assumption of homo economicus, a rational agent that choses those actions that yield the best balance of rewards versus costs. Real human beings behave in a very different way. We are not very good at calculating the best possible solution that will maximize the expected pay-off. Instead, we tend to use all kinds of computational short-cuts – ‘heuristics,’ rules-of-thumb – to figure out what would be the best course of action. In many situations this approach works reasonably well, but it can also fail quite disastrously.

However, it’s not enough to say that we fail to measure up to the lofty standards assumed by the rational choice theory. What would be particularly interesting is to understand in what ways our behavior deviates from ‘perfect rationality’ and why we evolved to behave in these ways. In the last couple of decades the fields of evolutionary psychology and behavioral economics have been making great strides in answering such questions.

We now know, for example, that people behave cooperatively in various social games (public goods, ultimatum, etc.) not because we are stupid (rational agents should always defect, that is, play uncooperatively), but because we value cooperation for its own sake. And a good thing we do (or most of us do).

Carsten

Carsten Herrmann-Pillath, the author of Foundations of Economic Evolution (Elgar, 2013) (credit: PT)

The second current in evolutionary economics is sometimes called the ‘Universal Darwinism’ (one proponent of this approach at the conference was Sylvie Geisendorf at École Sup. de Commerce, Berlin campus). Darwin developed his theory to explain biological evolution. But his basic insight has a lot of value when considering the dynamics of economic agents (especially, organizations such as firms and corporations) competing in the market. In biological organisms evolutionary ‘fitness’ is maximized when they increase their chances of survival and reproduction. Firms also have fitness, which is maximized when they increase their revenues and cut costs.

Of course, it is quite possible to maximize short-term returns at the expense of long-term profitability. But biological organisms may also be similarly irresponsible: produce too much offspring, more than they could feed, and have all of them starve as a result. So there are lots of parallels (it is not entirely by chance that ecology and economics sound similar). At a deeper level, mathematical models explaining evolution of ecosystems and evolution of whole industrial clusters may have a lot in common.

I don’t want to say that all the presentations at the conference strictly conformed to one of these two currents – there was a lot of diversity, and the backgrounds of participants ranged from modeling, biology, and psychology to anthropology, economics, and political science. There was one theme that was largely absent at the conference – the deep roots of economic development. As readers of this blog know, I am convinced that an evolutionary approach to this question can be very productive. In my own presentation I touched on it, but mostly I talked about the Z-curve of human egalitarianism.

dinner

Dinner in Ringberg Castle (credit: PT)

So the conference was a great success. Not only were nearly all talks excellent and thought-provoking, the setting within which the conference took place, Schloss Ringberg, was what tipped the conference from being just, well, a conference, into quite an extraordinary experience. But I am running out of space here, so I’ll write about this fantastic (even, fantastical) setting in the next blog.

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A note added 19.IX.2013. For those interested in reading up on various strands within evolutionary economics, I’d like to direct you to an article Ulrich Witt wrote a few years ago for the Journal of Evolutionary Economics (appropriately enough), with the title What is specific about evolutionary economics?

In that article Ulrich discusses four different approaches, distinguished in a 2 x 2 classification. First, does the approach assume that social/economic versus biological evolutionary processes belong to different, disconnected, spheres of reality? Second, does the approach use a formal set of Darwinian postulates (the three focusing on variation, selection, and heredity), or is it based on more informal comparisons (change, novelty, emergence – after all, ‘evolving’ means changing with time).

Universal Darwinism falls into one of the four cells in this 2 x 2 table. Other cells are occupied by Schumpeter and Neo-Schumpeterians, and by approaches of Hayek, North, etc. In any case, the article is well worth reading, although it is fairly abstract in places!

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