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Evolutionary economics has gained increasing acceptance as a field of economics that focuses on change over time in the process of material provisioning (production, distribution, and consumption) and the social institutions that surround that process. It is closely related to, and often draws on research in, other disciplines such as economic sociology, economic anthropology, and international political economy. It has important implications for many other fields in economics, including, but not limited to, growth theory, economic development, economic history, political economy, history of thought, gender economics, industrial organization, the study of business cycles, and financial crises.
Historically, evolutionary economics was the province of critics of the mainstream, neoclassical tradition. Both Marxist and original institutional economists (OIE) have long asserted the importance and relevance of understanding change over time and critiqued the standard competitive model for its abstract, ahistorical, and static focus. In recent years, however, the rise of the new institutional economics (NIE) as well as game theory has resulted in wider acceptance of evolutionary explanations by the mainstream (Hodgson, 2007b, pp. 1-15; North, 1990). Consequently, it is now possible to identify three major traditions in evolutionary economics: the Marxist (Sherman, 2006), the OIE (Hodgson, 2004), and the NIE (North, 1990). Each of these major traditions encompasses multiple strands within it. As a general rule, Marxists and OIEs seek to replace the standard competitive model of mainstream economics, while NIEs seek to complement the standard competitive model, although the growing acceptance of game theory may make this less of an important distinction. Despite their differences, it is possible to identify some common themes that are shared by each of these disparate traditions. For example, authors in each tradition have exhibited a concern with how the interaction of technology, social institutions, and ideologies leads to changes in economic and social organization over time.
The goal of this research paper is to introduce the reader to a few of the major concerns, themes, and important authors of each respective tradition. In doing so, it will first address some general issues in evolutionary economics, including its relationship to evolutionary biology as well as some conceptual, definitional, and taxonomic issues. It will then proceed to provide a brief overview of the evolution of each respective tradition. Unfortunately, the length of this entry precludes discussion of many worthy contributions to each tradition as well as important topics that can and should be addressed by evolutionary economics. For example, space does not permit a discussion of how evolutionary economics could be applied to gender economics or how economists who write on gender often incorporate the contributions of evolutionary economists. Nor will this entry attempt to assess the extent of empirical or conceptual progress in evolutionary economics within or between respective traditions. In addition, the reader should be aware that evolutionary economics itself is an evolving field and that the boundaries between the three traditions are often fluid.
Relationship Between Theories of Biological and Sociocultural Evolution
Taken at face value, the word evolution simply means change. But Darwin’s theory of gradual (step-by-step) evolution by variation of inherited characteristics and natural selection (differential survival based on the level of adaptation) removed both theological and teleological explanations from the process of biological evolution and placed humans firmly in the natural world. The modern neo-Darwinian synthetic theory of evolution combines Darwin’s focus on gradual (step-by-step) change based on variation of inherited characteristics and natural selection with modern population genetics. Both Darwin’s original theory and the modern synthetic theory of evolution explain change within a species, the rise of new species, and the more dramatic kinds of change such as the rise of mammals, primates, and eventually human beings as a result of the same step-by-step process (Mayr, 2001, 2004).
At the risk of oversimplifying slightly, it should be noted that the neo-Darwinian synthesis formulated by Thedosius Dobzhansky and Ernst Mayr in the 1950s has given rise to two sometimes opposing strands within the overarching frame of the synthesis (Mayr, 2004, pp. 133-138). One strand, exemplified by Richard Dawkins, who has written many widely read books on evolution, focuses on the role of genes in building organisms and on the tendency of natural selection to result in highly adapted organisms. This approach is sometimes referred to as the strong adaptationist program in evolutionary biology. It is closely related to fields such as sociobiology and evolutionary psychology, which explain many human behaviors in terms of their evolutionary origins.
Other evolutionary biologists have de-emphasized the role of natural selection and emphasize the importance of understanding biological evolution in terms of emergence, chance, path dependence, satisficing, and punctuated equilibrium. Richard Lewontin and the late Stephen J. Gould are two widely read authors who have advocated this position. Both Gould and Lewontin have been strongly critical of biologically based explanations for human behavior.
Although these two differing approaches to evolution are sometime viewed as rivals, they are in actuality complementary to each other. It is important to understand both aspects of biological evolution. In addition, biological evolution is a very complex process, and evolutionary biologists continue to push their field forward. Contemporary research in evolutionary biology focuses on the important interactions between genes, organisms, and their interaction with the environment in the process of development. Evolutionary biologists have also become more aware of the importance of lateral gene transfer and endo-symbiosis in bacteria evolution. However, there is still widespread consensus among evolutionary biologists that the synthetic theory of evolution is a true theory. Evolutionary biologists reject theories that incorporate teleological explanations or inheritance of acquired characteristics because these theories have been discredited empirically. Evolutionary biologists reject theories that are premised on or seek to find evidence of supernatural design as this adds nothing to the explanation and draws the focus of science away from understanding and explaining natural law.
Evolutionary economists often draw on and incorporate concepts developed by evolutionary biologists to explain how economic evolution occurs. For example, many evolutionary economists view economic evolution as a nondirected step-by-step process that is non-teleological (it lacks a specific goal or predetermined endpoint). Many, although not necessarily all, evolutionary economists agree that humans have at least some genetically based cognitive and social predispositions that are a result of genetic evolution. Some examples include the ability to learn a language, to learn social norms, to cooperate in groups, and to develop complex tool kits with which to transform nature into useable goods and services. In addition, the use of the Darwinian concepts of inheritance, variation, and selection as analogs to explain outcomes is pervasive in evolutionary economics. Evolutionary economists also distinguish between specific or microevolution (change that occurs within a sociocultural system) and general or macroevolution (change from one sociocultural system to another).
Some evolutionary economists view the market as natural and as an extended phenotype. Other evolutionary economists argue that evolutionary economics should be viewed as a generalization of the Darwinian concepts of variation, inheritance, and natural selection with each case specifying additional, relevant detail (Hodgson, 2007a; Hodgson & Knudsen, 2006). Others have argued that while Darwinian concepts often provide useful analogies for understanding sociocultural evolution, aspects of sociocultural evolution are distinctly non-Darwinian (Poirot, 2007). For example, in at least some instances, social and economic evolution results from the conscious decisions of groups of purposive agents who intentionally design or redesign human institutions. Also, in the process of socio-cultural evolution, we can pass on cultural traits that we acquire through the process of learning. Biological evolution results in a branching pattern and barriers between different species. But human cultures can always learn from each other. The more emphasis that is placed on purposive design of social institutions and cultural learning as well as the abruptness (instead of the step-by-step nature) of social change, the less Darwinian a model of sociocultural evolution becomes. However, it would be difficult to identify anyone today who argued for a strong teleological concept of sociocultural evolution or who sought to explain sociocultural evolution in terms of divine or supernatural intervention.
Two other important concepts borrowed from the natural sciences, emergence and complexity, also play a key role in evolutionary economics. Emergence means that an observed system results from the complex interaction of the components of the subsystems. This process of interaction gives rise to patterns that would not be predicted from and cannot be reduced to the behaviors of the individual components. However, understanding the system still requires an understanding of its components and the interaction of the components. So it is important to understand what individuals do. And it is also important to understand how individual choices and habits interact with social institutions in a dynamic way. It is often easier to think in mechanical terms. But if we are careless with mechanical analogies, then we can be easily misled.
This raises the question of what it is that evolves in sociocultural evolution. In evolutionary biology, selection takes place at multiple levels but logically requires changes in the gene pool of a population over time (Mayr, 2004, pp. 133-158). This has led some evolutionary economists to suggest that institutions and/or organizational routines provide us with an analog to the gene. Others argue that there is not a precise analog. To understand this debate, we first have to understand what an institution is.
It is popular to define institutions as “rules of the game.” This is a good start, but it confuses the function of institutions with a definition of institutions. A more extensive definition of institution defines an institution as any instituted process, or in other words a shared, learned, ordered, patterned, and ongoing way of thinking, feeling, and acting. Institutions may be tacit and informal or highly organized and structured. By this latter definition, modern firms, medieval manors, technology, nation-states, political ideologies, and even technology are all institutions. In other words, virtually everything that humans do is an instituted process. Institutions are component parts of a sociocultural system.
But to just call everything an “institution” can make it difficult to conduct analysis. So it is useful to draw a distinction between entities such as social ideologies (e.g., Calvinism and democracy), social institutions (e.g., class, caste, kinship, the family, the nation-state), organizations (e.g., the modern firm, the International Monetary Fund, the medieval manor), organizational routines of actors within specific organizations, and technology (the combined set of knowledge, practices, and tool kits used in production). So in that sense, everything in sociocultural systems is constantly evolving. There is no precise analog in sociocultural evolution to the gene pool of a population.
As suggested above, social institutions are part of more general wholes, which it is convenient to term sociocultural systems. A sociocultural system includes the direct patterns of interaction of a society with the ecosystem (its subsistence strategy, technology, and demographic patterns), its social institutions, and its patterns of abstract meaning and value. Many anthropologists classify sociocultural systems by their scale, complexity, and the amount of energy captured by their subsistence strategy. Standard classification includes bands, tribes, chiefdoms, agrarian states, and industrial states, each of which corresponds roughly to subsistence strategies of foraging, horticulture, pastoralism and fishing, settled agriculture, and modern industrial technology. This classification system provides a useful scheme with which to understand the rise of large agrarian empires in the neolithic era and, ultimately, the Industrial Revolution in northwestern Europe. It also provides a useful classificatory schema with which to understand the interaction of multiple kinds of contemporary societies in a globalizing world. However, care must be taken to emphasize the multilinear and dynamic nature of socio-cultural evolution rather than rigidly applying these concepts as a universal and unilinear schema (e.g., see Harris, 1997; Wolf, 1982).
The Scope and Methods of Evolutionary Economics
The evolutionary biologist Ernst Mayr (2004) argued that biologists who study genetic evolution ask “why” questions while biologists who study things such as biochemistry ask “how” questions. Similarly, many mainstream economists ask “how” questions while evolutionary economists ask “why” questions. While the study of evolutionary economics does not preclude the use of formal mathematical models or quantification, most of its practitioners employ qualitative and interpretive methods. Also, as suggested above, some evolutionary biologists focus on changes that occur at the level of species, while others focus on more dramatic kinds of change. Similarly, evolutionary economists are interested in the study of sociocultural evolution on a grand scale, such as the rise of agrarian empires or modern capitalism, as well more specific, micro-level evolution such as changes in the organizational routines of individual firms.
Consequently, the kinds of issues that evolutionary economists are interested in overlap with the focus of other social sciences and even, in some instances, with the fields of ecology and evolutionary biology. Evolutionary economics reflects a tendency to counter the fragmentation of political economy into disparate social sciences that occurred in the late nineteenth and early twentieth centuries. Evolutionary economists, like their counterparts in economic sociology, economic anthropology, and political economy, focus more directly on those institutions with the strongest, most immediate, direct relevance to the process of material provisioning. So there may still be a need for some division of labor in the social sciences. What is of direct relevance will vary according to what is being analyzed in any particular study. An economic historian studying the rise of capitalism may, following Weber, find an understanding of Calvinist theology to be essential. Someone studying financial innovation in twenty-first-century industrialized societies would most likely find the religious affiliation of modern banking executives to be of little interest or relevance.
Research Traditions in Evolutionary Economics
Evolutionary economics is composed of three rival but sometimes overlapping major traditions: the Marxist, the OIE, and the NIE. While there is some degree of ideological overlap between the schools, each of the respective schools tends to share a common overarching ideology. Marxists seek to replace capitalism, OIEs seek to reform capitalism, and NIEs generally view capitalism as beneficent. This is not, notably, to argue that the ideology necessarily determines the empirical and theoretical analysis. Also, as previously noted, Marxists and OIEs seek to replace the standard competitive model while NIEs seek to complement the standard model. However, the reader should be aware that the boundary between the three traditions is often fuzzy, and there is sometimes overlap between the three traditions. Similarly, each of these three schools is composed of multiple strands and has undergone significant change over time.
The remainder of this entry will focus on outlining in very broad terms a few of the significant themes and concerns of each respective tradition, how these traditions have changed over time, and the contributions of a few representative authors of each of the three traditions. The reader may note that despite the differences between the traditions, there is a strong interest in all three in understanding how technology, social institutions, and cognitive models interact in the process of sociocultural evolution. The division made between the three traditions may be of greater interest and relevance in the United States, where there is a strong correlation between specific organizations and schools of thought. For example, the Association for Evolutionary Economics (AFEE) has been the primary promoter of OIE in the United States. In contrast, the European Association for Evolutionary Political Economy (EAEPE) has a much wider umbrella. So there may be hope someday for a grand synthesis of the three respective traditions.
Marxist Models of Evolution
There are, of course, many different Marxist and quasiMarxist models of sociocultural evolution. For the purposes of this entry, it is convenient to make the differentia specifica of a Marxist model of sociocultural evolution a focus on class struggle: the conflict between social groups defined in terms of differential access to the productive resources of a given society (Dugger & Sherman, 2000). This way of understanding sociocultural evolution is often referred to as historical materialism. While Darwinian reasoning may at times be employed in Marxist theories of sociocultural evolution, Marxists have generally emphasized the non-Darwinian aspects of sociocultural evolution as well as sharp discontinuities between human and infrahuman species. At the same time, it is hard to think of any academic Marxists writing today who would advocate Lysenkoism or Lamarckian theories of inheritance as valid explanatory concepts for understanding genetic evolution.
To understand historical materialism, we must begin with Marx’s concept of the mode of production (for extended discussions, see Wolf, 1982, chap. 3, and also Fusfeld, 1977). A mode of production includes the techno-environmental relationships (e.g., agriculture based on a plough or factories using steam engines) and the social relationships of production (e.g., warlords and peasants or factory owners and workers) or, in Marxist jargon, the forces of production and the social relations of production, respectively. These relationships between groups of people in Marx’s view are characterized by unequal relations of power, domination, subordination, and exploitation. This gives rise to social conflict over the terms of access to and the distribution of the productive resources of society. Social conflict requires the creation of a coercive entity to enforce the interests of the dominant social class (i.e., a state). In addition, human beings develop complex ideologies with which to justify their positions. Thus, the entire civilization (or what above is termed a sociocultural system) rests on a given mode of production, with the mode of production distinguished by the primary means of mobilizing labor (e.g., slavery, serfdom, wage labor).
In his analysis of Western history, Marx distinguished between the primitive commune, the slave mode of production of the ancient Roman Empire, the Germanic mode of production, the feudal mode of production of medieval Europe, and the modern capitalist mode of production. In analyzing Western history, Marx argued that each successive mode of production had produced technological advance, thus elevating the material level of human existence.
Capitalism, in Marx’s view, is qualitatively different from extended commodity production. Capitalism requires that land, labor, and capital are fully treated as commodities. This means that labor is “free” in the sense of not being legally bound to perform labor for the dominant class and “free” in the sense that it has no claim to the resources needed to produce goods and services. Therefore, capital is used as a means to finance innovation in production, and labor is compelled by economic circumstances to sell its labor power. Because capitalism promotes endless accumulation of capital, it is thus far the most successful in a material sense. However, the dynamic of capitalist accumulation gives rise to periodic crises, and it is therefore unstable. In addition, it is often destructive of human relationships. So a relationship of apparent freedom is in actuality a relationship of power, subordination, and domination that will give rise to social conflict. The only way to end this conflict, in Marx’s view, is to redesign social institutions so as to pro-mote both development of the forces of production and social cooperation (i.e., replace capitalism with socialism). There is disagreement among scholars who study Marx as to whether Marx thought that the triumph of socialism over capitalism was inevitable.
Insofar as one seeks to explain the historical origins of capitalism and the Industrial Revolution, two historical epochs are of particular relevance. Marxist historians and Marxist economists (and many others) with a particular interest in economic history thus often refer to two transitions (one from antiquity to feudalism and the other from feudalism to capitalism) as giving rise to modern capitalism. Howard Sherman (1995, 2006), a well-known Marxist economist, has summarized and synthesized much of this existing literature.
Sherman traces Western economic history from tribal organization through the rise of modern capitalism. Sherman is a materialist who analyzes societies by starting with the material base of human existence and examines the interaction between technology, economic institutions, social institutions, and ideologies. Technology and technological innovation as well as social conflict between classes are key variables in Sherman’s analysis. But overall, Sherman’s schema is holistic and interactive, rather than mechanical or reductionist.
In analyzing the breakdown of feudalism, Sherman focuses on the tripartite class conflict between peasants, nobles, and monarchs and the ability of each of the respective classes to force an outcome on the other classes. As a consequence of this conflict, a new pattern of relationships based on private property and production for profit in a market, as well as increasingly organized around new sources of mechanical power, gave rise to a unique and extremely productive system referred to as capitalism. This system of production encourages constant cost cutting, innovation, and capital accumulation, thus leading to the potential for the progressive material elevation of human society.
However, capitalist society is still riven by conflict between property-less workers and property-owning capitalists. Because the capitalist has a monopoly over the productive resources of society, the capitalist is still able to compel the worker to produce a surplus for the capitalist. This creates social conflict between the capitalist and worker and also forces the capitalist into an ultimately self-defeating boom-and-bust cycle of rising profits and increasing concentrations of capital, followed by falling rates of profit, leading to cycles of recession and crisis. The institutional structure of capitalism also magnifies other social conflicts and problems such as environmental degradation and destruction, as well as relations between racial and ethnic groups and genders. The solution to this social conflict, in Sherman’s view, is to replace the institutions of capitalism with economic democracy (i.e., democratic socialism).
Sherman, who has long been a critic of Stalinist-style socialism, also extends his analysis to change in Russia and the Soviet Union. The October Revolution of 1917 occurred because neither the czar nor the Mensheviks were able to satisfy the material aspirations of the vast majority of Russians. But industrialization in the Soviet Union became a nondemocratic, elite-directed process due primarily to the particular circumstances surrounding the Bolshevik Revolution, the ensuing civil war, and the problems of the New Economic Policy. In time, factions among the elites developed as the Soviet economy proved unable to satisfy the material aspirations of the majority of the Soviet population. This created new pressure for change as elites were able to capture this process. Due also to pressure from the West, change in the former Soviet Union took the direction of restoring capitalism rather than developing greater economic democracy.
It should be noted that the standard Marxist model of historical materialism focuses on the ability of capitalism to elevate the material capacity of human societies. This focus has been challenged by the rise of world systems and dependency theory. Theorists who follow this line of thinking focus on the uneven nature of development and the tendency of core economies to place boundaries on the development of formerly colonized areas of the world. Some theorists in this tradition have been justly accused of having a rather muddled conception of the term capitalism, insofar as they claim inspiration from Marx. The late Eric Wolf (1982), a well-known economic anthropologist, resolved many of these conceptual issues in his book Europe and the People Without History. So rather than assume that capitalism leads uniformly to material progress, Wolf extended the historical materialist model to analyze the process of uneven development in the world system as a whole. In their textbook on economic development, James Cypher and James Dietz (2004) provide an excellent history and exposition of classical Marxism, dependency theory, and extended analysis and discussion of the new institutional economics, original institutional economics, and modernization theory.
Original Institutional Economics
Thorstein Veblen (1898) was the founder of OIE, and his influence on OIE continues to be prevalent (Hodgson, 2004). Veblen was strongly influenced by Darwin’s theory of biological evolution and held evolutionary science as the standard for the social sciences, including economics, to emulate. He was also deeply influenced by the evolutionary epistemology of the American pragmatists Charles Saunders Peirce and John Dewey. In addition, he incorporated the contrasting positions of nineteenth-century evolutionist anthropology, as exhibited by the work of Tylor and Morgan, and the historical particularism of Franz Boas. Although he was strongly critical of Marx and of Marxism, there are both parallels as well as differences in the writings of Marx and Veblen.
Like Marx, Veblen focused on the importance of understanding the interaction of changes in technology, social institutions, and social ideologies as well as social conflict. Veblen also had a stage theory of history, which he borrowed from the prevailing anthropological schemas of his day. However, where Marx focuses on concepts such as class and mode of production, Veblen focuses on instituted processes and the conflicts created by vested interests seeking to reinforce invidious distinctions. Veblen’s model of sociocultural evolution is a conflict model in that it focuses broadly on social conflict that arises in the struggle for access to power, prestige, and property. But it is not a class-based model in the sense that Marxists use class.
In “Why Is Economics Not an Evolutionary Science?” (1898) and in “The Preconceptions of Economic Science” (1899) , Veblen developed a critique of the mainstream economics of his day. In developing this critique, Veblen was critical of the abstract and a priori nature of much of mainstream economic analysis. In articulating this point, he contrasted the “a priori method” with the “matter of fact method.” This particular aspect of Veblen’s criticism has often led some to view both Veblen and later OIEs as “atheoretical.” But this misses the point for at least two reasons.
Veblen did not eschew theoretical analysis per se. He was however, critical of theory that divorced itself from understanding actual, real-world processes of material provisioning. But most important, in Veblen’s view, economics was not up to the standards of evolutionary science because economics continued to implicitly embrace the concepts of natural price and natural law by focusing on economics as the study of economizing behavior and the adjustment of markets to equilibrium. In contrast, Veblen argued that the process of material provisioning entailed a constant process of adaptation to the physical and social environment through the adjustment of institutions or deeply ingrained social habits based on instinct. Veblen’s understanding of the term institution was broad enough to encompass any instituted process. Yet he drew a sharp distinction between institutions and technology. He was sharply critical of the former and strongly in favor of the latter.
When Veblen wrote about deep-seated and persistent social habits developing on the basis of genetically based instincts, he did in fact appear to mean something similar to contemporary theories of gene-culture evolution. Social habits are not consciously thought-through, purposive behaviors—they develop out of the complex “reflex arc” of enculturation based on genetically based propensities to act in the presence of environmental stimuli. Instincts are acquired through genetic evolution and social habits through enculturation. Both are inherited, vary in nature, and may therefore be selected for or against in the process of sociocultural evolution (Hodgson, 2004, Part III). However, Veblen also borrowed from Dewey a view of socialization in which individuals are active participants in socialization, a concept that was later more clearly articulated by Meade. In addition, Veblen also emphasized the ability of humans to conceptualize and engage in purposive behavior.
Veblen drew a sharp dichotomy between the instinct of workmanship and the instinct of predation. He associated the instinct of workmanship with a focus on adaptive, problem-solving, tinkering, and innovative behavior. In contrast, he associated predation with a focus on brute force, ceremonial displays of power, emulative behavior, conspicuous consumption, financial speculation, and the power of vested interests. Veblen argued that the instinct of workmanship arose in the primitive stage of human history (roughly corresponding to what contemporary anthropologists would term bands and tribes) and that the instinct of predation emerged during the stage of barbarism (roughly corresponding to the rise of chiefdoms). These instincts gave rise to deep-seated social habits. Both instincts continued to be present during the rise of civilization (agrarian states) and persisted in modern civilization (industrial states). But because modern civilization is based on the rise and extensive application of machine technology, further progress would require the triumph of the instinct of workmanship over the instinct of predation.
But in Veblen’s view, there was no reason to expect this would necessarily occur. Vested interests were often capable of instituting their power to reinforce the instinct of predation. Hence, institutions often served to encapsulate and reinforce the instinct of predation. The behaviors of predation were primarily exhibited by the new “leisure class” or, in other words, the robber barons of the late nineteenth century. In contrast, workmen and engineers often exhibited the instinct of workmanship. Consequently, Veblen tended to view institutions in general as change inhibiting and the instinct of workmanship as change promoting.
In later works, Veblen extended this kind of analysis to study other topics such as changes in firm organization and the business cycle. Veblen argued that as modern firms became larger and more monopolistic, a permanent leisure class arose, thus displacing technological thinking among this new class. In addition, increasing amounts of time and energy were channeled into financial speculation, leading to repeated financial crises. Emulative behavior in the form of conspicuous consumption and ceremonial displays of patriotism and militarism served to reinforce the instinct of predation. In his analysis of the rise of militarism in Prussia, Veblen noted the socially devastating impact of the triumph of the instinct of predation. Thus, Veblen tended to identify institutions with imbecilic behaviors that serve to block the triumph of technological innovations.
Veblen’s focus on the conflict between the instinct of workmanship and predatory and pecuniary instincts is often referred to as the instrumental-ceremonial dichotomy. Ayres (1938) in particular reinforced the tendency of the OIE to focus on the past binding and ceremonial aspects of institutions and on the scientific and progressive nature of instrumental reasoning. This dichotomy was, at one point in time, a core proposition of the OIE.
Most contemporary OIEs, however, recognize and accept that at least some institutions can promote and facilitate progressive change and that technology itself is an institution. This rethinking of the ceremonial-instrumental dichotomy is also reflected in the incorporation of Karl Polanyi’s (1944) dichotomy between habitation and improvement. Polanyi noted that the need for social pro-tection may actually serve a noninvidious purpose. Some improvements destroy livelihoods and reinforce invidious distinctions while others promote the life process. So the distinction might better be thought of in terms of “invidious versus noninvidious.”
One OIE who had a more positive understanding of the role of institutions is J. R. Commons (Commons, 1970; Wunder & Kemp, 2008). Commons in particular focused on the need for order in society and thus addressed the evolution of legal systems and the state. Commons’s theory is primarily microevolutionary insofar as he focuses on the evolution of legal arrangements and shifting power alignments in modern industrial states. Commons is not as critical of existing arrangements as Veblen. Institutions, including the state, in Commons’s view, are clearly both necessary and potentially beneficial. For example, with the rise of big business, labor conflict, and the problems inherent in the business cycle, there is a need for a strong state to manage this conflict. At the same time, Commons developed a theory of the business cycle that has strong elements in common with some of Keynes’s analysis.
The Veblenian strand as expressed by Commons is, by the standards of American politics, moderately left of center in that it expresses support for much of the regulatory framework and expanded role of government in managing the business cycle that came out of the New Deal and the publication of Keynes’s (1936) The General Theory of Employment, Interest and Money. Not surprisingly, a number of OIE economists have begun to attempt to synthesize OIE and Keynes, relying to a large degree on the work of Hyman Minsky (1982). This project, often referred to as PKI (post-Keynesian institutionalism), is microevolution-ary in nature in that it focuses on the problems of financial instability created by financial innovation and deregulation. The goal of PKI is wisely managed capitalism (Whalen, 2008). PKI clearly has a focus on the possibility of designing effective institutions, which logically implies that at least some institutions can embody instrumental reasoning.
In contrast to the direction taken by some OIEs, Hodgson (2004) has argued that Veblen’s focus on technological thinking and the Commons-Ayres trend in OIE was a wrong turn for OIE. He has sought to revivify OIE by reinterpreting Veblenian economics as generalized Darwinism. Generalized Darwinism, according to Hodgson, generalizes the basic principles of Darwin’s biological theory of evolution (inheritance, variation, and selection) to sociocultural evolution. In Hodgson’s view, the mechanisms of inheritance, variation, and selection are not just analogies or metaphors to explain outcomes in social evolution—they are ontological principles that describe any entity that evolves. As noted above, because institutions and organizational routines are inherited through cultural learning and vary, they are subject to selection. Social evolution is therefore a special case of the more general case of evolution.
However, Hodgson (2004) also acknowledges that human agents are purposive and that culture is an emergent phenomenon. So Hodgson is not seeking to biologize social inequality or to reduce the social sciences to genetic principles such as inclusive fitness. Indeed, as Hodgson states, “more is needed” than just the principles of inheritance, variation, and natural selection. This would appear to be an understanding of how social institutions, in concert with instincts and human agency, generate outcomes in a complex, emergent process of social evolution. To this end, Hodgson has incorporated some elements of structure agency theory into his analysis.
Hodgson’s program could be taken as an injunction to OIEs to build models of change that incorporate both Darwinian principles as well as more complex concepts of structure and agency. Hodgson has used this model to explain how changes in firm organization can be selected for or against by changes in market structure. So there are strong parallels between the work of Hodgson and that of Nelson and Winter (1982), who could notably be placed in either the OIE or NIE camp. As noted in the preceding section, Hodgson’s view of evolutionary economics as “generalized Darwinism” is controversial, even among his fellow OIEs.
One competing strand of Veblenian economics is the radical strand as advocated by Bill Dugger (Dugger & Sherman, 2000). Dugger focuses on the role of technology, instrumental reasoning, and institutions as providing the capacity for improving the material condition of humans. The full application of instrumental reasoning, however, in Dugger’s view is blocked by the key institutions of capitalism. These institutions are reinforced by ceremonial myths. Dugger also puts more emphasis on the social and ideological implications of the respective traditions and has been sharply critical of the NIE. He has also notably been instrumental in promoting dialogue between Marxists and OIEs and has often copublished works on sociocultural evolution with Howard Sherman. Dugger also tends to emphasize the non-Darwinian nature of sociocultural evolution.
The New Institutionalists
It can be fairly argued that Adam Smith was the first evolutionary economist, even though his contributions predate any significant consideration of biological evolution by naturalists. Adam Smith provides an account of how an increasingly complex society arises out of the natural propensity of humans to truck, barter, and exchange (Fusfeld, 1977; Smith, 1776/1937). Ironically, some of Smith’s concerns with specialization and division of labor, as well as the writings of another political economist, Thomas Malthus, influenced Darwin. Many Social Darwinists in the late nineteenth century drew on Darwinian reasoning to explain how competitive markets work and to justify social inequality. Some twentieth-century theorists such as Frederick Hayek and Larry Arnhart have tended to view the market as a natural outgrowth of human genetic endowments.
Taken as a whole, however, evolutionary explanations fell out of favor among economists in the twentieth century. In the late nineteenth century, the social sciences became increasingly fragmented, and the new field of economics increasingly lost its evolutionary focus. With the triumph of the standard competitive model in the mid-twentieth century, economics became narrowly focused on providing formal mathematical proofs of narrowly defined “how” questions. However, there are some signs that the standard competitive model is in the process of being displaced by game theory. There is also widespread recognition that it is necessary to supplement the standard competitive model with an evolutionary account. These developments have led to an increased acceptance of evolutionary explanations among mainstream economists and renewed attention to the importance of institutions in framing economic outcomes.
Some strands of the NIE, particularly the version espoused by Coase (1974) and Williamson (1985), view institutions primarily as providing “solutions” to the problems of asymmetric information and transactions costs. This strand of NIE does not significantly challenge the standard competitive model or its underlying behavioral assumptions. To the contrary, it is a complement to the standard competitive model. It is also to a large degree a micro-oriented theory of sociocultural evolution.
A more dynamic view of economic evolution is that of Joseph Schumpeter (1908, 1950). Schumpeter focused on the individual entrepreneur and his role in promoting technological innovation. This technological innovation disturbs the equilibrium and leads to gales of creative destruction. However, with the rise of the modern, bureaucratically organized firm, the role of the entrepreneur was lessened, leading to a static and moribund organization. Schumpeter thought that this would eventually lead to the destruction of capitalism, an outcome that, in contrast to Marx, Schumpeter viewed in a negative way. Schumpeter, however, drew a strong distinction between statics, exemplified by the Walrasian model of his day, and dynamics, exemplified by theories of economic evolution. Thus, “dynamics” was intended to complement “statics” (Andersen, 2008). Many contemporary mainstream models of economic growth, often referred to as new growth theory, explicitly incorporate Schumpeterian analysis.
Some of the richness of Schumpeter’s focus on technological innovation as gales of creative destruction has been recaptured by the economic historian Joel Mokyr (1990) in his masterful work on technological progress. Mokyr adapts Gould’s concept of “punctuated equilibrium” to the history of technology. He also draws a distinction between invention (the rise of new techniques and processes) and innovation (the spread of these new techniques). The Industrial Revolution, in Mokyr’s view, is ongoing but is nevertheless a clear instance of a dramatic change in technological and social organization. Similarly, the work of Nelson and Winter (1982), previously cited, which acknowledges the contributions of Veblen, can also be considered neo-Schumpeterian. There are, it should be noted, significant parallels between Marx, Schumpeter, and Veblen, as well as differences.
The most prominent and most successful NIE, of course, is Douglas North. North’s career has spanned several decades, during which his contributions to multiple fields in economics have been voluminous. Notably, North’s own views themselves have undergone significant evolution. North’s (1981) earlier work on economic evolution was an application of the work of Coase (1974) and Williamson (1985) to the problem of economic evolution and did not significantly challenge the standard competitive model. North viewed economic evolution as taking place due to changing resource constraints in response to the growth in population as rational agents calculated the marginal costs and marginal benefits of shifting from foraging to farming.
North’s later work (1990, 1991, 1994), however, has challenged many aspects of the standard competitive model. North has focused specifically on the role institutions play in cognitive framing of decision making. Notably, North has explicitly abandoned the theory of strong rational choice in favor of models of human behavior that focus on the limited ability of humans to obtain, process, and act on information. In most textbook models of market behavior, price is the primary means of providing information. But in North’s view of markets, information encompasses much more than price. In addition, norms, values, and ideology can blunt the ability of humans to obtain and interpret some information. North is not arguing that humans are “irrational” as his approach still logically implies some degree of calculation and conscious decision making based on self-interest. But he has abandoned the strong view of rationality, which implies humans are lightning rods of hedonic calculation. In that sense, his view of human behavior is much closer to that of the Austrians in focusing on the purposiveness of human behavior.
For the most part, North tends to see institutions as constraints on human action, though he acknowledges that institutions can provide incentives both in terms of the things we actually do, as well as the things that we do not do. Thus, institutions that reward innovative behavior, risk seeking, and trade will lead to efficient outcomes. Institutions that reward rent seeking and prohibit innovation and trade will lead to inefficient outcomes. Once an institutional structure is set, there is a strong degree of inertia that perpetuates the existing institutional structure. In other words, evolutionary paths, in North’s view, tend to be path dependent. Clearly, the kinds of institutions in North’s view that promote efficient outcomes are those that clearly define the rules of the game in favor of the operation of markets. This does not necessarily imply laissez-faire as the state may still be necessary to perform multiple functions. It does serve to distinguish between states, such as Great Britain in the seventeenth and eighteenth centuries or South Korea in the past several decades, that were able to define an institutional framework that promoted innovation and growth as opposed to states such as Spain in the sixteenth and seventeenth centuries or in the Congo (Zaire) today that destroy any incentive for innovation and economic growth.
This raises two very interesting questions. How does a particular type of path become established, and how does it change? North’s explanation is one that is rooted in a metaphor of variation and selection. Greater variation will allow for a higher probability that a particular path will be successful. Greater centralization will reduce variation and increase the chances that the state will adopt or promote institutions that blunt technological and social innovation. North explains the greater success of Europe versus the rest of the world as a result of the relative decentralization of Europe in the early modern period. Arbitrary authoritarian states that destroyed incentives for growth such as Spain existed. But Spain was unable to impose its will on Europe or on the emerging world market. Consequently, this enabled states such as England, where the power of the Crown became limited as Parliament enacted laws to protect commercial interests and innovation, to industrialize rapidly and emerge as world leaders. These contrasting paths were transferred to the New World. The United States inherited and successfully modified the institutional framework of Britain and therefore developed. Latin America inherited and failed to successfully modify the institutional frame-work of absolutist Spain and developed much more slowly.
Whither Evolutionary Economics?
Evolutionary economics clearly has a future. Economists in general are becoming more attuned to the importance of understanding how humans organize the economy through institutions and how institutions change over time. This entails extensive borrowing of concepts from evolutionary biology and a reconsideration of the underlying behavioral assumptions of mainstream economics. Understanding how institutions permit or inhibit changes in technology, as well as how changes in technology in turn require changes in institutions, is a concern of all three schools of evolutionary economics. As NIE economists push the boundaries of the mainstream, at least some have increasingly asked heterodox questions, and a few have been willing to acknowledge heterodox contributions. Some Marxist and OIE scholars have also begun to note that at least some versions of NIE, if not necessarily entirely new, are at least genuinely institutional and evolutionary. Any grand synthesis seems distant, but there is at least a basis for further argumentation and even dialogue.
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