Evolutionary Approaches to Economic Change

What is the evolutionary approach to economic change? How does it compare with conventional approach in mainstream economics?

Introduction

The changes in the economic process brought about by innovation, together with all their effects, and the response to them by the economic system, we shall designate by the term Economic Evolution”, – Schumpeter (1939).^[1]

The above description of economic evolution by Schumpeter aptly illustrates the picture of the evolutionary approach to economic change, where innovations and technology set the economic system in dynamic motion.^[2] It takes into account the complexity of economic change by emphasizing: a.) the importance of technology as a contributing factor to economic change; b.) the factors that create states of disequilibrium; c.) the uncertainty of the economic system; d.) the importance of entrepreneurship; and e.) the diversity of growth rates. The evolutionary approach emphasizes dynamism in terms of competition between and among firms, which necessitates making new adaptations to the changing environment brought about by transformations created by other firms. ^[3] On the other hand, the conventional approach to economic change in mainstream economics perceives economic change as a function of savings, population growth and technological progress (which are viewed as exogenous), ascertain the static income per capita levels. ^[4] It assumes that the growth rate of total output will in fact, always move towards a given constant level which represents a state of steady economic growth. ^[5] Moreover, the conventional approach operates on the basis of assumptions that center on the existence of perfect information, absence of uncertainty and achievement of warranted economic change.

Comparative Analysis of Evolutionary and Conventional Approaches to Economic Change

Evolutionary and conventional approaches to economic change differ in many aspects. In the context of economic change, these important differences center on the following points: a.) use of metaphors; b.) states of equilibrium / disequilibrium; and c.) emphasis on technological progress as input to economic change.

1. Use of Metaphors

The evolutionary approach uses biological metaphors to explain economic change, which uses the living organism in its analogy in effecting such change. This approach uses biological / genetic mutations to represent the small changes coming from investments in already existing enterprises. The process of mutation as evolutionary adaptation for survival lies on the nature of biological mutations which happens at random and where natural selection weeds out the unsuccessful species. Similarly, economic change in the context of the evolutionary approach occurs in a competitive environment where changes are made at random and where enterprises with less efficient management systems become the unsuccessful ones. On the other hand, the conventional approach uses physical metaphors such as investments taking the form of physical inputs such as “modifications of existing factories, fields, roads, harbours, etc”. ^[6]

2. States of Equilibrium / Disequilibrium

The evolutionary approach highlights the dynamic interaction of the various firms, consumers, households and markets, taking into account the distribution of income and production among them, thereby emphasizing the influence of a diverse group of variables on economic change. This is in stark contrast to the consideration of the economy as an aggregate entity by the conventional approach. In effect, the variables being diverse and numerous in the perspective of the evolutionary approach, potentially create states of dynamic disequilibrium within the economic system. These states of disequilibrium are in fact embodied in the structural change within the economic system which is “a necessary reflection of diversity in the growth rates of different activities.^[7] It rejects the classical assumption of Say’s Law ^{[8] , [9]}, since the evolutionary approach is grounded on a more realistic view of the economy where society places a value on the goods produced based on its preferences and tastes, thus, the uncertainty of gains and losses are well taken into account. This realistic view of the evolutionary approach to economic change therefore delves into the interaction between the diverse agents or actors involved in the economic system as a whole. These interactive processes being essentially dynamic and transformative in nature, expose the economic system into more random forces that lead to a disorderly state or to a state of disequilibrium. In this scenario, market processes shape the competitive process which breeds innovation consequently leading to the restless quest for technological progress. Technological progress later determines market share and hence, becomes a useful yardstick of competitive edge. In this case, there is hardly any state of equilibrium, but instead, there exist randomly interacting forces colliding with one another, producing further disequilibrium in the economic system. A useful analogy would be to equate biological evolutionary forces that determine the likelihood of an organism to survive in a constantly changing environment, to the economic factors that cause disequilibrium which determine the competitive strength of firms in the face of imperfect competition.

The conventional approach views economic change as a stationary or static process, and thus, the growth of all activities” are “at a uniform rate”. ^[10] The neoclassical theory which follows a conventional approach negates the importance of economic forces that often influence the rate of economic change, making it an idealized approach. Thus, in this case, there is a total absence of unemployment or inflation, while what exists is a uniform return to scale. This approach models economic change in a state of equilibrium where economic decisions are made from perfect information, and are carried out with “perfect foresight and precision so that there is never any excess supply of or, excess demand for, labor or land.” ^[11] This approach also assumes that a perfect suitability exists in production between capital goods and consumption goods, thus, “only one commodity is produced which may be used either for final consumption or for addition to the stock of instruments of production.” ^[12] Hence this steady state of economic change in the perspective of the conventional approach assumes that: “(i) all elasticities of substitution between the various factors are equal to unity, (ii) technical progress is neutral towards all factors, and (iii) the proportions of profits saved, of wages saved, and of rents saved were all three constant,” ^[13] The conventional approach inherently possesses an “apparent inability to account for observed diversity across countries” and a “strong and counterfactual prediction that international trade should include rapid movement towards equality in capital-labor ratios and factor prices.” ^[14] Since it emphasizes the production function where the relationship of inputs of factors used to generate the output becomes a major consideration, in effect, it uses the classical assumption of Say’s Law.^[15]

3. Technology as Input to Economic Change

The evolutionary approach to economic change emphasizes the role of technological knowledge in the improvement of economic productivity. It presupposes that technological progress and innovation are central to the attainment of economic change. J.S. Gans asserts that acceleration to the growth rate could be achieved if resources would be allocated to the production and distribution of knowledge. ^[16] The endogenous sources of technological progress and innovation are the institutions and organizations within which it becomes an integral part. This approach emphasizes the need to capitalize on institutions and organizations as sources of technological knowledge, in effect highlighting the importance of entrepreneurship in the quest for economic change. The costliness of technological innovation becomes embedded in the central factor of entrepreneurship which is viewed as a factor that drives capital deepening through shifts in the production function to achieve a higher rate of technological progress.^[17]

The conventional approach regards technology as exogenous and therefore is not regarded as an inherent part of the economic system . It does not trace the source of economic growth to technological innovation and consequently assumes that technology is a free good,“manna from heaven.” ^[18]

Conclusion

In the final analysis, the revolutionary and conventional approaches to economic change lie on opposite planes of the overarching concept of economic change. Their differences lie on the following salient points:

• The evolutionary approach emphasizes: the use of biological metaphors, dynamic change, and disequilibrium factors in a diverse economic system and entrepreneurship; and puts significant consideration on the role of technological knowledge as an endogenous part of institutions and organizations responsible for wealth creation and distribution.
• The conventional approach on the other hand, espouses: the use of physical metaphors, static or comparative static condition; disregards entrepreneurship due to the aggregate production perspective; and considers technological knowledge as a free, exogenous good , not directly associated with wealth creation and distribution.

References:

Dosi, G., Nelson, R. R., “Evolutionary Theories”. In Markets and Organization, ed.

Arena, R., Longhi, C., 205-234. New York: Springer – Verlag, 1998.

Gans, Joshua, S. “Knowledge of Growth and the Growth of Knowledge”. Information Economics and Policy, 4 (1989/91): 201 – 224.

Green, Eric Marshall. Economic Security and High Technology Competition in an Age of Transition: The Case of the Semiconductor Industry. Westport, CT: Praeger Publishers, 1996.

Lucas, Robert, E. Jr., “On the Mechanics of Economic Development” . Journal of Monetary Economics , 22 (July 1988): 3-42.

Martens, Bertin. The Cognitive Mechanics of Economic Development and Institutional Change. New York: Routledge, 2004.

Meade, J. E. A Neo-Classical Theory of Economic Growth. New York: Oxford University Press, 1961.

Meliciani, Valentina. Technology, Trade, and Growth in OECD Countries: Does Specialisation Matter?. London: Routledge, 2001.

Metcalfe, J. Stanley. Evolutionary Economics and Creative Destruction. London: Routledge, 1998.

Metcalfe, J.S. “Knowledge of growth and the growth of knowledge.” Journal of Evolutionary Economics, 12 (March 2002): 3-15.

Nelson, Richard. “How New Is New Growth Theory?.” Challenge 40, no. 5 (1997): 29+.

Reinert, E. S., Riiser, V. Recent Trends in economic theory – implications for development geography. Oslo, Norway: Studies in Innovation and Economic Policy ( Step Group) , 12 (August, 1994): 1-12. ISSN : 0804-8185. Available from: http://www.step.no/reports/Y1994/1294.pdf. Accessed ; 18, November, 2006.

Scott, Maurice Fitzgerald. A New View of Economic Growth. Oxford: Clarendon Press, 1991.

Sengupta, Jati K. New Growth Theory: An Applied Perspective. Northampton, MA: Edward Elgar, 1998.

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Footnotes

^[1] J. Stanley Metcalfe, Evolutionary Economics and Creative Destruction (London: Routledge, 1998 ): 103.

^[2] Giovanni Dosi, Richard R. Nelson, “Evolutionary Theories” in Markets and Organization, ed. Arena, R., Longhi, C. (New York: Springer – Verlag, 1998): 205-234.

^[3] Maurice Fitzgerald Scott, A New View of Economic Growth (Oxford: Clarendon Press, 1991): 124.

^[4] Jati K. Sengupta, New Growth Theory: An Applied Perspective (Northampton, MA: Edward Elgar, 1998): 13.

^[5] J. E. Meade, A Neo-Classical Theory of Economic Growth (New York: Oxford University Press, 1961): 30.

^[6] Maurice Fitzgerald Scott, A New View of Economic Growth , 125.

^[7] J. S. Metcalfe, “Knowledge of growth and the growth of knowledge”. Journal of Evolutionary Economics 12 ( March 2002): 3-15.

^[8] Say’s Law assumes that “everything produced has some value for the community”.

^[9] Joshua S. Gans, “ Knowledge of growth and the growth of knowledge”. Information Economics and Policy 4 (1989/91): 203.

^[10] J. Stanley Metcalfe, Evolutionary Economics and Creative Destruction, 3.

^[11] J. E. Meade, A Neo-Classical Theory of Economic Growth (New York: Oxford University Press, 1961): 4

^[12] Ibid, 6.

^[13] . J. E. Meade, A Neo-Classical Theory of Economic Growth, 30.

^[14] Robert E. Lucas, Jr., “On the Mechanics of Economic Development”. Journal of Monetary Economics 22 (July, 1988): 3-42.

^[15] Joshua S. Gans, “Knowledge of growth and the growth of knowledge”. Information Economics and Policy 4 (1989/91):203

^[16] Joshua S. Gans, “Knowledge of Growth.., 220.

^[17] J. S. Metcalfe, “Knowledge of growth…, 4.

^[18] Erik S. Reinert and Vermund Riiser. Recent Trends in economic theory – implications for development geography. (Oslo, Norway: Studies in Technology, Innovation and Economic Policy: Step Group, 1998): 10. ISSN: 0804-8185. Available from: http://www.step.no/reports/Y1994/1294.pdf. Accessed: 18 November, 2006.