Adapting to a New Economy

Darwin 200 / by Rob Mitchum /

An evolutionary perspective on economics can explain how we got into this current mess, and how we might find our way out.

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Illustration by Tyler Lang

IN A WORLD where a harsh, unforgiving environment creates scarce resources and fierce competition between its inhabitants, minute changes can mean the difference between dominance and death. Amid the chaos, former behemoths find themselves hurtling toward extinction, while scrappy underdogs get the opportunity to reach new heights.

So which is it: a movie-trailer narration of Darwinian natural selection, or this morning’s business section?

You’d be forgiven for confusing the two in the midst of the financial mayhem tormenting the world’s economies. Armchair observers, financial leaders, and increasing numbers of economists are using the language of Darwin to describe the current crisis.

“There is vicious natural selection going on right now in the financial services industry, and it’s appropriate,” said Mark Carney, governor of the Bank of Canada, in a November BBC interview. “Those who weren’t on top of things are gone or going.”

But can the relation of evolution to economics go further than skin-deep terminology? Can it actually change the face of the discipline? For more than a century, the scientific undercarriage of economic theory has been physics, the neoclassical idea that predictions can be based on a series of unchanging and universal laws. Swapping out the forecasts and equilibriums of physics for the complexity and chaos of biology’s main engine would require a complete makeover.

Yet with the neoclassicists and free-market cheerleaders bearing (fairly or not) the brunt of the blame for the current financial meltdown, some economists say the time has come for just such a philosophical reset.

“Mainstream models have not had a very good record of prediction,” says Geoffrey Hodgson, a British economist who has written several books and dozens of papers on evolutionary economics. “No one predicted the state of affairs in the last few months; no one predicted the financial crash of the last few years.”

Perhaps it’s time, evolutionary economists argue, to focus less on finding the best way to foresee the economic future and more on explaining how the economy works. That discovery may lie in modeling the economy as a complex system based upon the three core concepts of Darwinism: variation, selection, and inheritance. “We’re not saying it’s identical. We’re not saying the mechanisms are the same,” Hodgson says. “The key issue is whether there is an ontological similarity in terms of the structure of reality that crosses the two domains, that’s similar in biology and similar in the economic sphere.”

“The fact is, some firms are surviving more than others. There is a differential capacity to survive amongst a population of entities that carry information, engage with their environment, solve problems, and pass on problem solutions to others. That happens in a biological world in a very different way than it happens in the economic world, but nevertheless, in abstract terms, the ontology fits in both cases. So what Darwinism does is give you that framework to think about that problem.”

PAINTING A PORTRAIT of the economic system with Darwin’s palette is hardly a new concept. In fact, evolutionary economists like to point out that Darwin may have never even sprouted an -ism were it not for economics, citing the pivotal influence of Thomas Malthus’s early-19th-century theories about resource scarcity upon Darwin’s work. That dialogue between disciplines continued after The Origin of Species was published. Inspired by Darwin, University of Chicago economist Thorstein Veblen’s 1898 essay “Is Economics Not an Evolutionary Science?” laid the groundwork for the field.

But Veblen’s foundation gathered dust as the distortion and perversion of Darwinian ideas into Social Darwinism and its genocidal offshoots put evolutionary economics in the cellar for much of the 20th century. The reign of neoclassical economics, with its love of physics-based assumptions and predictions, also did its part to keep economists and evolutionary biologists on separate sides of the theoretical playground.

In 1982 economists Richard Nelson and Sidney Winter attempted a forced mingling of those crowds with their book An Evolutionary Theory of Economic Change. Their model saw all the key elements of Darwin’s theory in the world’s economy: a variety of species/businesses endlessly competing in a changing environment/market and mutating/innovating new “routines” that, like genes, would replicate and spread if successful/profitable in a given context.

It was a powerful analogy, but some, such as Hodgson, thought that it could be more: It could change the core assumptions of economics. Viewing economies as complex systems constantly in flux rather than stable, predictable systems in equilibrium could help economists, and the governments who trust them, to understand the machinations of the economy more accurately and dictate policy accordingly.

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