From simplistic to complex systems in economics

The applicability of complex systems theory in economics isevaluated and compared with standard approaches to economictheorising based upon constrained optimisation. A complex systemis defined in the economic context and differentiated from complexsystems in physio-chemical and biological settings. It is explainedwhy it is necessary to approach economic analysis from a network,rather than a production and utility function perspective, whenwe are dealing with complex systems. It is argued that muchof heterodox thought, particularly in neo-Schumpeterian andneo-Austrian evolutionary economics, can be placed within acomplex systems perspective upon the economy. The challengeis to replace prevailing ‘simplistic’ theories,based in constrained optimisation, with ‘simple’theories, derived from network representations in which valueis created through the establishment of new connections betweenelements.     

Prior Commitment and Uncertainty in Complex Economic Systems: Reinstating History in the Core of Economic Analysis

Conventional ‘neoclassical’ economics is very useful in understanding how prices are determined but less so as a general basis for understanding the economic behaviour we observe. What is not taken into account is that economic systems are dissipative structures that are complex, but incompletely connected, networks of rules. It is explained why a degree of prior commitment in decision‐making is inevitable in complex economic systems and the implications of this are examined. It is argued that economic analysis must begin with the reality that choices are made in relation to pre‐existing commitments, both with regard to economic structures built in the past and to prevailing systems of belief, when deciding what to do in a future characterised by uncertainty. It is explained how conventional economic incentives can be dealt with in such a complex historical context building upon the neoclassical perspective of Alfred Marshall over a century ago. It is argued that econometric modelling remains viable and useful in understanding behaviour in complex economic systems. It is shown how we can design and interpret time series econometric modelling from a complex systems perspective.     

Darwinism in economics: from analogy to ontology

Several social scientists, including ‘evolutionary economists’, have expressed scepticism of ‘biological analogies’ and rejected the application of ‘Darwinism’ to socio-economic evolution. Among this group, some have argued that self-organisation is an alternative to biological analogies or Darwinism. Others have seen ‘artificial selection’ as an alternative to natural selection in the socio-economic sphere. Another objection is that Darwinism excludes human intentionality. It is shown that all these objections to ‘biological analogies’ and ‘Darwinism’ are ungrounded. Furthermore, Darwinism includes a broad theoretical framework for the analysis of the evolution of all open, complex systems, including socio-economic systems. Finally and crucially, Darwinism also involves a basic philosophical commitment to detailed, cumulative, causal explanations. For these reasons, Darwinism is fully relevant for economics and an adequate evolutionary economics must be Darwinian, at least in these fundamental senses. However, this does not undermine the need for auxiliary theories and explanations in the economic domain.     

Evolutionary macroeconomics: a research agenda

In this article, the goal is to offer a new research agenda for evolutionary macroeconomics. The article commences with a broad review of the main ideas in the history of thought concerning the determinants of economic growth and an introduction to the evolutionary perspective. This is followed by a selective review of recent evolutionary approaches to macroeconomics. These approaches are found to be somewhat disconnected. It is argued that the ‘micro-meso-macro’ approach to economic evolution is capable of resolving this problem by offering an analytical framework in which macroeconomics can be built upon ‘meso-foundations’, not micro-foundations, as asserted in the mainstream. It is also stressed that the economic system and its components are complex adaptive systems and that this complexity must not be assumed away through the imposition of simplistic assumptions made for analytical convenience. It is explained that complex economic systems are, at base, energetic in character but differ from biological complex systems in the way that they collect, store and apply knowledge. It is argued that a focus upon stocks and flows of energy and knowledge in complex economic systems can yield an appropriate analytical framework for macroeconomics. It is explained how such a framework can be connected with key insights of both Schumpeter and Keynes that have been eliminated in modern macroeconomics. A macroeconomic framework that cannot be operationalized empirically is of limited usefulness so, in the last part of the article, an appropriate methodology for evolutionary macroeconomics is discussed.     

A survey of evolutionary policy: normative and positive dimensions

We explore public policy from the perspective of evolutionary analysis. Potential entry points for developing a normative evolutionary policy theory are examined, which involves a critical examination of the related idea of “evolutionary progress”. The meaning of evolutionary policy is next studied from two different, normative and positive angles: namely, policy design informed by evolutionary thinking; and policy-making and politics as an evolutionary process. Several examples are provided to discuss the value of evolutionary thinking for policy, including in the context of the current economic crisis. Next, evolutionary policy is compared with policy advice coming from two dominant schools of policy analysis, namely neoclassical economics and public choice theory. We conclude that evolutionary thinking offers a distinct and useful perspective on public policy change and design. Nevertheless, there is a need for more synthesis and coherence among different studies as well as for policy experiments and in-depth empirical studies.     

Competitive selection, self-organisation and Joseph A. Schumpeter

Post-Schumpeterians have tended to use biological analogies to understand economic evolution, in contrast to Schumpeter himself. In this paper it is argued that the biological analogies used tend to be outdated and that Schumpeter espoused an intuitive understanding of the evolutionary economic process that is closely related to modern conceptions of self-organisation, suitably adapted for application in socioeconomic systems. Using a self-organisation approach, competition can be understood without recourse to biological analogy, in terms of general systemic principles that operate in the presence of variety. Viewing economic evolution in terms of complex adaptation in self-organising systems yields nonequilibrium and nonlinear perspectives that parallel Schumpeter's own intuitions, reinvigorating them as the basis of evolutionary economic thinking in the new Millennium.     

Forms of emergence and the evolution of economic landscapes

Over the past two decades, the notion of ‘emergence’ has attracted increasing attention and controversy across the social science, including economics. Within this context, as economic geographers, our concern in this paper is with the usefulness of the idea of emergence for studying the economic landscape and its evolution. The paper considers in what sense geographical processes and places can legitimately be described as emergent, how such places themselves produce emergent effects, and how we should conceive of and study the ‘emergent’ space economy. To do this, we apply Deacon's (2006) models of first-order, second-order and third-order emergence, and trace through their implications for constructing an ‘emergence perspective’ in economic geography. The notion of third-order emergence is argued to be the most promising, since it focuses explicitly on emergence as an evolutionary process. What is evident, however, is that a notion developed mainly for applications in physical and biological systems requires further elaboration and exploration if it is to provide explanatory leverage in studying the evolution of economic landscapes.     

Toward an Evolutionary and Moral Science

Thorstein Veblen asked in 1898 why economics is not an evolutionary science; he also proposed a Darwinian paradigm shift for economics. Among the implications reviewed here was his claim that Darwinian principles applied to social entities as well as to biological phenomena. It is also argued that economists have additional reasons for taking Darwinian evolution seriously. Recent work on the evolution of altruism, cooperation and morality show that we are on the brink of developing an evolutionary-grounded theory of human motivation that breaks from the selfish utility-maximizer lambasted by Veblen. This new theory accepts a biological as well as a cultural foundation for moral dispositions. As noted here, the neglected British institutional economist John A. Hobson — who was an acquaintance of Veblen — foreshadowed this approach.     

Evolutionary Theories in Environmental and Resource Economics: Approaches and Applications

Recent advances in evolutionary theory have important implications for environmental economics. A short overview is offered of evolutionarythinking in economics. Subsequently, major concepts and approaches inevolutionary biology and evolutionary economics are presented andcompared. Attention is devoted, among others, to Darwinian selection,punctuated equilibrium, sorting mechanisms, Lamarckian evolution,coevolution and self-organization. Basic features of evolution, such assustained change, irreversible change, unpredictability, qualitativechange and disequilibrium, are examined. It is argued that there are anumber of fundamental differences as well as similarities betweenbiological and economic evolution. Next, some general implications ofevolutionary thinking for environmental economics are outlined. This isfollowed by a more detailed examination of potential uses ofevolutionary theories in specific areas of environmental economics,including sustainability and long run development theories, technologyand environment, ecosystem management and resilience, spatial evolutionand environmental processes, and design of environmental policy.     

J.A. Schumpeter and T.B. Veblen on economic evolution: the dichotomy between statics and dynamics

At present, the discussion on the dichotomy between statics and dynamics is resolved by concentrating on its mathematical meaning. Yet, a simple formalisation masks the underlying methodological discussion. Overcoming this limitation, the paper discusses Schumpeter's and Veblen's viewpoint on dynamic economic systems as systems generating change from within. It contributes to an understanding on their ideas of how economics could become an evolutionary science and on their contributions to elaborate an evolutionary economics. It confronts Schumpeter's with Veblen's perspective on evolutionary economics and provides insight into their evolutionary economic theorising by discussing their ideas on the evolution of capitalism.     

Market failure vs. system failure as a rationale for economic policy? A critique from an evolutionary perspective

This paper reconsiders the explanation of economic policy from an evolutionary economics perspective. It contrasts the neoclassical equilibrium notions of market and government failure with the dominant evolutionary neo-Schumpeterian and Austrian-Hayekian perceptions. Based on this comparison, the paper criticizes the fact that neoclassical reasoning still prevails in non-equilibrium evolutionary economics when economic policy issues are examined. This is more than surprising, since proponents of evolutionary economics usually view their approach as incompatible with its neoclassical counterpart. In addition, it is shown that this “fallacy of failure thinking” even finds its continuation in the alternative concept of “system failure” with which some evolutionary economists try to explain and legitimate policy interventions in local, regional or national innovation systems. The paper argues that in order to prevent the otherwise fruitful and more realistic evolutionary approach from undermining its own criticism of neoclassical economics and to create a consistent as well as objective evolutionary policy framework, it is necessary to eliminate the equilibrium spirit. Finally, the paper delivers an alternative evolutionary explanation of economic policy which is able to overcome the theory-immanent contradiction of the hitherto evolutionary view on this subject.     

A theorist's view of experiments

The paper springs from a position that economic theory is an abstract investigation of the concepts and considerations involved in real life economic decision making rather than a tool for predicting or describing real behavior. It is argued that when experimental economics is motivated by theory, it should not look to verify the predictions of theory but instead should focus on verifying that the considerations contained in the economic model are sound and in common use. It is argued that when theory is motivated by experiments, the theorist should not be hasty in adopting new functional forms but should try to identify the basic psychological themes which are revealed exposed by the experiment. Finally, some critical comments on the methodology of experimental economics are presented.     

Behavior and cognition of economic actors in evolutionary economics

An evolutionary perspective on the nature of economic activity requires a theory of human behavior and cognition that highlights human creativity and innovativeness, while at the same time recognizing that in many arenas of economic life change is slow and more routine aspects of behavior obtain. It is proposed that Herbert Simon’s conception of human behavior as largely “bounded rational” is capable of suiting both aspects. However, to be able to encompass the enormous advances humans have achieved over the years in their ability to meet a variety of wants, a theory of behavior and cognition suitable for evolutionary economics needs to recognize the evolving cultural context of economic behavior and cognition.     

Bioeconomics as economics from a Darwinian perspective

Bioeconomics—the merging of views from biology and economics—on the one hand invites the 'export' of situational logic and sophisticated optimization developed in economics into biology. On the other hand, human economic activity and its evolution, not least over the past few centuries, may be considered an instance for fruitfully applying ideas from evolutionary biology and Darwinian theory. The latter perspective is taken in the present paper. Three different aspects are discussed in detail. First, the Darwinian revolution provides an example of a paradigm shift which contrasts most significantly with the 'subjectivist revolution' that took place at about the same time in economics. Since many of the features of the paradigmatic change that were introduced into the sciences by Darwinism may be desirable for economics as well, the question is explored whether the Darwinian revolution can be a model for introducing a new paradigm in economic theory. Second, the success of Darwinism and its view of evolution have induced economists who are interested in an evolutionary approach in economics to borrow, more or less extensively, concepts and tools from Darwinian theory. Particularly prominent are constructions based on analogies to the theory of natural selection. Because several objections to such analogy constructions can be raised, generalization rather than analogy is advocated here as a research strategy. This means to search for abstract features which all evolutionary theories have in common. Third, the question of what a Darwinian world view might mean for assessing long term economic evolution is discussed. Such a view, it is argued, can provide a point of departure for reinterpreting the hedonistic approach to economic change and development. On the basis of such an interpretation bioeconomics may not only go beyond the optimization-cum-equilibrium paradigm currently prevailing in economics. It may also mean adding substantial qualifications to the subjectivism the neoclassical economists, at the turn of the century, were proud to establish in the course of their scientific revolution.     

Austrian Economics,Socialism and Impure Forms of Economic Organisation

Modern supporters of the Austrian school of economics maintain that their critical stance towards impure forms of economic organisation - such as the mixed economy - grew out of the arguments of Mises and Hayek during the socialist calculation debate of the 1930s. The paper assesses the two theorists, contributions in the debate and argues that their ideas cannot provide the basis for a general rejection of impure forms of economic organisation. First of all, and contrary to most modern Austrians, who consider the contributions of Mises and Hayek as essentially consistent, it is argued that Hayek's critique of socialism is much more effective than Mises' as it rests on his concept of tacit knowldge and on an evolutionary account of the emergence of capitalist institutions. However, the paper goes on to argue that, if Hayek's critique of state intervention is to have any relevance for contemporary capitalist economies, it must be in a position to show the non-viability not only of a fully centrally planned economy of the Soviet type but also of the mixed economy. It is argued that it is precisely in this that Hayek's evolutionism fails, for his teleological approach is not persuasive in ruling out the possibility of impure forms of capitalism in a manner that is consistent with truly evolutionary - i.e. non-teleological - ideas.     

Schumpeter's theory of economic evolution: a Darwinian interpretation

A general Darwinian framework is employed to arrive at an interpretation of Schumpeter's work that brings out clearly its specific evolutionary aspects. Schumpeter's theory of economic evolution is seen to be still highly relevant to evolutionary economics, because it sheds light on some fundamental issues: the relationship between evolutionary theory and equilibrium analysis, the usefulness of Darwinian theory for economics, and the precise nature of the evolutionary forces at work in economic systems.     

A review of Personalist Economics

The recent focus on sustainability as guiding principle for economic activity has generated many (often conflicting) definitions of sustainable economic development. Yet while the terminology may be new, the discussion is not. It parallels the discussion about biases of economic valuation concepts that have led to the neglect of the domestic and subsistence contributions relegated to the "informal" or household sector. This paper argues that the narrow definition of economic theory, methodology, and valuation concepts has led to the detrimental neglect of sustaining functions without which economic activity is impaired. To move toward sustainability it is imperative to regain a broader understanding of economics. Three principles are identified as essential for this conceptual expansion of economics. They are: concreteness rather than abstraction, connectedness rather than isolation, and diversity rather than homogeneity. All three are informed by feminist theory. Thus it is argued that the voices of women who have gone largely unheard in economics are essential to reconceptualizing economics as sustainable.     

Economic emergence: An evolutionary economic perspective

The standard neoclassical approach to economic theorising excludes, by definition, economic emergence and the related phenomenon of entrepreneurship. We explore how the most economic of human behaviours, entrepreneurship, came to be largely excluded from mainstream economic theory. In contrast, we report that evolutionary economists have acknowledged the importance of understanding emergence and we explore the advances that have been made in this regard. We go on to argue that evolutionary economics can make further progress by taking a more ‘naturalistic’ approach to economic evolution. This requires that economic analysis be fully embedded in complex economic system theory and that associated understandings as to how humans react to states of uncertainty be explicitly dealt with. We argue that ‘knowledge,’ because of the existence of uncertainty is, to a large degree ‘conjectural’ and, thus, is closely linked to our emotional states. Our economic behaviour is also influenced by the reality that we, and the systems that we create, are dissipative structures. Thus, we introduce the notions of ‘energy gradients’ and ‘knowledge gradients’ as essential concepts in understanding economic emergence and resultant economic growth.     

The Rate of Change in Evolutionary Systems and Evolutionary Economic Modeling

Evolutionary economics seeks to model socio-economic reality as an evolutionary system. This powerful approach entails the implication of the continuous loss of information through the evolutionary process. The implication corresponds to evolutionary biology, although the systems in evolutionary economics are different from those in evolutionary biology. The issue of the loss of information has not been extensively studied in economics. Many open questions remain: Which knowledge is lost under what circumstances? Can loss of information be harmful to the socio-economic system as a whole in the presence of runaway dynamics caused by, for example, network externalities? How can the development of knowledge in economic systems be studied? The present article examines these questions and more.