Evolvability and progress in evolutionary economics

This paper develops an account of evolutionary progress for use in the field of evolutionary economics. Previous work is surveyed and a new account set out, based on the idea of evolvability as it has been used recently in evolutionary developmental biology. The biological underpinnings of this idea are explained using examples of a series of phenomena that influence the evolvability of biological systems. It is further argued that biological and economic selection pressures and developmental processes are sufficiently similar to make this biological concept useful in economics. The new account is defended against a number of common objections to the notion of progress in evolving systems, including the claim that all stipulated measures of evolutionary progress are essentially arbitrary and the idea that economic evolutionary progress might not accord with the preferences of economic actors. It is argued that progress, understood as an increase in evolvability over time, is both philosophically well-justified and provides useful predictive and explanatory resources to those seeking to understand and manipulate evolving economic systems.     

Explaining the Poor Performance of Consumption-based Asset Pricing Models

We show that the external habit-formation model economy of Campbell and Cochrane (1999) can explain why the Capital Asset Pricing Model (CAPM) and its extensions are betterapproximate asset pricing models than is the standard onsumption-based model. The model economy produces time-varying expected eturns, tracked by the dividend–price ratio. Portfolio-based models capture some of this variation in state variables, which a state-independent function of consumption cannot capture. Therefore, though the consumption-based model and CAPM are both perfect conditional asset pricing models, the portfolio-based models are better approximate unconditional asset pricing models.     

Aligning Incentives at Systemically Important Financial Institutions: A Proposal by the Squam Lake Group

To address the moral hazard problem that can motivate bank executives to take excessive risks and to fail to raise capital when needed, a group of 13 distinguished financial economists recommends that systemically important financial institutions be required to issue contingent convertible debt (CoCos) and to hold back a substantial share—as much as 20%—of the compensation of employees who can have a meaningful impact on the survival of the firm. This holdback should be forfeited if the firm's capital ratio falls below a specified threshold. The deferral period should be long enough—the authors suggest five years—to allow much of the uncertainty about managers' activities to be resolved before the bonds mature. Except for forfeiture, the payoff on the bonds should not depend on the firm's performance, nor should managers be permitted to hedge the risk of forfeiture. The threshold for forfeiture should be crossed well before a firm violates its regulatory capital requirements and well before its contingent convertible securities convert into equity. The Swiss Bank UBS has paid bonuses to its top 6,500 executives that have been structured in exactly this way. Management forfeits its deferred compensation if the bank's regulatory capital ratio falls below 7.5%, and its contingent convertible debt is set up to convert into equity if the bank's capital ratio falls below 5%.     

Reviews

'WOMEN IN BRITAIN TODAY' Beechey, Veronica and Whitelegg, Elizabeth (Editors), 1986: Women in Britain Today. Milton Keynes: Open University Press, £20.00 hardback, £6.95 paperback.

'WOMEN AND TRAINING' Wickham, Ann. 1986: Women and Training. Milton Keynes: Open University Press, £6.95 paperback.

'ALL WORK AND NO PLAY?' Deem, R. 1986: All Work and No Play? The Sociology of Women and Leisure Milton Keynes:Open University Press, £20.00 hardback, £6.95 paperback.

'ANY ADVANCE ON MONETARISM?' Tomlinson, J., 1986: Monetarism: Is There an Alternative? Oxford: Blackwell, £22.50 hardback, £6.50 paperback.

'LOCAL AUTHORITIES ACTION ON INDUSTRIAL CLOSURES' Local Authority Associations, 1986: Crisis and opportunity: local authorities' response to decline of major traditional industries. Available from ACC, ADC or AMA, £5.00 incl. p. and p.

'DEVELOPING THE SOCIALLY USEFUL ECONOMY' Bodington, S., George, M. and Michaelson, J., 1986: Developing the Socially Useful Economy. Macmillan, £9.95 paperback.     

The population crisis in sub-Saharan Africa

The authors argue that sub-Saharan Africa, given its present institutions and endowments of capital and technology, is already dangerously close to overpopulation. Specifically, they suggest that projected rapid population growth will have disastrous effects on the region's ability to increase exports and provide people with goods.