Evolutionary Economics

Evolutionary Economics By DANIEL LIBERTO Updated Aug 1, 2019 What Is Evolutionary Economics? Evolutionary economics is a theory proposing that economic processes evolve and that economic behavior is determined both by individuals and society as a whole. The term was first coined by Thorstein Veblen (1857-1929), an American economist and sociologist. KEY TAKEAWAYS Evolutionary economics proposes that economic processes evolve and are determined both by individuals and society as a whole. It shuns the rational choice theory of traditional economics, arguing that psychological factors are key drivers of the economy. Economists in this field seek to explain economic behavior and progress in relation to evolution and evolutionary human instincts. Understanding Evolutionary Economics Traditional economic theories generally view people and governmental institutions as entirely rational actors. Evolutionary economics differs, shunning rational choice theory and instead pinpointing complex psychological factors as key drivers of the economy. Evolutionary economists believe the economy is dynamic, constantly changing and chaotic, rather than always tending toward a state of equilibrium. The creation of goods and the procurement of supplies for those goods involves many processes that change as technology develops. Organizations that govern these processes and production systems, as well as consumer behavior, must evolve as production and procurement processes change. Evolutionary economics seeks to explain economic behavior and progress in relation to evolution and evolutionary human instincts such as predation, emulation and curiosity. The field explores how human behavior, such as our sense of fairness and justice, extends to economics. This branch of economics is inspired by evolutionary biology. In the free market, the survival of the fittest model is rampant. Consumers have plenty of choices, few firms can fully meet their needs and everything is in a constant state of flux, meaning that many competitors will be obliterated. The linking of evolutionary economics to Darwin principles has attracted considerable criticism, including from Joseph Schumpeter, one of the leading figures behind the theory. Examples of Evolutionary Economics Like behavioral economics, the actions of companies are believed to be shaped by more than just a goal to make a profit. Several factors influence and motivate decision making, including local customs and fear of not surviving. History also plays a key role. Entire countries and economies are said to be heavily influenced by their pasts. For example, nations in the former Soviet Union, who for years were governed by strict regulations, are likely to struggle more to be creative because they were taught not to think this way for decades. Conflicting histories mean that the same economic policy should not be expected to have the same impact in every country. History of Evolutionary Economics American economist Thorstein Veblen came up with the term evolutionary economics. He believed psychological factors presented better explanations for economic behavior than traditional rational choice theory. Veblen used an example of social hierarchy and status to make his point, noting that demand for some goods tends to increase when the price is higher—otherwise known as conspicuous consumption. Veblen drew upon many fields of studies, including anthropology, sociology, psychology and Darwinian principles. Austrian economist Joseph Schumpeter also played an important role in the development of evolutionary economics. His model of creative destruction described the essential nature of capitalism as a relentless drive towards progress, expanding on Veblen’s early observations. Schumpeter argued that human entrepreneurs are the main drivers of economic development and that markets are cyclical, moving up and down, as companies constantly compete to find solutions to benefit mankind. Special Considerations One of the biggest lessons that most evolutionary economists agree on is that failure is good and just as important as success. According to the theory, failure paves the way to economic prosperity by encouraging greater efficiency and the development of better products and services. It also teaches us more about how society's needs develop over time.