Darwinian Economics ... ?

Institutional Economics ... ?

If you're an aspiring student of economics the pages around here should interest you. They're a light and optimistic look at economic growth, wealth creation and technological & institutional innovation.

These notes were originally put together for a series of tutorials in the English language to help Eastern European students of market economics to think about economics as the science of choice. Have a look at the site map here to find your way around.

Understanding economic choice starts with the 'why?' questions and the big one - why are some economies rich and some poor? ... and the gap is enormous ... and growing ... could it be -

* just the luck of geography, climate & natural resources? 

* or was it planned design by intelligent folks or super intelligent Gods? 

* or could it all be explained by the process of evolution?

It must be one of the three ... mustn't it?

Around 1850 Karl Marx and Charles Darwin rejected both luck and divine intervention, they proposed new answers to the 'why?' questions. Marx suggested an historically plausible top down design process of exploitation driven by an elitist class conspiracy. Darwin suggested a counter-intuitive bottom up process of adaptation driven by discarding alternatives that don't work.

Marxist top down thinking was finally discredited with the fall of the Berlin wall in 1989, but meanwhile, relentlessly, for 150 years Darwin's 'strange inversion of reason' has explained more and more .... 

In the following pages four economic breakthroughs are explored with the help of evolutionary thinking -

the industrial & scientific revolution in Western European  1500 - 1800

the global spread of democracy 1975 - 1995

the collapse of Eastern European economic planning in 1989

the global market reforms of the 1980s

The gist of the exploration is four Why? questions -

1. Why are some economies rich and some poor?
Adaptive Efficiency & Evolutionary Economics - the wealth creation gravy train discovers & accumulates good tricks

Around 1750 something dramatic happened. In some economies a process of technological & institutional innovation started to create an abundance of new wealth. The process had two notable characteristics -

* the growth was not cyclical but self sustaining

* most economies missed out

This industrial revolution is a striking fact of recent economic history, an explosion in our capacity to change things, a potential 'gravy train' of wealth helping to alleviate ignorance, fear, poverty and violence.

Neo-classical Economics has traditionally explained the explosion using Newton's maths with a focus on market equilibrium and the rational allocation of scarce resources. This tended to neglect explanations of dynamic growth and theories of choice inspired by an environment of emergence, risk and uncertainty - complex, changing and full of scarcity and conflict.

Evolutionary Economics describes the unleashing of a process of continuous competitive technological & institutional innovation which discovers & accumulates more survival value for the costs incurred than competing alternatives. The evidence suggests that it could be adaptive efficiency that defines economic efficiency.

2. Why does freedom & democracy help economic growth?  
Enabling Environments & Economic Growth - lawful freedom to generate & test

In a hostile environment where the future is risky and uncertain there are evolutionary pressures for aspiring people to try for their own survival tricks and oppose the impositions of oppressive Bishops, tyrannical Princes, dictatorial Generals and errant majorities. Any notion of domination by divine right, 'natural' authority or elitist instruction is evolutionarily unstable and economically inefficient. 

Evolution diversifies knowledge and skill widely and differently amongst the population. This individual diversity means tyranny & oppression can never survive long term because there are always better alternatives to be discovered, sometime, someplace ... which nobody knows in advance.

Folk get into a pickle when they want to be 'top peck', control events and have the pick of the girls ... crowd trouble emerges ... others will always want to try their own hand and go for longevity.

Alternatively free democratic institutions tend to speed up the adaptation process because more folk are free to lawfully participate in cooperative institutions in an environment of diversity & choice - keeping more options open and increasing the chances of discovering & accumulating new survival tricks ... it seems we are like inspired dwarfs standing on the shoulders of giants who have managed to accumulate survival tricks over past centuries.

Unfortunately turkeys don't vote for Christmas so we shouldn't expect authoritarian elites (not even elected governments!) to abandon the reins of command & control and promote institutions which encourage diverse participation ...

But evolution can't be stopped and competitive innovative ideas are always being hatched by ingenious folk ... 'enabling' institutions which tend to undermine top down processes are always emerging and spreading ... take monogamy for example ... think about it?

The Universal Declaration of Human Rights is a good summary of the evolving principles of freedom and democracy ... folks are free to choose but not free to harm others ... 

NB the UDHR emerged from aeons of evolution, it was not written ex nihilo in 1948

NB the crucial Article 30 caveat guards against an authoritarian 'top down' interpretation 

3. Why is wealth creation so difficult to plan? 
Cooperative Synergies & Wealth Creation - 2 + 2 = 5

All 'wealth' is survival 'know how', it is discovered by trial & error and accumulated in institutions. Only a very few ideas survive and grow to become institutionalised. These surviving successes become part of inherited 'know how'. In this way wealth is a changing population frequency of survival 'know how', emerging in the midst of vast complexity from a tacit, dispersed and incomplete discovery & accumulation process ... immensely difficult and impossible to design from above ... no wonder so many miss out ... but it is the only way evolution can work ...

It is not easy as there are many more ways of being dead than alive and evolution needs a constant stream of energy to run faster and faster just to stand still. Competition is around and yesterday's success is tomorrow's failure.

Furthermore evolution provides survival niches for 'free riding' parasites & predators which prey on any wealth stocks. To enable wealth accumulation defence systems must co-evolve ... not only energy but also immunity ... a double whammy.

Cooperation is an essential prerequisite for survival for all social animals. But cooperation is risky. Although new survival tricks start with an unproven idea of individual creativity, innovations grow and compete with alternatives in interacting populations by exploiting 2 + 2 = 5 synergy benefits. We are totally enmeshed in the complex vagaries and foibles of our mates, our adversaries and our ancestors ... 

4. Why is wealth all about survival 'know how' and not other factors of production?
Innovation & Technology & Institutions - a good trick is survival 'know how'

During the latter half of the 20th century rapid technological growth and globalisation forced neo-classical economists come to terms with two counter-intuitive issues -

* 'money' is just a useful measuring trick, survival 'know how' is the fundamental economic resource that drives growth and it is found in technology & institutions

* 'rational calculating economic man' is a myth, no one is 'in charge' of economic growth there is just a dynamic process of adaptation 

History classes traditionally teach that the pursuit of power and progress is a deliberate, materialistic, resource dependent process - 

* Feudalism and primitive pecking orders

* Mercantilism and pilfered gold

* Empires and territorial expansion and 

* parasites & predators who steal other people's property

For sure money grabbing is an historically plausible zero sum behaviour but much better positive sum survival strategies exist.

Survival 'know how' from technological & institutional innovation converts labour, capital and natural resources into products and services which are more valuable than the factor costs incurred. It is 'know how' that evolves ... not gold ... 'know how' defines what counts as a useful resource. 

Yes energy is needed to sustain the process but without 'know how' - 

* oil is just a dirty pollutant in the desert sand and 

* pills that cure cancer are just bits of chemical compounds ... think about it?

Furthermore although the ghost of 'rational calculating economic man' still stalks the corridors of power no one is 'in charge' of wealth creation and economic growth. 

Real human behaviour involves individual decision making and consumer and investor choices based on Herbert Simon's 'satisficing'. In their ignorance folk survive only if they adopt behavioural rules of thumb about cooperating and responding to threats which enable the discovery of synergies and the accumulation of benefits in institutions.

And order emerges from these activities because markets co-ordinate activities 'as if' a control loop, not because the boss issues instructions.

The bottom line ... if evolutionary economics is all about adaptive efficiency ... there are three implications - 

* Beware of Soothsayers - there is no evidence that the 'rational purposeful intentional planning' of economic agents is anything more than a Darwinian generate & test process. Long term co-ordination of economic activity cannot be achieved by intelligent designers who 'pull levers and press buttons' in a vain attempt at command & control of the future. 

* Moral Logic - 'Universal Darwinism' seems 'as if' it involves an optimistic moral and economic efficiency logic, suggesting cooperative behaviour will tend to evolve as deep down in the skull moral sentiments emerge. Sure it is a hit and miss affair and only increasing slowly in population frequency before eventually becoming established in institutions of economic behaviour. But over time, survival 'know how' will tend to move populations from less efficient zero sum 'red in tooth and claw'/anarchic/'laissez faire' behaviours to the highly organised positive sum behaviours associated with the lawful, individual freedoms which we see slowly emerging in democracies and the global market economy? Clearly this is NOT a result of any overarching purposeful design, but merely the failure of alternatives!

* Behavioural Strategy - all this suggests that the best economic strategy is to adopt simple rules of thumb which speed up evolution. This is best done by encouraging the search for synergies by generating & testing rival wealth creating ideas widely amongst the population and rewarding the discovery & accumulation of new tricks. 

Students are invited to accept the evolutionary process and then test for themselves its explanatory power through debate and discussion of four significant economic issues from recent history -

why did the scientific revolution take place when it did and where it did, around 1750 in parts of Western Europe?  An introduction and some essay notes are here!

why did democracy spread so rapidly from around only one third of global Nation States in 1975 to more than two thirds in 1995 and still growing? An introduction and some essay notes are here!

why did Eastern European economic planning collapse with the Berlin wall in 1989?  An introduction and some essay notes are here!

why did the market reforms of the 1980’s reflect an economic theory and practical policy consensus?  An introduction and some essay notes are here!

Economic Principles act 'as if' to drive evolution by discovering & accumulating more survival value for the costs incurred than competing alternatives ...

Some Fun  with evolutionary economics which may help 'the dismal science' to recover some of its poise ... 

Quotations from some of the contributors to evolutionary economics ... a memorable collection of succinct encapsulations of the key ideas ... 

Geoffrey Hodgson - a summary note on Evolutionary Economics, far more concise and erudite than I ...

criticisms of Evolutionary Economics come from all quarters - economists, scientists, political analysts and religious believers ...

Don't forget this material intentionally challenges some orthodox economics to provoke thinking about choices. I'm happy to see any comments, corrections and critiques ... here!