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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IN HIS 2006 BOOK on evolutionary economics, The Origin of Wealth, McKinsey Global Institute Fellow Eric Beinhocker suggests that new ways of thinking could take economic policy beyond the simplistic paradigm of left versus right. Harnessing the unpredictable complexities of evolutionary selection to spur economic growth and social well-being should be the goal. “We may not be able to predict or direct economic evolution,” Beinhocker writes, “but we can design our institutions and societies to be better or worse evolvers.”

An evolution-informed policy would not merely let the free market sort out the strong and profitable from the weak and bankrupt, as Milton Friedman (who used the natural selection analogy in his own essay “The Methodology of Positive Economics”) would have had it. In biology, Hodgson reminds us, evolution does not produce objectively “better” species, but merely species effectively adapted to their current environment. The current crisis environment, where banks have become risk averse and innovation is poorly supported, is a case in which the unbridled free market could leave us with businesses that are well-adapted but ineffective in the long run.

“The crisis doesn’t actually give us a very good way of bringing about more effective firms,” Hodgson says. Instead, he says, it provides a context for restructuring the banking system. According to Hodgson, government intervention is applicable even within the framework of evolution: “We shouldn’t rule out intervention of the government to create a more effective context where competition can occur.”

So gifting hundreds of billions of dollars to the world’s largest banks — so long as they agree to redistribute that cash — would be strong evolutionary economic policy, Hodgson argues. That infusion of capital would foster innovation, be it the development of new technology or business plans, and encourage active competition and growth. Bailing out the reeling auto industry, with its outdated business plans and stubborn resistance to change, would be less advisable through a Darwinian lens, he says.

BUT CRITICS OF EVOLUTIONARY economics argue that the abstractions of equilibriums and rational action are still necessary to sort through the overwhelming complexity of a system running on Darwinian rules. No less a figure than recent Nobel Prize winner Paul Krugman argued in a 1996 talk to the European Association for Evolutionary Political Economy that even evolutionary biologists utilize their own “useful fictions” to make sense of complex systems.

“By all means, let us use simulation to push out the boundaries of our understanding; but just running a lot of simulations and seeing what happens is a frustrating and finally unproductive exercise unless you can somehow create a ‘model of the model’ that lets you understand what is going on,” Krugman told the conference.

Others, while supportive of introducing Darwinian ideas into economics, maintain that its potential remains untapped on a macroeconomic level that could more directly inform economic policy. Though behavioral economics, the field that applies evolutionary theory and psychology to better model individual economic behavior, has made great strides in recent decades through the work of economists like Samuel Bowles and Richard Thaler, larger models that incorporate those advances into higher-order economics remain undeveloped.

“At the moment, we’re a ways from that. It’s a big disappointment,” says Lawrence Blume, professor of information science at Cornell University and an external professor of the Santa Fe Institute. “In order to talk about evolution, you have to talk about diversity, and there are no serious economic models which take diversity seriously.”

For now, an evolutionary perspective on economics can help explain at least broadly how we got into the current mess, and how we may find our way out, Blume says.

“In a Darwinian way, I think there were a lot of incentives for investment managers and fund managers to act in ways we are now criticizing,” Blume says. “But whatever happens, the market regime is going to change, with new institutions and new kinds of oversights. At the end of the day [the crisis] could actually end up helping by making markets more transparent. It’s not as if there’s going to be a totally new group out there doing things in a different way, but we are going to see adaptation going on within the same corporate shell.”

But from the middle of that brutal economic selection pressure, Hodgson warns that the evolution driven by the current crisis won’t be easy: “National economies can adapt a lot, but it takes time and it’s often very painful.”

    Darwin 200More From Our Darwin 200 Celebration.

Originally published February 12, 2009

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