Wednesday, July 17, 2013

Will Economics Be Revolutionized By Being Evolutionized?

Mark Thoma at economists view , has linked to a post by Jag Bhalla at Scientific American, who in turn links to the Evolution Institute, , where one finds a link to a special issue of the Journal of Economic Behavior and Organization (JEBO) that I have coedited with David Sloan Wilson and John M. Gowdy.  The special issue makes a play for increasing the use of evolutionary theory in economics.  Bhalla argues that this involves arguing that economics should not necessarily involve assuming people rationally maximize utility or that equilibrium analysis should be the focus of analysis.  Mark is unhappy about this characterization and disses the argument pretty hard.  Of course, he is welcome to his view.

Furthermore, he invokes Paul Krugman, quoting in full a speech that PK gave in 1996 to the European Society for Evolutionary Political Economy (while I am into such things, I know nothing of this group).  One can directly access PK's speech at , if one does not want to go through Mark's link.  It may well be that Krugman would now disavow parts of this speech, or at least pull his punches a bit, but it is a place where he puts on his neoclassical hat full force and defends orthodox economics full bore.  This may well not be inconsistent with his current stance as the critic of new neoclassical synthesis views, given that one can view him to some degree as an advocate of the old MIT-Samuelson "neoclassical synthesis" that adopted a neo-Keynesian ISLM approach to macro while essentially maintaining a position of full orthodoxy in microeconomics.  Let us grant that this orthodoxy includes emphasizing agents who are fully rational and maximize their well-defined utility that interacts with other economic agents to lead reasonably quickly to equilibrium, with this being the appropriate focus of analysis.

In any case, I think that PK's presentation of both evolutionary economics and evolutionary theory are seriously narrow and misleading.  He essentially argues that evolutionary theory is all about maximization and equilibrium and that those who focus on other approaches, including Stephen Jay Gould and Stuart Kauffman, are just peripheral losers within established evolutionary theory, which is represented by the work of Richard Dawkins.  He emphasizes the importance of evolutionary game theory developed by Maynard-Smith and then introduced into economics, where it is now more or less a part of standard economics.  He even notes that Hamilton and others allow for rewards for cooperation.  This is all true, and can even be viewed ironically as a form of microfoundations of macroevolution within evolutionary theory, although it is not the whole story.

One important point is that there are and have been many different branches of evolutionary economics.  Of course, economics influenced evolutionary theory from the beginning, notably through the influence of Malthus on Darwin and Wallace.  Some forms of evolutionary economics have always been completely consistent with fully orthodox neoclassical economics, most notably the arguments regarding firm survival and the pressure to maximize profits due to natural selection pressures within competition, as emphasized in the famous 1950 paper by Armen Alchian, followed up by Milton Friedman in his Essay on Positive Economics. 

Of course, Krugman and probably Thoma probably dismiss the oldest evolutionary school, the old institutionalists, who founded the AEA and once ran it, only to be overcome and replaced by the MIT neoclassical synthesis of Samuelson.  It is easy to dismiss them, but they have made many insights and continue to offer more, most notably through the Journal of Economic Issues.  An irony is that the person who coined the term "neoclassical economics" was none other than Thorstein Veblen, founder of the institutionalist evolutionary school.  I suspect that Krugman and Thoma probably consider many of his ideas to be quite relevant to our current situation.

Another evolutionary economics school, vaguely referred to by Krugman, is the neo-Schumpeterian school whose main leaders have been Nelson and Winter and their followers.  This school continues with many followers and journals such as Journal of Evolutionary Economics and Industrial and Corporate Change.  I do not see anybody seriously questioning that they have had much to offer regarding the study of technological change.

Krugman dismisses Stephen Jay Gould and his punctuated equilibrium view as some sort of evolutionary equivalent of John Kenneth Galbraith, an idea popular among the public, but dismissed within evolutionary theory itself.  I think that Krugman is seriously off on this characterization, and the idea of multiple equilibria and dynamic discontinuities is one that is certainly of great relevance in economics.  Just what is going on when we see major financial crashes?

Finally, there is the new complexity evolutionary theory, which is associated with Kauffman of the Santa Fe Institute, whom Krugman also dismisses.  This approach is deeply linked with what is probably the most serious competitor to the DSGE model in macro analysis, namely agent-based modeling.  Many of those models use genetic algorithms, and evolutionary ideas such as emergence are taken very seriously in this approach.  Indeed, this is an alternative way of doing micro foundations of macro, an issue that Krugman simply does not address at all, which does not necessarily depend on the old orthodoxy of rational agent utility maximization or convergence on equilibria within dynamic evolutionary processes.

Barkley Rosser


Wallfly said...

Where is a good department for studying behavioral/evolutionary econ? said...

For evolutionary game theory, U. of Wisconsin-Madison. For neo-Schumpeterian approach, U. of California-Berkeley or U. of Manchester in UK or U. of Queensland in Australia or Sant'Anna School of Advanced Study in Pisa, Italy. For complexity emergence, the first one again.