Thursday, February 27, 2020

464. Evolutionary economics

Perhaps the most fundamental problem for rational choice arises when uncertainty is radical, i.e. when we do not know in advance what all the options for actions are and what their consequences may be. Often options arise in the light of the outcomes of actions rather than being given in advance. Also, the preferences that are supposed to form the basis for rational choice are often formed in action rather than being given before it. I will argue that an evolutionary perspective of innovation, which avoids ‘intelligent design’, yields a more useful perspective.

The basic principles of evolution are variety generation, selection and transmission (of what survives selection). In item 30 of this blog I discussed evolution in society. Here I focus more on the economy. Variety generation arises from innovation, selection is performed by markets and institutions, and transmission of success occurs in firm growth, imitation, education and training.

However, in item 30 I warned against going too far in adopting a biological analogue of evolution. In society, variety generation, selection and transmission take their own forms, which are quite different from biology. Innovation is not the same as mutation of genes and crossover of chromosomes. The selection environment of markets and institutions can be manipulated by political influence. Transmission entails communication, which entails interpretation, which entails transformation, so that it is at the same time not only transmission but also a source of variety. 

Evolution provides an alternative to market logic including freedom and variety as well as selection. There is freedom in a variety of ideas put up for selection. Struggle for survival includes competition, but also symbiosis. Survival, in adaptiveness to the selection environment, is not necessarily rational or optimal. In innovation it is often not the best product that wins, but the one that manages to conquer the market first. Most important, evolutionary theory recognizes radical uncertainty that limits intelligent design. 

It is often adaptive, good for social survival, to go along with majority opinion, against one’s own views and convictions. This is connected with group think in organizations, herd conduct in markets, and immorality of groups (see item 48). Policies are designed and adopted that are illogical, not optimal or even detrimental, for the sake of political expediency.

Paradoxically, this can lead to policies that satisfy old, erroneous intuitions of rational design, thwarting the dynamics of evolution. An example is innovation policy, as adopted in the Netherlands, in the form of planning innovation in committees for selected industries. It goes against the logic of evolution, and indeed the logic of markets, in reducing variety and selection. It yields an obstacle for the crossing of boundaries between industries and technologies that generates innovation. However, there is an erroneous, adaptive political rationale. Such policy avoids the risks of real innovation that parliament finds hard to stomach for its ‘failures’ to succeed, it gives vested interests in big business an opportunity to lobby for their interests to limit innovation to incremental innovation that does not upset existing investments and markets too much. This yields a powerful political force to adapt and conform to current standards that sweeps along even scientists who know better.

Is there no evolution or market mechanism to penalize this? Yes: it is manifested in new emerging countries less caught in habits and regulation that win out in innovation.   

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