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Economics Meets Evolution – in a Fantastic Setting

Over the last two weeks I did not have any time left for blogging. First, I have moved from Connecticut to Aarhus, where I will be for the next several months. Or, at least, this is where I will be based – I already have a lot of trips planned, all over Europe. Second, I have already gone and returned from the first of these trips. Hopefully, now things will start to settle down and I will be able to resume my regular schedule of blogging (roughly, twice a week).

The trip was to Ringberg Castle in the Bavarian Alps to participate in a conference on evolutionary economics.

Ringberg

(Photo by the author)

What is evolutionary economics? I posed this question to Ulrich Witt, the director of evolutionary economics group at the Max Planck Institute for Economics and the organizer of the meeting.

According to Ulrich, there are two main currents in evolutionary economics, which have developed largely independently of each other. One research direction, within which Ulrich himself has been working, begins by questioning the assumption of homo economicus, a rational agent that choses those actions that yield the best balance of rewards versus costs. Real human beings behave in a very different way. We are not very good at calculating the best possible solution that will maximize the expected pay-off. Instead, we tend to use all kinds of computational short-cuts – ‘heuristics,’ rules-of-thumb – to figure out what would be the best course of action. In many situations this approach works reasonably well, but it can also fail quite disastrously.

However, it’s not enough to say that we fail to measure up to the lofty standards assumed by the rational choice theory. What would be particularly interesting is to understand in what ways our behavior deviates from ‘perfect rationality’ and why we evolved to behave in these ways. In the last couple of decades the fields of evolutionary psychology and behavioral economics have been making great strides in answering such questions.

We now know, for example, that people behave cooperatively in various social games (public goods, ultimatum, etc.) not because we are stupid (rational agents should always defect, that is, play uncooperatively), but because we value cooperation for its own sake. And a good thing we do (or most of us do).

Carsten

Carsten Herrmann-Pillath, the author of Foundations of Economic Evolution (Elgar, 2013) (credit: PT)

The second current in evolutionary economics is sometimes called the ‘Universal Darwinism’ (one proponent of this approach at the conference was Sylvie Geisendorf at École Sup. de Commerce, Berlin campus). Darwin developed his theory to explain biological evolution. But his basic insight has a lot of value when considering the dynamics of economic agents (especially, organizations such as firms and corporations) competing in the market. In biological organisms evolutionary ‘fitness’ is maximized when they increase their chances of survival and reproduction. Firms also have fitness, which is maximized when they increase their revenues and cut costs.

Of course, it is quite possible to maximize short-term returns at the expense of long-term profitability. But biological organisms may also be similarly irresponsible: produce too much offspring, more than they could feed, and have all of them starve as a result. So there are lots of parallels (it is not entirely by chance that ecology and economics sound similar). At a deeper level, mathematical models explaining evolution of ecosystems and evolution of whole industrial clusters may have a lot in common.

I don’t want to say that all the presentations at the conference strictly conformed to one of these two currents – there was a lot of diversity, and the backgrounds of participants ranged from modeling, biology, and psychology to anthropology, economics, and political science. There was one theme that was largely absent at the conference – the deep roots of economic development. As readers of this blog know, I am convinced that an evolutionary approach to this question can be very productive. In my own presentation I touched on it, but mostly I talked about the Z-curve of human egalitarianism.

dinner

Dinner in Ringberg Castle (credit: PT)

So the conference was a great success. Not only were nearly all talks excellent and thought-provoking, the setting within which the conference took place, Schloss Ringberg, was what tipped the conference from being just, well, a conference, into quite an extraordinary experience. But I am running out of space here, so I’ll write about this fantastic (even, fantastical) setting in the next blog.

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A note added 19.IX.2013. For those interested in reading up on various strands within evolutionary economics, I’d like to direct you to an article Ulrich Witt wrote a few years ago for the Journal of Evolutionary Economics (appropriately enough), with the title What is specific about evolutionary economics?

In that article Ulrich discusses four different approaches, distinguished in a 2 x 2 classification. First, does the approach assume that social/economic versus biological evolutionary processes belong to different, disconnected, spheres of reality? Second, does the approach use a formal set of Darwinian postulates (the three focusing on variation, selection, and heredity), or is it based on more informal comparisons (change, novelty, emergence – after all, ‘evolving’ means changing with time).

Universal Darwinism falls into one of the four cells in this 2 x 2 table. Other cells are occupied by Schumpeter and Neo-Schumpeterians, and by approaches of Hayek, North, etc. In any case, the article is well worth reading, although it is fairly abstract in places!

11 Comments

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11 Comments

  1. Good stuff. I’ve been following evolutionary economics for some years. It’s a good field. Still a bit wedded to the “rational self-interest” paradigm, but moving fast toward the realization that people (and, to a lesser extent, other primates) are into emotional group-interest instead.

    • Peter Turchin says:

      The group that Ulrich gathered together was completely divorced from the rational self-interest paradigm! Things are moving in the right direction.

  2. radek says:

    I dipped my toe into some ecological papers and I was amazed at how similar the math is to that used in economics models, The functions that are usually used are more or less the same, just have different names. Given that, there appeared to be one crucial difference between dynamic economic and ecological models:

    Generally, even though they use more or less the same maths the economists tend to always assume functional forms and parameter restriction which ensure that a given steady state is stable, based on the justification that “well, the world doesn’t fall apart” (*). The ecologists on the other hand (judging from that dipped toe of mine) tend pick functional forms and parameters which admit the possibility of unstable equilibria or exploding oscillations, maybe because they want to emphasize the fact that “hey, the world COULD fall apart!”. People like Jared Diamond, neither really an ecologist or an economist, are somewhere in between (and probably the author of this blog too, I’m guessing)

    I do like evolutionary economic models a lot but occasionally I see them being over sold. People outside a particular research area tend to think of how the scholarly process evolves in very dialectic terms. One “school of thought” or methodology overthrows another. Impressionism overthrows neo-classicism, post-impressionism overthrows impressionism, fauvism overthrows post-impressionism, cubism overthrows fauvism, expressionism overthrows cubism, post-expressionism overthrows expressionism etc.

    But that’s really not how it works. It’s really about synthesis and building a wide range of approaches that can address particular questions. I’m pretty sure there are economic questions which evolutionary economics will just not be very good at tackling and where “traditional” economic theory does a better jobs (if you want to know why the price of oranges at your grocery store went up last week, it’s probably just a boring standard supply/demand story). However, given our initial conditions (at this point) evolutionary economics does deserve a bigger share of the research agenda.

    (*) The other issue is that (macro)economists often linearize their models for the sake of tractability and so that they can throw some linear regressions at them (and good luck with non-linear time series models!). Almost by definition this kind of approximation excludes the possibility of multiple equilibria/steady states as these require non-linear functions which can cross each other more than once. This differs by sub-discipline though. Growth and Development economist as well as (many) Economic Historians actually like multiple equilibria and consider these an interesting aspect of a particular model. More straight up macroeconomic guys (the ones studying business cycles) tend to regard multiple equilibria as bad because it’s seen as subtracting from the predictive power of the model (at least with many equilibria such a model can be made to fit anything). But this too may be changing as it has gotten some attention in the discussions of modern macroeconomics recently.

    • Peter Turchin says:

      Hi Radek. I wouldn’t say that I am ‘between’, rather I advocate an approach that encompasses both the possibility of a stable equilibrium and cycles, chaos, or even collapse. In my book on Complex Population Dynamics I review all kinds of dynamics, running the complete spectrum.

      Why lock yourself into a particular outcome? Depending on parameters and initial/boundary conditions all kinds of outcomes are possible. If it’s multiple equilibria, fine. We need to know it, so that we can knock the system out of an unfavorable steady point.

      BTW, your comment shades into complexity economics, which is related, but not the same as evolutionary economics. Not that I care about such boundaries.

    • I mention this and provide a link in a comment below yours, but Robert May has done some awesome work formalizing and exploring this connection between ecology and economics (finance, in particular). It seems to wander into the complexity economics territory that Peter mentions, and relies a lot on agent-based modeling, but you might enjoy it. I would recommend taking a look if you haven’t already seen it. A quick over is:

      May RM, Levin SA, & Sugihara G (2008). Ecology for bankers. Nature, 451 (7181), 893-5

      But May makes more substantial contributions in some of his other recent papers. Another fun connection between the fields is evolutionary game theory and evolutionary economics, which is a great example of the merging, synthesis, and strange “currents of thought” changes that you describe. Since we can see some of the origins of EGT in neo-classical econ and then moving through biology back to economics.

  3. I had assumed that the first stream was just a part of behavioral economics while the second was evolutionary economics as conceived by Nelson and Winter; thank you for correcting my misconception.

    Do you think Robert May’s bringing tools and ideas from ecology to studying finance is also an example of evolutionary economics, or is it something else all together?

    • Peter Turchin says:

      I am not an economist, but looking from the outside it does not seem terribly important to me to clearly classify what is evolutionary economics, what is ecological, and what complexity economics. I certainly think that contributions of Bob May and colleagues to economics are very insightful. Another big field that we should mention is econophysics. Of course, economists themselves take a dimmer view of such interlopers into their field.

      Thanks for the link to your blog – very nice!

  4. After a Bob May seminar on complexity theory and stock markets, someone asked whether he had actually made a profit applying his ideas to a real market. In typical Bob May fashion, he replied, ” I don’t know, but George (Sugihara) is driving a new Porsche.”

  5. Ford Denison says:

    It’s interesting that, of all the possible viewpoints to photograph the castle, we chose almost the same one. See my blog.

  6. Chris Auld says:

    Peter, you use the word “rational” to mean a markedly different and much more restrictive concept, “narrowly self-interested and rational.” It is not, for example, intrinsically irrational to “value cooperation for its own sake.”

    It is common to model people who are willing to do things such as give up their own material well-being to help others, particularly if others are also being “kind”, or to give up own material well-being to punish other people who are not cooperating, or just out of spite.

    These are rational choice models—choices follow well-defined transitive orderings—they just involve (like huge swathes of modern economics) goals other than narrowly-defined material self-interest.