Evolutionary Economics

Evolutionary Economics (or economic evolution theory) refers to the viewing of the economy as a continuously evolving system accompanying regular change, chaos, adaptation, and revival affected by people and society. It helps predict the survival of the fittest businesses on the previously mentioned parameters. It focuses on the importance of failure in economic development and prosperity.

It consists of three steps – variation, selection, and retention. The theory has its basis in a mathematical model called replicator dynamics. It offers constructive suggestions to everyone engaged in business comprising of trade and barter. According to it, reducing the price-cost of products cannot sustain a business but will fail due to the evolutionary economic selection of a market.

• Evolutionary economics means a unique system of modern economics that advocates for economic evolution, entailing the selection and variation of goods and products to enable a firm's survival.
• It plays a vital role in assimilating failures into success plans of businesses enabling them to survive amongst their competitors.
• Three important assumptions of the theory are – variation sources, selection process, and subcategories of products.
• One can observe important characteristics of this theory as - a compound set of factors such as motivational factors, the dynamism of economic equilibrium, previous performance of the firms, and differential effects of taxes in different countries.

Evolutionary economics theory refers to a branch of economics studying the sustenance of economic systems like manufacturing, selling, and buying using social evolution system. It draws inspiration from similar subject branches like economic sociology, anthropology, and foreign political economy. It does have enormous implications for other areas of economics like industrial organization, economic history, business cycle study, and financial crisis.

Generally, traditional economic theories assume that people and governmental organizations act rationally. However, contrary to rational choice theory, evolutionary economics identifies intricate psychological aspects as the main forces behind the economy.

Instead of continuously gravitating toward a state of equilibrium, evolutionary economists contend that the economy is dynamic, continually shifting, and chaotic. Numerous procedures are involved in producing items and acquiring the necessary resources, and these processes evolve as technology advances. As production and procurement procedures change, organizations that oversee these systems and output must adapt, as must consumer behavior.

Evolutionary economics studies how human conduct extends to economics to understand economic behavior and advancement about evolution and human evolutionary tendencies, including predation, emulation, and curiosity. For example, human’s sense of fairness and justice.  The survival of the fittest paradigm is pervasive in a free market. Since there are many options for consumers, few businesses can completely satisfy their demands, and everything is constantly changing, so many competitors will be eliminated.

Most evolutionary economists concur that failure is beneficial and equally necessary as success, which is one of the most important lessons. According to the argument, failure promotes increased effectiveness and the creation of better goods and services, which in turn leads to economic prosperity. Additionally, it enlightens us on how society's requirements change over time.

Thorstein Veblen (1857-1929), an eminent revolutionary American economist, coined the term. Most of the theory is based on biological evolutionary theory, as social behavior has an evolutionary effect. However, the evolutionary theory of economics mainly tries to know the 'why' of every economic problem instead of asking the question 'how.' In other words, if an economy lacks resources, mainstream economics would try to resolve the issue by suggesting how to maximize resources using mathematical models.

On the other hand, the same scarcity of resources would be solved by the evolution of economics using the reasons leading to the scarcity of resources utilizing the step-by-step evolution of the scarcity. However, it won't be correct to say that it does not use any scientific method but rather use qualitative, interpretive, emergence, and complexity methods of natural sciences.

Joseph Schumpeter, an economist from Austria, was also crucial in the advancement of evolutionary economics. He built on Veblen's initial insights by describing capitalism's fundamental essence as a constant pursuit of development in his theoretical concept of creative destruction.

According to Schumpeter, businesses run by human entrepreneurs are the primary forces behind economic growth. Markets experience ups and downs due to ongoing competition among businesses to produce solutions that benefit humanity.

Theory conceptions that must satisfy the evolutionary economics assumptions to get termed as an evolutionary economics policy are the following:

• It must contain various basic units of selection, like selecting people's behavior, selecting individuals' rules of behavior, and selecting societal rules of conduct;
• It needs to consider and observe the selection process;
• It must check and be aware of the various source.

These ensure that businesses adapt to the prevailing demand and evolve to stay relevant and sustainable in the market. It also ensures that individuals with the right attitude, temperament, and habits drive the business and economy.

Like another branch of economics, this branch also has unique aspects. Let us discuss the following points:

• A compound set of factors motivate a firm towards running its business: survival desire, innovation, inspiration in producing goods, and the effect of local, legal, and cultural practices.
• Economic equilibrium tends to be a farce, but a constant dynamic flux of the economy tends to be the feature.
• Past and historical developments affect the economy.
• Different effects of the same taxes on different countries.

Further, let us also study the different levels of economic evolution. They are the following –

1. Micro Level Views

Per this view, routines, and rules shape the behavior of firms and economies, like past actions and repetition. Moreover, the routines and rules could change more than what is allowed in neo-classical economics.

2. Meso Level Views

It is the intermediary between micro-level and macro-level views. It consists of an influential population in the process of developing new behaviors. Evolutionary economics believes that every macro population has a diversity that cannot get approached in a homogenous manner. Therefore, diversity makes the economy develop at micro and macro levels.

3. Macro Level Views

According to the economic evolution theory, the macro level consists of a collection of vast fields of microeconomics in contrast to neoclassical economics theory. For instance, the total labor supply cannot get assumed to be of a uniform population. Still, researchers may consider a collection of subcategories like- freelancers, professionals, government staff, labor class, and management staff of the private sector.

Let us look at an evolutionary economics example to understand the topic better.

Suppose ten companies produce shoes in America with similar price ranges and quality. Out of these companies, Amacon & Blinder offers a variety of products, adapts to market needs, and selects workers and products per the customer's needs. In contrast, the other eight companies need to evolve in their approach.

After a few years, only companies Amacon & Blinder could sustain the market competition, and the rest wound up their business. In a way, economic forces chose two companies out of these ten companies to survive the battle of the survival of the fittest. Hence, one may also observe the working of the evolutionary theory in this case.

This article has been a guide to Evolutionary Economics and its definition. Here, we explain its history, conceptions, unique facets, and example. You may also find some useful articles here -

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• Behavioral Finance
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