Evolutionary Economics

Evolutionary economics designates a school of thought that focuses on market processes of change and progress, restructuring and innovation through competition, rather than on static equilibrium, the focus of neoclassical economics Opens in new window.

Evolutionary economics analyses economic phenomena in historic time, that is, on the knowledge that one cannot turn the clock back and that certain events are irreversible. One therefore has to look at historic paths, for example in technical change.

Evolutionary economists reject the unrealistic notion—common in neoclassical analysis—that economic actors make decisions completely anew at the beginning of every period.

Evolutionary economics also deals with open-ended systems, which allow individual experimentation by variation, selection and imitation of what people value highly.

Thus, evolutionary economics focuses on change, diversity, learning and creativity, and the complex interplay between technical, societal, organizational, economic, and institutional change. It pays great attention to the role of creativity and entrepreneurship.

Competition is seen as the device that sorts what is deemed useful from what is considered not worth the cost. In distinction to comparative-static analysis, it is assumed:

  1. positively that disequilibrium is the normal state of affairs, and
  2. normatively that people thrive in disequilibrium processes (stable equilibrium is death! Opens in new window).

The evolutionary approach is to analyze a path-dependent sequence of events, where the decisions in earlier periods have great (though not exclusive!) influence over what can happen in the next.

To illustrate the point: the standard neoclassical assumption would be to assume that a music student in her first semester chooses to learn the piano, in semester 2, she starts afresh and decides to learn the trombone, in semester 3, it may be the violin.

By contrast, path dependency in evolutionary economics assumes that, normally, music students build on their first-semester skills. In contrast to comparative-static neoclassical economics, which suggests the pursuit of perfection, the evolutionary policy stance is to look out for pragmatic, ongoing improvement.