Thursday, July 18, 2013

Economics and Evolution

There's a minor dust up brewing over how much economists can learn from evolutionary theory, stimulated by this special issue of the Journal of Economic Behavior and Organization, entitled "Evolution as a General Theoretical Framework for Economics and Public Policy". I haven't yet read the papers in the issue, although they certainly look to be well-motivated, focused on policy relevant questions, and eager to draw insights from long study of evolution, which I think is a good idea as evolution is, in general, a lot smarter than we are. But it seems that Mark Thoma isn't impressed by the idea, or at least finds a Scientific American article discussing the special issue irritating in making a number of sweeping statements about economics that aren't justified.

In that Thoma is right (and I do often agree with him). For example, economists do have a huge body of work studying tragedies of the commons, their origins and how they might be avoided, and the article implies otherwise. He makes other criticisms as well, more or less justified, although he also seems rather touchy about the idea that economists haven't woken up to the deeper insights that evolutionary theory has to offer and remains stuck on restrictive game theoretical notions of equilibrium. One of the editors of the Special Issue, Barkley Rosser, offers a considered response:

Mark Thoma at economists view http://economistsview.typepad.com/economistsview/2013/07/revolutionizing-economics-by-evolutionizing-it.html , has linked to a post by Jag Bhalla at Scientific American, who in turn links to the Evolution Institute, http://evolution-institute.org/node/144 , 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 http://www.pkarchive.org/evolute.html , 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
I would definitely further that point. I read that Krugman speech several years ago and enjoyed it; Krugman is someone who, it seems to me, reads widely and is open to ideas from other areas of science, although he admitted in the speech that he is "basically a maximization-and-equilibrium kind of guy". Rosser mentions Stephen Jay Gould and the idea of punctuated equilibrium. From my readings of Gould, that idea remained more or less qualitative with him and his co-author (Eldridge I think), but was subsequently developed in more detail by others such as physicist Per Bak. Their view was that ecosystems and ecologies aren't in a static equilibrium of any sort, but in a much more dynamic state through which vast avalanches of change occasionally ripple for perfectly ordinary reasons and having NOTHING to do with external shocks to the system. This is more at the forefront of our understanding of whole-system dynamics than is the old idea of evolutionary stable states and Nash equilibria (although these are still useful on shorter timescales for understanding interactions between a small number of species).

But the point Gould is perhaps more famous for is emphasizing that if one assumes that species have evolved to maximize their (local) fitness, then you open yourself to potentially huge errors of misinterpretation. You might try to interpret everything you see is an optimal solution to some problem, even if some of it, or even most of it, might have nothing to do with optimality. Sure enough, it turns out that an awful lot of what happens in evolution is driven not by genetic changes that increase fitness at all, but rather to changes that are entirely neutral; in essence, most evolution is random drift! If something like this were true in economics, the we might be making systematic errors in assuming the marketplace victory of one firm, technology, computer device or idea over another generally has something to do with its inherent superiority. It may simply reflect a series of random accidents. In principle, this might not be an odd or unusual thing, but the general rule across the board. Taking this possibility seriously would be a big shift for economics, I think, and something it would learn from evolution.

I won't drone on. The most important thing is that the evolutionary theory currently used in economics as a source of metaphor and mathematical models has been/is being cast aside in evolution and ecology by a richer mathematical framework that goes well beyond equilibrium. I hope some of this will be discussed in the special issue. Lots of us who aren't biologists haven't kept up with what is going on in biology and we're quite a bit out of date. For example, genes flow down through the generations, don't they, transmitted vertically from one generation to the next? There is no sideways or horizontal flow of genes between different organisms; we all know that. Indeed, that was the lore for 50 years at least and I only know that this idea is wrong because New Scientist a few years ago asked me to write an article about something called "horizontal gene transfer," which is one of the greatest recent discoveries in biology. 

We probably still know very little about evolution, but what we do know I expect will be a treasure of useful ideas about economics.

9 comments:

  1. Thoma is a troll guarding the gate of orthodox economics so am I surprised that he has taken this position, no.

    This is Thoma's MO when it comes to anything new in economics, everyone is an idiot and Thoma knows all.

    In reality I have to ask what has Thoma done that someone would consider relevant and useful other than playing the enforcer in the hockey game called economics? I'll give you a hint, not much.

    The reality is as economics becomes more and more traumatized by the atrocious output it has delivered, academics from other disciplines will begin to take apart the trolls piece by piece until they are banished into obscurity only to be ridiculed by future generations.

    PK at least has an interesting blog with some good insights. But imho he is more a pundit than an economist. Sure he knows a lot of stuff but he is also blinded by his assumptions. There are two that totally cripple him in my mind: QE and his ranting about a liquidity trap. QE has done nothing to help anyone that needs help in this current economic environment, and talking about a "liquidity trap" takes the focus off the root cause of the financial crisis and the fact that it is all about aggregate demand.

    Ok, I feel better.

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