Why isn’t economics evolutionary?

Despite the massive influence of Richard Nelson and Sidney Winter’s An Evolutionary Theory of Economic Change within evolutionary economic circles, the book and the body of work it inspired has had a limited effect through mainstream economics. I believe there are a few reasons for this, but I’ve always thought that this 1996 speech by Paul Krugman to a bunch of evolutionary economists captures one of them:

To read the real thing in evolution - to read, say, John Maynard Smith’s Evolution and the Theory of Games, or William Hamilton’s new book of collected papers, Narrow Roads in Gene Land, is a startling experience to someone whose previous idea of evolution comes from magazine articles and popular books. The field does not look at all like the stories. What it does look like, to a remarkable degree, is - dare I say it? - neoclassical economics. And it offers very little comfort to those who want a refuge from the harsh discipline of maximization and equilibrium. … Evolutionary theorists, even though they have a framework that fundamentally tells them that you cannot safely assume maximization-and-equilibrium, make use of maximization and equilibrium as modelling devices - as useful fictions about the world that allow them to cut through the complexities. And evolutionists have found these fictions so useful that they dominate analysis in evolution almost as completely as the same fictions dominate economic theory.

Krugman illustrates his point with an example:

William Hamilton’s wonderfully named paper “Geometry for the Selfish Herd” imagines a group of frogs sitting at the edge of a circular pond, from which a snake may emerge - and he supposes that the snake will grab and eat the nearest frog. Where will the frogs sit? To compress his argument, Hamilton points out that if there are two groups of frogs around the pool, each group has an equal chance of being targeted, and so does each frog within each group - which means that the chance of being eaten is less if you are a frog in the larger group. Thus if you are a frog trying to maximize your choice of survival, you will want to be part of the larger group; and the equilibrium must involve clumping of all the frogs as close together as possible. Notice what is missing from this analysis. Hamilton does not talk about the evolutionary dynamics by which frogs might acquire a sit-with-the-other-frogs instinct; he does not take us through the intermediate steps along the evolutionary path in which frogs had not yet completely “realized” that they should stay with the herd. Why not? Because to do so would involve him in enormous complications that are basically irrelevant to his point, whereas - ahem - leapfrogging straight over these difficulties to look at the equilibrium in which all frogs maximize their chances given what the other frogs do is a very parsimonious, sharp-edged way of gaining insight.

It was an interesting paper to select for the example. While Hamilton did assume the frogs had a fixed instinct for wanting to minimise their chances of being eaten, Hamilton ran a simulation to show his point rather than solving a set of equations for an equilibrium. Krugman continues:

Now some people would say that this kind of creation of useful fictions is a thing of the past, because now we can study complex dynamics using computer simulations. But anyone who has tried that sort of thing - and I have, at great length - eventually comes to realize just what a wonderful tool paper-and-pencil analysis based on maximization and equilibrium really is. By all means let us use simulation to push out the boundaries of our understanding; but just running a lot of simulations and seeing what happens is a frustrating and finally unproductive exercise unless you can somehow create a “model of the model” that lets you understand what is going on.

I take Krugman’s argument to be a call for heterogeneity of approach. And in evolutionary biology, multiple approaches are often used. If we stick with William Hamilton, his famous 1981 Science paper with Robert Axelrod on the evolution of cooperation uses a dynamic out-of-equilibrium approach to examine how cooperation could initially emerge in a population of defectors. For that purpose, a maximisation and equilibrium approach is insufficient. However, this work was not done in a vacuum, and there was a lot of work using a maximisation and equilibrium approach that informed it.

Today, simulation and other methods of examining dynamic processes are becoming more prevalent in evolutionary research. Computers have come some way since Krugman’s speech in 1996. Much of the theoretical research on the evolution of handicaps or Fisherian runaway selection is now simulation based. However, although they are important and their use is growing, I’m tempted to agree with Krugman’s assessment that “evolutionary” approaches are not the dominant approach in evolutionary biology.

Given this, it is a challenge to argue that economics should be “evolutionary” when an evolutionary approach is not the dominant paradigm in the field that bears its name. One of the stronger signs of the lack of the “evolutionary” approach in evolutionary biology is that most of Nelson and Winter’s evolutionary models are not sourced from evolutionary biologists. There was not a body of work that could easily be transferred across.

I will, however, stop well short of saying that the use of evolutionary approaches is currently at the right level in either economics or evolutionary biology. Krugman goes on to criticise those who see maximisation and equilibrium as truths and not as useful fictions to discard when the time is right. There is certainly space for an evolutionary approach in economics.

For me, the strongest case for a more evolutionary approach in economics comes from the timeframes with which economics is engaged. In evolutionary biology, maximisation and equilibrium approaches typically assume plenty of time for the traits of interest to have evolved. Economics is more interested in short-term dynamics, possibly more in the style of ecological models where dynamic modelling is the norm. In that case, there may be a stronger case for evolutionary economics than for “evolutionary” evolutionary biology.

*I’ve posted about other parts of this Krugman article before - here and here.