Both classical and Marxian theories of change established the growth of capital as the fundamental driving force of economic growth and structural change. In the classical view, of course, this would lead to population growth, and this combined with diminishing returns would only lead to eventual stagnation. In the Marxian view, this would lead to revolutionary change as contradictions built up between productive forces and both the productive relations and overlying superstructure. There are more modern views, however. The first view is Neoclassical growth theory, and the second is the economic evolutionary approach which may be seen as a combination of Austrian approach with the Darwinian theory of biological evolution.
Neoclassical Growth Theory
The first piece of the classical growth theory that has been discarded by most neoclassical economists is the idea that economic growth necessarily leads to population growth. In the Malthusian view, people breed like rabbits, and population growth is checked primarily by death rates due to inadequate food. In the neoclassical view, however, rational individuals make choices based on their incentives, constraints, and information. In this latter view, economic development may lead to reduced birth rates for a variety of reasons, even though it allows families to afford more children, since:
Evolutionary and Austrian Views
Like Marx, Joseph Schumpeter also predicted that capitalism would destroy itself, but for different reasons. The major actor in his model is the entrepreneur; through his willingness to take risks and try new ideas in the hope of profit, the entrepreneur would unleash the force of creative destruction. New technologies, new products, new types of organizations would compete against old ones, and the less successful would go bankrupt. In his view, societies that became wealthy through creative destruction would eventually try to restrain such excesses of the marketplace, by trying to manage risk-taking, regulate it, or bureaucratizing it within large corporations. A society through its government and its corporations would try to prevent the harmful side of capitalism, to reduce risk and uncertainty, but Schumpeter believed that the destructive side could not be contained without harm to the creative side. Entrepreneurship could not be bureaucratized without destroying both the entrepreneurial incentive which leads to innovation and the selection device which leads to technological progress.
a. Biological Evolution
Schumpeter was influenced by Charles Darwin, and creative destruction is a process very much like natural selection in Darwinian evolution. Darwin claimed that he his idea for the theory of evolution and natural selection was influenced by reading Malthus, since the pressure of a population upon limited resources must lead to competition among individuals. Given the variation present in any population, Darwin argued that those individuals who were best adapted to their environment would have the greatest chances of survival, and given enough time this would lead to new species emerging from old ones, particularly if populations became isolated from each other in different environments. A later popularizer of Darwin's ideas, the anthropologist Herbert Spencer, coined the phrase "survival of the fittest", and he even applied the idea to human societies (Social Darwinism) to explain differences in race and class structure, ideas which have since been largely discredited. Such a simple view of evolution has tended to equate it with progress, as if objectively superior beings were replacing inferior ones. However, modern evolutionists see instead a great deal of variety and interdependence among organisms, and argue that there are many strategies for adapting to the environment. Some species are parasitic, some are complex and many are very simple. Many coevolve with other species in an interdependent fashion. As Stephen J. Gould once said, history is contingent. Adaptation to the environment is highly contextual.
It is important to distinguish evolution from adaptation. Individuals may adapt to new environments, and some species are more adaptable than others. Humans who move to high elevations, for example, tend to experience changes in the composition of their blood that allow them to process the thinner oxygen more efficiently. Individuals don't evolve, however. Evolution requires: 1) variation of individuals in a population; 2) a selection mechanism which allows those whose variation is more appropriate to a given environment to survive in greater proportion than those less well-adapted; 3) a transmission mechanism which allows surviving parents to pass on their better-adapted characteristics to their offspring; and 4) lots of time (or, as the biology professor Hoelzer phrases it, Darwinian evolution requires competition, variability, heritability, and iteration). Populations evolve over generations or millennia, and natural selection picks those variations which are better-adapted. In time, accumulated differences may lead to the development of radically different populations that can no longer interbreed, which we would consider new species.
Those biologists and geneticists who study evolution at the micro level tend to see evolution as a gradual process, unpredictably random at a predictable rate over long periods of time. As the DNA within a cell divides, mistakes happen, and such mistakes may lead to mutations of the organism if the changed DNA is passed off to its offspring. From this emerges traits that are naturally selected if they increase the organism's chances for survival, while vestigial traits that are neither helpful nor harmful may not be affected by selection. In biology, microevolution does tend to be gradual, and it has been observed and documented. For example, perhaps twenty percent of Africans have a sickle-cell gene, which gave them protection from Malaria but led to a 1-in-4 chance of having a child with sickle-cell anemia if both parents had the gene; in African-American populations, however, the trait occurs very infrequently, presumably because malaria is not a factor in the United States. Similarly, the peppered moth in England was mostly light in color, with a very small frequency of dark individuals who were quickly eaten by birds because they hung out on white birch trees. The use of coal during the industrial revolution, however, darkened the trees and made the light ones more vulnerable. Within generations this moth became predominantly dark in color. Again, it is important to understand that the moths are not chameleons, and do not individually change colors; but if dark-colored parents tend to survive better, and they are more likely to have dark-colored offspring, then it only takes time before the population becomes dark. Now that England's environment has been cleaned up and the birch trees are white again, the moth is becoming mostly light again, for the same reasons.
Macroevolution is harder to observe, but scientists make inferences based on the observed workings of microevolution and an incredibly diverse fossil record. The fossil record is not one of gradual change, however, but is characterized instead by punctuated equilibrium, where the species appears more or less unchanged for very long periods, and then very suddenly seems to either die off or evolve into something very different. Such sudden changes may be due to catastrophic events which significantly change the environment, making conditions harsh for existing species and leading to intense competition for new adaptations. So change may be constant and gradual, but the environment for which they are selected apparently changes suddenly (in geological time, a million years is very sudden) and dramatically.
b. Economic Evolution
Do economic systems, which are the product of human decisions and institutions, evolve like biological populations? A recent Nobel Prizewinner, Douglass North, is an economic historian who has traced from the beginning of history the emergence of institutions such as private property rights, the scientific method, the ideology of the marketplace, and the state itself. Key to this development are the problems of information dissemination, transactions costs, and the free rider problem. The idea is that societies choose among available alternatives that work best to solve their particular problems. Over time, more efficient economic systems evolve due to this selection process.
The Austrian economists Ludwig von Mises and F.A. Hayek believed that the capitalist economy developed its institutions in a quasi-rational fashion - a sort of spontaneous order out of chaos - and institutions and behaviors which work best survive and are adopted by others. In a classic article in this tradition, UCLA economist Armen Alchian described how bankruptcy would lead to profit maximization by firms over time even if managers have no such intention, since in a capitalist economy, those that don't concern themselves with profit go belly up. Those whose doors remain open are those who followed strategies to maximize profits, whether by chance or intent. This can be summarized, perhaps, as "innovate, imitate, or die." The economist James Buchanan has studied the development of political institutions such as constitutional democracy from this point of view, showing how it is a rational answer to problems which vex the individual, but that its choices are not themselves rational.
Economic evolution is not just an idea that economic and social change occurs over time; it is a theory about how and why those changes occur. It must include the four elements: variation, selection, transmission, and time. In practice, it is hard to distinguish it from simple learning, where people try different things and then choose what works best. One interesting paper (presented at the Boston ASSA economics convention in January, 2000) suggested a model where individual preferences evolve, but individual choices adapt. Economists typically assume that preferences are given and outside the realm of economic analysis. But if certain preferences lead to more success in mating (e.g., preferences for wealth lead to a greater chance of getting married and having kids), and if preferences can be passed on to your kids, then over time we would see certain preferences become more likely.
Economic evolution is also a metaphor for selection, not just of individuals in a population, but also of technologies, products, and institutions which are otherwise hard to change. For example, once we choose to make a particular investment in a particular technology, we are stuck with it. If bankruptcy acts as an artificial selection mechanism to weed out investments which, in hindsight, were inefficient, then evolution occurs because we are then left only with relatively efficient choices.
Evolutionary economics is becoming increasingly subtle and appreciated, as Nelson argues, not only as a framework for explaining the development of political and economic institutions, but also to explain the development of specific technologies. Rather than following a deterministic path of "progress," such evolution can be described as path-dependent and co-evolutionary, e.g. gasoline engines, the QWERTY keyboard, and the Betamax. Like species seeking a niche, particular industries taking advantage of increasing returns to scale, or particular institutions (the "rules of the game" - organizational ones such as the corporation or the government agency, behavioral, ideological, cultural, whatever). The equilibrium systems so favored by neoclassical economists are often called negative-feedback loops (e.g., if consumers suddenly demand more of a good, the price increases, which leads producers to produce more, which causes the price to fall back, discouraging producers from producing too much more, while the still-higher prices may discourage some consumers). Increasing returns is an example of a positive-feedback loop, and such systems do not tend towards equilibrium but may instead shoot off in unpredictable directions. Any effort to label the path actually taken as "better" than the ones not taken is pointless, because the context, and the outcome, may be entirely circumstantial.
Economic evolution is different from biological evolution in that individuals and firms can adapt and learn, while genetically a species can only change over long periods of time from accumulated mutation and selection. But the rational selection of institutions is always contextual, and an economic system cannot simply be transplanted from one society to another and work as well. Perhaps such institutions must evolve on their own, and evolution is a slow process.
This has interesting applications to comparative economic systems. First, economies which allow inefficient firms to go bankrupt are more likely to have faster economic evolution, while economies which prevent bankruptcy (perhaps because the state owns the firms) do not waste productive assets but also do not face evolutionary pressures. Economies which have more competition are more likely to evolve faster than those with less (this artificial selection, of course, is in addition to the improvement in managerial incentives that competition adds). Thus, economies which are open to trade, finance, and interaction with other nations have both more variation and more competition. (Of course, economies with greater incentives to adapt may also find that learning and imitation occur more rapidly as well.) Perhaps, then, the classical socialist economy of the Soviet Union could only survive as long as it remained closed to the outside world, since a lack of evolutionary pressure would have led to an accumulation of inefficient technologies, institutions, and products, and thus made it impossible for their industries to survive in a global marketplace.
If evolution is contextual, then economies cannot be compared easily. An economy that works well in one context may not work well in another situation. Economies may work well in niches. The Asian export-oriented economies followed a strategy that worked as long as the U.S. was willing to accept their exports without reciprocation in order to keep them as stalwart allies in the cold war, and as long as most other countries in the world followed inward-looking policies. As the cold war ended and other economies began to follow their lead in promoting exports, the success of combining government intervention with private markets began to unravel. Suddenly, the Asian model was a hindrance, not a help.
How one stands on this may determine whether one believes that economic
systems will converge or diverge over time. If one type of
economic system consistently performs better, if one particular set of
economic, political, and social institutions tends to lead to better economic
performance, then over time such a system will grow to dominate others
or be adopted by others. Such a pattern would clearly suggest that different
economic systems should converge over time. The current pattern of market
liberalization around the world suggests that this may be so. But
if economies can find a niche, if societies can adapt to a contextual environment,
then perhaps economies may continue to be an extremely diverse lot.