former Evolutionary Economics Group

Contemporary mainstream normative economists assess policies in terms of their capacities to satisfy preferences, though most would concede that other factors such as freedom, rights, and justice are also relevant. Why should policy be responsive to preferences? This essay argues that the best reason is that people's preferences are in some circumstances good evidence of what will benefit them. When those circumstances do not obtain and preferences are not good evidence of welfare, there is little reason to satisfy preferences. (PDF)

We focus on the relationship of age and diversification patterns of German machine tool manufacturers in the post war era. Based on trade journals we track the entire firm populations' product portfolio development throughout each firm's lifetime. We distinguish between 'minor diversification' and 'major diversification', where these two concepts refer to adding a new product variation within a familiar submarket, or expanding the product portfolio into new submarkets. Our analysis reveals four main insights. First, we observe that firms have lower diversification rates as they grow older, and that eventually diversification rates even turn negative for old firms on average. Second, we find that product portfolios of larger firms tend to be more diversified. Third, with respect to consecutive diversification activities, quantile autoregression plots show that firms experiencing diversification in one period are unlikely to repeat this behavior in the following year. Fourth, survival estimations reveal that diversification activities reduce the risk of exit controlling for various additional firm and industry specific fixed effects and business cycles. These results are interpreted using the Penrosean growth theory. (PDF)

Is Friedrich von Hayek in some specific, perhaps paradoxical, way a "classical liberal paternalist"? My answer will be an unsatisfying "yes and no" depending not only on my interpretation of Hayek, but also on the manifold interpretations one can give to the concepts of paternalism and classical liberalism (or, indeed: liberty). I start with an interpretation of Hayek’s account of "modernity". Here, I hint at a first potential paradox in the form of a "magic triangle" composed of (a) Hayek’s praise and explanation of the evolutionary emergence of the spontaneous order of the market and civil society, (b) Hayek’s fierce opposition to modernist thinking and the fatal conceit of rationalist constructivism and (c) Hayek’s gloomy visions of politics, legislation, or public choice. Next, I shortly distinguish various dimensions of paternalism and confront these with Hayek’s classical liberalism. In the following parts, I offer a brief account of behavioral "anomalies" of public choices that are analogous to, and even more harmful than, those used as legitimizations of "libertarian paternalism" in the private realm. I end up with a qualified claim that at least in the realm of potentially self-damaging collective choices, Hayek might be called a (classical liberal) "paternalist". (PDF)

This working paper is a lightly edited version of two chapters of a book that I am currently writing. This book will present and defend a form of normative economics that conserves the main insights of the liberal tradition of classical and neoclassical economics but does not depend on strong and implausible assumptions about individual rationality. In this paper, I ask who the addressee of normative economics should be. Conventional welfare economics, both neoclassical and behavioural, asks what is good for society from an impartial perspective – the ‘view from nowhere’. Explicitly or implicitly, its recommendations are addressed to an imagined benevolent despot. I argue for an alternative, contractarian approach, in which recommendations are addressed to individuals who are looking for ways of coordinating their behaviour to achieve mutual benefit. The contractarian approach disallows paternalistic recommendations, since these have no valid addressee. (PDF)

Although decision makers are often reported to have difficulties in making comparisons between multi-dimensional decision outcomes, economic theory assumes a uni-dimensional utility measure. This paper reviews evidence from behavioral and brain sciences to assess whether, and for what reasons, this assumption may be warranted. It is claimed that the decision makers' difficulties can be explained once the motivational aspects of utility ("wanting") are disentangled from the experiential ones ("liking") and the features of the different psychological processes involved are recognized.

The claim that the Darwinian paradigm of blind-variation-and-selective-retention can be generalized from the biological to the socio-cultural realm has often been questioned because of the critical role played by human purposeful design in the process of cultural evolution. In light of the issue of how human purposes and evolutionary forces interact in socio-economic processes the paper examines F.A. Hayek's arguments on the "extended order of the market," in particular the tension that exists between his rational liberal and his agnostic evolutionary perspective. 

published in: Jounal of Evolutionary Economics, 2012, Vol. 24, 35-57

This theoretical paper presents an incentive salience model of intertemporal choice. The model is a variation of the quasi-hyperbolic discounting model. Based on the distinction between 'wanting' and 'liking', the paper presents one possible explanation of impulsive choices of smaller sooner rewards instead of larger later ones. These impulsive choices are induced by cues that trigger strong motivational 'wanting' to obtain smaller sooner rewards, but do not necessarily influence the degree to which the rewards are 'liked'. Cue-triggered 'wanting' can occur when an individual is in a specific need deprivation state, perceives a cue previously associated with an immediately obtainable reward, knows that the cued reward can reduce the current deprivation state, and lacks self-control. By integrating cue-triggered 'wanting' into an intertemporal choice model, the incentive salience model allows to predict which rewards elicit impulsive choices of smaller sooner rewards, thus offering an explanation for the domain effect.

We present attractiveness, a re?nement criterion for evolutionary equilibria. Equilibria surviving this criterion are robust to small perturbations of the underlying payoff system or the dynamics at hand. Furthermore, certain attractive equilibria are equivalent to others for certain evolutionary dynamics. For instance, each attractive evolutionarily stable strategy is an attractive evolutionarily stable equilibrium for certain barycentric ray-projection dynamics, and vice versa. (PDF)

Strong growth in disposable income has inflated consumption to unprecedented, but not sustainable levels. In this process consumer behavior has been changing. To explain the driving forces of this development, the paper introduces a theory of evolving consumer preferences that is molded in an evolutionary paradigm. The theory allows to better assess how individual welfare would be directly affected by policy measures designed to make consumption sustainable. Such policy measures are likely to also trigger indirect welfare losses by negative employment effects. The policy debate therefore needs to pay attention to both direct and indirect welfare effects. As a concrete proposal a redesign of consumption taxes is discussed that accounts for both concerns. (PDF)

Bad health can severely disrupt a person's life. We apply matching estimators to examine how changes in subjective health status as well as different (objective) conditions of bad health affect subjective well-being. The strongest effect is in the category alcohol and drug abuse, followed by anxiety, depression and other mental illnesses, stroke, diabetes and cancer. We also take into account differences in "Big Five" personality traits. Adaptation to health impairments depends strongly on the health impairment examined. There is also a puzzling asymmetry: strong adverse reactions to deteriorations in health are observed alongside weak increases in well-being after health improvements.

This paper is an exploration of the interface between two quite different strands of economic thought, the Schumpeterian, evolutionary theory of innovation and competition, and the classical, Sraffian theory of prices and distribution. Can the two methods usefully speak to each another? If they can, we would have in prospect a more general evolutionary economics (GEE) in which the classical emphasis on production of commodities by means of commodities would allow a far more sophisticated analysis of the place of technical change in economic development. To explore this question is decidedly not to propose a synthesis between classical and Schumpeterian economics; it is simply to enquire whether there are mutual lessons to be learned to enrich these very different approaches to the long period evolution of capitalist economies. Schumpeter's system is a system that is always out of equilibrium but it is not chaotic, rather it is a system strongly ordered by market forces and the ensuing relations between prices and profitability. Moreover, it is concerned with long-period market forces, that is to say the development of an economy in which innovation and investment to capitalise on innovation are dominant aspects of its working. The classical system is a long-period system of analysis too, and it has the great merit of working in terms of prices of production, those prices that enable the replication of the production process over time. Since much real world innovation is innovation in the produced means of production, within the network of inter-industry input-output relations, there are undoubtedly mutual lessons to be learnt. (PDF)

Using data spanning over four decades (1960-2000), this paper employs Engel's needsbased approach to analyzing household expenditure patterns to find evidence for the existence of a stable hierarchy of expenditure patterns at low levels of household income. Second, we investigate how rising household income influences the manner in which total expenditure is distributed across Engel's expenditure categories. Our results suggest that i) total household expenditure is distributed across Engel's expenditure categories in an increasingly even manner as household income increases and ii) over time, there has been an acceleration in the rate at which household expenditure patterns become diversified as household income rises. Finally, we consider how the shape of Engel Curves may help shed light on the relationship between goods and the underlying needs they serve. (PDF)

The standard neoclassical approach to economic theorizing excludes, by definition, economic emergence and the related phenomenon of entrepreneurship. We explore how the most economic of human behaviours, entrepreneurship, came to be largely excluded from mainstream economic theory. In contrast, we report that evolutionary economists have acknowledged the importance of understanding emergence and we explore the advances that have been made in this regard. We go on to argue that evolutionary economics can make further progress by taking a more 'naturalistic' approach to economic evolution. This requires that economic analysis be fully embedded in complex economic system theory and that associated understandings as to how humans react to states of uncertainty be explicitly dealt with. We argue that 'knowledge,' because of the existence of uncertainty is, to a large degree 'conjectural' and, thus, is closely linked to our emotional states. Our economic behaviour is also influenced by the reality that we, and the systems that we create, are dissipative structures. Thus, we introduce the notions of 'energy gradients' and 'knowledge gradients' as essential concepts in understanding economic emergence and resultant economic growth.

In infant industries, a great share of new market opportunities is depleted by firms that spinoff from incumbents. A model emphasizing the relation between incumbents' evolving corporate cultures and the generation of spinoffs explains this regularity in industry evolution. Organizations reach a critical size that entails the collapse of a cooperative culture and triggers the exodus of personnel founding own firms. Thereby, organizations with a cooperative culture active in a dynamic business environment provide ideal training grounds for potential founders. We relate our findings to empirical evidence on developmental patterns in industries, such as genealogies and performance of spinoffs. (PDF)

How can economic theory explain the reasons why consumers adopt innovations? Using the example of innovations in washing machines two approaches are compared. The first focuses in the manner of household production theory on changes in constraints without specifying preferences, leading to the well-known time substitution hypothesis. The second approach develops specific hypotheses about consumer preferences and focuses on how technical change accounts for them. The two approaches are empirically evaluated with a data set representing the motives suggested in washer advertisements for purchasing new vintages of machines over the period 1888 to 1989 in the U.S. (PDF)

Agents interacting on a body of water choose between technologies to catch ?fish. One is harmless to the resource, as it allows full recovery; the other yields high immediate catches, but low(er) future catches.? Strategic interaction in one 'objective' resource game may induce?????? several 'subjective' games in the class of social dilemmas. Which unique 'subjective' game is actually played depends crucially on how the agents discount their future payoffs. We examine equilibrium behavior and its consequences on sustainability of the common-pool resource system under exponential and hyperbolic discounting. A suffcient degree of patience on behalf of the agents may lead to equilibrium behavior averting exhaustion of the resource, though full restraint (both agents choosing the ecologically or environmentally sound technology) is not necessarily achieved. Furthermore, if the degree of patience between agents is suffciently dissimilar, the more patient is exploited by the less patient one in equilibrium. We demonstrate the generalizability of our approach developed throughout the paper. We provide recommendations to reduce the enormous complexity surrounding the general cases. (PDF)

Subjective well-being is a complex phenomenon coevolving with events in important domains of life. Panel vector autoregressions are a suitable tool to analyze the underlying structure of changes in happiness and its coevolution with changes in income, health, worries, marital status and employment status. With this technique we can simultaneously analyze the impact of the aforementioned factors on each other for the German Socio-Economic Panel (SOEP) data set. We find that positive changes in the named life domains are followed by decreases in subjective well-being (except for health, which is followed by well-being increases). Moreover, positive changes in well-being are followed by positive changes in most life domains. These findings are robust to different model specifications and comparable to similar findings for the British populace. We also examine how the structure of happiness differs with respect to different "Big Five" personality traits. Personality plays an important role, especially with regard to high traits of Neuroticism and Extraversion.

It is a fact of life that economic resources are used to alter other's preferences over commodities. Yet this is seldom taken into account in basic economic theory, explanatory or normative. It is shown here how a certain type of advertising is readily allowed for in the Edgeworth exchange box, in the small country foreign trade model, etc.. It is found, in welfare terms, that exchange/trade with advertising can involve some agents gaining at the expense of others; there need not be mutual gain. To deal with sales promotion, welfare economics needs to step outside the familiar Paretian framework to face difficult (and perhaps contentious) ethical issues, some of which are raised here. (PDF)

Epistemic arguments play a significant role in Hayek's defense of market liberalism. His claim that market competition is a discovery procedure that serves the common good is a case in point. The hypothesis of the markets' efficient use of existing knowledge is supplemented by the idea that markets are also most effectively creating new knowledge. However, in his assessment Hayek neglects the role of new technological knowledge. He ignores that the discovery procedure induces not only price and cost competition but also competition by innovations. Thence he overlooks the ambiguity that follows from the unpredictability of the consequences of innovations. This fact is shown to challenge the epistemic foundations and the stringency of Hayek's version of market liberalism. (PDF)

While there is little doubt that innovations drive economic growth, their effects on well-being are less clear. One reason for this are ambivalent effects of innovations on well-being that result from pecuniary and technological externalities of innovations, argued to be inevitably. Another major reason lies in the fact that, as a result of innovations, preferences can change over time. Under such conditions, a time-consistent measuring rod for changes in well-being is hard to construct. Existing conceptions of well-being are shown not yet to solve the problem in a way that provides an unambiguous answer to the question in the title. (PDF)

The rapidly growing literature on the relationship between energy consumption and economic growth has not univocally identified the 'real' causal relationship yet. We argue that bivariate models, which analyze the causality at the level of the total economy, are not appropriate – especially in cases where both variables do not cover the same scope of economic activity. After discussing appropriate pairs of variables, we investigate Granger causality between energy consumption and GDP in the U.S. for the period from 1970 to 2007 for three sectors - industry, commercial sector, transport as well as for the total economy. The choice of additional variables is based on major findings from the Environmental Kuznets curve literature and its critical reflections. Using the recently developed ARDL bounds testing approach by Pesaran and Shin (1999) and Pesaran et al. (2001), we find evidence for long-run Granger causality for the commercial sector, in case energy is the dependent variable, as well as bi-directional long-run Granger causality for the transport sector. We conclude that controlling for trade as well as increasing energy productivity significantly improves the fit of several extensions of the bivariate model.

Strong growth in disposable income has driven, and is still driving, consumption to unprecedented, but not sustainable levels. To explain the dynamic interplay of needs, need satisfaction, and innovation underlying that growth a behavioral theory of consumption is suggested and discussed with respect to its implications for making a transition to more sustainable patterns of consumer behavior.

The paper discusses recent trends in the sister sciences of evolutionary economics and complexity economics. It suggests that a unifying approach that marries the two strands is needed when reconstructing economics as a science capable of tackling the two key questions of the discipline: complex economic structure and evolutionary economic change. Physics, biology and the cultural sciences are investigated in terms of their usefulness as both paradigmatic orientation and as toolbox. The micro–meso–macro architecture delineated puts meso centre stage, highlighting its significance as structure component and as process component alike, thereby allowing us to handle the key issues of structure and change.

By representing a system of budget shares as an approximate factor model we determine its rank, i.e. the number of common functional forms, or factors, spanning the space of Engel curves. Once the common factors are estimated via approximate principal components, we identify them by imposing statistical independence. Finally, by means of parametric and non-parametric regressions we estimate the factors as functions of total expenditure. Using data from the U.K. Consumption Expenditure Survey from 1968 to 2006, we find evidence of three common functional forms which correspond to decreasing, increasing and almost constant Engel curves. The household consumption behavior is therefore driven by three factors respectively related to necessities (e.g. food), luxuries (e.g. vehicles), and goods to which is allocated the same percentage of total budget both in rich and in poor households (e.g. housing).