Recent work

Economic Growth has brought prosperity for large parts of the growing world population with an increasingly critical impact on nature's resources and absorption capacities. Policy making therefore promotes a reduction of that impact to sustainable levels - and cannot exclude that adverse effects on economic growth may occur. If so, how will consumer welfare be affected?
Under certain conditions consumer welfare is not diminished by reductions in economic growth or even de-growth. If, however, there are negative welfare effects, how can the policy interventions that trigger them be legitimized? How will consumers as voters react in the political arena if policy interventions are proposed that are likely to cause welfare sacrifices? For answering these questions the present paper develops an extended explanation of consumption behavior and welfare related to work in the human sciences on the evolved foundations of human behavior. The approach allows a differentiated view on the driving forces and the welfare effects of consumption growth as well as legitimization and acceptance problems of different sustainability-promoting policy options.

The characteristic of the "service economy" is the rise to dominance of the service sector in terms of employment and value added shares. We track this rise during the second half of the 20th century for the U.S., more precisely the period from 1970 to 2005. Following seminal work by Baumol (1967) the rise is often attributed to growing productivity differentials between the economic sectors. The causes of the productivity differentials are, however, controversial. Inspired by Georgescu-Roegen’s (1971) evolutionary approach to production theory, the present paper explores whether differences in the energetic features of the sectors’ production technologies contribute to the growing sectorial productivity differentials. For the data for our period of analysis it turns out that a close relationship indeed exists between the sectors’ incentives for substituting relatively cheap energy for ever more expensive labor and their labor productivity gains. In highly energy-dependent sectors an increasing energy/labor ratio has been driving productivity growth while this was not the case in the service sector. The paper closes with a short discussion of what the finding may imply for the future of the service economy.

The full text of the article just published in the Journal of Evolutionary Economics can be downloaded for free under:
https://link.springer.com/article/10.1007/s00191-019-00649-4

The new volume which I edited jointly with Andreas Chai is out. It contains twelve papers by leading authors that extend the evolutionary approach in economics to new and less researched fields such as macroeconomics, institutions, economic history, welfare, and sustainability. Each of the papers offers new insights and demonstrates how the evolutionary paradigm helps making sense of the ongoing transformations of the economy.

Part I Introduction:

1. Ulrich Witt & Andreas Chai, Evolutionary Economics: Taking Stock of Its Progress and Emerging Challenges.

Part II Conceptual and Methodological Problems:

2. Brian Loasby, Missed Connections and Opportunities Foregone: A Counterfactual History of Twentieth Century Economics.
3. Joel Mokyr, Science, Technology, and Knowledge: What Historians Can Learn from an Evolutionary Approach.
4. Jack Vromen, Generalized Darwinism in Evolutionary Economics: The Devil is in the Details.

Part III Perspectives on Evolutionary Macroeconomics:

5. Richard H. Day, Macroeconomic Evolution: Long Run Development and Short Run Policies.
6. André Lorentz, Evolutionary Micro-founded Technical Change and the Kaldor-Verdoorn Law: Estimates from an Artificial World.

Part IV Advances in Explaining and Assessing Institutional Evolution:

7. Dennis Mueller, Democracy, Rationality and Religion.
8. Roger D. Congleton, On the Evolution of Organizational Governance: Divided Governance and Survival in the Long Run.
9. Reinoud Joosten, Strategic Interaction and Externalities: FD-games and Pollution.
10. Christian Schubert, Fairness in Urban Land Use: An Evolutionary Contribution to Law & Economics.

Part V Evolutionary Perspectives on Welfare and Sustainability:

11. Martin Binder & Ulrich Witt, As Innovations Drive Economic Change, Do They Also Improve Our Welfare?
12. Andreas Chai, Sustainable Consumption Patterns and the Malleability of Consumer Preferences: An Evolutionary Perspective

ISBN: 978-1107-13620-5

This paper argues that many features of capitalism that are typical for complex adaptive systems offer an explanation for why economic growth in competitive capitalist economies is an unsteady process. Producers' parallel adaptation efforts cause rather wasteful non-linear accumulation paths. Market saturation tendencies require innovative adaptations which, however, have ambiguous effects on economic growth. This may be the reason for the empirical finding that in the most developed capitalist economies growth rates are secularly declining.

Complex adaptive systems consist of a multitude of agents from whose individual adaptation efforts the adaptive behavior of the system as a whole emerges. This paper argues that capitalism has features that are typical for such a system. A case in point is the way in which economic growth emerges as a collective outcome of individual adaptation strategies. The successive parallel extension of the bounds of existing production possibilities results in an unsteady and rather wasteful accumulation process. Moreover, particularly the innovative strategies by which the producers ever more try to adapt to crises in recent decades do not necessarily contribute to a re-emergence of new growth impulses. The empirical record of economic growth in the developed capitalist economies indeed reveals a trend of declining growth rates. This seems to suggest that successfully creating new economic growth through innovative strategies is the more difficult, the more prosperous an economy becomes. The paper discusses some implications for innovation policies.

The full text of the article published in the Journal of Open Innovation Vol.3, 2017 can be downloaded for free under open access here: DOI 10.1186/s40852-017-0065-0 (open access).

Innovations sometimes turn out to cause severe negative externalities after they have successfully passed the market test. In such cases, the social costs that are revealed only later may result in substantial welfare losses. Obviously, innovations of this kind are the opposite of what we need to secure our future. In this article I discuss the question of whether knowledge flows related to innovation processes be strategically arranged in such a way that these externality risks are minimized.

The question of what kind of innovations can secure our future is in this paper put in perspective with the unknown risks which innovations may imply. Can the knowledge flows related to innovation processes be strategically arranged in such a way that these externality risks are minimized? The options I review relate to the debate on open vs. closed innovation processes in management science. I briefly discuss several aspects of this debate and introduce a model of self-organizing belief formation. The model reflects the attitudes of a team involved in R&D activities towards the benefits and costs (including the risk assessment) of an emerging innovation. On this basis I show that open innovation processes tend to stop innovations with strong negative externalities earlier than closed processes do. However, open innovation processes at the same time reduce the incentives to innovate and hence curb innovativeness. Society’s strategy of raising innovativeness to secure our future faces a dilemma.

The full text of the article published in the Journal of Open Innovation Vol. 2, 2016 can be downloaded for free under open access here:  DOI 10.1186/s40852-016-0043-y

Rethinking Economic Evolution
– Essays on Economic Change and its Theory

Cheltenham: Edward Elgar, 2016, 264 pp., ISBN 978 1 84844 304 4

Can we gain new insights about the human economy, its long term development, and its future by putting on the looking glasses of the theory of evolution? Several questions arise if we do so: Are there general principles governing economic evolution and, if so, how do they look like? What relevance does the Darwinian theory of evolution have in the context of economic evolution? How can the implications of such evolutionary principles be brought to bear on economic theorizing? Fourteen essays reprinting material from my publications over the past years and an introductory chapter “The Evolutionary Way of Thinking in Economics” seek to answer these and other questions central to evolutionary economics.

In a first part, four essays lay out a road map for evolutionary economics as I see this highly diversified branch of economics. In the second part, four essays discuss the role of novelty for evolution and evolutionary methodology in economics. This often neglected role is particularly important for understanding why innovativeness, rather than selection, is a central topic in evolutionary economics and why (selection-driven) adaptation processes rarely support stable equilibria in the economy. The third part contains six essays in which I try to show how evolutionary thinking can be put to work in explaining economic change in production and consumption, in institutional rules of conduct, in macroeconomic dynamics, and in defining the frame for policy making.

Several dissertations at the MPI of Economics in Jena have explored various aspects of the “learning to consume approach”, offering a theoretical foundation for understanding the evolution of consumption. A forthcoming special issue of the Journal of Evolutionary Economics edited by Andreas Chai covers some of that material. In my contribution to the special issue I summarize the research on LTC and show what it implies for the theory of consumer preferences and for welfare economics.

The approach I take in my paper “The Evolution of Consumption and its Welfare Effects” rests on making a novel connection. The explanation of consumer preferences over actions is connected to what we know about motivational forces driving actions. This explanatory recourse is the core of the learning to consume approach. More specifically, what we know about the motivations underlying consumption activities draws on insights from biology, behavioral science, and psychology. From these insights the following main hypothesis on the evolution of consumption is derived: With secularly rising income, the growing consumption opportunities and the expanding consumption alter the underlying motivational forces and induce a change of preferences. As a consequence, the structure of consumption expenditures is systematically transformed.

In the light of this explanation, the paper analyzes the effects of the growth and transformation of consumption on individual welfare. As turns out, the motivations driving the growth of consumption do not necessarily imply that this growth indeed results in welfare increases, particularly when the ability to spend on consumption is already high. Moreover, when preferences change, the measurement of the welfare effects of the growth and transformation of consumption depends on the arbitrary choice of a reference point. This implies an ambiguity that raises further queries about the normative foundations of the ubiquitous calls for continued consumption growth.

This paper has just appeared in the Journal of Evolutionary Economics. You can freely download it by clicking on  link.springer.com/article/10.1007/s00191-016-0459-3

The social philosophy of Friedrich A. Hayek finds a renewed attention these days particularly in the political arena of the U.S. Foes and friends of Hayek’s ideas appear in new formations, hailing him as an intellectual hero or rejecting him as an ideologue. For a European spectator this new engagement in old battles is somewhat surprising. Is the message of Hayek’s social philosophy still relevant? And, what precisely, was his message? In a recent internet blog for the newly establish magazine Evonomics I offer some answers to these questions. Click here to read more and to view the comments on the blog:

evonomics.com/friedrich-hayek-intellectual-hero-ideologue/

In a recent paper Herbert Gintis and Dirk Helbing (forthcoming) submit that the notion of general social equilibrium should be made the core of sociological theory, mimicking in this respect the role of general equilibrium theory in economics. In my comment I discuss the implicit ideological content of general equilibrium theory, its fictional status, and its inability to account for many premises and research interests in economics and, even more so, in sociology.

In their rich paper “Homo Socialis: An Analytical Core for Sociological Theory” forthcoming in the Review of Behavioral Economics, Gintis and Helbing suggest that the analytical core of sociological theory should become more individualistic and integrate the notion of a general social equilibrium. In many respects this is a thought-provoking undertaking, albeit in my view an inept one. Recommending sociology the adoption of the hard core of neoclassical economics reminds of earlier attempts (by neoclassical economists) to engage in disciplinary imperialism. However, both the unconditioned rational actor model and the notion of general equilibrium fail already to adequately reflect the conditions of modern economies. How can they then be expected to do justice to sociology and its focus on social interactions usually lacking the privileged institutional conditions of legal contract, contract enforcement, and freedom of contract?

            Given their plea, it appears somewhat inconsequential when Gintis and Helbing deplore towards the end of their essay that “sociology, anthropology, and social psychology … have suffered by separating themselves from sociobiology”. Would an adoption of the rational actor cum general equilibrium framework bring sociology closer to sociobiology – of course not! Modeling of utility-maximizing behavior in economics is given carte blanche regarding the assumptions about human nature; assumptions about utility functions or preferences are completely ad hoc. Regarding general equilibrium theory, the dissonance with an evolutionary paradigm – sociobiology is, after all, a branch of evolutionary biology – could hardly be greater. If the recommendation is that evolutionary thinking should be fostered in sociology, the suggestion to adopt general equilibrium theory as an analytical core is a step in the wrong direction.

This comment is forthcoming in the Review of Behavioral Economics. If you would like to receive an electronic copy of the paper please send me an email to witt@evoecon.mpg.de

In this joint paper with Naomi Beck we discuss what lessons can be learned from the evolutionary thought of three eminent Austrian economists, Menger, Schumpeter, and Hayek – not least for present-day theorizing in Austrian Economics. All three break new ground in directions that transcend the narrower agenda defined for Austrian Economics, for example, by Mises and his followers. How much potential do the evolutionary extensions hold?

The economists whose “evolutionism” I discuss in this joint paper with Naomi Beck – Karl Menger, Joseph A. Schumpeter, and F.A. Hayek – represent three very different directions of Austrian economics. Despite considerable differences between them, all share what are usually considered the core elements of Austrian Economics: a preference for methodological individualism, a skeptical attitude toward static equilibrium economics, and the focus on the role of entrepreneurship and free markets in advancing the economy. And all three wrestled in their own way with the inclusion of evolutionary thought in their theories. The challenges they saw in doing so and the solutions they accomplished testify to the great variety of interpretations and potential uses of evolutionary concepts in economics.

Menger, who made no reference to Darwin’s theory, advanced an “organic” (his synonym for evolutionary) view of the emergence of social institutions. Schumpeter – who even distances himself from Darwinian analogies – elaborated an original theory of industrial development based on the recurrent emergence and dissemination of innovations. Hayek adopted the biological notion of group selection and made it the central element in his theory of cultural evolution and the rise of the free-market. As we explain in the paper, none of these contributions is without problems, particularly when assessed from the modern understanding of evolution. Yet all of them offer important impulses for enriching present-day theorizing in Austrian Economics by taking evolutionary thought seriously.

This paper is forthcoming as a Chapter in the Oxford Handbook of Austrian Economics edited for Oxford University Press by Christopher Coyne and Peter Boettke. If you would like to receive an electronic copy of the paper please send me an email to witt@evoecon.mpg.de

Evolutionary economics shares the attribute “evolutionary” with theories that represent an overarching research paradigm focusing on the evolution of nature and man. Evolutionary biology, evolutionary anthropology, evolutionary psychology – all these disciplines frame human behavior and human culture within a theory of descent commonly referred to as Darwinian theory. Evolutionary economics does not tune in here. What justifies then the attribute “evolutionary”?

Unlike in the other disciplines, no agreement has been reached in evolutionary economics on adopting the Darwinian framework (or any other theory of evolution). The research field rather represents a patchwork of different, unconnected topics and theoretical interpretations of economic evolution. In some approaches, particularly the Neo-Schumpeterian one, the attribute “evolutionary” stands for loose economic analogy constructions to biological selection models. In other contributions such as in agent-based models, it is just a synonym for a special kind of economic “dynamics”, namely population dynamics. Evolutionary game theory takes yet another approach, borrowing algorithms and mathematical metaphors from biology often without motivating their application in economic contexts. Finally, there are also currents that do advocate adopting a naturalistic, Darwinian approach. Important as a conceptual debate on these and other alternative is, it is unlikely to easily be settled. The present confusion about what “evolutionary” economics specifically stands for can therefore be expected to continue.

In a new paper – a follow-up to my article “What is Specific About Evolutionary Economics” (Journal of Evolutionary Economics 18, 2008, 547-575) – I therefore suggest to shift focus to the methodological implications of the evolutionary paradigm. More specifically, I concentrate on its characteristic modalities of causal explanation. I show that at this level common ground exists across the differences in concepts and theoretical content. Understanding these commonalities also helps to come to grips with what distinguishes evolutionary from non-evolutionary research in economics. The purported distinction holds irrespective of the specific theories and topics concerned. I illustrate my argument exemplarily with some reflections about how evolutionary explanations concerning economic institutions should be constructed.

This paper has now been published in the Journal of Institutional Economics (Cambridge University Press). If you would like to receive an electronic off-print please send an email to witt@evoecon.mpg.de

By creating the Euro as common legal tender, European leaders had hoped to accomplish a great step forward towards European unification. Yet, since the public debt crisis of some member states in the past few years, the currency union has turned out to backfire on the public acceptance of the unification ideal. Old national resentments and clichés crop up again. The countries in crisis complain about lacking financial solidarity by the more successful member countries. Do they rightly call for more solidarity?

Given the traditional economic disparities between the countries forming the Euro zone, introducing a common legal tender in 2002 was a daring political act. It eliminated the alignment mechanisms of national currency exchange rate adjustments and interest rate differentials that had compensated for the disparate national developments before. Lacking these mechanisms, liabilities and debt claims between the participating countries accumulated to extreme imbalances. They contributed to the European debt crisis starting in 2009. Doubts spread in the financial markets that some Euro zone countries might exceed their debt carrying capacity and become unable to refinance their debt, given the huge public and/or private debt already reached and the low rates of economic growth. Economically, a depreciation of debt claims (a “hair-cut” as in the case of Greece) amounts to a retroactive income transfer between Euro-zone countries, The absence of a realignment mechanism to match diverging international competitiveness therefore seems to leave only two options. Either the less competitive countries accept heavy reductions of disposable per-capita income in the common currency to realign and meet their obligations – a so-called internal devaluation. Or the more competitive European countries will have to accept more permanent income transfers to the less competitive ones.

Both alternatives stir much resistance in the electorate of the respective countries and pose classical public choice problems. The Euro – whose introduction nourished political hopes for pushing the European unification – seems to be backfiring on the acceptance of the unification ideals. In view of the wide acceptance of financial solidarity (in the form of income transfers between regions and between more and less well-to-do citizens) within nation states, the resistance may have surprised many European policy makers. The question can be raised what makes the difference between the common consent on national income transfers and the lack of such consent for intra-European income transfers. In this paper I discuss the question from an evolutionary perspective. I explore the conditions of human social behavior within and towards groups that can be assumed to frame the national voters’ decisions. The analysis suggests some conclusions regarding the future of the European unification project.

If you are interested in the paper please order a copy via witt@evoecon.mpg.de