Realism of Perception

It was Veblen (1898) who introduced the term “evolutionary economics” into the disci­pline, and he did so in recognition of the fundamental fact that the nature of the modern economy may be captured most adequately by referring to its dynamics (1909: 621): “To the modern scientist the phenomena of growth and change are the most obtrusive and most consequential facts observable in economic life.

Although Joseph Schumpeter’s theoretical work differed from Veblen’s in fundamental ways, the two pioneers of the evolutionary school found themselves in entire agreement when it came to the recognition that continual change is the hallmark of modern capi­talism. As Schumpeter (1942 [1976]: 82) puts it, “Capitalism... is by nature a form or method of economic change and not only never is but never can be stationary”.

The engine of the system of “restless capitalism” (to use Stanley Metcalfe’s felicitous phrase) is the energetic-dynamic entrepreneur, who carries out new combinations in every province of the economy. Schumpeter designates the entrepreneur as the dynamic alter ego of Vilfredo Pareto’s static Homo oeconomicus. He portrays the particular func­tions of this agent in his Theory of Economic Development (Schumpeter 1912 [1934]), and describes their withering away in the managerial large-scale enterprise of late capitalism in his Capitalism, Socialism and Democracy (1942). The institutional conditions of the engine of change of modern capitalism have seen a number of metamorphoses, but at no time in its historical course has its engine come to a halt.

There is a distinct difference between the kind of dynamics at work in a traditional system and that in a modern one. Change may well occur in the former on account of altered external factors and data, but this does not represent the evolutionary change that is characteristic of modern capitalism; see Schumpeter (1942 [1976]: 82-3).

Schumpeter did not consider extant neoclassical theory to be deficient in its treatment of static (non-changing) aspects - in fact, he went so far as to praise Leon Walras’s static equilibrium theory as the magna carta of the discipline - but, rather, that it lacked a dynamic element (Schumpeter 1908: 182-3).

Schumpeter was well aware that a theoretical programme dealing with dynamic issues would encounter major conceptual and methodological challenges, for which statics could not provide any answers (1908: 183): “Statics and Dynamics are completely dif­ferent fields; they concern not only different problems but also different methods and different materials”.

Alfred Marshall, another heroic member of the “hall of fame” of the evolutionary school, shared Veblen’s and Schumpeter’s fundamental perceptions about modern capi­talism. He too acknowledged the fact that change - continuous, novelty-driven, qualita­tive and structural change - was the distinctive feature of the modern regime. Arguably, however, he was more reluctant than Schumpeter to make compromises when it came to method and formalisation and, in general, to the use of technique. Schumpeter (1997: 93, 101) emphasises Marshall’s pioneering contribution to the understanding of the dynamic nature of modern capitalism:

Marshall was one of the first economists to realize that economics is an evolutionary science..., in particular that the human nature he professed to deal with is malleable and changing, a func­tion of changing environments.... His thought ran in terms of evolutionary change - in terms of organic, irreversible process.

Marshall emphasises repeatedly in his works the endogenous dynamics of modern capi­talism.

To Marshall, the nature of this process was very similar to the ideal found in modern evolutionary biology, eschewing that of classical mechanics - a position well epitomised in the familiar passage in the foreword to the eighth edition of his Principles (1920 [1972]: xii): “The Mecca of the economist lies in economic biology rather than in eco­nomic dynamics”. However, Marshall saw formidable hurdles in the way of actually undertaking the journey to Mecca:

But biological conceptions are more complex than those of mechanics... This fact, com­bined with the predominant attention paid in the present volume to the normal conditions of life in the modern age, has suggested the notion that its central idea is “statical”, rather than “dynamical”. But in fact it is concerned throughout with the forces that cause movement: and its key-note is that of dynamics, rather than statics. (Ibid.)

The work of Marshall - more than that of any other pioneer of the evolution­ary approach - demonstrates the conflicting priorities between realism and method. Schumpeter’s (1997) appraisal of Marshall’s work is itself a portrayal of this difficult journey, which alternates between statics, in honouring the demands of method, and dynamics, in satisfying those of realism given the ever-changing nature of the system.

This difficult course, alternating between the conflicting demands of method and of realism, has characterised much of the history of theory formulation in evolutionary economics right from its very inception.

Finally, there is Friedrich Hayek’s contribution as the fourth pillar of the exegetically construed edifice of evolutionary economics. He saw the essence of the modern market economy in the distinctive complexity and accelerated evolution of knowledge.

Hayek’s emphasis on the role of knowledge in the process of coordination brought him, inevitably and naturally, into opposition to the mainstream doctrine, which largely neglects knowledge (Hayek 1945: 532):

Clearly there is here a problem of the division of knowledge, which is quite analogous to, and at least as important as, the problem of the division of labour. But, while the latter has been one of the main subjects of investigation ever since the beginning of our science, the former has been as completely neglected, although it seems to me to be the really central problem of economics as a social science.

The knowledge problem is “central”, embracing not only the particular provinces of price theory but also, more generally, the way in which the different commodities are obtained and used (ibid.: 532).

There is, therefore, a “narrow” aspect to knowledge, referring to current prices or price expectations, and a “wider” aspect, referring to knowledge about the generation and use of the knowledge upon which price formation is based. Generally, there is knowledge that pertains to the knowhow required to perform economic operations, on the one hand, and factual knowledge that relates to an understanding of the circumstances of the environment in which operations are performed, on the other.

The evolution of the knowledge that governs economic operations and outcomes works out in a process in which, first, “knowledge bits” originate in a group and, sub­sequently, those variants that have a selective advantage are retained. The evolutionary course of knowledge follows the logic of a Darwinian trajectory - specified in biology by the phases of mutation, selection and retention (Hayek 1973). Hayek joins in the chorus with Veblen, Marshall and other proponents of an evolutionary approach in advocating biology rather than mechanics as the economist’s Mecca.

In Hayek’s theoretical efforts to specify the notion of knowledge, the concept of rule plays a pivotal role. At the micro level, the term shows up as “rules of conduct”; at the macro level, it appears as social rules coordinating individual activities under the premise of man-made or spontaneous organisation. The conceptual term “rule” may carry either a positive or a normative meaning. In a positive mould, a rule is a “knowledge bit”, providing individuals with the potential to carry out operations; here, “rules... follow from their desires and their insights into relations of cause and effect” (Hayek 1973: 45). In turn, “[f]or the resulting order to be beneficial, people must also observe some con­ventional rules”; here, rules “are normative and tell them what they ought to or ought not to do” (ibid.).

Although rules may come in different guises, they share a common syllogistic struc­ture. Whether individual, social, positive or normative, they are all anchored in an “if-then” logic. Given its general format, the rule concept may serve as key device for constructing the overall theoretical framework of evolutionary economics. On top of this, the concept is instrumental as a bridging concept, connecting the domain of theo­rising with that of modelling and computational analysis, in which the concept of the “rule” is widely used.

The early pioneers of evolutionary economics perceived the economy as a highly dynamic system. This fundamental perception of reality informed their theorising and their methods substantively. The neoclassical economists after them had a different perception, and their ways of theorising and their methods differ accordingly.