Imagine Economics as an Evolutionary Science

What might an evolutionary perspective mean for the future of economics?

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By Geoffrey Hodgson

In 1898, the great American institutional economist Thorstein Veblen published an article entitled: “Why is economics not an evolutionary science?” By “evolutionary”, Veblen explained that he meant an economics that took full account of the impact of Darwinism on the social and behavioral sciences.

More than a century has passed, and since 1898 there has been a notable increase in the use of evolutionary ideas in economics. Important examples include the large literature inspired by Richard Nelson and Sidney Winter’s path-breaking 1982 book on An Evolutionary Theory of Economic Change and the vibrant development of evolutionary game theory.

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But what might the future development of an evolutionary perspective mean?

In my 2004 book entitled The Evolution of Institutional Economics, I outlined what I called “the principle of evolutionary explanation”. This is the idea that any behavioural assumption, including in the social sciences, must be capable of causal explanation in evolutionary terms, or at least be consistent with a scientific understanding of human evolution. This principle is found in Veblen’s work.

A number of economists and other social scientists have addressed evolutionary explanations. There is a large and valuable literature that considers how humans have evolved in groups and how human propensities for altruism and cooperation have emerged, alongside more selfish and competitive tendencies.

Evolution and the maximization of utility

But Veblen made an even more radical point, which is still difficult for many economists to swallow. He argued that the idea of the utility-maximizing individual is inconsistent with the principle of evolutionary explanation. This point remains pertinent, because the idea of a fixed utility function – even if it is one that has “social” or “altruistic” preferences – lacks a clear evolutionary and causal explanation of its origins. It is simply assumed.

Some economists have tried to show why humans evolved to maximize their utility. But these claims are rather empty, because all possible exhibited behavior can be made consistent with some utility function. Utility functions are summaries of observed behavior, rather than true causal explanations of it.

Fitting a utility function to data is not the same as providing an evolutionary and causal explanation. We need to explain the evolution of the particular traits and dispositions that make us human. Yet it is widely argued by economists that other species are utility maximizers as well.

Modern behavioral economics relaxes the assumption of strict utility maximization, in pursuit of a “more realistic” theory. Yet even here there is a tendency to treat claimed departures from utility-maximization as “errors” or “deviations”. Throughout mainstream economics, the utility-maximizing model retains its gravitational pull.

If he were alive today, Veblen would be unhappy with the enduring affection by economists for the utility-maximizing model of rational choice. Instead he pointed to developments in psychology that drew on Darwinian evolutionary theory, particularly the work of the pragmatist philosopher-psychologist William James. He tried to develop a more specific theory of human behavior.

Instincts and habits

Veblen took the view that humans were driven by habit. Habits are guided by both inherited propensities – called instincts – and existing institutions. A habit is a learned capacity to act or think in a particular way. Instead of beliefs being prime movers, they too are based on habits.

As the pragmatist philosopher John Dewey argued eloquently in his 1922 book Human Nature and Conduct, deliberate choices occur when our habitual propensities clash and we are forced to make a decision between them. Generally, habit drives reason and choice, rather than the other way round.

This way of putting instinct first, habit second, and reason third is consistent with our understanding of human evolution. The instinct-habit-reason ordering is consistent with the sequence in which these emerged long ago in the evolution of our species. It is also consistent with the way in which they develop in each human individual, from infanthood to adulthood.

This evolutionary perspective on human agency is very different from the mind-first, or beliefs-first, perspectives that still dominate economics and much of social science.

The evolution of morality

The evolutionary perspective on human agency is important for another reason, noted by Veblen, stressed by the dissident British economist John A. Hobson, and researched today by leading scholars such as Frans de Waal and Christopher Boehm.

Consistent with Darwin’s account in The Descent of Man, these writers argue that humans have developed propensities for moral judgement. Moral systems evolve in societies because they enhance group cohesion and survival. As I argue in my book From Pleasure Machines to Moral Communities, this thesis is consistent with the rehabilitation of “group selection” arguments by Elliott Sober, David Sloan Wilson and others.

This does not mean that humans are unselfish. We are both selfish and capable of acquiring and heeding moral values. Sometimes these two come into conflict – we face dilemmas between self-interested behavior and morally “doing the right thing”.

Utility-maximizing models in mainstream economics have been adapted to take on “altruistic” behavior and “social preferences”. Sometimes morality is mentioned. But even if the individual is “altruistic” in these models, he or she is still maximizing his or her own utility. The individual is always “selfish” in that sense. As moral philosophers such as Richard Joyce argue, utility-maximizing models have difficulty accommodating genuine altruism or morality. Adam Smith also rejected a utilitarian perspective for this reason.

The evolution of institutions

Veblen saw a further extension of the evolutionary perspective in economics and the social sciences more generally. While there was competition and cooperation between individuals in the struggle for survival, there were also social processes that lead to some institutions being more successful than others: a “natural selection of institutions”.

This insight is important because it opens up the possibility of a dynamic theory of social change, involving both the selection and development of institutions, entailing human agency but never entirely by design. But as Thorbjørn Knudsen and I explain in our book Darwin’s Conjecture, this approach has taken some time to get off the ground.

The key point here is that the implications of evolutionary thinking for economics and the social sciences have only partially been explored. Economics, in particular, is not yet an evolutionary science.

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To take economics forward would require a widening perspective, where ideas and approaches from several other disciplines were taken into account. The standard apparatus of utility maximization and rational choice would be regarded as an interim position, rather than an adequate, evolutionary explanation of human behavior.

We would be closer to the discursive economics of Adam Smith, Alfred Marshall and Thorstein Veblen, rather than the technique-driven concerns that dominate much of economics today. The words of John Maynard Keynes would once again be relevant:

“the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher — in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of a man’s nature or his institutions must lie entirely outside his regard.”

2016 September 20

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  • Mike Miller
  • George McKee

    I would argue that the quote from Keynes is more relevant than the commentary suggests. Rather than diffusing to the more discursive style of Veblen and Smith, economists need to note that Keynes puts mathematics first of all. Math makes assumptions clear, even if they’re absurd, and requires rigorous logic without room for escape into the ambiguity of natural language.

    Mathematical evolutionary economics would absorb the lessons of population genetics, nonlinear dynamics and statistical mechanics, which would provide a pathway to incorporate innovation and cross-pollination of ideas, rather than confining its studies to macroeconomics’ currrent Procrustean framework of equilibrium solutions.

  • Je’ Czaja

    Darwin’s theory is full of holes. But if you mean by evolution “change” well, duh. The world changes and we’d better change along with it.

    • robertmkadar

      Darwin’s theory = scientific fact.

      • Je’ Czaja

        No, no it’s not. And what is a scientific fact? The four humors? Phrenology? Eugenics? All were once scientific facts. Times change, so do definitions of “facts” apparently.

        • robertmkadar

          It’s a consensus in science.

    • Je’, what are those holes?

  • The next evolution in economics is realising that scarcity based values (market values) are not appropriate mechanisms to use when dealing with anything that is potentially universally abundant – which is already a large set of things, and the set is exponentially expanding.

    We need to understand the role of cooperative strategy sets in the evolution of complexity, rather than simply focusing on competition.

    We need to evolve economics beyond markets.
    We need to evolve to the next level of cooperation, universal cooperation.
    Technology can empower universal security, but not inside a scarcity based model that promotes competition, but only in an abundance based model based on universal cooperation and fairness. You don’t need to dig too deeply into games theory to figure that out.

    Evolution doesn’t have to work perfectly.
    It only needs to find “heuristic hacks” (strategies that are a near enough fit to work in practice in the situations present most often) to work.

    That seems to be what life is.
    A set of many level of cooperative systems (often involving layers of recursion), that succeed in replicating in practice in the environments they find themselves in.

    We are capable of taking that up another level.

    Economics, as currently understood by most, as a set of market derived systems, cannot do that.
    Economics, as originally understood, as a set of systems for managing the largest household (originally a glorified village, and in today’s context this ball of rock currently containing some 7 billion people) is something more than most people currently imagine.

    And science is not about consensus.
    Science is about what does or does not work, in practice, in terms of explanatory paradigms and tools.

  • Oswaldo Lairet

    Vindicating Veblen’s and your book’s vision of seeking economics’ evolutionary roots, last year, using a BIS’ Financial vs Business Cycles, 40-yr chart, I confirmed ( how Debt and GDP follow a path typified by Lotka–Volterra Predator-Prey equations of unstable focus. The scientific nature of the proof explains why Classical Economics’ static; linear-math model fails to describe a set of interactions whose principal dynamics is intrinsically nonlinear. Yet, while we insist on using unreliable prescriptions to study the economy, “Ecosystemic Economics” has being applied since 1967. In fact, the unstable feedback system model predicting the paths revealed by the BIS chart was inferred by Hyman Minsky in his 1985 Financial Instability Hypothesis. Minsky’s “Long Cycle” Debt to Capital model traces Top-Down-Controlled Predator-Prey Dynamics, when predator size (Debt plus annual carrying cost) grows exponentially with each cycle, until it depletes prey size (Capital plus annual income) …Exactly as we are witnessing in today’s global economy.

  • Jan de Jonge

    Dear professor Hodgson. I think you follow the wrong track. The track of microeconomics. You want that any behavioral assumption must be capable of causal explanation in evolutionary terms. But you also say that people are driven by instincts and habits. Thus you belief that they act within the context of institutions. In that case I can to your reassurance tell you that your mission is already accomplished. Read the bestseller “Why Nations Fail” by Acemoglu and Robinson. It is about economics, institutions and evolution. It is macroeconomics, but that is only beneficial to you. You can concentrate on economics and let psychologists worry about behavioral assumptions.

    • Now, the theoretical connection between biological instincts and psychology is provided by the research of Konrad Lorenz – triggered by and linked to his ‘exposure’ to the early psychological research of Charlotte and Karl Bühler. There’s also a strong connection to the two Tinbergens (economist and ethologist).

      Habits as regularities in behavioral patterns should also similarly have a link to psychology and evolutionary foundations.

      Habits as sociological concept – institutions – need to be distinguished from the former, though. These can be derived on the basis of other constructs. Arguably domain-specific evolutionary processes also operate on the aggregate social and economic levels as instance of a generalized evolutionary process.

      • Jan de Jonge

        Carl. You miss my point. I am recommending a macroeconomic outlook. Read Acemoglu and Robinson and afterwards explain to me what’s wrong with their analysis (it’s too Anglo-Saxon, I agree) because it does not mention the biological an psychological foundations of human behavior.

        • Jan, “you miss my point”: Hodgson (he has his own shortcomings, admittedly, but he) is right in that microeconomics needs a foundation in naturalistic human behavior, psychology and these in evolution.

          William James is a good start. Veblen’s 1898 paper criticizes neoclassical utility maximization, but is nevertheless less well suited as it is more institutional than psychological than Hodgson seems to imply, though better it is than nothing.

          To link these points to your perspective: You can get from microeconomics to macroeconomics simply by aggregating, however Veblen comes in handy here as starting point for an evolutionary bridge between micro- and macroeconomic processes.

          • Jan de Jonge

            Carl. The attempts to deliver microfoundations for macroeconomics have not been very successful. Simple aggregating will not do anyway. The last attempt delivered us new classical economics with rational expectations and efficient markets. It ended in the crisis of 2008. The only macro theory we have known is Keynes’ theory (that is continued in post-keynesian theory) and his theory is sometimes in conflict with microeconomics, see for instance the paradox of saving.

          • Yes, you got a point there regarding the outcome in the mainstream economics world, the microfoundations project did not work too well.

            Which is why you need sensible psychological, sociological, institutional characterizations as bridge. Let me illustrate: so, for instance, if you take Soros’ human fallibility approach, which says actors are driven by error-prone interpretations, then in a first, simple model you can aggregate those and reach different, differentiated conclusions about subsets of populations of actors influencing economic outcomes, testing hypotheses, being right, being wrong, over different time horiyzons, producing bubbles, producing crashes. Oswaldo Lairet’s commment and link is a nice example (on the aggregate level again). Psychological foundations you need to understand and describe how the different hypotheses form, sociological processes to model their interaction, institutions to understand how they are ‘channeled’ into aggregate results – all of the being a historical process, that follows patterns, laws that can be described on the basis of systemic, evolutionary, complexity models. Lots of crosslevel feedback, reflexivity, hierarchic constraints and messy, muddled situations, which are an interesting challenge.

          • Jan de Jonge

            Carl. How can you aggregate the outcomes of different people? How do you take into account that actions usually have unintended outcomes? The saving paradox is an example. In modern approaches of macroeconomics, a national or regional economy is seen as an emerged entity, depended on but not reducible to their microfoundations. In a book like “Why Nations Fail” this view is not made explicit, but the book constantly refers to actions of individuals as a starting point but then history runs its course. Nations, cultures; they are emerged or emerging phenomena.

          • Oswaldo Lairet

            Jan. Just as Lorenz fit an infinite number of weather factors into just 3 ODEs ( to model atmospheric convection, it wasn’t necessary for Minsky to aggregate the outcomes of different people’s behavior or interactions to fit the dynamics of the financial system into 2 ODEs (Goodwin’s modified version of Lotka–Volterra’s). OTOH, our politico-financial elite has a stake in hiding its deeds behind a 70 yr-old theory that willfully ignores them (banks, debt and money). Yet, regardless of its faulty mathematical core & predictive uselessness, mainstream economics will continue helping them transfer everyone’s NPV from future income.

          • Jan de Jonge

            Oswaldo. Maybe you have not noticed it, but I did not defend microfoundations. You should turn to Carl Reschke.
            You write that Minsky only needed two equations to model the dynamics of the financial system. By using these equations he in fact used a two actor model, for these equations mimic the interactions of prey and predator. Lucas and Sargent, the prominent economists of the new classical economics used only one representative actor in their mathematical models. Would Minsky have written his article at a later moment, he probably would have used a model from game theory.
            I do not share you attack on the politico-financial elite. I don’t like conspiracy theories in general. Throughout decades economists regarded money as a neutral element in their models. Even Keynes had no financial sector in his models. Minsky, who was a Keynesian, was the first to introduce the financial sector in his model when he formulated the financial instability hypothesis. For a long period his work was ignored. Paul McCullen from Pimco coined the term “Minsky moment” in 1998. From 2008 Minsky is rehabilitated. In the new Handbook of Macroeconomics two articles cite Minsky. Paul Krugman wrote an article that included the Minsky model in 2010 and Janet Yellen has written that Minsky’s work has “become required reading”. There was no conspiracy, but a lack of understanding of the ever increasing importance of the financial sector in our economies. Minsky was the first to acknowledge this, already a long time ago. You may blame the economic profession that they for such a long period did not understand the consequences of abandoning the Bretton-Woods agreement in 1971 and the withdrawal of the restrictions of the Glass -Steagall act in 1999.

  • “Fitting a utility function to data is not the same as providing an evolutionary and causal explanation.” Correct. We need an evolutionary foundations of economic psychology and a better economic psychology. However, Veblen is more relevant to the ‘sociological’ part of interaction among economic actors.

    William James is better suited for the ‘hook’ into psychology. His radical empiricism may be a bit too strong, but links into a knowledge perspective on economic actors. Notably actors’ function in economic discovery processes in market interactions proposed by the likes of Schumpeter, Hayek and Kirzner, managerial dynamic capabilities building on Edith Penrose, and learning approaches as in the iterative, experimental lean startup ‘movement’.