The Neo-Darwinian synthesis and the re-emergence of institutionalism in economics

There has long been a love-hate relationship between biology and economics. This off-and-on liaison was particularly intense between the branches of these two fields of study known respectively as evolutionary biology and institutional economics.

The study of biology took a giant step forward with the publication in 1859 of Charles Darwin’s epochal book “On the Origin of Species.” But perhaps little known to many is that Darwin (who, with his contemporary, Alfred Russel Wallace, co-founded modern evolutionary biology) has been influenced to some degree in his views on the workings of complex living systems by the writings of Adam Smith and Thomas Malthus, both of whom preceded him by several decades. Adam Smith, best known for his book “An Inquiry into the Nature and Causes of the Wealth of Nations,” published in 1776, and pioneering demographer Thomas Malthus are the earliest exponents of the newly emergent social science known at its incipience as political economy and now as economics.  Several decades into its later development, classical economics extensively used biological metaphors in explaining the behavior of firms, industries and markets, a tradition that continued up until the early years of the 20th century.

Toward the end of the 19th and the beginning of the 20th centuries, many American economists, taking their cues from their European counterparts, viewed institutions and societies as living systems and embraced biological metaphors with even greater fervor. Foremost among these institutional economists was Thorstein Veblen who, in 1898, published his landmark article “Why is economics not an evolutionary science?” in the Quarterly Journal of Economics. More enthusiastically than anyone else, Veblen applied the Darwinian principles of variation, inheritance and natural selection in the study of institutions, markets and societies.

The strong ties between evolutionary biology and economics started to turn sour with the emergence of neo-classical economics in the 1870s. At around this time, economics started to take inspiration from physics rather than from biology. While many classical economists, notably Alfred Marshall, continued to apply evolutionary concepts in their writings, the love affair between biology and economics has started to wane.

A major development in biology that culminated in the late 40s was the fusion of Darwin’s theory of natural selection and Mendelian genetics into what is now known as the Neo-Darwinian synthesis. This modern reinvention of Darwinian evolutionary theory gave it new life and has become the basis of a renewed relationship between biology and the social sciences in the several decades to follow.

In the meantime, the chasm between biology and economics widened further between the war years. Fearful of the political, social and moral implications of the new science of genetics, most Anglo Saxon economists eschewed biological evolutionary metaphors in their analysis of economic phenomena. Moreover, institutional economics — not to be confused with the New Institutional Economics, an extension of the neoclassical economic theory of the firm — became increasingly marginalized by the overwhelming dominance of mathematical formulations of neoclassical economic theories and Keynesian macroeconomics.

Many prominent American economists during this period such as Michigan’s Kenneth Boulding, Carnegie Mellon’s Herbert Simon and Stanford’s Kenneth Arrow have long been staunch advocates of the application of evolutionary concepts in economics and have helped sustain interest in institutional and evolutionary perspectives in the field. However, two landmark publications during this period helped renew the long-standing bond between biology and economics and have set the tone in re-establishing institutional economics as a credible alternative to the existing orthodoxy.

First was the publication in 1950 of Armen Alchian’s landmark article, “Uncertainty, Evolution and Economic Theory” in which he argued that economic rationality, the hallmark  of neoclassical economics, is not a given but is the result of learning and evolution, and that efficient behavior tends to persist through time over inefficient ones. 

The second major work, published in 1982, was “An Evolutionary Theory of Economic Change” by Richard Nelson and Sidney Winter. This landmark publication gave new credibility and vitality to institutional economics and helped re-established the strong bonds between biology and economics.

In their seminal work, Nelson and Winters argued that the use of concepts from biological evolution in economics is not just a matter of metaphor or analogy. They pointed out that that there are fundamental scientific principles that are common to both areas of study. There is, in other words, a common unifying conceptual framework that helps explain both biological and economic phenomena.

In their analysis, Nelson and Winters identified certain organizational traits called “routines” by which organizational members interact and coordinate among themselves to produce output. These routines constitute the “genetic” makeup of organizations that ultimately affect their performance. Gene-routines that contribute to success tend to persist and their relative frequency in the population of firms increases through time. Thus, the pool of organizational routines in a population evolves in much the same way as do gene pools of species.

The continued merging of biology and the social sciences was buttressed by a number of major developments during this period.

1. In the early 50s, a number of social and natural scientists, including biologist Ludwig von

Bertalanffy and economist Kenneth Boulding, started to lay the groundwork for General Systems Theory (GST) which underscores the dynamic inter-relatedness among the elements that comprise social, biological and physical systems, along with the inter-phase between different systems levels.

2. The publication in 1975 of Edward O. Wilson’s pioneering work “Sociobiology: The New Synthesis” represents a major inflection point in the long-standing relationship between biology and the social sciences. According to a noted evolutionary economist, this work “…brought biology back onto the social science agenda.” This landmark work was followed many years later by the widely read book “Consilience: The Unity of Knowledge,” which firmly established the epigenetic principle and notion of gene-culture co-evolution in the social science and the popular lexicons. These concepts underscore the dynamic inter-action between the evolution of the human species on the one hand, and the development of human society on the other. 

3. Finally, the collaboration among several scholars representing the different sciences and disciplines starting from the early 90s gave birth to Complexity Theory (a “New Science,” according to many of its adherents) which looks at the dynamics of social, biological and physical systems comprising large numbers of interacting elements.  Complexity Theory has led to the now widespread view that human institutions and organizations are Complex Adaptive Systems, and the recognition of the importance of path dependence in the process of organizational and social change.

At this point in time, the romance between biology and the social sciences appears to be in the process of being firmly re-established, and a more lasting relationship is bound to ensue.

* * *

The special fields of interest of Niceto S. Poblador, Ph.D, are knowledge management (with emphasis on the management of Complex Adaptive Systems), and organizational analysis.

He holds a Ph.D., M.A. (Business and Applied Economics) from the University of Pennsylvania, M.A. (Economics) from the University of Chicago, and B.A. (Economics) from the University of the Philippines. His current interest lies in the dynamics of complex organizations and value creation through the effective management of knowledge. His e-mail address is [email protected].