Differences and similarities between biological and economic evolution

We stress that evolutionary theories of firms and markets do not derive by analogy to biological evolution. Evolution is an inevitable feature of complex systems that operate away from equilibrium, are processing and communicating information, and compete for scarce resources in transformations and transactions that exhibit non-linear kinetics. This situation applies to both economic organizations and biological organisms. Both types of organization follow the pattern that derives from the systems theory of evolution. This is the main area of similarity between economic and biological evolution.

Furthermore, there is the aspect of separation between the information set that ultimately

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defines competiveness and the vehicle with which competition for scarce resources takes place, the firm’s products in the broad sense discussed in the preceding section and the organism’s protein based phenotype. This distinction between the genotype and the phenotype applies to both economic and biological organizations. In addition, the circumstance that the genotype survives the phenotype applies.

Another important similarity is the concept of the error threshold. If a system “experiments”

too much, the information set melts rather than evolves in the direction of increased competitiveness. To the author’s opinion and he feels support in the literature (e.g. Douma and Schreuder (2008)) this applies to both biological systems and firms and other economic institutions. The reverse is also true, if an organism perfectly reproduces its DNA, evolution comes to a halt and responding to changes in the environment is no longer possible.

Experience shows that organisms seem to operate close to the error threshold and introduce the maximum admissible level of variation in the genome. This also is relevant for economic institutions. If the restrictions to modifying the information set on which the company operates are too strict, it is no longer able to improve the competitiveness of its products and is no longer able to react on competitor moves and other changes in the environment. This becomes particularly important if drastic changes in the environment challenge the position of the firm.

There also are important differences. The present view in biology is that mutations in the genotype that drive evolution are almost wholly random. In firms, there is an element of design, but we indicate that bounded rationality applies due to the complexity of the environment, the competition and the internal processes inside the firm.

A second point is that the DNA of an organism is part of its product, the next generation phenotype. This is not the case in the products of firms. These do not physically contain the complete information set of the company. Furthermore, the information set, the genome of the firm modifies without its physical replication. This is partly different in biology, where the DNA replicates to produce a new generation of the organism. Of course, also in biology mechanisms developed avoiding replication for transmission of information. The brain and its derived products like science and technology lead, also in biological systems, to exogenic evolution and introduce information that not directly replicates in the next generation of the organism.

Another important difference relates to the mechanism of communication of the information set. In biological systems, the communication of the information contained in the DNA is largely restricted to the offspring of the parents (vertical transfer of information). This most certainly applies to the higher organisms, in bacteria mechanisms of transfer other than by reproduction have existed and do exist. We refer to the mechanisms of horizontal gene transfer discussed in Section 6.10. In exogenic evolution communication of information to organisms or organizations other than the direct offspring, takes place. This may shift the driver of evolution from the level of an individual organism or organization to groups of such entities. This of course applies to aspects of the evolution of the socioeconomic system such as the evolution of science, technology and culture and for that matter the socioeconomic system with its markets and firms.

Finally, but with some hesitation, there is the aspect of the speed of evolution. The information set of the firm appears to evolve far more quickly than the pace of biological evolution. This certainly applies to the higher organisms, but less to bacteria and notably viruses.

Additionally, we again address the methodological and philosophical problem highlighted in Chapter 2 and in Chapter 4 when discussing the Capital Asset Pricing Model. An important assumption is that the model and the system are independent. The fact that the model exists should not influence the outcome of the transformations and transactions in the system. If a

93 model becomes part of the system and particularly if the players in the system accept the predictions of the model, the assumption of independence of system behavior and the existence of the model breaks down. This is a significant methodological and philosophical problem. It is akin to the problem in quantum mechanics, where the assumption that observing the system does not influence its behavior breaks down. The problem identified above does of course apply to all theories of socioeconomic systems not just to EVT based approaches.

7.8. Conclusion.

We developed a consistent macroscopic model of the socioeconomic system, EVT. In this chapter, we use it to indentify the nature of the firm. Our model rests on a reduced information picture of a complex reality, as almost all models of relevant phenomena in physics. It identifies the forces that drive transactions and reveals their statistical background in the concepts of statistical entropy and the cost of information. We also argue that the socioeconomic system is a system beyond equilibrium, where significant forces exist and/or result from the activities of the actors in the system. This leads to the conclusion that the socioeconomics system behaves according to a systems theory of evolution that applies to all system beyond equilibrium where the forces exceed a critical limit. This evolutionary concept predicts that, in such systems, organizations appear that extract economic value from the forces present or the forces that can be created, by a process of coupling to these forces. We particularly identify systems that store and process information with a high but not perfect copying fidelity as an outcome of evolution and a source of further, sustained, evolution. The nature of the fluctuations in the system, i.e. deviations from the averaged properties used in the macroscopic description, determines the development of the system at critical branching or bifurcation points. This introduces a historical dimension in the development of such systems. The problem is that, by the very nature of the macroscopic approach to modeling, information about the fluctuations is not present in the model. Hence, the exact future evolution is not predictable, even if we fully characterize the system in a macroscopic sense.

The evolution of the system is subject to chance and necessity. In the system evolution to more complex organizations, resulting in the extraction of economic value in increasing amounts, inevitably takes place. We cannot predict, however, the path of the future evolution, although we can say a few things about likely evolutionary patterns based on further assumptions about the system’s behavior. In this book, we avoided going into detailed models of the socioeconomic system and this choice should be understandable based on the reasoning we present. This problem does not apply to the socioeconomic system only, but is also present in the engineering sciences. A book of the present author Roels (1983) that describes macroscopic methods for the description of processes involving the activities of microorganism witnesses this. Also microorganisms are far too complex to describe in detail, but useful predictions result from macroscopic modeling and careful experimentation. Also in that field too complex models, untraceable experimentally, have little practical value. The additional problem in the socioeconomic system is that the freedom of experimentation as in systems in which microorganisms appear, does limitedly apply.

In the foregoing, we stated the limitations and prospects of the macroscopic description. We can predict that evolution will take place, we can generalize some features of the evolution in the direction of increased competitiveness, but we have to remain silent about the path of evolution in an individual case.

The problem becomes clear if we look at the picture of human evolution (Lewin and Foley (2004), Chapter 11). Some 5-7 million years ago, our ancestors abandoned their tree dwelling habit and developed walking on two legs as a new way of earning a living. This allowed them

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to develop some primitive tools to assist them in earning that living. They developed hunting and got access to high quality food in the form of meat. This allowed and induced the further development and sophistication of the brain, which consumes about 20% of a human’s total energy budget at only 2% of body weight. This later on, a few million years ago, leads to an increase in the size of their brains by a factor two and later on three compared to the early ancestors. Animal husbandry and agriculture appear some 12,000 years ago. Language and other forms of communication develop further; exogenic evolution takes place at an increasing rate. Today we witness our socioeconomic system as an outcome of those developments. Was there any chance of predicting these developments when our ancestors appeared?

95 CHAPTER 8. SOME CONCEPTS OF ECONOMIC THEORY.

8.1. Introduction.

This chapter presents an overview of selected aspects of contemporary economic theory that are relevant to this work. In view of the main theme of this book, we highlight the role of information in economic analysis. We introduce microeconomics and the perfect competition model and selected aspects of the macroeconomic perspective. The discussion of models of economic growth and business cycles introduces aspects of the dynamics of economic development. In addition, we analyze the reigning evolutionary approach to economies, firms and markets in the perspective of this book’s main theme. Furthermore, we introduce transaction costs economics and the agency theory of the firm as well as an approach to strategic management.