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«Contents 1. Preface 2. Mainstream Economics Is Mechanistic in Structure 3. Mainstream Economics Ignores Custom and Institutions 4. History of ...»

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Geoffrey M. Hodgson, Economics and

Evolution: A Review Article

Laurence S. Moss

Babson College

moss@babson.edu

Moss, Laurence S., "Geoffrey M. Hodgson, Economics and Evolution: A Review Article" Marshall

Studies Bulletin 4 (1994): 33-49 URL: http://www.cce.unifi.it/rivista/moss.htm

Contents

1. Preface

2. Mainstream Economics Is Mechanistic in Structure

3. Mainstream Economics Ignores Custom and Institutions

4. History of Economic Thought

5. Organicism and the Future of Economics

6. Conclusion

1. Preface Alfred Marshall suggested over a century ago that in the "more advanced stages of economics" the Mecca of the economist is economic biology. According to Marshall, ordinary static concepts (such as "equilibrium") change in meaning and acquire a definite "biological tone" when economists focus their attention to the historical development of economic institutions. Such economists study the balance between the "organic forces of life and decay" rather than the balancing of "crude forces" such as supply and demand.

Marshall's suggestion that economists change their perspective from physical to biological conceptions was not without influence in the history of economics. Those who followed Marshall's suggestion and made the recommended switch to "growth analysis" in economics, such as Edith Penrose did in 1959, had significant influence on the development of formal economic theory during the 1960s as well as some part in shaping the curriculum of the modern business school, with its life-cycle conceptions of product and process development (1). More recently still, Brian Loasby, lamenting the switch to formalistic coherence theoretical models from the study of "co-ordination (in) real economies", has proposed a return to Marshall's Mecca (2).

Marshall's prescient ideas have not received the recognition they deserve by historians of economics. Unfortunately, I was disappointed to discover that the book under review is no exception (3). Surprisingly, Hodgson takes no notice whatsoever of this post-Marshallian literature: he incorrectly concludes that "later Marshallians neglected the biological aspects of Marshall's thinking, and abandoned any attempt to recast economics along biological or evolutionary lines" (p. 107), and asserts that the "dialogue between economics and biology had virtually ceased" after Marshall died in l924 (p. 107).

In Economics and Evolution, Hodgson has more exciting objectives in mind than merely commenting on post-Marshallian thought. He is determined to save economics from increasing formalism and sterility by bringing life back into economics. Hodgson's criticism of mainstream economics is largely the same one made familiar by the so-called institutionalist school of economic writers, of whom Hodgson appears to be a fellow-traveler (4).

Institutionalists complain that the intentionally non-evolutionary approach of modern economists, who wrongfully banish "biological thinking to the fringes of economic science" (p.

108), has brought about a sterile theory (5). Hodgson agrees with this verdict.

Hodgson finds his Mecca in Darwinian biology and that is what this book is all about. In the author's words, he has come to help mainstream economists recognize that the "mechanistic and utilitarian foundations of economic theory must be replaced (and) it is upon these reforming convictions that we should turn to the (Darwinian) biological metaphor to help us build an alternative economics" (p. 267). By "Darwinian biology" Hodgson does not mean the biology of Marshall. Marshall's sorties into biology bore the mark of Herbert Spencer whose notions of progressive social development turned out to be inconsistent with Darwinian reasoning. Modern biological reasoning - the reasoning that informs Hodgson's book - is about evolutionary process, the errors as well as the successes, proceeding irreversibly along time's arrow with no teleological goal in sight. There is no tendency or move toward partial equilibrium. There is no tendency or move toward general equilibrium. On the contrary, there is only adjustment without social progress. According to Hodgson, "in the biological and the economic context, evolution is not a grand optimizer, or a perfectionist. Evolution is awesome and inspiring, but also messy, stupid and tragic" (p. 212).

In addition, economists must learn that they cannot dispense with the troublesome long-run consequences of the second law of thermodynamics. That law reassures us that no matter how religiously we believe in progress, we are indeed sinking into disorder. The humbling implications of modern biological metaphors may disheaten mainstream economists and shake their faith in material progress, but they may also have the salutary effect of sensitizing the profession to the "limits to the natural resources available and to the tolerances of the ecosystems on the planet" (p. 34).

According to Hodgson, the economics profession is actively shopping for an escape from the baggage bequeathed by the neoclassical research program. A change in perspective from static equilibrium to Darwinian biology will not constitute progress in economics, since scientific progress cannot exist for a thoroughgoing Darwinian evolutionist. The switch will merely end the crisis.

The particular crisis that Hodgson has in mind is the one referred to in the title of a collection of essays edited by Daniel Bell and Irving Kristol (B&K) in l981 (6). In this book, major economists complain of The Crisis in Economic Theory (7). Hodgson does not define the crisis with any degree of precision. My own reading of B&K suggests that the economists who contributed to the volume were not of one mind about how the alleged crisis ought to be defined. Despite this lack of concensus, Hodgson's book can best be appreciated as an extended essay designed to persuade his economic colleagues that the best prospects for escaping from the B&K crisis in economics is to set sail into the main currents of biological research. Two aspects of Hodgson's bill of particular indictments directed against mainstream neoclassical economics make this purpose clear.





2. Mainstream Economics Is Mechanistic in Structure

According to Hodgson, the current mechanistic structure of economics is an unfortunate inheritance of the Cartesian/Newtonian world view, which shunted aside Aristotle's legacy and the organicist medieval tradition for a sharp return to the naked atomism of Leucippus and Democritus. The result is contemporary neoclassical economics with all of its defects (p. 234).

The greatest fallacy of the mechanists is that the main features of any structure can be accounted for or explained by the characteristics of the elements that make up that structure.

Indeed, this has long been the research strategy of general equilibrium reasoning. In most if not all cases, economic structures are made up of individual actors - the "agents" - and it is common in economics to explain the structure by describing the interactions of the individuals.

Hodgson argues that neoclassicals have closed their eyes to a second possibility, which is that "society constitutes individuals as much as individuals constitute society" (pp. 10-11).

Here Hodgson draws insights from a variety of writers and most importantly from the works of Nicholas Georgescu-Roegen (GR). The chemical doctrine, as GR described it, insists that economic processes, like chemical compounds, can be decomposed into component parts and that the characteristics of the economic process can always be related back to the properties of the acting individuals. GR vigorously disagreed with the chemical doctrine and pointed out, in a telling example, that "although every inch of the devastation left by a mob could be traced back to an act of some particular individual, an individual by himself can never display the peculiar properties of a mob" (p. 328). He called his commitment to a biological conception "organismic epistemology" (p. 327). Hodgson's commentary resembles that of GR especially in statements like this one: "organicism denies that individuals may be treated as elemental or immutable building blocks of analysis" (p. 11). According to Hodgson, organicism, long discredited among mainstream economists, should be immediately rehabilitated. Why should economists take up this charge? They should do it to enhance the relevance of economic conceptual analysis to real-world developments and end the awful crisis.

Organicist reasoning will, along with other reforms, finally pound the last coffin nail into the casket of methodological individualism (M-I). Hodgson dislikes M-I because, in his mind, it makes a genuinely evolutionary economics impossible and allegedly excludes from economics the organicist notions which so badly need to be restored. M-I holds that all explanations about macroeconomic phenomena should be (in principle) reducible to statements about individual action, since in society it is only individuals that act. It leads to bald rational calculations of decisionmaking individual agents and misdirects attention from the important role that habit or custom plays in the maintenance and functioning of any complex order.

Indeed, modern biology has increasingly taken notice of the central role culture plays in human evolution. Since the crisis in economic theory stems in part from the rational-choice or utilitymaximization model of valuation, which has removed the flesh-and-blood individual from modern economics, the restoration of life requires that we acknowledge the importance of habit and custom. Hodgson is quite explicit about the strategy involved in this book: "this work is to attempt to use biology both to help counter the mechanistic metaphor and to provide some basis for the future development of economic science" (p. 24). This brings us to the second of Hodgson's indictments of mainstream economic thinking.

3. Mainstream Economics Ignores Custom and Institutions

According to Hodgson, the concept of economic time used by economists is sorrowfully out of date with the understanding of time that informs both biology and physics. For example, sophomores are taught that when demand increases (that is, "shifts to the right"), price and quantity-traded will increase; when demand decreases back to where it rested originally (that is, "shifts to the left") price and quantity-traded will drop back to their respective original values. The fact that learning occurs whenever time passes makes the return to the status quo most unlikely (8).Economics should adopt a concept of time that treats economic activity as a process-in-time where what happens cannot be reversed.

According to Hodgson, a more enriched understanding of the implications of passing time would open the door to an economics in which individuals can do creative things. The implication of this theoretical insight is that an economy will never settle down to a position of final equilibrium. Change is unending. Economists should learn from modern biologists what has always been implied by Darwin's theory of evolution. Unless variation occurs constantly, natural selection will "consume its own fuel" and come to an abrupt halt (p. 45). What, then, accounts for the unending supply of variations? The human ability to be creative and produce novel situations and results. The rational-calculation model of homo economicus has ignored this most vital and distinctive feature of human action. This is another reason why contemporary economics lacks life.

Orthodox economics, especially in the extreme variant of the Mises-Rothbard school, is stuck in a rut of typological thinking (9). In other words, economic analysis identifies selected categories of action and claims that variation on these archetypes can be found in every civilization past, present and future. This is not modern biological thinking, because in biology a species is only a distribution of characteristics - not a final Platonic form. Over time that distribution of characteristics changes depending on the selection that takes place by way of sexual reproduction. There are no archetype species only distributions of characteristics.

Economists have yet to commit to Darwinian methods of reasoning and when they do they will dispense with typological methods of thinking altogether.

According to Hodgson, in an effort to "ape nineteenth century physics" economics became "progressively more reductionist and formalistic" (p. 251). Economists

Abstract

from cultural institutions which themselves are (or include) the rules and procedures that govern economic transactions. "The science of biology has had to face up to problems of the analysis of complex systems and (biology) seems to offer a tentative way out" (p. 251). Modern biology has changed in dramatic ways since Marshall declared it the Mecca of economists more than one hundred years ago. Contemporary economists should turn back to the biological metaphor to help us build an alternative economics and finally escape from the crisis in economic theory.

4. History of Economic Thought

Parts II and III of Hodgson's book offer an interpretation of a selected group of economists that gives special attention to how and in what ways they used biological metaphors and reasoning in pursuit of economic analysis. Apparently, Hodgson believes that if he can put a finger on the exact point in the application of biological reasoning to economics where previous writers got stuck, then he can warn contemporary economists not to make the same error.

I read Hodgson as claiming that the writers he examines fall into two broad categories. First, there are the pseudo-biologists who claim that they are linking economic analysis to biological metaphors but are in fact not doing that at all. Second, there are the true biologists who see the light and head toward it, only to become stymied for one reason or another and therefore never to liberate economics from its sinking concrete block of formalistic equilibrium modeling.



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