Business cycles

The neoclassical economics fails in delivering a realistic description of how the economy works, how individuals and companies choose and perform, of how intermediate bodies participate to policymaking.

Evolutionary economics is a powerful alternative, both in contents and methodology. Indeed, it represents a new paradigm, with its own evaluation criteria for scientific soundness, acceptable explanations, its formal methods, validation, the way it represents novelties over time, its ethical stance, the way through which it is transmitted by teaching.

In this page by Valentino Piana (2018-2024), you will find a concise peculiar point of view for the foundation and development of the paradigm of evolutionary economics.

1. Human beings

Guidelines for a study of whole human beings, not just homo oeconomicus.

2. Pluralism

Methodological guidelines to the description of societies and economies, renouncing to methodological individualism.

3. Time

The fundamental difference between evolutionary and neoclassical economics relies on the concept of time.

Building on the former, the paper allows for opening new venues of data analysis such as temporal morphogenesis.

4. The unity of economic disciplines

Specialization in University departments and chairs, nurtured by and reflected in the hyperspecialization of scientific journals, is hiding the underlying unity of economics (macroeconomics, industrial economics, regional economics, microeconomics, labour economics, international economics, etc.) and business (marketing, organization, administration and control, corporate finance, etc.). Such disciplines are in a matrix structure with vertical disciplines referring to the institutional sectors (e.g. public finance), industries (e.g. banking, manufacturing, tourism, networks etc.), types of countries (e.g. economics of development) and issues so important that would require an ad-hoc approach (income distribution and inequality, innovation, sustainable development, etc.). Innovation economics seems to be a small niche, whereas it is the core of the evolutionary economics paradigm.

We object to such separation and we have systematically built the research and the teaching at the Economics Web Institute as an hyper-text connecting key concepts across nominal disciplinary barriers.

Just as for an example, we think that cutting-edge advancement in business sciences, such as social marketing and Living Labs, highlight issues that should be tackled also by microeconomics.

5. Substantive examples of intertwined micro, meso and macroeconomic theory embedding key methodological insights of evolutionary economics

5.1. Consumer theory

A sharp systematic list of differences of the consumer theory under neoclassical and evolutionary economics. it is an entry point to many key concepts that economics share with marketing and other disciplines.

5.2. Agent-based models: a structured set of consumer rules and a testbed for general routines

The most typical formal tool in evolutionary economics is agent-based modelling, by which all agents are individually modelled and emerging properties can arise. In this paper, an extensive treatment of consumers in agent-based possible models is provided. In this other paper, the key concept of "routine" is introduced and you are given a testbed for comparing results from the implementation of routines with real data in an interpersonal validation procedure for agent-based models.

5.3. Companies dynamics

Dynamic oligopolies with competition on a multiplicity of leverages (technology, product differentiation, prices, advertising,...) and persistent profits, more or less turbolent market shares, etc. are common presence in evolutionary industrial dynamics. In this paper, an exploration of modelling about companies is provided, introducing issues of structural fragility between real and financial markets. The dual problem of labour market and micro-macro success is a key concern. A comprehensive view of market structure is presented here.

5.4. Macroeconomic dynamics in a graph representation

With time delays and varying elasticities, macroeconomic variables are interconnected and they can be usefully represented by network graphs. We have applied this visualisation to a more traditional model here; however, this graphical language should be used also for the "Schumpeter meets Keynes" macroeconomic evolutionary tradition.

6. The distance of economics from physics and biology, the connections to history and geography

Economics for too long has been drawing from natural sciences, and even from theories that became obsolete in their respective science. The neoclassical atomistic view of consumers and firms draws on a rational mechanics before the XX century new physics (with the theory of relativity, quantum physics and the principle of indetermination). It reflect a pre-Freudian psychology. Since economics should rooted in the analysis of human beings, the reference to natural science should be weakened. This applies to physics (where atoms do not have a will and do not evolve) and thermodynamics but also to biology (which has been approached by evolutionary economics but need to be taken not too literally). People and companies do have a birth, development and death, but the lack of any goal in biological actions is at odds with humans' projects (which build upon the past and have a tension towards the future).

By contrast, we think that economics need to speak a language which can have a dialogue with history and with (anthropic and bioclimatic) geography. We need to upgrade from the Methodenstreit in the XIX century, where a vision of history totally deprived of inner logics and alternatives was skipped in favour of a type of mathematics that seemed to promise tractability and generality. Today we need to recognize that our models generate alternative histories and patterns that contain both random and non-random components (drawing from necessity, will and power distribution). Conversely, we expect from historical analysis to draw lessons, find patterns, rules of change, and be conducted under value judgement, helping us in coping with the key issue of our age.

6.1. Sources of inspiration and metaphores

Useful metaphores and analogies for describing, understanding, and modelling economic actions should draw on everyday life, not come from physics. Biology can be a very interesting source, provided one does not overstretch specific keywords. In this, narratives and storytelling may be helpful, but they need to intertwine with historical real episodes, stylised facts and scientifically-rooted explations.

6.2. Comparing history-friendly evolutionary models with empirical realities

In this book, a chapter is devoted to the way emerging properties in both real and artificial worlds (including history-friendly models) become the main line of conjuction between the two (ch. 16). At the micro-level, our golden rule is that agents should be given rules that can be enquired in surveys with real human beings.

7. Which causality? What's an acceptable explanation for evolutionary economics

In evolutionary economics, you explain a certain situation (e.g. a configuration of values and structures) by taking a step back in time, describing a historical state, offer certain dynamics (laws of motion) which generate the current and future (alternative) states and a "final stage", chosen with some criteria. You don't regress back ad infinitum; you accept that there was a certain past and you detect and demonstrate modifications of it. The explanation is the way things change. This is in contrast with neoclassical explanation that relies on the equilibrium concept. Explanation is the formal demonstration that the state is optimal (in the sense of Nash, Pareto, etc.). It's an instantaneous equilibrium (e.g. between demand and supply), where all agents are maximising something and don't want to introduce further changes. If something exogenously (thus unexplainable) change, a new equilibrium is reach instantaneously (indeed: timelessly, since it's just the crossing point of curves and the solution of a system of equations where time is out). Even when there is a talk of time and the utilization of differential equations gives the appearance of time, everything is reversible.

Instead, in the evolutionary paradigm all events take time; they cumulate and multiply over an irreversible time, with an arrow from the burden of the past to the tension towards the future. Their inertial development and delays in transmission from a variable to another, thanks to agent-to-agent microdynamics, provide a "time window" in which the observer (an analyst empowered by the theoretician's production) can understand and envisage what is going to happen, while recognising that the multiplicies of factors at play and dynamic influences engender key uncertainties. The actions of humans can change the future. A forecast can lead to action that avoid the forecasted events. It's falsification is not a failure, but a scientific success. In this sense, we are anti-Popperian.

For instance, in consumer theory, an important explanation of current purchases is rooted in the cumulative bundle of past purchases. On a broader scale, cities are historically stratified built and non-built environments, deriving from past investment and current activities, including urban regeneration. In a simple formula, Past + innovation = current state.

8. Multi-dimensional representations of parametres and outcomes of simulation models

In this book, a few chapters are devoted to graphical methods to represent 10+ parametres in the same sheet to provide ways to give insights on the high non-linearities typical of our modelling way (ch. 12-15).

9. Emerging properties and stylized facts in models and in empirical data as a way to validation

Temporal morphogenesis is an innovative approach to generate all possible states-of-the-world and changes in a micro-meso-macro system as well as all possible shifts in the emerging distribution of entities. Here we provide a well-defined context in which the problem is sensible and meaningful.

By generating a morphospace that is exhaustive of all possible shapes, you get a structured container to which both real (empirical) and artificial (model-generated) data structures can be mapped. Thus you will have precise indications about what distinguish real from non-real shapes (ie. shapes that are possible but not empirically detected), as well as how extensively models can replicate real structures. Comparison of models can be based on how many (and which) real structures can be generated by them. We have proposed a specific method of a sub-class of evolutionary agent-based models here.

Moreover, discovery of new structures become a possibility for models, substantiating their power. Scientific knowledge gets a venue for cumulativeness, in the sense that new models may be directed to generating structures not yet generated by current models but that exist or that might exist.

10. Qualifying the quantitative and not quantifying the qualitative

Since Galileo, science has been oriented to measure and quantify empirical events, in the perspective of finding mathematically simple relationship across such values, capable of predicting future values in dependence from variable somehow under the human control. This approach has mixed technological advancements with the abstract tools of mathematics, including calculus and systems of differential equations, with an extension to stochasticity and more sophisticated instruments.

However, human experience is qualitative and decisions are taken without such heavy apparatus, which is the competence domains of specialists, not of the normal person. Accordingly, economics and social sciences should give priority to qualitative methods of investigation on real flows of human actions. Group decision-making, including interactions (conflict, cooperation, coalitions, veto powers, etc.), characterise most of key decisions and their implementation (from dreams to products and infrastructure, including their cumulative bundle).

For humans and human systems, there is a conflict between precision and truth: the more precise a guess, the higher the probability of missing the true. If you have to guess the age of a person on the street, you'll certainly be able to distinguish an adult from a child. With good chances you will fit the generation. But the exact year - or day of the year in which he or she was born become unattainable, with a collapse of methods and of the likelihood of fitting the right answer. If the precision level goes down to the minute and second of the birth, the same individual concerned might not have the answer and no record kept in official registers could provide it.

Conversely, in agent-based evolutionary models, a lot of variables appears with their actual numerical values, in a "deluge" of data that can only be interpreted in pattern, clusters and qualitative terms. Especially when discussing policies, the relationships across variables and the right sequence of instruments should take into account the nonlinearities, the cumulative and bifurcation effects that make history.

11. Teaching evolutionary economics

Cutting-edge research and teaching should be connected, in contrast to the easy trick of the neoclassical economics in which textbooks contain a very unrealistic description that, if challenged by any reasonable student, is then skipped in favour of extremely advanced (and unreadable) papers, which do never trickle down to textbooks back. In this way, a circular reasoning prevents any objection and closes the paradigm.

By contrast, teaching at EWI alternates the presentation of the key concepts of economics, redefined along evolutionary economics lines, and the distribution of real data (long time series for most countries in the world), so that the student can detect whether the overall indications are matched by data. This implements the fundamental difference between theoreticians (the teacher) and the would-be analyst (the student). In so doing, we are aiming at a critical reader who can articulate a long reasoning, as envisaged in this book, who literally enters into models (human participated simulations), and develop an actively critical attitude, ready to read and react to media coverage of the real world, aware of interpreting fraameworks and support (or reject) certain policies to change the world.

More in general, evolutionary economics puts emphasis on interactivity in teaching, openness to a plurality of opinions, dialogue with history and geography more than with natural sciences.

We still need to devise ways to test students and give marks in a way that is systematically different from the neoclassical paradigm, since teaching methods, drills and evaluation criteria are conducive to the establishment to an agreed "normal science" in T. Kuhn's terms.

12. Evaluation criteria for publication

Normal science needs criteria to orient reviewers to evaluate, judge and suggest revisions to submitted papers. A body of formal knowledge is thus constituted. What's important for evolutionary economics is that papers should offer tools for others to think, understand and act upon. They can broadly refer:

1. to theory, as a somewhat abstract set of key concepts, typical connections, tentative hypotheses that hold until disproofed in a specific case;

2. to history (ages, centuries, and years), geography (thus countries, sub and supra national regions), and institutions, including business history, as empirical entities to be understood and changed (if present and future);

3. to alternatives, from realistic to utopian and dystopians, as far as goals, policies, tools, attitudes, values and other similar items are concerned.

A paper does not need to cover all of these aspects; it can well refer just to one (and even be narrower). Methods do not need to demostrate usefulness in specific instances (for being accepted to publication). They only need to demonstrate correctness under explicit assumptions. We are aware that papers are not monads (in Leibniz terms): they are not self-sufficient closed worlds.

In another direction, for economics (and other sciences) to be relevant to policymaking, papers need to be intelligible and accessible. The typical journal is burdening papers with the mandatory jargon, equations, and other distancing devices. This is why at the Economics Web Institute we typically publish very readable texts.

13. Ethics for evolutionary economics

In the multiple and dynamic outcomes of evolutionary models and argumentations, where a plurality of agents have a plurality of interests, including conflictual ones, the economist should take side and make explicit value judgements, before providing advice on policies. There is no unified optimization procedure that may allow her or him to evaluate ours as the best of all possible worlds. On the contrary, we are always at the crossroad of development pathways that can be better or worse than the starting point. Moreover, it may well turns out that a pathway leading to advantages for a group is damaging others. Pareto optimality cannot be the ethical guiding principle of evolutionary economics. On the contrary, we are insisting on the full responsibility of the agents for the direct and indirect development pathways connected with their choice, their lack of it, and of events that require reactive and pro-active action on their part.

14. Connection with world class evolutionary economics

Some of the reference websites of evolutionary economics are the Journal of Evolutionary Economics, Industrial and Corporate Change and the Sant'Anna repository of papers. For teaching, see the Journal of Pluralism and Economics Education.

Fundamental books are the following:

* Nelson R. R. and Winter S. G., Evolutionary theory of economic change (1982);

* Nelson R. R., Dosi G., Helfat C. E., Pyka A., Saviotti P. P., Lee K., Dopfer K., Malerba F. Winter S. G., Modern evolutionary economics - An overview (2018)

* Yoshinori Shiozawa, Masashi Morioka, Kazuhisa Taniguchi, Microfoundations of Evolutionary Economics (2016)

* The paradigm of social complexity: an alternative way of understanding societies and their economies by Gonzalo Castañeda (2020)

* Pier Paolo Saviotti, Innovation, Complexity and Economic Evolution: From Theory to Policy, Routledge (2023)

* Kurt Dopfer, Richard R. Nelson, Jason Potts, Andreas Pyka, Routledge Handbook of Evolutionary Economics, Routledge (2024)

* and, in policy terms, Piana V. et al. Innovative economic policies for climate change mitigation (2009-2012) [Full text PDF].

15. A strategy for paradigm shift away from neoclassical economics

In line with Thomas Khun epistemology, we need to identify not only logical and empirical flaws in the neoclassical paradigm but also key anomalies (empirical facts of high historical importance that stubbornly refuse to be explained with their paradigm). As unemployment was in the 1930s a key anomaly, giving rise to the Keynesian revolution (which Hicks tried to capture back into the neoclassical paradigm and post-Keynesian have succeeded in fostering), so innovation is an anomaly that cannot be explained by the hyperrationality and determinism of neoclassical paradigm. Evolutionary economics has successfully occupied the best explanation for innovations and their diffusion, paving the way for a new paradigm.

Our own contribution is to consider climate change as key anomaly, whose urgency for the XXI century cannot be underestimated. For it, the simple elements of the neoclassical paradigm (quantities and prices), which lead to the neclassical suggestions being limited to quantity policy (cap-and-trade) and price policies (CO2 taxes) are way too weak and ineffective. By suggesting innovative policies to cope with climate change (including innovation-centred but also going beyond), we are providing a leverage for the paradigm shift.

We need to introduce new key concepts (e.g. Simon's "bounded rationality", Dosi's "technological trajectory" or our cumulative bundle, closely related to Saviotti's Man-Made-Artefacts) and demostrate how they improve the capability to explain empirical and theoretical "facts". We need to have our own default values for certain functions or schedules (e.g. in terms of costs, by which we reject the neoclassical default value of increasing marginal costs in the short run). We need to have our own formal methods and to avoid the mistakes that we criticize in the neoclassical approach (e.g. the abuse of mathematics).

Obviously important as they are as departure points, criticisms to neoclassical paradigm will not suffice for the shift unless we have convincing alternatives on which the young generation, the ultimate judge, can draw for insight and guidance.

Embedded in theory, we need to develop scenarios for the XXI centuries, point at critical juctions across alternative futures and identify policies and historically powerful subject capable, if organized, to deviate certain trajectories in favour of others, evaluated by an explicit set of values but without artificially forcing utopies on the historical movement of forces.