Books and Reviews


The Evolving Economy

This volume contains 20 of Ulrich Witt's essays on evolutionary economics written between 1985 and 2001. Some of the issues he addresses include the biological foundations of economic behavior, the dissemination of new industrial technologies under network externalities, and the application of the theory of self-organization to the study of change in the marketplace.

Review by Stan Metcalfe

Twenty Essays

In this volume of twenty essays written over the last quarter century, Ulrich Witt has brought together many of his pioneering contributions to an evolutionary approach to economic analysis.  Grouped together under three broad themes the essays cover at first sight what might appear to be unrelated topics, viz: evolutionary methods of analysis, in part Darwinian but actually conceived more broadly; evolutionary approaches to the problems of public choice and the design and acceptance of institutions; and, the divers connections between evolutionary economics and the Austrian School of economic thought.  However, unrelated they are not, since a consistent and many dimensioned thread weaves its way through all the essays giving them a remarkable sense of belonging to a coherent evolutionary tradition.  This is a genuine tour de force and what must be acknowledged by anyone who has followed the evolution of evolutionary economics since the early 1980s is the original, pioneering nature of these essays and the ideas they contain.  One can only conjecture that at times the author may have felt that he was working in a vacuum, as more mainstream approaches to economics became further distanced from a convincing analysis of the dynamics of capitalism.  It is not that capitalism is a knowledge based system that matters in Witt’s view, for all economic societies are knowledge based; rather it is the particular kind of knowledge dynamic that he explores so effectively– the dynamic of innovation, enterprise and competition.  In reality he has been expounding the deeper implications of that evolutionary story in a way which sets it on secure foundations but at the same time more challenging foundations.  To anyone who considers that competitive general equilibrium, whether stationary or semi–stationary, is the only way to understand economic action, these essays are an elegant reminder that capitalism is not like that.

It is for the reader to take each essay in turn, my task is different; to try and distill the principal elements of Witt’s scheme of evolutionary thought.  First and foremost, if we take the idea of evolution seriously we recognize it as a process of self transformation in an economy, a process of development from within, as Schumpeter expressed it, that cannot in its very meaning be an equilibrium process.  Any equilibrium process takes a system back to were it started and there is no escape from the constraints that equilibrium imposes on what is possible.  If the economy truly is self equilibrating it is difficult to know how it could exhibit any real history and certainly not a history as rich as that reflected in the Western world since the early middle ages.  Thus Witt makes clear the fundamental point that evolving systems are necessarily unstable systems, indeed they may possess no attractors that survive long enough for the system to converge to.  What is the source of this instability?  Witt’s continual insistence is that it is the emergence and diffusion of novelty in economic action and that novelty presupposes the growth of knowledge in an autocatalytic fashion in which the solution to one problem opens up new problems and opportunities for the combinatorial combination of ideas.  Not surprising then that knowledge explodes in the course of history, not surprising that an economy cannot be in equilibrium if knowledge cannot be in equilibrium, for what sense could we make of such a hypothesis; a hypothesis that would seem to imply that all human creative potential has been dissipated — an intellectual ‘heat death’ of mankind.  The traditional repost to this claim, made at least since Robbins’ essay on the characteristics of economic science is that these problems are out with the discipline, they lie in the domains of psychology, sociology or whatever.  Unfortunately for this comforting demarcation, the creation and dissipation of novelty are deeply economic processes.  To take this line is to pose a serious challenge in terms of what can be said about novelty.  Here Witt makes important distinctions in terms of objective and subjective novelty and between pre revelation and post revelation analysis.  Post revelation analysis promises to be the more amenable to analytical thought, it maps onto the diffusion of ideas and innovations and within limits it is capable of elucidation within the confines of dynamical systems.  Yet even here no given system of equations will serve except as a thought experiment, for the nature of novelty is to arise within and disturb irrevocably the postulated set of dynamic conditions on the evolution of the system.  Novelty cannot be presupposed to rest within the initial conditions otherwise any pretence to freedom of thought and action is illusory.  Can anything then be said about pre revelation analysis, for Witt accepts that it is in the meaning of the term that novelties cannot be predicted?  His answer is to the affirmative and it is found not in the realm of economics but in the fields of cognitive and behavioural psychology.  In particular, Witt argues first that the search for novelty is a human predisposition that cannot be independent of our genetic make up, the continuity of human and natural evolution is one of his major sub themes, and, secondly, that the hypotheses derived in relation to satisficing behaviour provide at least a workable way into understanding the broad operation of novelty generating processes whether in individuals or organizations.  But there is a deeper implication that Witt hints at but does not fully develop, an implication that is embedded in the idea of a division of labour in the production and use of knowledge.  Knowledge is always a product of individual minds but never individual minds working in isolation and this ineluctable social dimension has two significant implications.  The first is that social action and organization of all kinds requires that individual knowledge be correlated to the degree required to coordinate and harmonise individual behaviour.  In turn this requires the existence of institutions and codes for transmitting information between individuals so that they come to understand in common sufficiently to cooperate.  The second is that the growth of knowledge itself depends on the exchange of information and the challenges that provides to existing states of thought.  For the corollary of novelty, and epistemic novelty in particular, is that it entails dispute and disagreement, indeed it is only by interpreting the flux of information differentially that novelty can emerge.  To this degree novelties de–correlate the present state of understanding by challenging the status quo and this is precisely what is achieved by entrepreneurial action for every entrepreneur holds a business conjecture that is in disagreement with the established disposition of resources and expenditures.  It may fail and that is the point, success or failure cannot be pre–known that can only be discovered.  But conjectures alone are not enough and Witt makes a major contribution to the study of entrepreneurship by reminding us that enterprise requires action and that leadership and the ability to marshal and organise resources for a purpose are at the core of the capitalist dynamic.  As he understands very clearly this is why market institutions are so important in that they permit the status quo to be challenged, that they both stimulate and reward novelty.  Over the longer term this is surely vastly more important to human welfare than any alleged properties markets may have in generating the best possible allocation of given resources in given states of knowledge.

One implication of this takes us to the second of Witt’s broad themes, if understanding is a social phenomena then it exhibits frequency dependent properties and frequency dependent properties turn out to be of wider evolutionary significance especially when they are associated with positive feedback effects.  This theme is explored primarily in the context of the social acceptance of institutions, which is treated as a sophisticated diffusion problem.  Whether new arrangements can invade the status quo depends on the associated payoffs of the competing alternatives and these will often depend on the distribution of the adherents to each possible institutional arrangement or innovation.  Novelty, whether economic or political, has to compete with established positions and Witt’s main concern here, apart from sketching the wide range of game theoretic possibilities, is to elucidate the causes and consequences of threshold effects which act as barriers protecting established arrangements.  As he points out, the Hayekian emphasis on self organization and spontaneous order can be thwarted in such circumstances but this requires some form of collective action, a diffusion agency for example, to cross a threshold and set in motion the dynamics of displacement.  This is explored in elegant fashion in several of the essays with examples ranging from economic innovations to the possible causes if coup d’etats.  In the case of the former Witt makes an important observation.  If we took the idea of lock–in, the corollary of threshold effects, too seriously we would give to the evolutionary process a very conservative bias.  The pace of change becomes difficult to comprehend unless we realize that lock–in is not irreversible and that it can be overcome by sufficiently discrete changes in the performance of new novelties.  ‘Natura non Facit Saltum’ is clearly not the whole story.

The third major theme comes out most strongly in the discussion of the Austrian economics school and its acceptance of human kind’s eagerness to change its fate not only through calculation but through the exercise of imagination, alertness, intelligence and power.  Not surprisingly Witt is a Schumpeterian and he distances himself with evident relish from the Misean position and the sterile logic of apriorism.  Instead he argues persuasively for an active, exploratory model of human action that recognises alertness and the need to explain alertness.  The behavioural and cognitive psychology of aspiration and satisficing theory provide a basis but they have to be extended to give scope for action that is not premeditated that is spontaneous that is unreflected.  However, in appraising the significance of enterprise, novelty and alertness there is a major difficulty, in that the distribution of the effects of progress is never even, that every position is in principle open to challenge and economic obsolescence.  Economic development in the presence of novelty must encompass decline as well as growth, if new activities emerge then previously established activities disappear.  That is the uncomfortable bargain that is made with progress, the consequence, as Henry Adams put it, of ‘Impossibilities made actual’ If progress is measured by the increase in per capita income (leaving aside the intrinsic limits of this measure) on average this leaves open the possibility, indeed the inevitability, that not all percentiles of the distribution benefit to the same degree.  What sense are we to make of progress in these conditions?  In an absorbing essay, Witt confronts this issue helping the reader towards a ‘welfare economics’ of economic evolution by pointing out that Pareto based rules are too conservative since they create property rights in the status quo, and that in a laissez faire system the insurance costs of uneven progress fall on the polity as a whole.  Thus the issue to comprehend is not that progress is uneven that there are gainers and losers and that compensation is rarely paid to the victims of enterprise but rather the instituted response of the system to its evolutionary nature.  The creation of protective interest groups, the development of legal rules and precedents, the influence on the political process of group interests, the regulatory influence of the state more generally are instituted responses to restless capitalism.  This is particularly important since the full consequences of novelties cannot be anticipated, regrets may and do appear in the post revelation phase.  Leaving fraudulent behaviour aside this places a severe challenge to the proponents of novelty, ‘On what basis is any liability for unforeseeable damage to be realised?’  The direction that Witt points us to is the instituted context of the market process which itself is open to evolutionary development through novelty and the diffusion of new rules.

These essays are a pleasure to read and to reflect on at leisure.  Many, like this reviewer, will recognise that Ulrich Witt has followed the path of novelty in these essays and that in relation to much of our present understanding of evolutionary economics he has exercised enterprise and leadership.  Moreover, his world view connects to with the complexity research agenda, and the corollary that self organisation is not enough; it must be matched with self transformation if we are to understand how capitalism has developed and must be expected to continue to develop.  If we are to sustain an energy intensive economic system it will require new novelties to emerge to cope with the limits on resource availability and the limited carrying capacity of the environment.  Once again the spectre of a stationary state will be kept at bay only through a suitable innovative response.  The best acknowledgement that we can give of Witt’s enterprise is to continue to follow along the path marked out by these essays and extend the evolutionary perspective into new channels of economic and social experience. 

To be published in the Journal of Bioeconomics

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Review by Geoffrey Hodgson

Essays on the Evolutionary Approach to Economics

The book is a collection of nineteen papers previously published in the period from 1985 to 2001, plus an additional essay specially written for the volume. Together, these papers underline Ulrich Witt’s well–deserved status as one of the leading and most innovative of evolutionary economists in the world today.

The papers are not reproduced in chronological order but divided into four groups, under the headings ‘Evolutionary concepts and methodology’, ‘The Darwinian perspective and the continuity hypothesis’, ‘Evolution in the context of new institutional economics and public choice’ and ‘The evolutionary approach and the Austrian school of economics’. These headings indicate the scope and range of Witt’s research to date.

Joseph Schumpeter, Friedrich Hayek and other economists of the Austrian school have inspired Witt. Also, especially in his more recent writings, he acknowledges the important contribution of Thorstein Veblen to evolutionary economics. Like all these writers he wishes to come to grips with the rapid pace of technological and institutional change in modern capitalism. From this broad intellectual legacy he derives his emphasis on concepts such as self–organization, novelty, discontinuity and change. He rejects the ‘equilibrium–cum–optimality paradigm’ of much mainstream economics. He applies his thinking to topics such as technological innovation and change, economic coordination and cooperation, sociobiology, institutional economics, endogenous preference formation, consumer theory and the theory of the firm. However, Witt is not limited by the canons of any particular school: his own thinking is wide–ranging and innovative. In all of these areas he has made an important and distinctive contribution. His approach is frequently interdisciplinary and constantly refreshing. His overall contribution is simply enormous; it is an unavoidable segment of the literature in evolutionary economics today.

It would be impossible within the scope of a short review to examine the contents of Witt’s essays in detail. Instead I shall focus on a few important points of discussion for evolutionary economists.

The first question is Witt’s definition of evolution as involving ‘the self–transformation over time of a system’ (p. 13). This conception of evolution as primarily one of a system changing ‘from within’ is repeated in several of the essays and was shared by Marx and Schumpeter, among others. However, this apparent exclusion of exogenous factors from evolution is unwarranted. In biology, neither individuals nor species nor even ecosystems are entirely ‘self–transforming’. Evolution takes place within open systems involving both endogenous and exogenously stimulated change. Generally, evolution takes place both through internal changes and interactions with the (possibly changing) environment.

Indeed, in socio–economic evolution, the importance of exogenously stimulated change is of equal or greater importance, partly because of the cultural mechanisms of imitation and conformism that tend to reduce internal variety and can lead to institutional ossification. Exogenous shocks can sometimes be important in overcoming the rigidity of the institutional complex. Many historical examples illustrate this, such as the seventeenth century revolutions in England being sparked by outside forces from Scotland and elsewhere, and the classic case of the arrival of American warships in Tokyo Bay led to the Meiji Restoration of 1868 and the abrupt transition from feudalism to a Western–inspired capitalist society. The occupation of Japan by American troops in 1945 also led to major institutional changes. There are many other cases of institutional transformation being promoted by invasion or other forces from outside.

Instead of the one–sided emphasis on endogenous change, it would be better to make more use of the concept of an ‘open system’. The distinction between an open and a closed system was first made by Ludwig von Bertalanffy and has been taken up and emphasized by institutional economists such as K. William Kapp and realist philosophers such as Roy Bhaskar. Evolution takes place both with the boundaries of the system, but openness means that interactions across that boundary have important additional effects. Recognition of openness obliges us to consider interactions between the evolving system and its environment.

I now turn to another aspect of Witt’s thought, that is the relationship between evolutionary economics and Darwinism. Witt argues that Darwinian principles do not apply to the processes of economic evolution. For him, Darwinism applies to biological evolution only.

Nevertheless, Witt is interested in exploring general features of evolutionary processes that are common to the biological and social domains. He does this under the label of his ‘continuity hypothesis’. This hypothesis is mentioned but underdeveloped in the present volume. The reader is referred to some of Witt’s post–2001 essays for a fuller exposition. With this notion, Witt points to ontological continuity between natural and socio–economic evolution, and the possible existence of some broad general principles that apply to both these domains, alongside domain–specific auxiliary explanations.

But those who embrace a generalized or universal Darwinism propose exactly the same broad proposition. Darwin himself argued that his general principles of variation, inheritance and selection might apply not only to nature but also to the evolution of human language and morals. The idea of applying Darwinian principles to social phenomena, without reducing them to biology, was taken up by a host of social theorists and philosophers, including Walter Bagehot, William James, Benjamin Kidd, David Ritchie, Thorstein Veblen and Albert Keller, and more recently by V. Gordon Childe, Donald Campbell and Richard Dawkins. Ritchie and Veblen, for example, proposed the natural selection of social institutions. Dawkins has proposed the ‘meme’ as a unit of replication and selection in cultural evolution. These authors recognized the important differences of detail between biological and social evolution, but proposed that some general Darwinian principles apply to both.

Hence the ‘continuity hypothesis’ is not original in its proposal of exploring general evolutionary principles that span all evolving systems. Witt points to a degree of ontological and explanatory communality, but separates himself from the universal Darwinists by eschewing a generalized Darwinian framework. In this regard he proposes a severe discontinuity between social and biological evolution. Hence the ‘continuity hypothesis’ label is somewhat confusing, in that it proposes less continuity than the rival hypothesis of a universal or generalized Darwinism.

This dismissal of Darwinism from the social domain relates to Witt’s definition of evolution, as he has implicitly downgraded the importance of any selection process in the socio–economic sphere by his seemingly exclusive emphasis on self–transformation and self–organization. What this would leave out of the picture would be any process of selection action on rival, self–organized units. Yet other self–organization theorists, such as Stuart Kauffman, have made it clear that some such selection process is also required, and that self–organization theory cannot replace Darwinism.

Although Witt does attempt to develop a general notion of evolution, part of the problem is that he does not consider a generalized concept of selection, which goes beyond natural selection in biology and encompasses socio–economic evolution. Hence when in one passage he observes that cultural evolution cannot be explained by the natural selection of genes, he then drops the concept of selection in its entirety (p. 15). His reservations concerning the application of the selection concept to socio–economic phenomena are raised briefly in one essay (pp. 142–4). He also raises important difficulties concerning the identification of the objects and populations of selection in the socio–economic domain. He finds no plausible units or processes of selection at the socio–economic level. He admits some ‘ontological evolutionary continuity’ between socio–economic and biological evolution, and some general principles common to both domains, but generalized concepts of selection and replication are dismissed.

His alternative notion of evolution, defined as change ‘from within’, is not itself adequate because it fails to address selection processes, and changes due to exogenous shifts in the environment. Witt identifies novelty, self–transformation and diffusion as general evolutionary principles. However, with little difficulty these can be placed within a Darwinian framework: novelty is a source of variation; and diffusion and self–transformation involve inheritance or retention. Witt’s general principles of novelty, self–transformation and diffusion are entirely compatible with part of the Darwinian story. In sum, Witt’s general evolutionary principles can be seen as part of a generalized Darwinian framework, but missing some vital parts of any fully–fledged evolutionary conception.

If Witt had succeeded in developing a novel and general theoretical framework that applied to all evolutionary processes, then this would be a theoretical achievement of huge proportions, worthy of Nobel Prizes in science as well as economics. A lot is a stake here. Both Witt and the universal Darwinists propose a general evolutionary framework. But the Darwinian proposal is in fact more general and robust, even if it remains to be fleshed out in many of its details and in some versions carries some unsatisfactory baggage. Witt’s alternative framework has the aforementioned limitations. As yet, we have no adequate alternative general framework, to span evolution in society and nature, to that of Darwinism.

I raise these fundamental issues because they are of vital importance for the future development of evolutionary economics. They are at the heart of its self–identity and its research programme. Progress in this field will depend very much on the core ontological, conceptual and theoretical issues involved. Debate and clarification in these areas is a vital and pressing priority.

In at least one respect Witt is right to be sceptical of ideas of selection in the socio–economic sphere. Most attempts to apply Darwinism to social or cultural evolution suffer from a conceptual vagueness and imprecision that has stimulated legitimate doubt. The literature on ‘memes’ is a case in point, where exponents have failed even to agree on a definition or description of the meme, and thus have reached no consensus on the mechanisms of inheritance and replication. If Darwinism is to be generalized to socio–economic evolution then much more conceptual clarity and development is required.

However, in recent years considerable progress has been made in this area, particularly in the philosophy of biology and in some reaches of anthropology. We now have reasonably precise general definitions of key Darwinian concepts such as selection, replication and interactor. The task remains to apply these systematically to socio–economic phenomena. The generalization of Darwinism depends on the success of these moves. Note that this is not an attempt to apply biological analogies. Instead it is an attempt to uncover fully the ‘ontological continuity’ that Witt himself suggests. It involves the identification of general and common features, but in no sense does it diminish the important differences between biological and social evolution. All types of evolutionary process differ in their details, within biology itself as well as between the biological and social domains.

Putting these disagreements aside, part of Witt’s achievement is to begin to explore these ontological and methodological questions with his own unique framework. He has raised many of the core theoretical questions to which evolutionary economists have to supply a satisfactory answer if the approach is to survive and prosper. Alongside that, he has made a major contribution to several important areas of economic enquiry.

This review has raised no more than a small subset of the many issues that are raised in this rich and enlightening volume. The book is a worthy monument to the scientific contribution of its author over a period of seventeen years. It shows a lively, enquiring and evolving mind, from which we expect much in the future.
vely, enquiring and evolving mind, from which we expect much in the future.

Published in the Journal of Evolutionary Economics, 2004, Vol. 14, 365–368.

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