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Is novelty always a good thing? Towards an evolutionary welfare economics

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Abstract

Evolutionary economists are increasingly interested in developing policy implications. As a rule, contributions in this field implicitly assume that policy should focus on the encouragement of learning and innovation. We argue that, from an individualistic perspective, this position is not easy to justify. Novelty and evolutionary change have in fact a rather complex normative dimension. In order to cope with this, the evolutionary approach to policy-making needs to be complemented with an account of welfare the background assumptions of which are compatible with an evolutionary world-view. Standard welfare economics is unsuited to the job, since the orthodox way to conceptualize welfare as the satisfaction of given and rational preferences cannot be applied in a world in which preferences tend to be variable and incoherent. We argue that, in order to deal with the specific normative issues brought up in an evolving economy, welfare should be conceptualized in a procedural way: At the individual level, it should be understood as the capacity and motivation to engage in the ongoing learning of instrumentally effective preferences. Evolutionary-naturalistic insights into the way human agents bring about, value, and respond to novelty-induced change turn out to be a valuable input into this extended concept of welfare. Finally, some implications of this concept are explored.

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Notes

  1. This is reflected, throughout economic history, in outbreaks of resistance against economic change. See Witt (1996), Mokyr (2000).

  2. Evolutionary economists have not been entirely silent on normative issues. Sartorius (2003: ch. 6) and Binder (2010) discuss notions of welfare from an explicitly evolutionary perspective. Earlier contributions include Dopfer (1976: 19–29), Nelson (1977: 129–143), Nelson (1981), and Nelson and Winter’s (1982: ch. 15) largely ignored programmatic call for a “normative evolutionary economics”. See also Hodgson (1999: ch. 11), Witt (1996), Witt (2003: 89–91), and the sections on “progress” in Van den Van den Bergh and Kallis (2009).

  3. In the following, we will refrain from using “Darwinian” language in the sense of metaphors or analogies from Darwinian biology. The jury is still out on the issue of whether notions such as “variation” or “selection” can be used in evolutionary economics without biasing the analysis in undesirable ways (Witt 2008; Aldrich et al. 2008). Biases may be particularly strong in the realm of normative reasoning, as this kind of analysis is unrelated to anything known in biology. See also FN 6, below.

  4. Strictly speaking, it is a logical fallacy, though, to predict that innovation will continue to benefit the “average” individual in the future. After all, the future tends to be unknown (Witt 2003).

  5. Note, however, that insofar as this concept relates to the criterion of Kaldor-Hicks efficiency, it is highly contentious. See FN 33, below.

  6. As Hodgson (1993: 25) observes, “[i]t is still widely assumed that evolutionary thinking involves the rejection of any kind of state meddling, subsidy or intervention, and the support for laissez-faire on the basis of the idea of ‘survival of the fittest’”. Notice that Hodgson himself does neither share this assumption (on which see also Whitman 1998) nor endorse any such kind of policy.

  7. My italics. Interestingly, the temptation to oscillate somehow between the systemic and the individualistic perspective can be studied in the cases of both Hayek and Schumpeter. See Vanberg (1994b) and Schubert (2009), respectively.

  8. See, e.g., Metcalfe (2005), Cantner and Pyka (2001), Dosi et al. (2006), Audretsch et al. (2007), Stam (2008).

  9. In contrast, in Keynes’ framework, normative economics proper is about the critical analysis of welfare criteria and policy goals per se. We will adopt this distinction in the following. John Neville Keynes (1852–1949), a British economist, was the father of the much better known John Maynard Keynes.

  10. Classic contributions include von Weizsäcker (1971) and Elster (1982).

  11. Italics in the original.

  12. See, e.g., Schumpeter (1942: 144), Schumpeter (1954: 130, 1039). In fact, the utilitarian legacy of standard welfare economics has been argued to be incompatible with an evolutionary world-view (Hodgson 1999: ch. 11). See also Hayek (1978: 90–91).

  13. See Ludwig Lachmann’s quip that “[i]n a world of unexpected change economic forces generate a redistribution of wealth far more pervasive and ineluctable than anything welfare economists could conceive” (Lachmann 2007: 81, FN 6).

  14. Harsanyi (1982) is the locus classicus for this way of thinking about welfare. See Sugden (2009) on the strong (implicit) value judgments inherent in accounts of this sort. Notice that the orthodox account of welfare is explicitly unconcerned with mental states: “satisfaction” does not refer to any “feeling” of, e.g., “pleasure” (as in classical utilitarianism) but rather denotes a purely technical measure of degree.

  15. Methodologically, this approach was motivated by the supposed lack of reliable scientific knowledge about the process and content of human preference formation. With the rise of evolutionary and behavioral economics (as well as neuroeconomics), this caveat has become obsolete: “non-choice” sources of information on the structure and content of individual preferences are now available and accepted as meaningful by most economists. See Sen (1977a) for the methodological issues involved.

  16. Nevertheless, this first step of instrumental reasoning is often lacking in applied evolutionary economics research, when (implicitly) an omniscient social planner seems to lurk in the background; see Wegner (2005) for some critical thoughts on this.

  17. See Broome (2008): “Democracy has at least two departments. One department is decision making, and here democracy requires that the people’s preferences should prevail... Another department... is the forming of people’s preferences...Our preferences about complex matters depend on our beliefs, and democracy requires a process of discussion, debate and education, aimed at informing and improving people’s beliefs... The role of economists in a democracy belongs in the second department, not the first... Economists should aim to influence preferences, not take preferences for granted.”

  18. See his suggestion in “Capitalism, Socialism and Democracy” that “we shall call that system relatively more efficient which we see reason to expect would in the long run produce the larger stream of consumers’ goods per equal unit of time” (Schumpeter 1942: 190, italics omitted) and the fact that here and in related work he never really elaborates upon this notion of efficiency or welfare. On Schumpeter’s complex, insightful and often contradictory reasoning about welfare, see Schubert (2009).

  19. See, e.g. Baumol (1990) who defines as “productive” those kinds of entrepreneurship that stimulate growth and productivity.

  20. See Nelson (1977: 18): “A powerful normative structure can help in the sorting out, weighing, and education of values, and thus can facilitate agreement among groups even in situations where agreement originally seemed implausible.”

  21. See Witt (2003: 87): “The policy maker gathers information to learn about the consequences [of some policy]... For example, if the proclaimed goal is a ‘more just’ income distribution, it is only with the experience made with some concrete redistributive policy measure that the policy maker finds out what kind of ‘justice’ actually results (which is a factual question) and whether its observed consequences are indeed considered to be worthwhile (which is a normative question). It may turn out that other goals are also being affected... The experience made will most probably be one of trade-offs which may induce ... revaluations at the level of the goals. A prominent case are inconsistencies... between the attainment of short run goals and the attainment of long run goals which are discovered only later.” Note that all this does not affect the categorical (logical) distinction between positive and normative statements.

  22. “GDP growth” as a policy goal is subject to intense critical scrutiny, particularly in the field of ecological economics.

  23. This third argument relates to the post-positivist insight that there really is no perfectly “value free” way to engage in instrumental analysis in economics (Myrdal 1933). The scientist’s choice of goals inevitably directs the attention of the policy-maker or citizen who is addressed (Witt 2003).

  24. On a more applied level, Potts (2004) stresses the importance of the systemic view on welfare in the context of assessing financial “bubbles”. Starting from the premise that bubbles are “natural mechanisms of economic growth and evolution”, he argues that they are “ultimately a sign of system health and vigour, not of decadence and decay” (ibid.: 16), and that policy should appreciate their beneficial effects: “Inside a bubble, the cost of experimentation, and therefore variety generation, is lowered and,... the process of structural change is accelerated... Learning is accelerated within a bubble, and radically new business ideas can get a start, as can radically new products” (ibid.: 18–19). His policy implications are straightforward: “Policy should not worry about bubbles; if anything, and where it is safe to do so, it should perhaps even encourage them.” (ibid.: 20). In light of recent events in global financial markets, this may sound absurd. Potts, however, has a point in stressing the systemic aspect of welfare: In order to establish the conditions necessary for an evolving economy to work smoothly, bubbles do have some functional properties. The argument gets into trouble, though, as soon as the normative and the instrumental levels are mixed: Fast learning and variety generation would then be judged as desirable goals per se. Potts seems to be aware of this risk of producing counter-intuitive policy advice (note his caveat: “where it is safe to do so”), but does not elaborate upon this issue.

  25. See also the references given by Vanberg (1994b: 465–66).

  26. Hayek (2009) constructs a strong moral obligation for man to support “rapid material progress”, which leads him ultimately to argue that “we are ... the captives of progress; even if we wished to, we could not sit back and enjoy at leisure what we have achieved” (ibid.: 52). On this tension in Hayek’s normative argument, see also Vanberg (1994a, b: 183) and Gray (1999: 154).

  27. Purely procedural criteria would neglect any considerations related to outcomes (or patterns of outcomes) whatsoever, thereby running the risk of generating strong counter-intuitive conclusions. They are hardly ever consistently defended (Nozick 1974 being a notable exception), which is why we will not consider them here.

  28. My translation from the German original.

  29. Cf. Buchanan’s(1977: 27–30) related hint at the possibility of “spontaneous disorder”.

  30. Italics added.

  31. Note that this does not apply to Kirzner’s entrepreneur, whose arbitraging brings the economy back into equilibrium.

  32. This holds as long as an egalitarian and non-discriminatory allocation of basic rights is maintained.

  33. To paraphrase Rawls’ well-known critique, the offsetting involved in applying this criterion does not take seriously “the distinction between persons” (Rawls 1971: 27). Add to this the manifold technical problems widely discussed in the literature (e.g. Scitovsky 1941; Little 1957; Gowdy 2004). Anticipating most of this, Schumpeter (1954: 1072, FN 9) dismisses the Kaldor-Hicks criterion in just one sentence.

  34. To illustrate, consider Rawls’ difference principle (“inequality of winners and losers is just as long as losers are better off in the regime allowing the inequality than in a regime disallowing it”) which frames issues of justice in terms of all-purpose “primary social goods” rather than in terms of preference-based utility (Rawls 1971: ch. 2).

  35. “Just” and “legitimate” are used synonymously in the following.

  36. Again, Rawls‘ notion of “primary social goods” may illustrate this approach.

  37. See Hanusch and Pyka (2007: 284).

  38. Italics partly omitted.

  39. Cf. Buchanan(1977: 139–40) on the (non-justificatory) status of statements based on such a “hypothetical contract” analysis. Ostrom (2005) illustrates the practical relevance of this way to achieve mutually beneficial systems of rules to solve social dilemma issues.

  40. I.e., not necessarily involving comparisons between alternative social states (such as bundles of goods); see Kahneman and Sugden (2005: 164) for the terminology.

  41. The following five paragraphs rely heavily on Witt (2001) whose account of want learning is inspired by Benthamite hedonism (Kahneman et al. 1997), need-theoretic approaches (e.g. Georgescu-Roegen 1954; Ironmonger 1972) – without, however, endorsing a ‘Maslovian’ hierarchy of needs – and the theory of instrumental conditioning (Herrnstein 1990). For methodological details, see Witt and Schubert (2010).

  42. Such needs (or “basic” needs) include the needs for food, water, sleep, warmth, sex, etc., but also psychological needs, such as the need for cognitive arousal and the need to comply with social norms. See Witt (2000, 2001) and Witt and Schubert (2010) for details.

  43. In the long run, though, the intensity of the acquired want tends to weaken unless the original association with the underlying need is occasionally re-established (Witt 2001: 28–29).

  44. See the related evidence given by, e.g., Frey and Sutzer (2007) on the human tendency to mispredict the hedonic impact of consumer decisions.

  45. See Cordes and Schubert (2010) for a formal model of cultural learning that captures this idea.

  46. There may be exceptions, e.g. with respect to the consumption of addictive substances (see below).

  47. At a basic methodological level, there are, however, two important differences between the capability approach and our account of well-being. First, at its origins, the capability approach was motivated by the inability of the orthodox concept of welfare to cope with normative issues arising out of preference endogeneity, in particular the problem of “adaptive preference formation” (Qizilbash 2008). The solution was to define well-being in an essentially objectivist way, i.e. independent of subjective preferences (or the way they change). By contrast, our account defines well-being in more (albeit not perfectly) “subjectivist” terms. Second, our account is much more firmly grounded in empirical research on human behavior and preference formation. Notice, e.g., the conspicuous lack of interest in behavioral economics in Sen’s most recent writings (e.g. Sen 2009).

  48. See Sen (1996).

  49. To illustrate, all available empirical evidence shows that child-rearing has a significant negative impact on parents’ happiness (see, e.g., Di Tella et al. 2003; Clark 2007; Blanchflower 2009). However, many people decide to have children and to raise them, simply on the grounds of other goals in life (“achievements”, say, or the compliance with social norms).

  50. See, for example, Vis and van Kersbergen (2007) and Boeri et al. (2001). See also the related melancholic thoughts offered by Buchanan (2005).

  51. See also Sen (2009) on the implausibility of a non-pluralist notion of welfare, in particular in the context of accounts of justice.

  52. My italics.

  53. On the inevitable incompleteness of evaluations in matters of social justice, see Sen (2009: 103–08).

  54. Note that the evolutionary model of preference formation discussed in Section 4.1 above, may back the following qualification of “libertarian paternalist” tools. According to the model, agents acquire preferences on a non-cognitive and, based on this, on a “higher” cognitive level. Given that the former provides the essential building blocks (“needs”) for the subsequent refinement achieved on the cognitive level, one may argue that libertarian paternalism should refrain from using any tool that affects non-cognitive learning processes, i.e., that cannot be made subject to conscious deliberation at the level of cognitive reasoning. In this way, our evolutionary model would help in providing an explicit justification to an argument that is usually made ad hoc; see, e.g., Bovens (2008).

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    Christian Schubert

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Schubert, C. Is novelty always a good thing? Towards an evolutionary welfare economics. J Evol Econ 22, 585–619 (2012). https://doi.org/10.1007/s00191-011-0257-x

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