The Signs of Change in Economic Evolution

Abstract

Neo-Schumpeterian evolutionary economics has, since the early works of Nelson and Winter, defined evolution as the change of the mean of a characteristic of a population. This paper trancends the previous paradigm and explores novel aspects of evolution in economics. Within the traditional paradigm change is provided by directional selection (and directional innovation). However, the full definition of evolutionary processes has to include two important types of selection that change the variance without necessarily changing the mean. Stabilizing selection removes any outlier and diversifying selection promotes the coexistence of behavioural variants. This paper emphasizes the need for an integrated analysis of all three types of selection. It also demonstrates that the evolutionary algebra provided by Price’s equation increases the intellectual coherence and power of thinking about selection and other aspects of evolutionary processes. Directional, stabilizing and diversifying selection are then related to fitness functions that can produce the different types of selection; and the functions are used for simple simulations of the change of the population distribution of a quantitative characteristic. Finally, the paper adds to evolutionary economics a novel way of using Price’s equation to decompose the statistics of the changes of the frequency distributions. The changes of mean, variance, skewness and kurtosis are all decomposed as the sum of a selection effect and an intra-member effect. It is especially the signs of these effects that serve to define and characterize the different types of selection. Both this result and the general analysis of the types of selection are of relevance for applied evolutionary economics.