What is Economics?
Economics is all about making decisions in the face of scarcity, and it examines human behaviour as a relationship between resources and ends, human wants. Economics studies how societies use limited resources with alternative uses to produce goods and services and distribute them to different groups of people. It can be divided into two types:
Economics
Normative economics – It deals with what should be done or how economic problems should be solved.
Positive Economics – It deals with what are the economic problems and how they are solved.
An Overview of Evolutionary Economics
Evolutionary economics assumes that economic processes evolve and are determined by individuals and societies. It eschews the rational choice theory of traditional economics and argues that psychological factors are an important driving force in economics.
Many political thinkers tried explaining the origin of the state in different ways. The evolution theory of the origin of the state can be described as the product of states' growth. This is a slow and gentle evolution over a long period that eventually forms the complex structure of the modern state. There are five theories for explaining the origin of the state, but it fails to provide an adequate explanation.
Evolutionary economists believe economies are dynamic, ever-changing, and chaotic rather than tending toward equilibrium. Traditional economic theory generally views people and government agencies as perfectly rational actors. Evolutionary economics differs by avoiding rational choice theory and identifying complex psychological factors as the primary driving force in economics. One of the biggest lessons most evolutionary economists agree on is that failure is a good thing and is just as important as success. The theory is that failure paves the way for economic prosperity by increasing efficiency and developing better products and services. It also tells us how society's needs evolve.
The Evolution of Microeconomics
Now, let's discuss the evolution of microeconomics in detail.
Microeconomics is a branch of economics that deals with the behaviour of individuals and firms in making decisions about allocating scarce resources and how those individuals and firms behave. One of the goals of microeconomics is to analyse the market mechanisms that set relative prices between goods and services and allocate limited resources to other uses.
It reveals the conditions under which free markets lead to desirable allocations. It also analyses market failures when the market fails to produce efficient results. Microeconomics is in contrast to macroeconomics which encompasses economic activity as a whole and deals with problems of growth, inflation, unemployment, and national policies related to these problems.
Microeconomics also examines the impact of economic policies, such as changes in the levels of taxation. Much of the modern microeconomics theory has been built on micro foundations, especially after Lucas's critique. It is based on a basic assumption about behaviour at the micro level.
Case Study
According to you, is economics normative or positive economics? Explain to support your answer.
Ans: Positive economics is concerned with developing and validating positive statements about the world that are objective and verifiable. Normative economics is deeply concerned with value judgments and theoretical scenarios. We can say that economics is positive and normative economics. Positive economics influences normative economics by ranking economic policies or outcomes based on their acceptability. Positive economics is defined as economics, whereas normative economics focuses on what should be. Positive economics is used as a practical tool to achieve prescriptive goals. In other words, positive economics presents economic problems explicitly, while prescriptive economics offers value-based solutions to problems.
Summary
The evolution of economics is one of the most important concepts of economics for Class 11 students. Evolutionary economics studies how human behaviours such as fairness and a sense of justice extend into economics and analyses economic behaviour in terms of evolution and evolutionary human instincts such as predation, imitation, and curiosity and try to explain progress. The survival of the best-fit model is prevalent in the free market. Consumers have many choices, but few companies can fully meet their needs, everything is in constant flux, and many competitors are being wiped out.
FAQs on Evolutionary Economics Overview
1. What is evolutionary economics?
Evolutionary economics is a school of thought that views the economy as a complex, dynamic, and constantly evolving system. Unlike traditional economics that often focuses on static equilibrium, this approach studies how economic structures change over time through processes like innovation, selection, and institutional adaptation. It draws analogies from evolutionary biology to explain how new firms, technologies, and behaviours emerge and compete, leading to economic growth and transformation.
2. What is the importance of evolutionary economics for understanding modern business?
Evolutionary economics provides crucial insights for understanding modern business dynamics. Its importance includes:
Explaining Innovation: It treats innovation not as an external shock but as the core driver of competition and growth. Businesses succeed by creating novel products and processes.
Understanding Market Dynamics: It highlights that competition is not just about price but about offering superior products and services. Business failures are seen as a natural part of a healthy, evolving market.
Role of Institutions: It emphasises that a stable legal and political framework is essential for fostering the creativity and entrepreneurship needed for economic development.
Path Dependency: It helps explain why certain industries and technologies dominate, as historical choices shape future possibilities.
3. Who are the key thinkers associated with the development of evolutionary economics?
The two most prominent figures in the development of evolutionary economics are:
Thorstein Veblen: An American economist who first coined the term 'evolutionary economics'. He argued that economic behaviour is driven by social institutions and psychological factors (like habit and status), rather than purely rational choices.
Joseph Schumpeter: An Austrian economist known for his concept of 'creative destruction'. He identified entrepreneurship and innovation as the primary engines of capitalism, where new technologies continuously replace old ones.
4. How does evolutionary economics differ from traditional neoclassical economics?
Evolutionary economics differs from neoclassical economics in several fundamental ways. Neoclassical economics typically assumes perfect rationality, market equilibrium, and predictable outcomes. In contrast, evolutionary economics focuses on bounded rationality (agents have limited information), constant disequilibrium (the economy is always changing), and the importance of historical processes. While neoclassical models often seek a single optimal solution, evolutionary models explore the variety of possible outcomes that emerge from competition and innovation over time.
5. What is the concept of 'creative destruction' in evolutionary economics, with a real-world example?
Creative destruction is a core concept, popularised by Joseph Schumpeter, describing the process where new innovations and technologies dismantle established industries and create new ones. It is the 'essential fact about capitalism'. A classic real-world example is the rise of digital streaming services like Netflix. This innovation led to the destruction of the video rental store industry, epitomised by the decline of companies like Blockbuster, while simultaneously creating a new, dominant market for on-demand entertainment.
6. Why is the concept of 'path dependency' so important in evolutionary economics?
Path dependency is a crucial concept because it asserts that 'history matters'. It means that the decisions and events of the past constrain the choices available in the present and future. This explains why economies might get 'locked-in' to certain technologies, institutions, or industrial structures, even if they are not the most efficient. For example, the QWERTY keyboard layout persists not because it is the fastest for typing, but because it was established early, and the costs of switching to a superior layout are too high for society.
7. How does evolutionary economics view the role of the entrepreneur?
In evolutionary economics, the entrepreneur is not just a business manager but a central agent of change and innovation. Following Schumpeter's view, the entrepreneur's primary role is to disrupt the existing economic order by introducing new combinations of resources. This can be a new product, a new production method, a new market, or a new way of organising an industry. The entrepreneur is the driving force behind the 'creative destruction' process that fuels economic development.
8. Can evolutionary economics explain why some businesses fail and why this might be good for the economy?
Yes, absolutely. Evolutionary economics views business failure not just as a negative event but as a vital part of a dynamic and healthy economy. Failures are a form of market feedback, indicating that a firm's products, routines, or strategies are no longer competitive. This process of 'selection' allows resources (like capital and labour) to be reallocated from less efficient firms to more innovative and successful ones. Tolerating failure is therefore essential for encouraging risk-taking, fostering innovation, and ensuring long-term economic dynamism.
