I spent last weekend attending a Liberty Fund conference on themes of liberty and responsibility in the writings of Charles Darwin. We read selections from The Origin of Species, The Descent of Man, The Expression of Emotion in Man and Animals, and Darwin’s autobiography. It was a fascinating opportunity to learn about Darwin’s theories, models, methodology, and data on his own terms.
From an economics perspective, the value of the discussion was the opportunity to think more specifically about how we use metaphors of evolution and natural selection in our analyses of institutional, social, and technological change. The simple metaphor is pretty straightforward. Through a distributed, decentralized process (natural selection in Darwin’s model), agents that behave in ways that are favored in their environment exhibit a higher degree of fitness, and thus have a higher probability of persisting. The traits or behaviors that lead to that fitness in that environment persist while others recede, leading to incremental changes in the characteristics of the agents as they adapt to the environment. When the environment changes, which happens almost constantly and imperceptibly, sufficiently dramatic changes will change the relative fitness value of different traits or behaviors, leading to further adaptation. This ongoing process creates the variation and complexity that we observe in the natural world. It also allows for rogue beneficial mutations to flourish, and for malevolent mutations to be crushed. In this way the process has some global stability properties, notwithstanding the constant change.
How good a metaphor is this for institutional, social and technological change? I like it and think it’s a pretty good one, although clearly it’s not a true 1:1 mapping from biological variation and changes in agents (individuals or “species”) into the institutional sphere. One of the mechanisms of natural selection in biology is sexual selection, and I think it’s a stretch to apply sexual selection processes to institutional change. But if you model technological change as either a process of adaptation or beneficial mutation (or both), you can get pretty far with the metaphor. Evolutionary economics and evolutionary game theory have done just that.
I think the metaphor for institutional change is less exact but still useful. I had been trying to model institutions and the process of institutional change in the way just described for technological change, but it has been ringing a little hollow to me. I like thinking about institutions as agents that change in adapting to their environment, because that gives me a theoretical foundation for using what I call “the evolutionary criterion” to evaluate policy changes: is the institution sufficiently flexible to adapt to unknown and changing conditions? This way of modeling the problem requires thinking about the environment as being the economic and technological environment, with policies as agents in the environment. I can also think of particular institutions as having different levels of fitness. It gets me what I want, but sounds a little contrived when I try to formalize it like this.
So what if I think instead about institutional change as changes in the environment, to which agents (individuals, firms, consumers, producers, regulators) adapt to varying degrees? Still interesting, but a different model, a different game, leading to different hypotheses and policy recommendations. And I think that’s been done, and done well, by folks like Paul Rubin in his book Darwinian Politics. This way of structuring the problem also works well for answering public choice questions, rent seeking, etc.
But my primary question of interest is how we design institutions to maximize their fitness in a dynamic economic and technological environment. I think that means thinking of the institutions as agents interacting with their environment (and presumably with each other, to complicate the model).
Note that I used the D-word: design. Natural selection is a bottom-up process, in which variations in agents emerge in response to the requirements implied by the environment and its changes. But institutions are not natural. At the same time, though, can we think of and design institutions that are not entirely artificial? Can we design institutions that are more approximately natural than artificial? And can we do it in a way that has these good fitness/efficiency characteristics, as well as some global stability properties? That requires flexibility and adaptability, yet also at the same time transparency. That’s the challenge.