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Evolutionary economics uses evolutionary biology to explain economic phenomena. It argues that markets are devices of selection, with low-productivity enterprises being forced out of the market and high-productivity firms continuing to grow. The theory has been applied to various fields, including industrial organization and innovation management.
Evolutionary economics is a branch of economic theory that is based on evolutionary biology and emerged in the early 1980s in the book “An Evolutionary Theory of Economic Change” by Richard R. Nelson and Sidney G. Winter. Even though the field of evolutionary economics has only recently developed, prominent economists such as Joseph Schumpeter, Herbert Simon and Edith Penrose built the foundation for the field of evolutionary economics in the 1940s and 1950s. In essence, evolutionary economics explains economic phenomena using evolutionary methodology.
Evolutionary economics argues that markets are devices of selection in the modern economy. Firms and corporations are selected based on productivity and revenue levels. Thus, low-productivity enterprises will be constantly beaten and lose market share, which will selectively force the enterprise out of the market. On the other hand, firms with high productivity will gain a larger share of the market and continue to grow. This is natural selection, which claims that the strong will survive.
Another aspect of evolutionary biology that has been adapted to evolutionary economics is the concept that traits beneficial to an organism will become more common in the population. The theory of evolutionary economics has developed this idea to also apply to firms within a given market. The less successful companies will try to copy the routines – equivalent to the traits of the theory of evolution – of the more successful companies in order to compete. Thus, the most successful routines will become more common in the marketplace as low-productivity firms attempt to increase productivity by mimicking high-productivity firms.
Evolutionary biology also states that mutations occur within a species’ gene pool, and that the most beneficial mutations are incorporated into the entire population. In evolutionary economics, the equivalent of this idea is the concept of the enterprise in search of innovation. Innovation involves bringing new routines to market, which is the equivalent of a mutation bringing a new trait to a population. Successful new routines will start to be imitated by less successful companies, which will increase the presence of the routine in the market.
Evolutionary economics has been applied to the fields of industrial organization, organization theory, economic geography, game theory, innovation management, network theory, and management sciences. This is mainly the result of the basic concept of evolutionary economics. This concept argues that companies must use routines that are competitive and cannot be replicated by other companies to be successful.
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