Understanding and Maximizing America's Evolutionary Economy

In the conventional view, the U.S. economy is a static entity, changing principally only in size (growing in normal times and contracting during recessions). But in reality, our economy is a constantly evolving complex ecosystem. The U.S. economy of 2014 is different, not just larger, than the economy of 2013. Understanding that we are dealing with an evolutionary rather than static economy has significant implications for the conceptualization of both economics and economic policy.

Unfortunately, the two major economic doctrines that guide U.S. policymakers’ thinking—neoclassical economics and neo-Keynesian economics—are rooted in overly simplistic models of how the economy works and therefore generate flawed policy solutions. Because these doctrines emphasize the “economy as machine” model, policymakers have developed a mechanical view of policy; if they pull a lever (e.g., implement a regulation, program, or tax policy), they will get an expected result. In actuality, economies are complex evolutionary systems, which means enabling and ensuring robust rates of evolution requires much more than the standard menu of favored options blessed by the prevailing doctrines: limiting government (for conservatives), protecting worker and “consumer” welfare (for liberals), and smoothing business cycles (for both).

As economies evolve, so too do doctrines and governing systems. After WWII when the United States was shifting from what Michael Lind calls the second republic (the post-Civil War governance system) to the third republic (the post-New-Deal, Great Society governance structure), there was an intense intellectual debate about the economic policy path America should take. In Keynes-Hayek: The Clash That Defined Modern Economics, Nicholas Wapshott described this debate between Keynes (a proponent of the emerging third republic), who articulated the need for a larger and more interventionist state, and Hayek (a defender of the second republic and a smaller state), who worried about state over-reach and loss of freedom.

Today, we are in need of a similar great debate about the future of economic policy for America’s “fourth republic.” Unfortunately, today’s debate is mostly a reprise of the 70-year-old Keynes-Hayek debate between the defenders of the third republic (liberals) and those who would try to resurrect the second republic (conservatives). However, as Lind writes, “it remains to be seen whether the global economic crisis that began in 2008 will mark the end of the Third American Republic and the gradual construction of a fourth republic by the 2020s or 2030s.”

It is in this context that the concept of evolutionary economics can play an important role, as any new economic framework for America’s “fourth republic” needs to be grounded in an evolutionary understanding. In this context, the central task of economic policy is not managing the business cycle—it’s driving a robust rate of economic evolution. It’s not about maximizing freedom or fairness as the right and left want, respectively—it’s about maximizing evolution.

Any new economic framework for America’s “fourth republic” needs to be grounded in an evolutionary understanding.

This report provides an overview of the evolutionary economics framework and the history of evolutionary economics thinking. It then discusses the three main drivers of U.S. economic evolution (geographic shifts in production, technological change, and demographic/cultural/governmental change). Finally, it lays out eight principles for an evolutionary economics-inspired economic policy:

• Support global economic integration based on firms’ market-based choices, rather than governments making political choices.

• At the same time, work to slow traded sector industry rate of loss where it makes sense.

• Don’t impede natural evolutionary loss.

• Limit government barriers to evolution.

• Foster a culture that embraces evolution, including natural evolutionary loss.

• Enact policies to spur organizations to act in ways that drive evolution.

• Support policies to speed economic evolution, especially from technological innovation.

• Develop a deeper understanding of the process of U.S. economic evolution.