Evolutionary Microeconomics



 

  

  

  

 

 





  





  

 

 

  

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The authors

Paul Bourgine, research fellow at CREA, Ecole Polytechnique, contrib￾uted to chapter 1.

Emmanuelle Fauchart, research fellow at Conservatoire National des

Arts et Métiers, wrote chapter 6.

Jean-François Laslier, research director at CNRS (CECO, Ecole Polytech￾nique), contributed to chapters 2 and 3.

Jacques Lesourne, professor at Conservatoire National des Arts et Métiers,

fellow of the Econometric Society, wrote chapter 4 and contributed to

introduction and chapter 8.

Luigi Marengo, professor at St. Anna School of Advanced Studies, Pisa,

wrote chapter 7.

François Moreau, professor at Conservatoire National des Arts et Métiers,

wrote chapter 9.

André Orléan, research director CNRS (PSE, CNRS-EHESS-Ecole Nor￾male Supérieure-ENPC), wrote introduction, chapter 5 and contributed

to chapters 2 and 8.

Gisèle Umbhauer, maître de conférences at University of Strasbourg,

contributed to chapter 3.

Bernard Walliser, professor at Ecole Nationale des Ponts et Chaussées

and at Ecole des Hautes Etudes en Sciences Sociales, contributed to

introduction, chapters 1, 3 and 8.

Contents

Introduction........................................................................... 1

The standard paradigm .........................................................................2

Towards an evolutionary paradigm ......................................................6

Presentation of the book .......................................................................7

References ............................................................................................9

Part I: The basic concepts

1 Individual decision........................................................ 13

1.1 Background and problems...........................................................14

1.2 Canonical principles....................................................................22

1.3 Some models ...............................................................................31

1.4 Theses and conjectures................................................................39

References ..........................................................................................41

2 The elementary market................................................. 43

2.1 Background and problems...........................................................43

2.2 Canonical principles....................................................................48

2.3 Some models ...............................................................................50

2.4 Theses and conjectures................................................................64

References ..........................................................................................65

3 Game situations............................................................ 67

3.1 Background and problems...........................................................68

3.2 Canonical principles....................................................................76

3.3 Some models ...............................................................................87

3.4 Theses and conjectures..............................................................108

References ........................................................................................110

VIII Contents

Part II: The markets

4 Market with irreversibilities........................................115

4.1 Background and problems.........................................................116

4.2 Canonical principles..................................................................117

4.3 Some models .............................................................................118

4.4 Theses and conjectures..............................................................128

References ........................................................................................129

5 Mimetic interactions ...................................................131

5.1 Background and problems.........................................................131

5.2 Canonical principles..................................................................140

5.3 Some models .............................................................................147

5.4 Theses and conjectures..............................................................169

References ........................................................................................171

6 Competition between firms ........................................173

6.1 Background and problems.........................................................173

6.2 Canonical principles..................................................................180

6.3 Some models .............................................................................182

6.4 Theses and conjectures..............................................................196

References ........................................................................................198

Part III: The institutions

7 Organization of the firm..............................................203

7.1 Background and problems.........................................................203

7.2 Canonical principles..................................................................205

7.3 Some models .............................................................................207

7.4 Theses and conjectures..............................................................232

References ........................................................................................233

Contents IX

8 Emergence of institutions.......................................... 237

8.1 Background and problems.........................................................237

8.2 Canonical principles..................................................................242

8.3 Some models .............................................................................247

8.4 Theses and conjectures..............................................................256

References ........................................................................................257

9 State and economic system regulation .................... 259

9.1 Background and problems.........................................................259

9.2 Canonical principles..................................................................263

9.3 Some models .............................................................................265

9.4 Theses and conjectures..............................................................282

References ........................................................................................287

Epilogue............................................................................. 291

Introduction

The development of science offers numerous examples of “scientific revo￾lutions” (Kuhn, 1970), which lead to deep changes in the existing “para￾digms”. During these revolutions, the prior knowledge, far from being

abandoned since it is obsolete, is often reinterpreted in the new paradigm

as a limit case of a broader representation. The theory of restricted relativ￾ity, proposed by A. Einstein, is an exemplary illustration of such a situa￾tion. It elaborates a new conception of energy, mass and time breaking up

radically with all was already accepted. Nevertheless, the formula of clas￾sical mechanics continues to be valid when considering speeds that are

much lower than the light speed. Is microeconomics involved in such a

revolution and changing its paradigm? One has to be careful when answer￾ing such a question since economics is far from being able to claim the

same scientific standards than the hard sciences. Moreover, it is hazardous

to speak of a revolution while it is already on the way.

Even if the conception defended in this book is clearly grounded on a

refoundation of microeconomics, its point of view is more modest. It rests

on four observations: (a) it exists a “standard paradigm” constructed around

three key concepts, optimizing rationality, equilibrium and market effi￾ciency, which frames the main classical works in microeconomics; (b) the

empirical limits of such a paradigm are obvious since it is unable to ex￾plain some major observed economic phenomena; (c) several original

models are already available in order to explain at least some of these phe￾nomena; (d) these models express a coherent project, looking as an origi￾nal paradigm, which integrates standard microeconomics as a limit case.

The book aims at designing this new paradigm, which progressively

emerges at the crossroads of various modeling streams: evolutionary, cog￾nitivist and institutionalist.

Characterized by its departure from classical economics, the present

project has still to be distinguished from another one which inspires today

an important part of microeconomics, the “extended standard theory”

(Favereau, 1989). The last aims at developing the study of organizations

and institutions while staying in the standard paradigm, and is well illus￾trated by the modern theory of contracts and incentives. The first is inter￾ested in institutions too, but is running away from the standard view in

2 Introduction

more profound aspects. However, in order to prevent ambiguity, it is nec￾essary to state that it still shares with the classical or extended approach

number of principles and problems, for instance the adoption of methodo￾logical individualism or a specific interest in price formation.

This introduction is devoted to making precise the four statesments

which justify the project. The first section is related to assertions (a) and

(b) and the second to assertions (c) and (d). A third section presents the

structure of the book and its pedagogical aims.

The standard paradigm

The existence of a “standard paradigm” is not unanimously recognized by

economists. As spelt out by R. Nelson and S. Winter (1982, p.6), some

economists “would strenuously deny there is an orthodox position providing

a narrow set of criteria that are conventionally used as a cheap and simple

test for whether an expressed point of view on certain economic questions

is worthy of respect; or, if there is such an orthodoxy, that it is in any way

enforced”. It is right that this notion is mainly put forward by economists

willing to differenciate their work from “normal science”. For that reason,

it may be endowed with a high critical charge which makes it suspicious to

“orthodox” economists. In many cases, it sustains a view which goes be￾yond a simple objective description of the economists’ achievements in

order to induce a new way of dealing with their discipline. This motivation

is shared by the authors of this book.

One should nevertheless not under-estimate the difficulties associated

with such a goal. Microeconomics is a rapidly developing science which

makes use of various concepts and principles in order to cover an always

broader field. It is not possible to reduce it to a few notions without mak￾ing a caricature of it. However, it seems possible to bring out what may be

called an “orthodox way” to deal with the usual microeconomic problems.

On one hand, it proceeds to a systematic appeal to optimizing rationality

and equilibrium as two general categories allowing to think all economic

phenomena. On the other hand, it develops a theory of trade order domi￾nated by the assumption of market efficiency. This triptyque will be ex￾ploited in order to analyze the standard paradigm.

Optimizing rationality

Adopted by the orthodox approach, optimizing rationality assumes that all

agents are endowed with an objective function that they maximize with re-

The standard paradigm 3

gard to some constraints. It expresses a specific form of instrumental ration￾ality since it deals with the adequation achieved by an agent between the

means at his disposal and the aims he pursues. In order to qualify it,

H. Simon (1982) speaks of “substantive rationality” since it is exclusively

concerned with the results of the choice process. It is opposed to “procedural

rationality” which is mainly interested in the deliberation process leading to

some choice. Optimizing rationality is involved in a lot of economic mod￾els such as profit maximization by a firm submitted to technological con￾straints, (discounted) utility maximization by a consumer trading under a (in￾tertemporal) budget constraint, expected utility maximization by a financial

investor acting under uncertainty and constrained by his initial wealth.

Optimizing rationality is grounded on several implicit assumptions con￾cerning the agent’s cognition when adapting to market exchanges. First,

the agent is always confronted to well defined problems in a transparent

environment. Such an assumption is unrealistic since the agent has to

search for various information in order to make a more precise view of his

environment. He has even to define more accurately what are his own op￾portunities and preferences since they are not initially given. Second, the

agent is endowed with infinite computing capacities. This is really a dis￾tinctive feature of the standard approach: the more the situation is com￾plex, the more are the agents endowed with a sophisticated and performant

rationality. In the limit, all actual interactions between agents are perfectly

simulated by the agents themselves. Such an assumption is again unrealistic

since the agents face computation constraints. Hence, optimizing rationality

appears at best as a contextual limit case, for instance when the agents are

involved in a “small world”.

Equilibrium

In the orthodox view, an equilibrium state is defined as a realizable eco￾nomic configuration in which no agentw can do better by modifying uni￾laterally his action. Hence, once an equilibrium state is established, no

agent has an incentive to deviate from it. Such a property explains the im￾portance given to that concept: an equilibrium state tends to survive in the

absence of changing exogenous factors. In other terms, an equilibrium

state is a fixed point of the economic dynamics in a stationary environ￾ment. As for optimizing rationality, equilibrium is a general concept which

is illustrated in many specific economic models such as Walrasian com￾petitive equilibrium, Cournot oligopolistic equilibrium, monopoly equilib￾rium or fixed price equilibrium.

4 Introduction

Although the study of equilibrium states leads to some fundamental re￾sults, the orthodox view stays silent about the way an equilibrium state is

reached. The dynamics of what happens out of equilibrium receives little

attention. The Walrasian equilibrium is a good illustration of such a lack of

understanding. Even if the study of its existence and multiplicity has been

fruitfully achieved, and constitutes a powerful achievement of the standard

paradigm, it does not exist a satisfying representation of the exchange

process leading to it. The Walrasian auctioneer device is, in this respect,

very insufficient since it appears as a fictitious entity. In fact, modelling

the off equilibrium process is a fundamental requirement, for instance to

prove that a competitive economy always stays in a neighborhood of some

equilibrium state. Even if it is natural to think that an economy tends to

deviate from any non equilibrium position, it does not follow that it con￾verges naturally toward some equilibrium state. The formal study of dy￾namical systems concludes to the existence of a great variety of attractors

even when some fixed point exists somewhere. Hence, by lack of a satisfy￾ing analysis, nothing proves that a complete flexibility of prices necessar￾ily leads the economic system to a general equilibrium. Moreover, even for

those who stick to the idea that an economy tends to some equilibrium state,

the question of the selection between multiple equilibria is still open. This is

a common situation in contemporary models. In that case, only a dynamical

study is able to select what equilibrium state will prevail as a function of the

initial conditions and the history.

When combining optimizing rationality and equilibrium, one obtains an

abstract view which seems very far from publicly observed features of a

concrete economy. Some orthodox economists were fully aware of that

apparent hiatus. It is the case for M. Friedman (1953) in a famous meth￾odological article entitled “The methodology of positive economics”. No￾ticing that the orthodox theory is built on assumptions in obvious contra￾diction with plain observations, he nevertheless defends them. According

to his as if argument, what is important is less the adequation of assump￾tions to observations than the expectations derived from them. Even if the

actual behaviors may differ from optimizing rationality, everything goes as

if it were valid: the prices and exchanged quantities expected by the model

are in conformity with the observations. Such a methodological position is

called instrumentalist as opposed to realistic since the assumptions are not

choosen for their empirical validity, but are considered as instruments al￾lowing the modeller to infer empirical phenomena. Moreover, M. Fried￾man and others tried to justify such a position by stressing that non opti￾mizing behaviors may exist, but have a weak impact since the rules of

The standard paradigm 5

competition necessarily lead to their removal. According to these theoreti￾cians, modeling an economy as exclusively formed of maximizing agents

may be instantaneously wrong, but constitutes nevertheless a good ap￾proximation in actual economies. However, if it is the evolution process

which produces optimizing behaviors, one has to model it explicitely.

Modeling has to think simultaneously the economic phenomena and the

conditions of their emergence.

Market efficiency

According to the orthodox approach, the competitive market is the funda￾mental institutional device allowing an efficient resolution of all coordina￾tion problems encountered by mutual exchanges. More profoundly, the

competitive equilibrium is endowed with the status of a norm. On one

hand, it constitutes the basic reference for evaluating all other equilibrium

notions. The notion of “market failure” precisely refers to conditions not

satisfied in a competitive market: incomplete information, imperfect com￾petition, sluggish prices. On the other hand, it suggests the way to deal

with any new difficulty. The recommendation is to establish or reestablish

the institutional conditions for obtaining an equivalent of a competitive

equilibrium. For instance, the distribution of “rights to pollute” consists in

creating a new market in order to solve an unusual environmental problem.

Such an approach, even if relevant in some instances, conceals great

dangers and may lead to important biases. On one hand, the obtention of

market efficiency, either allocative or informational, is still an open ques￾tion and not a dogma. Even when involved with a rigourous proof, as for

Paretian efficiency of a competitive market, it rests on many restrictive as￾sumptions on behaviors as well as on goods. On the other hand, the identi￾fication of an economy to markets leads to a distorted view of the trade or￾der. It is wrong to consider the market as a natural entity, as a necessary

by-product of the rationality of mutual exchanges. The market is a peculiar

social construct which needs for coming to maturity a whole set of social

conditions. Observing the evolution of capitalism brings to the fore histori￾cal phases in which some markets see their role increase or decline. For in￾stance, during the Thirty Glorious years in France, the stock market had a

marginal impact. Besides, the competitive forces always coexist with other

forms of regulation of same importance, for instance money, hierarchical

links, trust, conventions and norms. The prevalence given to the market

leads to under-estimate the regulative function of other entities, which act

conjointly with the market, for instance the firm, the central bank or the law.

6 Introduction

Towards an evolutionary paradigm

To the triptyque formed by optimizing rationality, equilibrium and market

efficiency, the promoted approach opposes procedural rationality, dynamic

processes and plurality of institutions. Hence, it is situated at the junction

of several modeling streams which developed with some success these last

three categories, namely the cognitivist, evolutionnist and institutionalist

approaches. If the term “evolutionary” is chosen to qualify that synthesis,

it is not only due to the necessity of a simple denotation, but also to the

transversal role played by that notion in the structuration of the set of ap￾proaches. As was already stressed, the underlying epistemology of our ap￾proach, at odds with Friedmanian individualism, insists on an evolutionary

modelling of the processes at work, simultaneously cognitive when indi￾vidual decision-making is concerned, evolutionist when dynamic interac￾tions are concerned and self-organizational when institutions are intro￾duced. The federating role played by the evolution processes in our

analysis explains why the labelling “evolutionist paradigm” is favored1

.

It is obvious that the conceptual achievement of evolutionary economics

would have been impossible without the constitution of a set of technical

tools allowing for a renewed approach of the economic evolution. For in￾stance, with the mathematical study of non linear dynamic systems, one

gets a lot of new concepts and results concerned with stability, bifurcations

and various forms of attractors. Likely, with the formal work by physicists

on systems of heterogeneous and tightly related entities, one gets richer in￾sights about “self-organization” (Lesourne, 1991) or “emergent phenom￾ena”. Finally, with the development of epistemic logics by philosophers

and cognitive scientists, one gets a more accurate view of individual (and

collective) beliefs and modes of reasoning.

Despite some external influences, the central theses of the book belong

really to economic science, or more generally to social sciences. They in￾duce a conception of economics notably different of the conception which

prevails in traditional textbooks. This can be illustrated by three examples

1

Note however that what the research program called here ‘evolutionary econom￾ics’ is not far from what B. Walliser calls elsewhere ‘cognitive economics’

(2000). Conversely, it differs from economic models called ‘evolutionary’ in a

strict sense and focalized on a dynamic dimension without replacing it in a cogni￾tive and institutional framework. It differs even more with an approach exclu￾sively grounded on a biological analogy as evolution is concerned.

Presentation of the book 7

which depart more and more from the traditional view of an efficient mar￾ket equilibrium. First, the notion of “path dependency” will be frequently

used in order to stress that “history matters”. The state towards which the

economic system may converge depends on the internal events that hap￾pened along its path and on the external shocks that perturbed its trajec￾tory. Such a notion is not incompatible with an equilibrium analysis, but it

restricts its relevance since that analysis has to be completed. Second, the

evolutionary dynamics does not necessarily converge towards some opti￾mal state. Contrary to the common vulgate shared by some evolutionnists,

evolution does not systematically mimic a global optimization of the sys￾tem. Not only is the asymptotic state not collectively optimal in some

technical sense, but the notion of optimality becomes even problematic.

Third, it appears that in many situations, the attractors are not necessarily

punctual. The system may stay perpetually in a moving state, and the no￾tion of equilibrium looses its relevance. This is the case when observing

limit cycles or chaotic dynamics.

These contributions of evolutionary economics stay compatible with a

somewhat mecanist approach of economic evolution. The introduction

both of beliefs and institutions is a further step which improves even

more the proposed analysis. Especially, it is shown that the beliefs have a

proper efficiency since the coordination of individuals depends on how

each agent interprets his strategic environment. Likely, the institutional

devices influence in several ways the interaction process by coordinating

the agents’ beliefs as well as actions. The complex interwaving of these

factors leads to an image of economic dynamics which is conceptually

better fitted to the economic phenomena and is pragmatically better

adapted to the economic problems.

Presentation of the book

The book differs profoundly from preceding books dealing with evolution￾ary economics too (Witt, 1992; Hodgson, 1996; Schweitzer-Silberberg,

1998; Dopfer, 2001; Foster-Metcalfe, 2001; Gandolfi et alli, 2002; Back￾haus, 2003; Witt, 2003). These books are litterary presentations of evolu￾tionary economics or proceedings of conferences on the topic. The struc￾ture of the present book in three parts manifests a progression from the

presentation of basic concepts to the analysis of complex situations. In

fact, it follows more or less the structure in traditional textbooks.