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Evolutionary Economics in the
21st Century: A Manifesto
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Evol. Inst. Econ. Rev. 1(1): 5–47 (2004)

ARTICLE

Evolutionary Economics in the 21st Century:
A Manifesto
Yoshinori SHIOZAWA*
Osaka City University, 3–3–138 Sugimoto, Sumiyoshi-ku, Osaka 558–8585, Japan.
E-mail: y@shiozawa.net

1.

Introduction

Japan Association for Evolutionary Economics (JAFEE) was founded in 1997. The
membership mainly includes economists who are dissatisfied with mainstream
neoclassical economics. In brief, evolutionary economics stands out in clear opposition(or “contestation” as in French in the 1960s) to mainstream economics. Those who
espouse the ideas of evolutionary economics include Marxists, Institutionalists, Post
Keynesians, and economic historians. This membership may not be much different fromother evolutionary economics societies in North America or in Europe. As a new feature,
JAFEE attracted many people interested in computer simulations. JAFEE membership
focuses on developing and defining new evolutionary economics employing various
methodologies.
Our organization should evolve to go one step further. A unified evolutionary
economic theory should be presented. Moreover, it is necessary to clarify the reasons forthe superiority of evolutionary economics over the neoclassical economics. Some
important issues from evolutionary economic points of views have been abandoned by
the neoclassical economists. New approaches towards these abandoned problems should
be explored.
JEL: O30, O40.
* This paper is based on the presidential speech, read on March 28 in the 2004 Annual Conference of
the Japan Association for Evolutionary Economics. At the occasion of the launch of the this Journal,
this paper is prepared and written as a first draft of the research program by which those who areinterested in the evolutionary economics may find out its common problems to solve, the direction to
pursue and the goals to attain. Of course, any research program of a science should not be defined as
an organizational decision making. It should come out spontaneously as a result of continuous
discussions in which programs are proposed and criticized from within and from without. This paper
is an invitation to such a continued discussion in the future. All propositions and opinions are my own
and do not necessarily represent the opinions of the Japan Association for Evolutionary Economics.

Y. SHIOZAWA

Some people argued that there were no unified criteria on what constitutes
evolutionary economics. Three topics are mentioned as fields of evolutionary economics:
economic development, knowledge, and institutions. Other people claimed that the unityof evolutionary economics derived from the methodologies of analyzing dynamic andhistorical change and the genesis of institutions.1)
This article would discuss this issue from different perspectives. The unity of theevolutionary economics lies in its unique methodology: the observation of various
economic phenomena from an evolutionary perspective. But this perspective alone
cannot advance this field. From a renovation perspective, a new perspective and a newframework for economics should appear simultaneously.
This paper was organized as follows: In section 2, evolutionary economics will bedefined. In Section 3, three categories of evolving entities are examined. A definition ofevolution is given and tested. Importance of these categories provides us a good reason
why economics should be evolutionary. Section 4 explained major aspects of selection
process. Section 5 is devoted to an examination of the economic systems. Some modesof adjustments are discussed in this section. These sections present some reasons why
evolutionary process is so widely observed and why it plays an important role ineconomies. Section 6 contains arguments on the nature of human behavior. Neoclassicalconcept of utility maximization is compared with rule-based behavior formulation ofevolutionary economics. Section 7 exposes the close relations between knowledge andother evolving entities while the last section concludes that multi-agent modeling andsimulations are good examples of new tools with which we hope to achieve a
breakthrough toward a new stage of economics.
2.

The definition of evolutionary economics

Evolutionary economics is a discipline that stands alone on its own theoretical basis andcovers the views of how economy works and develops. For this objective, it isinsufficient to criticize neoclassical economics. It is necessary to present alternative
subject matter, theories, and tools instead of the neoclassical framework from its very
foundations. This new framework and tools should be, on one side, a prolongation, andon the other side, a bold innovation of the long tradition of evolutionary economics. This
paper is a rough sketch on ideas in pursuit of such a new evolutionary economics.

1)
For Example, Susumu Egashira, in his tutorial session of the JAFEE 2004 conference, emphasized
this point.

– 6 –Evolutionary Economics in the 21st Century: A Manifesto

3.

Typical examples of economic evolution

Three major economic categories are considered as economic objects whose
development can be seen as evolutionary: Commodities, Technologies and Institutions.
Two other categories, Economic behavior and Knowledge, were discussed in Sections 5
and 6. Behavior and knowledge serve as supporting basis for the first three categories. In
this section our discussion focuses on the evolution of the first three categories. Cases offirms and organizations are more delicate. They can be interpreted as entities. They canalso be interpreted as systems that contain many evolving entities. The related topics will
be discussed in Subsection 3.5.
3.1

Commodities

In case of commodities, most manufactured commodities are standardized. However,commodities are modified from time to time.
Changes of car models may serve as a typical example. The Honda Odyssey, launchedin October 1994, has undergone full model changes twice (1999 and 2003), and minorchanges four times. In addition, eight new variants have been introduced. In one of thefull model changes, the engine and styling are transformed entirely. Even the basic
structure of engine can be replaced. When the Odyssey was changed in 1999, a V6
engine was introduced as an option for the parallel-lined four-cylinder engine. In one of
the minor changes, the basic styling is not removed, but the exterior and interior may bealtered. Bumpers, mirrors, sheet metal, wheels, panel displays, and colors can be easily
substituted.
A variety of commodities are produced and consumed. In an industrialized country,
the assortment is immense. Different commodities are counted as items. It is difficult tocount this multitude of items. For example, two pairs of shoes, identical except for sizeand color, may be counted as separate or vice versa. Even though, a rough estimate ispossible. For example, a standard convenience store may have a stock of 3,000 items;
and a big department store as many as 150,000 to 300,000 items. In Japan, there areprobably more than 100 million different commodities.
The set of all commodities used in a society changes from time to time. Some of them
may become obsolete while others may be introduced. Some articles are modified or
improved. New products will replace some old ones. Thus, the content of the set of allarticles is always changing. Even when there is no change for the set of all articles, someproducts become more important because they are more in demand and therefore moreof them are produced. Others become less important because they are less in demand.
The set of articles is closely related to the life of a culture, for they determine what is– 7 –Y. SHIOZAWA

consumed and the kinds of activities that are possible. Therefore, how the set of articles
changes is an important part of economic history.
Neoclassical economics continued to have ignored these important economic
phenomena because no theoretical framework is available to be analyze in this evolution.
Evolutionary economics provides a framework for answering these theoretical questions.
3.2

Technologies

The word “technology” usually represents a class of disciplines that can be seen as
making up a single body. In reality, technology represents broadly diverse knowledge
that tells how to transform goods, which one to choose as raw materials and how to use
those products. Technologies are used in the design of machinery, the manufacturing ofcars, robots, food products, and the exploration of medicines, to name only a few
applications. These kinds of knowledge required for the production of commodities are
extremely varied.
Technological knowledge is often structured and organized. It may be scientific orpractical in its very nature. Some parts of knowledge, such as material mechanics andbiotechnology, are important in the sense that they provide guiding principles for thedevelopment of new technological knowledge. Some parts of technological knowledge
may be characterized as tacit knowledge which can not be formally defined in an explicit
verbal form. A trained worker can do his job with extreme precision. Although thetechniques he uses are not obvious, it is clear that he has them.
Technology changes for various reasons. For example, there are always newinventions, discoveries, research, development, experience in production andconsumption, minor improvements, breakthroughs, and developments in science. New
inventions often render old technology obsolete. Some technologies become outmoded
and are abandoned. Thus, technology is a field where various elements evolve by various
factors. In the field of the history of technology, we already have a good collection ofmonographs and articles. It would be a large undertaking to compose a catalog of thecurrent works. It is remarkable that studies in the history of technology have a strong
tendency to describe the technological development as an evolutionary process.
Neoclassical economics sometimes has treated technological development within its
constrained framework. Using a method called growth accounting, Solow has discoveredthat a major part of economic growth is most often derived from productivity change.
This has given a light on the importance of technology development in economic
growth. The estimation of the total factor productivity became a big issue for interpreting
Asian Economic Miracle, as in the case of Krugman’s “Myth of Asia’s Miracle” and– 8 –Evolutionary Economics in the 21st Century: A Manifesto

debates after it.2) It is, however, dangerous to rely too much on the result of growthaccounting measurement. The premise of growth accounting is firmly connected with theneoclassical macroeconomic formulation. The Solow-type macroeconomic model treats
the development of technology as a parameter only and does not enter into the details of
the technology change.
Endogenous growth theory, a new variant of the neoclassical growth theory, treatstechnological development as an effect of increasing returns to scale of thepredetermined macroeconomic production function. This may be a major improvement
within the neoclassical framework. But this misses the real focus of the argument. Thereis no assurance that the macroeconomic production function takes that specific form
assumed in the endogenous growth theory.
Real technological development lies in the change of production possibility sets ateach production place. Neoclassical growth theory lacks a theoretical framework toconnect microscopic technological development to the presupposed macroeconomic
production function. This also means that neoclassical growth theory lacks suitable
framework that can be used to analyze the technological development in general.
Evolutionary economics, on the other hand, has no existing method to measuretechnological development. For the moment, we should be satisfied with thehistoriography of technological development but the measurement and theory are both
important in the evolution of technologies.
3.3

Institutions

The word institution has multiple meanings.3) For the purposes of this research, the word
institution is used to define the norms, rules, and conventions that are generally accepted
as a social code of conduct. Institutions are normal procedures used in negotiation,

2)

In this paper Krugman (1994) claimed that “Singapore grew through a mobilization of resourcesthat would have done Stalin proud.” This thesis induced many people to comment pros and cons.
3)
Hollingsworth (2003, Table 1) enumerates that in the common usage we can find following fivemeanings.
➀ institutionsnorms, rules, conventions, habits and values➁ institutional arrangementsmarkets, states, corporate hierarchies, networks, associations,communities➂ Institutional sectorsfinancial system, system of education, business system, system of research,social system of production➃ Organizations➄ Output and performancestatutes, administrative decisions, the nature, quantity and the qualityof industrial products, sectoral and societal performance– 9 –Y. SHIOZAWA

reaching agreements, conflict resolution, reporting and listening, and other business
transactions. In some cases, options exist, but are normally determined by the culture.
For example, in foreign trade, the choices for shipping conditions are limited to two;
FOB or CIF, and a third choice cannot be introduced without adding complications.
A market economy is supported by a number of institutions. Even in simple
procurement, it is necessary to understand the conventions for payment, shipping
conditions, promissory notes, underwriting, bank discounts, letters of credit, andexchange rates. If one fails to pay bill in due time two times consecutively, he/she will
face the cessation of bank transactions. The threatening of bankruptcy is a powerfulsocial tool which enforce payment of commercial papers in due time.
Institutions form a network. One institution is supported by others. As mentioned
above, payment at due time is enforced by the inter-bank agreement on the cessation ofbank transactions. However, all institutions are not necessarily enforced by one kind of
sanctions. Some norms and procedures are accepted as social standards or social
customs, without any sanctions to enforce them.
Two institutions will often compete against each other. When commercial customs
differ internationally, parties of different countries, if they want to come to an agreement,
should choose which ones to use in their agreement. In this case, institutions are selectedby the individuals. In some cases, choices may be different at each agreement. It may
happen that one of alternative customs becomes a standard for international transactions
between two countries. One may say that one of two competing institutions is selectedby a kind of majority vote of the people. But it is important to note that it is not always
possible to determine whether one institution is better than the other. Without
considering the environment in which it functions, namely, the network of existing
institutions, it is meaningless to ask which is superior to the other. In the process ofglobalization, we face many conflicts which arise from the difference of institutions of
two concerning countries. Conflicts should be settled on the realization that any
institution is imbedded in each country’s network of institutions.
Sometimes new institutions are introduced. There are various reasons and occasions
that new institutions are introduced to adopt a foreign institution, solve social problems,or adjust to a new lifestyle. When a new institution is introduced, it may compete against
old institutions. Some institutions may become outmoded or irrelevant, and they may be
excluded from the networks of institutions.
3.4

Core of evolutionary process

We have seen above three categories: commodities, technologies, and institutions. The– 10 –

Evolutionary Economics in the 21st Century: A Manifesto

elements of these categories undergo changes and the mode of those changes can be seen
as evolutionary. These entities of commodities, technologies and institutions share all of
the following common properties:(1)

They can be separated from others as a unit.

(2)

They can be seen as something that retains their identities.

(3)

They can be converted to others for various reasons.

(4)

They can be reproduced in a way or another.

(5)

They can be the targets of the selection.

These are major characteristics of entities that can be said to “evolve.” The mostdelicate one among these properties is item (4) above, or reproduction. Copies are madeand multiplied from a prototype. But each category has its copying mechanisms that are
different from each category. Commodities are reproduced after prototypes. Each
product is an instance of a commodity. Technologies can be transmitted from one person
or firm to another, either by imitation, emulation or licensing. Institutions are transmitted
from one community to another. Even though there are differences between copying
mechanisms, these entities can be called replicators because they make copies of theoriginals.
Although there is no need to build up exact parallels between economic evolution andbiological evolution, some common features can be observed. Economic entities can beseen as something similar to a phenotype. In the theory of biological evolution, eachphenotype is supposed to have some physical base called genes. In the economy, entities
that evolve may not have such physical bases. Instead, they are better seen as concepts.
In the case of commodities, entity is the specification of a commodity. In the case oftechnologies, it is technological knowledge which enables people to get a specific effectof a product. In the case of institution, entity is a rule or a convention which is thought tobe adopted in a determined case. Each entity can be realized in many ways: in a form ofphysical products, in a form of applications of technological knowledge and in a form ofactions defined by a rule. Each of these realizations is called instances. For an entity, wedefine the population as the set of all instances which are realizations of the entity.
Evolution is firstly a process of the change from one entity to another. In this process,three different phases of evolution are involved.
(1)

Mutation or change of entities, through inventions, discoveries, improvements,

improvising, and others. The birth of new entities is a part of this mutation in a wider
sense.
(2)

Reproduction or spread and diffusion of entities from person to person or– 11 –

Y. SHIOZAWA

community to community through emulation, imitation, licensing, introduction,
acceptance, and others.
(3)

Selection or differential growth of each entity, by selections within the market,

through differences in the reproduction rate, by the judgment of engineers and decisionmakers, by a political process, such as voting, and others.
It must be pointed out that the properties of the evolving entities do not exclusively
determine the process of evolution. The whole process of evolution is a complicatedchain of interactions. Competition between the entities of the same category is only acase of many types of interactions between the entities. We should be aware ofinteractions between the entities of different categories.
It deserves to note that, in the third phase, selections occur on the instance level rather
than on the entity level. Take an example of consumers’ choice, when consumers choose
which goods to buy, their direct action is to buy one among several competing
commodities. The selection of a specific mark adds one to the number of total
productions of that mark. Sometimes this number may serve as the base of a decision if
the firm continues to produce that specific commodities or cease to produce it. The entity
level selection occurs only when this kind of decision is made.
Distinction between the entity and its instances may seem unnecessarily in academic
details, but it is important to make this distinction in order not to make our discussion
confused. Replicator dynamics or population dynamics is the analytical tool that deals
with populations defined for each entity. Evolution is a changeover from an old entity to
a new entity; It must include two processes: an emerging process, i.e. the population
increase of a new entity and an extinction process, i.e. the population decrease of an old
entity.
3.5

A cursory examination of firms

It would seem for many economists that firms or organizations belong to the category ofthings which evolve. To determine the way in which firms can be considered to be
evolving entities, let us examine the five conditions presented in Section 3.4.
Firms are business units that can be clearly distinguished from others and retain theirown identity through time (1 and 2). Firms change as a result of a reform or innovationin management and personnel changes (3). In a market economy, competition amongst
firms is severe, and selection operates at the firm level (5). Four out of five conditions areeasily satisfied. A special feature of firms is that it is not easy to determine whether they
can reproduce or not.
In some special cases, we may say that firms can reproduce. Before 19th century, all– 12 –

Evolutionary Economics in the 21st Century: A Manifesto

firms were small and manipulated directly by the owners. A clerk who worked long time
for a shop was given the right to open a new shop and became the owner of that shop.4)
In this case, the operating know-how was transmitted from the parent shop to filial
shops. Often the filial shops were permitted to use the same shop name as the parent.
This form of reproduction is quite similar to the biological reproduction. But this type of
reproduction is now rare. When the transportation and information system became
developed, companies began to operate nationwide. For such a company, to make copies
of it is to produce its competitors. Old reproduction system became unusual.
Now a company may open a filial company abroad and this filial firm will share inmany respects common characteristics of the parent firm. But making filial firms may bebetter interpreted as an expansion of the same organization beyond the national borderrather than as a reproduction of a firm. Another form of reproduction of firms isfranchise chain system. Units of the same franchise, or franchisees, are quite similar to
one another; they are instances of the original prototype or replicators. However, thechain center, or the franchiser of this chain, must fulfill different functions as theorganizer, i.e. staff-training, supplying, controlling and marketing and others. A
franchisee is not a copy of the franchiser. The reproduction scheme is very different from
biological reproductions.
Typical reproduction scheme is not applicable to present day firms. Even if this is so,
the concept of evolution can still be applied to firms. Some firms exist for a long time.
During that time, directors will be replaced, owners may change, and main products maychange. Even though, the firm retains its essential identity. Operation procedures,
marketing know-how, production method, intra-firm education system, work style andmany others are inherited from one time to another. Continuation of a firm is itself a
reproduction of the firm through time. A firm does not multiply by reproduction but
makes a copy of itself through time.
A firm can evolve by various forms. Some parts of operating procedures can be
replaced by others. Wage system and other incentive systems can be modified. Even thework style of the personnel may change either intentionally or unintentionally. New
behavior and organizational measures can be established as routine behavior andcustoms. They will be inherited just like “DNA” or “genes” of the firm. The change ofthese routine behaviors and customs are mutations of the “genes” of the firm. A firm can

4)

In Japan, this custom became a widely observed tradition under the name of “norenwake” in Edo
period.

– 13 –

Y. SHIOZAWA

evolve with these mutations.
It will be useful to mention that the term evolution is often used to designate thechange of two different levels: entity level and system level. In the case of commodities
and technologies, the mutations are the change of commodities and technologies. In thecase of firms, the mutations occur for components of a firm. When the components of thesystem change, the behavior of the system changes, too. This change of the system,
which is a result of mutations of its components, is also called evolution. The evolutionof a firm is that of the system level. However, the distinction between the entity level
evolution and system level evolution is only a relative one. Commodities can be seen as
a complex of different types of know-how’s. From this point of view, the evolutions ofcommodities also bear the characters of the system level evolutions. In the following theword evolution is used both to indicate the change of the evolving entities and thechange of a system composed of the evolving entities.
4.

Selection process

The evolution is a complex process. For each phase of each category, the features andintervening mechanisms are different. Each process of each phase and of each category
is dependent upon the others. For example, the evolutionary process of technologies
affects the evolutionary process of commodities. The emerging of a new technology,
such as information and communication technology, changes the bases of institutions.
Institutions, which evolve through their own processes, create the ground on which
commodities will evolve. Thus, the evolutionary processes cannot completely beseparated from others.
Although economic evolution is a whole process, we cannot analyze it with one
stroke. An examination of its development should begin with the studies of the process
for each category. Entities, such as commodities, technologies, and institutions, go
through three phases: mutation, reproduction and selection, as pointed out in Subsection
3.4. The mechanisms of the phases change according to what entities are being treated
and what phases are being observed. When combined, there are nine cases. This paper
will not discuss them. Instead, from Subsection 4.1 to 4.4, we will focus on the selection
process in the market, Subsection 4.5 will introduce an important characteristic ofsystems: a system is either open to evolution or not.
4.1

Commodity selection: three moments

In a market economy, commodities are chosen three times. Firstly, they are chosen by
producers. Many firms have a section or a project team whose task is to propose ideas or– 14 –

Evolutionary Economics in the 21st Century: A Manifesto

concepts of new commodities. Each firm has its own screening procedure, such as, aconcept meeting, a technology review, or a feasibility examination. Few ideas are
deemed feasible to be placed in the development process. In the course of commodity
development, some ideas are abandoned because they may be too difficult to achieve
within the given budgets. Some ideas can be modified in order to make the commodity
more attractive. Normally, a board of directors discusses the new commodity anddetermines its readiness for the market.
Secondly, commodities are chosen by consumers at shops. Consumers examine thecommodities and determine whether they are sufficiently attractive in terms of price,proposed utility, design, and packaging.
The third moment of the selection process occurs within homes or at the site where a
product is used. Consumers examine its usability, durability, and others and determine
whether a product is worth the price by using it. If they like the product, they willprobably be repeated buyers. The manufacturer will then gain a loyal customer.5)
This selection process is quite different from the picture given by the neoclassicaltheory. In the neoclassical framework, consumers are supposed to have complete
information for all commodities. Each of consumers has its utility function and is
supposed to maximize the utility value for all sets of commodities which are available
with the given budget constraint and the given price system. This assumption isequivalent to require infinite speed of calculation. The maximization problem is only aspecial case of knapsack problem, which is the most famous intractable problem in themathematical theory of the computing complexity. The computing time necessarily tosolve a knapsack problem increases with the exponential order of the size of the
problem. The computing time for the maximization, even if you use a computer, easily
exceeds a million years if you are to choose a combination among 100 items ofcommodities.6) The neoclassical framework thus contains a purely imaginative
construction.
The evolutionary economics presents a totally different theory for consumers’
selection. At first, consumers know very little about commodities. Their purchasebehavior is a kind of random sampling. After a process of trials and errors, they come toknow the relative utility of a good. They also come to know the prices of many
commodities. When they are invited to buy a commodity, they know or can guess from5)
6)

Umezawa (1997) emphasized the importance of consumers’ evaluation in the use place.
It is supposed that a program is applicable for all systems of prices.

– 15 –

Y. SHIOZAWA

the past experience the usefulness of the commodity. They compare the expected utility
with the price in the market, and if the ratio is better than the expected level (or theaspiration level), they decide to purchase the commodity. This is a very simple purchasebehavior. The essence of evolutionary theory is in the evolution of this behavior. The
utility level will be changed when actually using the commodity. The aspiration level
will be changed when they happen to know the existence of the lower price offer. The
purchasing behavior itself will be replaced by another when they come to know a better
decision rule. Consumer’s behavior is a result of a learning process. We cannot explain it
without referring to consumer’s past experience.
4.2

Market as a process

The market is where consumers and producers make their choices. As a major part ofmainstream economics, standard price theory presumes the existence of a demand
function for each of the consumers and a supply function for each of the producers.
Moreover, these demand functions and supply functions are presumed to be transmitted
to the market in an implicit way and the price of each item is fixed at a level where thetotal demand is equal to the total supply. The idea underlies all explanations fromcrossing diagrams of demand and supply curves to the sophisticated construction of an
Arrow and Debreu-type general equilibrium theory. However, this picture is not only
fictional and unrealistic but also misleading as to how the competition develops in amodern market economy.
In a modern market economy, almost all firms are endeavoring to sell as many of theirproducts as possible. There is nothing that resembles a supply function. The notion of a
supply function with prices as independent variables implies that a firm has a sales limit
beyond which it does not want to sell at any given price level. However, the firms willusually be happy to sell much more than they are currently selling if they can sell at theactual market price. The supply attitude of the firms in a market economy is totallydifferent from that suggested by the standard price theory.
As for the demand side, it is also doubtful that a demand function can actually be
defined with prices as independent variables. The concept of demand function presumes
that consumers can maximize their utility for any given system of prices. Actually, a
consumer would be confused if all prices were to change at once. It is traditional, in thedefinition of demand function, to assume that consumers choose goods and services insuch a way that they maximize their utility. As it is explained at the end of theSubsection 4.1, this is equivalent to assuming perfect rationality for consumers. Even if
they try to maximize their utility, the calculation takes too much time until they get a– 16 –

Evolutionary Economics in the 21st Century: A Manifesto

solution.
Demand function and supply function have no solid foundations. They have been
accepted only because they were thought to be necessary for the equilibrium framework.
Equilibrium is a virtual state where there is no place for further adjustment. This
provided a convenient framework for mathematical formulations. As far as mathematics
was thought to be the unique tool which enables to analyze economic processes,
equilibrium continued to be assumed as a unique framework. But it is time to stop to
think from the equilibrium perspective. If the market is assumed to be a process oftransactions through time, there is no need to presume that demand functions and supply
functions can be defined with prices as independent variables. It is necessary to detachfrom the traditional image and switch to a new image of the market.
A typical transaction might occur as a customer walks around a shop to survey thegoods and prices. The customer picks up some articles and shows them to the attendant.
The attendant adds up the total price, and then the customer pays and exits with thegoods. In this typical process, there is no haggling. Shopkeepers display commodities intheir shops, and all articles have a price tag. This means that the shop is ready to sell thearticles at the price noted. If a customer wants to buy the article at a lower price, theshopkeeper would refuse to make the transaction.
The price tags are usually fixed by a simple mark-up method. Roughly speaking, thisis to add a constant rate of margin to the unit cost. Consumer selection determines thevolume of sales. Within a certain interval, a day or a week, for example (this period maychange according to the properties and circumstances of the commodities), theshopkeeper will replenish the sold articles by the procurements from wholesalers. The
wholesalers do the same thing. They set prices and see how many they sell and procurenecessary amount of commodities from producers. The producers, in turn, determine theproduction volume after the total sales volume realized in a determined period. Thus, themarket is a process in which sales information is transmitted from one agent to anotherin a series. When materials, which are required for a production, are produced by otherproducers, information flow may form a cycle.
This whole process determines not the prices but the sales volume for each item. In arough description, this determines the production volume for each consumer’s goods.
Thus, the scale of reproduction of each item is determined as the sum of the consumer’s
choice for each item. However, this is not a full description of the selection process.
After a period of time, one year, for example, the firm will learn the profit that it
makes for each item it produces. Profit is the difference between the total sales and total– 17 –

Y. SHIOZAWA

cost. For any item, the total cost is principally composed of two parts: the constant cost
and the proportional cost. Even when prices remain constant, the profit changes with thevolume of sales. If sales exceed the breakeven point, a profit is made. If sales drop below
the breakeven point, there is a loss. For a firm to continue to produce an item, it needs toexpect to make a profit from its sale. If the realized and expected profits are insufficient,the firm may decide to exit the market. This is the second type of selection that themarket imposes on the producers.
4.3

Price and the selection process

The preceding subsection does not imply that prices have no role in the selection processof commodities. Although prices play a very different role from the standard pricetheory, they are, at some point, an important factor in the consumer selection ofcommodities. Given that there are two products with similar qualities, but with different
prices, in a shop, then the consumers buy the cheaper commodity. Thus, a lower price fora product may result in an increase in the sales volume of that product.
A lower sales price can be achieved by various means, for instance, lowering themargins; reducing the costs of shop keeping, transportation, and transformation;
introducing superior transformation methods, and procuring products at lower prices.
These activities are the substantive part of the price competition. Low price without
these efforts may be effective for a short time but cannot be continued for a long time.
The low prices are not an unique method of competition. In a modern market
economy, most firms want to sell their commodities more than they are selling now.
Even if the total demand of the market is limited, there are normally two or morecompeting firms which can offer the same commodity or substitutes. Therefore, fierce
competition occurs so as to attract consumers (or producers). In order to enlarge theirsales volume, firms participate in many activities. For example, they put advertisements
in newspapers and on TV. Sales promoters visit sales points frequently. A service center
offers a warranty of free repairs. Discounts on products may be offered with or without asavings coupon. The best locations and shelves in a supermarket are eagerly sought. For
luxury goods and services, brand image is important, and firms work hard to establish agood brand image for their products.
Firms are not passive when it comes to choose their product lineup. A firm may
produce a product that is in the middle range and set a competitive price to attract
customers because the mass production of the product will result in lower prices. Otherfirms may choose to produce a higher-end commodity, refine its processing, and attract
users to buy its high-quality products at a higher price. In this strategic choice, the price– 18 –

Evolutionary Economics in the 21st Century: A Manifesto

is but one of many factors that the firms should take into consideration. Choice is madefrom the selection of commodity range, price, quality, production method, niche ofconsumers, supply network, service method, publicity method, and others.
4.4

Remarks on other selection processes

The market is not the only place where the selection takes place. The firms are mainly
responsible for the selection of production methods. If there are two or more techniquesthat can be used in the production of a commodity, it is the firm that chooses the one
from another to use. This choice is not always easy for the decision-makers. They must
consider many factors. Even if one method were to cost less than the others, this would
not guarantee that this method would remain competitive in the future. Each historicalcost curve has a different decreasing rate, and a more costly method now might be amuch less costly method in the future. A method which has a higher production cost forthe product now on sale, may be useful for the development of new commodities, while
another method with the lower production cost may not be useful for the development of
new commodities. A successful development may change the destiny of a firm, but somecontinued research may be necessary for the firm to compete in a new market using the
new method.
If the first phase of technology choice is made by the producers, the consumers will
occasionally play an important role. When there are two methods by which we canrealize the same function with slight variances, it is the consumers’ selection that
determines which is better and which one of the two technologies will survive thecompetition. The case of the competition for the videotape recorder (VTR) is wellknown. There was a fierce competition between two technologies for videotape
recording, the Beta Max method of Sony and the VHS method of the Victor andMatsushita group. When the Matsushita group succeeded in the development of a 4-hour
video tape, consumers started to buy more VHS recorders than Beta Max recorders.
Ultimately, the VHS technology was the definite survivor.
Nowadays a fierce competition is deployed in order to get the world standard position
for the protocols of their own group. This kind of competition is widely observed in theinformation and communication industry. The key word is compatibility. Usefulness of amachine is positively dependent on the rate of machines with which the machine iscompatible. So the competitive strategy is to get users’ support for machines of the ownside protocol as fast as possible. To launch machines faster than the competitors is themost powerful method of competition, for people who want to use these machines haveno choice to make. When the competitors want to enter in the same market, the market is– 19 –

Y. SHIOZAWA

already occupied by the machines of the own-side protocols. Competitors must sell theirmachines against the disadvantage which is already established by the existence ofmachines of competing protocols.
4.5

Systems open to evolution

From an evolutionary perspective, planned and market economies are in sharp contrast toeach other. A planned economy was strongly closed to evolution. The introduction of
new commodities was not banned, but the procedures to achieve that were long andcomplicated. If one has an idea of a new commodity, it was not sufficient to persuade hisor her superior. Planning procedure in a planned economy was made in a huge multilayered hierarchy. In order to get the commodity produced, it was also necessary to
persuade people who work in the ministry and people who work in the state planning
authority. A planned economy requires a highly detailed program. A firm’s product must
be delivered at the right time and in the right quantity to the appropriate firm that needs
it. Since the modern economy is a large network of outputs and inputs, any change ofplans, albeit small, may require a change of the total plan. For this reason, changing anapproved plan was avoided at all cost. The introduction of a new commodity or
technology in the course of the planned period required the change of the plan. It should
be avoided even if the needs were evident and urgent. So, practically, the introduction ofa new commodity was possible only at the starting phase of a 5-year-plan.
A market economy has a different logic for adjustments. Owners of resources are free
to exchange their possessions for others. An exchange is finalized if two parties agree. In
a money economy, exchanges take either the form of buying or selling according tomoney paid or received. Production and sales are freely made at the risk of the owner ofa firm. It is free to introduce either new commodities or new technologies. The future
profit is a sufficient incentive for such an innovation. In this way, it is easy to makeinnovations in a market economy.
In order to compare these two economies in general terms, let us make a shortroundabout. There are many artificial systems, from cameras to space rockets. They are
all finely designed machines. In such a system, a minor change in the design may cause a
malfunction of the total system. New designs require careful examination in order toassure good balances of various parts. They are systems rather close to evolution. But inthe world of the artificial, a different type of systems was brought to existence. It is theInternet system.
The Internet is a worldwide network of computers. Each computer sends messages
using an Internet protocol. A message is divided into packets. Each packet has an– 20 –

Evolutionary Economics in the 21st Century: A Manifesto

address in the tag line. Router computers search for computers with a specific addressand determine the route in which the packet should be sent. As long as packets follow
the Internet protocol, it is possible to send any information. The Internet system withdigital multimedia technologies made it possible to send information in the form of
pictures, videos, and sound tracks without any basic change in the protocols. The
Internet is a system open to evolution.
The unique characteristic of the Internet impressed many scholars. Professor Hajime
Kita of Kyoto University used the term “classical” to refer to systems before the onset of
the Internet.7) Classical systems are not very open to evolutions. The Internet is the firstsystem to be really open to evolution. Computer science engineers are now aware of thepossibility of a system that is open to evolution.
Systems may be classified as to whether or not they are open to evolution. Of course,
it is not easy to classify any given systems into two groups. Moreover, the word “open”
should be better used in the comparative sense. A system can be more open to evolution
than the other. The concept “open to evolution” is new but it must become an importantconcept of the systems theory.
If we use the above terminology, a market economy is open to evolution, whereas aplanned economy is not. In the past, the debate on the reasons causing the failure of theplanned economies has been a hot topic. The possible reasons of malfunctions of theplanned economy include bureaucracy, lack of incentive system, inadequate pricesystem, impossibility of calculation, and impossibility to use local knowledge. However,market economy was much more open to evolution than planned economy. This is thereason that the planned economies could not catch up with the advanced market
economies.
The openness to evolution may be a key concept to be considered in the developing
economies. The developing economies are not all the same. Each economy has its
history, its people, its culture and its institutions. The difference of culture andinstitutions make some economies more open to evolution, while others less open to it.
This difference can be a cause of different speeds of the economic growth. If
evolutionary economics clarify the reasons of different speeds, it can be an important
contribution to the development economics.

7)

Kita (to be published). He is partly inspired by Ichikawa (2000).

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Y. SHIOZAWA

5.

Adjustment Process and TimeIn the economy, everything is dependent on each other. This is true but this fact is often
too much emphasized in economics. The use of simultaneous system of equations forces
people to emphasize that some variables are dependent on other variables but this is amethodological assertion rather than a realistic observation. The same assertion can bemade in physics but analytical framing is much different from that of economics. For
instance, if one takes gravitation, for example, into consideration, everything is
influential to the others. But, on many occasions, the influence of gravitation is thought
to be negligible and treated as such in physics. In the same way, on many occasions, it iswiser to treat economic time series as an autonomous process than to treat it as a part oflarge deterministic process. Interdependence of variables is a kind of methodologicalmyth made by L. Walras and other protagonists of general equilibrium theory.
Alfred Marshall had a much more realistic view than Walras, and he investigatedproblems using partial equilibrium analysis. He knew that the economy is decomposable.
Simon (1969) pointed out that the world is almost empty and systems can be
decomposed into subsystems. This decomposability is not only important in the systems
designing but also in the theoretical framing.8) Needless to say, decomposability is not
absolute. Any economic system is connected. The point is that this connection is loose. It
is necessary to develop analytical frameworks which are suitable for these systems. Thisshould start with developing two kinds of analyses in two directions: one is to develop aframework to investigate an independent process, and the other is to develop a systems
analysis which provides us a terminology to discuss relationships between subsystems.
An example for the first task is to treat a time series as an autonomous process withrandom fluctuations. The second task is more complicated and requires closer
examinations.
5.1

Loosely connected system

If a set of variables form a decomposable subsystem, the time series of these variables
form an independent autonomous process. The main difference between the process
analysis and the equilibrium analysis is that the equilibrium is a state and nothing occurs
in it whereas the process is a series of events and it proceeds only when something
occurs. So the intervals of two events are important characteristics of the process.
Most of the economic process has a kind of rhythm which determines the standard
8)
Partial analysis is not an easier substitute of the general equilibrium, but has an empirical basis
concerning the systems working. See also Loasby (1991, pp. 48–51). Lachman (1986) pointed out theincompatibility of Marshallian analysis and general equilibrium (p. 20, note).

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interval of two consecutive events. For example, a shop keeper replenishes his or her
inventories regularly: everyday, every week, or every month according to the given
conditions. These rhythms are not uniform for all processes. In the factory, someproducts on a passing line are produced with a tact time of several minutes. Production
volumes per day can be changed everyday but they are usually controlled on a weekly
basis. A decision on the investments on the factory capacities are much more important
than the decision on production volumes per day but it is made less frequently than thechange of production volumes. The price of a product remains fixed for a relatively
longer period (e.g., a year).
In these processes, the rhythm and variables are the target of decisions. The mostimportant fact in the above is that these variables are not determined at once. Eachdecision is made with proper intervals, even if these intervals are also a target of adecision making. A general equilibrium framework masks the simple truth that ourdecisions are made one by one consecutively in time. The general equilibrium presumes
that all the variables are determined at once. This presumption is only necessary for thesimultaneous formulation of general equilibrium and has nothing to do with the reality.
Economy is not a system in which each element is tightly connected to others like asolid body. On the contrary, economy is a loosely connected system. In this system,
many of variables are loosely connected and have some freedom of variations. That is, if
x is supposed to be a loose variable, and s is supposed to be the value of x at the
moment, it can take any value in the interval [s-d, s+e] for certain margins d and e
without causing any change for other variables of the system. It is only in this loosely
connected system that you can make an effective decision. Otherwise, you are obliged tochange many variables at once. But most of the time this is impossible, since the humanability to change many variables at one time is quite limited.
In the next section, the nature of human behavior will be examined. Whether it is
economic or not, human behavior is normally a series of actions and each economic
action is to change a variable or two. The economic actions are in these senses justadjustments of the situation rather than a control of the state of the economy.
The decomposability of the economy and loosely connectedness of variables are thus
the basis of any human behavior. Systems’ view of the general equilibrium theory totally
ignores these facts and concentrates its interest on the interdependence of each element.
5.2

Decoupling mechanisms

For a system to be loosely connected there must be a mechanism which makes variables
separated from others. This separation or decoupling is done by various ways. The most– 23 –

Y. SHIOZAWA

important one is inventory of stocks. In the case of a shop, articles displayed on the
shelves and the stock in the backyard makes up the inventory. A factory has three forms
of inventory: stocks in the form of raw materials, stocks in the form of work-in-progress,
and stocks in the form of finished goods. All these stocks are most common means of
decoupling.
Take the case of a shop. Customers come in from time to time and decide if they will
buy this article or that. At each time when a customer wants to buy an item, theshopkeeper is ready to sell the item as much as the customer wants to buy. There is only
one exceptional case that the shopkeeper cannot satisfy the customer’s demand. It is thetime when the amount that the customer wants to buy exceeds the stock of the item. In
other cases, what the shopkeeper does is to pick up the required amount of the item fromthe inventory and deliver it to the customer. With the aid of inventory, the shopkeeper
can make an action to sell an item. The same is true for the factory. Thanks to the stocksof various forms, each section of the factory can have its own speed of production. Of
course, this freedom is limited, for we cannot accumulate stocks infinitely.
If the shop keeps no stocks, it becomes difficult for the shopkeeper to deliver an item
when it was required. Suppose that we cannot stock an item in an ordinary way, likeelectric power for example. Then we cannot separate the production and theconsumption and their decisions should be made at the same time. In an imaginary world
where there are no stocks at all, every variable should have a fixed value as a function of
all other variables. In this imaginary world, no coordination is possible, for we have nosuch power, even if we cooperate, to control at a time all the variables of an economy.
Another mechanism of decoupling is money. Money makes it possible for a person to
separate buying from selling. Without money, it is necessary to realize the so called
double coincidence of demands. This means that a person A wants to take an article X
and give an article Y in exchange, whereas another person B wants to take an article Y
and give an article X in exchange. It is very hard to find the pair of persons whose
demands are in this situation. Money dispenses with this double coincidence andincrease the chance to buy and sell. It is sufficient to find a person who wants to sell theitem one wants to procure or to find a person who wants to buy the item one wants tooffer. Promises are another form of institutions that have a decoupling function. If you
make a promise to deliver commodities at a certain time, and if your counterpart accepts
it, it will make possible to separate the time of transaction, the time of production and thetime of delivery.
These decoupling mechanisms are material base for a human agent with limited– 24 –

Evolutionary Economics in the 21st Century: A Manifesto

capacities to make decisions and execute them.
5.3

Adjustment on different levels

As mentioned in subsection 5.1, each process has its own rhythm of events. When we are
to examine two or more processes with different rhythms, the relations between themtake a form of multi-layered adjustments.9)
For the concreteness, let us suppose that process A is the sales of a convenience store,
process B is the replenishment of the stocks, and process C the change of assortment
which is to be sold in the store. Then, process A proceeds at the rhythm of every few
minutes, process B at the rhythm of every day and process C at the rhythm of every
month. At each time a customer comes in and buys some of the items, the inventory of
the store changes. The stock of each item decreases as the sales goes on. Each item isreplenished at a determined time of the day after a report of the sales of the previous day.
The initial stocks of the day are determined not by the shopkeeper but by the chain
center. The latter calculate appropriate amounts of initial stocks every day for each item
and for each store. At the end of the month, the center examines if an item is well sold ornot. Then it decides if it continues to supply the item or ceases to do that. In theseprocesses, three layers of adjustments can be observed. The stock adjustment of theconvenience store is almost automatic. Each time an item is sold, the stock changes. The
amount of replenishment can be adjusted by the center. For example, when an item often
is sold out, the initial stock of the item can be increased. The adjustments of theassortment are made by the same center but less frequently than the adjustments of theinitial stocks of each store.
For the owner of a convenience store, the set of items and the initial stock of each item
are given conditions. What the owner can do is to arrange the articles in a good way on
shelves and waits customers to come in. The chain center has to decide the initial stockof each item for each store. The series of daily sales gives the data for this decision. An
adjustment of the assortment is another matter to be considered for the center. The basisof this decision will be the monthly sales for each item. If the sales volume of an item isinsufficient, it will be replaced by a new item.
One may add another level of adjustment: the rhythm of replenishment. There is no
reason that the replenishment cycle should be day to day basis. One can change it for
example to twice a day basis or to once two days basis. The influence of this change willappear in various ways. One can choose the best cycle if he/she can estimates the effects
9)

Multi-layeredness of economic adjustments is remarked by Nishibe (2004) and others.

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Y. SHIOZAWA

of various cycles. The comparison may not be easy, for the effects of the change ofcycles are often complex and competing. The change of roles is also possible. For
example, the sales volume of lunch boxes depends much on school calendar. As lunchboxes occupy an important part of the total sales volume, it will be better to arrange insuch a way that the supply volume of lunch boxes will be made by the shopkeeper rather
than the chain center.
In this way, adjustments are made on various levels. Some of them are institutional in
the sense that they are decided on the agreements of the interested parties. Some of them
are conventional in the sense that the decision making routines continue to be adopted
because they worked so far without any big inconveniences. Each adjustment ruleconcerns only a small number of variables and adjustments are done only on one or two
variables.
5.4

Evolution and history

Theorists must be aware of equilibrium and maximization that are not an adequate
framework for the examination of evolutionary process. Evolutionary economics
requires a new theoretical framework which is totally different from the mainstream
neoclassical theory. Without such a framework, it is impossible to show why evolution isimportant and why it is pervasive in every domain of economies.
Evolution occurs and is possible only in loosely connected systems. An adjustment
rule is an example of economic behavior. It is a small rule in the sense that it concerns
only a small number of variables. An evolution is a replacement of this small rule toanother small rule. This explains partly why evolution occurs universally. Evolutionchanges the movements of only small number of variables. The risk of systemic failure issmall. You can try any change on a trial and error basis. Effects of the replacement are
sometimes difficult to determine. So the two competing rules can continue to co-exist fora long time.
A state of an economy can be described as a combination of many alternatives. A
specific combination may occur only once for always. So the process of economic
evolution must take the form of a historical. It is the succession of combinations ofwhich each is unique for all time.
The importance of historiography should be emphasized. Economic history is full of
examples of evolution. However, each economist only knows a small number of concrete
cases of historical evolution. Natural history preceded biology and, in particular, theevolutionary theory. History of economics has followed a reverse order. The idea of
evolution came from biology and the theory preceded the accumulation of knowledge.
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Evolutionary Economics in the 21st Century: A Manifesto

Until now we have but rather poor collections. Yet it is evident that the collection ofcases of economic evolution should be the base for further development of evolutionary
economics. It is necessary to organize systematic efforts to collect samples of concrete
evolution.
In 2004, the JAFEE started to edit and compile a handbook on evolutionary
economics. Half of the handbook will be devoted to a collection of concrete cases. Thisis an effort, after the publication of a periodical in English, which requires thecooperation of all members of the Association. A handbook which containing almost allkinds of cases of economic evolution should have been published much earlier than now.
But such an attempt requires an enormous work just like editing a dictionary or anencyclopedia. Only an academic association can achieve a work of such magnitude.
6.

The nature of human behavior

Evolutionary economics gives not only a wider perspective to economic analysis, it isalso a necessary framework for understanding the nature of human economic behavior
and explaining how market economy really works as a process. Evolutionary economics
is indeed an alternative to neoclassical economics as the core framework of the economic
theory. In order to clarify this point, in this section we will examine the nature of
economic behavior and in the next section we will examine the knowledge in relation tohuman behavior.
In Section 3, three categories of evolving entities were examined: commodities,
technologies, and institutions. But it is not sufficient for evolutionary economics toinvestigate various cases of these categories. As mentioned in Section 3, there are two
additional categories: behavior and knowledge. They are not only important as
categories of economic evolution, but they are at the same time essential factors that
support the mutations and reproductions of various entities.
As mentioned in Subsection 4.2, neoclassical economics has accumulated theoreticalanomalies. It is evident that economics requires a paradigm change. The necessity of thischange has been recognized since 1970’s but economics has failed in doing so, because it
could not abandon the theoretical framework of neoclassical economics and could notpresent an alternative framework. The neoclassical framework is composed of two
principles: the maximization principle to characterize human behavior and theequilibrium framework to characterize normal economic state. The common
understanding among evolutionary economists is that the equilibrium framework should
be replaced by the process analysis and the maximization principle by the routine– 27 –

Y. SHIOZAWA

behavior and selection process. Thus the correct understanding of the nature of behavior
is the crucial part of evolutionary economics. Knowledge and behavior are closely
linked. Indeed, knowledge and behavior are the face and back of the same coin.
Although it is difficult to examine knowledge and behavior separately, behavior will be
examined mainly in this section and knowledge will be briefly examined in the next
section.
6.1

Maximization principle reexamined

Let us first examine the nature of human economic behavior. This is a field in which theneoclassical economists feel at home and are confident of their theory. Alternative viewof how people behave should be presented from evolutionary perspective. The
conclusion reached in this study is that economic behavior should be understood as anapplication of a rule of conduct. Most evolutionary economists have come to support thisconclusion. The contribution of this paper is that rules of conduct, decomposed into its
simplest form, have a specific structure which is named as “CD transformation” by
Tamito Yoshida, an emeritus professor in Tokyo University. This will be explained in
Subsection 6.3, but it will be easier to understand the range of this characterization when
we start considering the explanations given by neoclassical economics on consumer’s
choice.
Suppose that a consumer chooses what to buy in the market. In such a situation,neoclassical economics postulates that the consumer follows the maximization principle.
Mathematically speaking, the problem of consumer’s choice is one of simple
maximization with a constraint condition. When the prices are positive, the set of nonnegative points, which satisfy the budget constraint, is bounded and closed. Any
continuous function has a maximum point on this set (Weierstrass theorem). Once this
explanation is given, neoclassical economists are quick to conclude that people choose
the maximal utility combination of goods because there is no reason to choose lessattractive combinations. However, there is a big gap between the existence of a
maximum point and the possibility to find the maximal point. As mentioned in
Subsection 4.1, the time necessary to solve the problem increases by exponential orderwith the number of goods, and it soon becomes impossible to solve.
In textbooks, which are used in an introductory economics, figures of the case of two
items are given. Finding a maximal solution does not seem difficult at all. In the generalcase, a system of equations is given, as well as an explanation that states that, at the
maximal point, specific conditions must be satisfied. However, no explicit explanation is
given for finding the maximal solution. Neoclassical economics systematically neglected– 28 –

Evolutionary Economics in the 21st Century: A Manifesto

the computing complexity of the problem and ignored logical consequence which iseasily derived from the fact that the computation requires too much time to solve theproblem. To postulate maximization principle is irrational when it is known that the
maximal solution cannot be found.
H. A. Simon was the first to question, following the theme of bounded rationality, howindividuals behave when unable to calculate maximal solutions. Bounded rationality canbe defined as the condition that the computing complexity should be within the range ofhuman reasoning.
Only one extra remark is necessary here. Owing in part to Simon’s first formulation,bounded rationality is often interpreted as something that is related to uncertainty. The
neoclassical approach to this situation is the expected utility version of the maximization
principle. Before an evolutionist’s understanding of behaviors is presented, it will benecessary to examine the case of expected utility maximization.
6.2

Expected utility and uncertainty

The world is complex, and it is difficult to foresee the consequences of specific actions.
In such a situation, theoreticians have a tendency to formulate the problem in a stochastic
form. They assume that people maximize the expected utility. This is a simple repetitionof the error of the maximizing principle. In a new situation, the conditional probability ofeach outcome will not be easily known. Expected utility for each set of alternative
actions is the sum of the utility of each outcome multiplied with the conditional
probability of the outcome. Without knowing conditional probabilities, how is it possiblethat people estimate the expected utility?
Suppose that all possible outcomes are known (this is not always the case). If the
problem is small, the expected utility for all alternative actions can be calculated. Whenthe size of a problem is a bit large, the work becomes difficult, for it is necessary to
enumerate all the combinations of different actions and estimate the conditional
probabilities of each outcome for each combination of actions. Even if this is done
correctly, the maximal solution does not assure that the outcome is substantively better
than the outcome expected by the rule behavior.
For clarification, let us assume that there are five consecutive choices with three
options each. As a result, the total number of combinations is 35, i.e., 243. Let us also
suppose that the same decision-making situation has occurred 100 times. Since this is asituation that occurs infrequently, this number of experience is significant. But an
occurrence of 100 times is insufficient in order to estimate the conditional probability ofan outcome for each combination of choices. For 243 combinations, we only know 100– 29 –

Y. SHIOZAWA

cases. Many of the combinations had never made in the past. How can we estimate
which outcome will follow in what probability for each combination of choices? Except
in cases in which the outcome can be determined by the laws of physics, the probability
estimates are purely subjective. The expected utility, based on these estimates, is a kindof pure imaginative guess and has no connection to reality. As a result, the maximal
solution will have no substantive meaning.10)
6.3

Rule-based behaviors

It is clear that the maximization principle should be abandoned. We live in a world wherecomplex problems are most often posed. But except in very simple problems, the pursuitof a maximum is practically impossible. The question of how individuals behave in thiscomplex world arises.
It is necessary to approach the question from a totally different angle thanmaximization. There are many hints for this. Behavioral psychologists analyze humanbehavior as a combination of stimulus and response. Whether it is the result of classicalconditioning, after Pavlov, or of the result of operant conditioning, after Skinner,
behavior is a combination of a stimulus and a response. Evolutionary economists talked
much about routines and rule-based conduct. Computer scientists formulate humanbehavior in a computer program. But no prototype of human behavior is so far given.
Any complex behavior is composed of several actions of a simple type. When we know
this simple form of human behavior, we can examine, in a general way, the nature ofhuman economic behavior.
Such a formulation can be given in the form of a quadruplet: qSSq. Here, q indicatesthe internal or physical state of the actor, S, the observed situation or stimulus, S, theaction to be taken, and q, the internal or physical state of the person after action S hasbeen taken. Stimulus S comes from the outer world, and S is an action to the world.
Here, “the world” refers to both the external world and the actor’s internal world.
The formula given above is too abstract. An illustration will be necessary. Any
conditioned reflex is given in a form qSSq. For example, take the famous reflex test. In
this case, q is the state that leg is free to swing, S is the stimulus given by a hit of ahammer on the knee, S is the unintentional kick forward, and q is the same state as q.
When you hear the alarm clock rings, you know that it is time to wake up. In this case, q
10)This point is once discussed in Shiozawa (1998). Expected utility maximization, as well as simple
utility maximization, is in the realm of “physical symbol systems hypothesis” (Newell and Simon,
1976). One may perhaps say that they still remain in the cognitivist view of representation (Ziemke
and Shakey, 2001, p. 62).

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Evolutionary Economics in the 21st Century: A Manifesto

is the sleeping state, S is the alarm of the clock, S is the directive that you should wakeup, and q is the state that you have get up already.
The essence of the formula is as follows: Directed by the internal state one examines if
the outer world is in state S; if it is, one acts as the directive S dictates and change his or
her internal state to q. What the actor does at a specific time is very simple. He or she
does only one thing: observe if the world is in state of S or act as S dictates. No specificlevel of intelligence is required to perform this action.
Quadruplets can be divided into two parts: qS forms the conditional part Q and Sq
forms the action part A. Then, we can rewrite the quadruplet in a form of couple QA or
QßA. The quadruplet then gives an if-then rule: if qS, then Sq, or, if Q, then A. Thisis the prototype of rule behavior. After a careful examination of American semiotics,
Tamito Yoshida (1990, original paper 1967) interpreted this formula as CDtransformation, i.e., a transformation of a cognitive meaning to a directive meaning. John
Holland’s “classifier” has a close relationship to if-then rule conduct or Yoshida’s CD
transformation.11) This subject will be dealt with later again.
If-then rule formula is a useful expression as independent behavior. But this formulacannot include information of how to unite different CD transformations and to organize
them into a series. The ingenuity of the quadruplet formulation lies in its ability to
express a series of actions as a set of quadruplets. In fact, let us consider the series ofactions briefly written below: If S1, A1. Then, if S2, A2. Then, if S3, A3. If we introduce
internal states q0, q1, q2, and q3, this series of conditional actions is described by thefollowing set:
q1S1A1q2 ,q2S2A2q3 ,q3S3A3q3 .

The actor starts from the internal state q1. If S1 is observed, the actor takes action A1 andtransits to the internal state q2. Then, if S2 is observed, the actor takes action A3 andtransits to q3, which means the end of this series of actions. This formulation was foundin a guide book on computation theory.12) It was surprising to learn that any computablefunction could be written as a set of quadruplets of this form. As a particular case, any
program in a computer can be written as a set of these quadruplets. This fact assures theuniversal character of the quadruplet formulation. Although it is highly abstract, theformula is well designed and applicable to human behavior even in a complex
11)Classifier systems are explained in many papers. For the explanation by Holland himself, see forexample Holland (1992) or Holland (2001).
12)
I found this formulation in Martin Davis (1985), Definition 1.2 in Chapter 1.

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Y. SHIOZAWA

situation.13)
6.4

An illustration from daily life

Any behavior can be decomposed into a series of if-then-type actions. Take, for example,
the act of making coffee. It can be broken down into a series of instructions, as follows:
Measure two cups of water into a pot; place the pot on a heat element; turn on the heat;place a paper filter in the drip strainer; place a suitable quantity of ground coffee in thefilter; place the strainer over a coffee cup; wait until the water boils; when the waterboils, pour it into the strainer; wait until the water passes through the filter; remove thestrainer; add milk to taste to the coffee; pick up the cup; carry it to the table; and enjoy
the coffee.
This is a series of actions, each of which is conditioned by prerequisites that should besatisfied as a result of previous actions. This series can be decomposed into a set ofquadruplets in which the internal states q and q play the important role of assuring agood order of actions.
Even animals with low intelligence behave in the similar way. Jakob von Uexküll(1934), the founder of biosemiotics and inventor of the Umwelt concept (species’ proper
environmental world), gave a classical description of tick’s egg laying behavior.
For a field tick to lay eggs, it is necessary to suck the blood of a mammal. But tick’s
abilities are quite limited. It cannot move quickly. In contrast to the flea which can jump
hundred times higher than its body, the tick cannot jump at all. In addition, the tick isalmost blind. At first thought, it seems impossible for a tick to catch a mammal and suckthe blood. However, an ingenious solution has been found by the tick. When a tick isready to lay eggs, it climbs up a bush tree and hangs at the tip of a branch. It waits for along time, even years, until it smells the butyril acid. This material is secreted from theskin gland of mammals. When a tick detects the butyril acid, it releases the branch andsimply falls. In a fortunate case, the tick falls on a mammal. It moves around and, when
it encounters a warm surface, it bores into the skin of a mammal and begins to suck theblood.
This tick’s behavior can be decomposed into a series of simple actions. The first action
is to detect the butyril acid and let the body fall. In a form of quadruplet, q is the waiting
position, S the detection of the butyril acid, S the freefall, and q the readiness to catch
whatever it falls on. The second action is to find warm place. Detection of the heat let thetick know that the surface around it is the skin of a mammal. All these actions can be
13)This idea was first presented in Chapter 11 of Shiozawa (1990).

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Evolutionary Economics in the 21st Century: A Manifesto

described in a form of quadruplet qSSq. Branching process of actions can also be
formulated by this quadruplet. For example, when the tick fails to fall on a mammal, lackof heat dictates that the tick should go back to the tip of a bush branch again. This choiceof actions which depend on the situation can be given as a pair of two quadruplets, withthe same internal situation q (the state after the free fall) and the different S and S .
Here S is the state in which the tick detects the heat whereas S is the state in which thetick fails to detect the heat for a suitable trial time.
Both of animal behavior and human behavior can be decomposed in the same way to aseries of simple actions which can be represented in a form of quadruplet qSSq.
Difference between human behavior and animal behavior is that human behavior ismuch more plastic in the sense that human behavior can be remolded into a different
series of actions whereas animal behavior is much more stubborn in the sense thatanimal behavior is more often impossible to change. Despite these differences, there is aremarkable continuity between human behavior and animal behavior. We can easily
imagine how an intelligent human behavior came into existence in the world. At the very
beginning human behavior was not very intelligent and not very different from animal
behavior. After a long history of experience, human being improved their behavior in an
evolutionary manner. This process should have been helped by the mankind’s highcapacity of learning, adaptability, and by the use of language and sign systems andintelligence. But the essence of the process is the same as the case of animal’s learningand acquisition of a new behavior.
Quadruplet formula can be a bridge that connects animal behavior and humanbehavior. This indicates that quadruplet formula is not only a convenient expression of arule-based behavior but one that can show the nature and the structure of humaneconomic behavior. Rule-based behavior can now be defined as behavior that isexpressed by a set of quadruplets.
6.5

Mode of selection of behaviors

Let us come back to human behavior. If-then rule behavior and a series of these if-thenrules do not require a high level of intelligence. However, this does not mean that theperformance of this type of behavior is inferior to that of more sophisticated definitions.
The maximization of any type, say a maximization of expected utility, gives aninstruction on how to behave, if it is possible to find the solution. As explained in
Subsection 6.2, the obtained result does not assure that the solution is the best possible
action in any substantive way. The solution of the maximization problem only meansthat it is the best one in a fictitious world of subjective estimates. A rule-based behavior,– 33 –

Y. SHIOZAWA

which is a result of a long history of evolutionary process, may produce much better
results than the solution of the imaginary maximization problem.
The evolutionary process of human behavior is of course different from that ofanimals’ behavior from various points of view. Animals have a behavior pattern that isproper to their species. Ethologists teach us many such species-specific behaviors. The
most important of them is the mating behavior. Be them insects, birds, or mammals,
male finds a female of the same species quite accurately. Birds of two different species
sometimes resemble with each other so much that even a researcher has a difficulty toidentify them at a first glance. However, birds can distinguish specific traits in one
another and can choose an appropriate partner.
Some behaviors are repeated in a rigidly fixed pattern. In the egg-laying season a malethree spined stickleback will attack male competitors of the same species. The sign
stimulus is the red color of the fish formed objects. So sticklebacks attack any modelimitations with this trait, even they do not resemble stickleback at all.
Animals show a wide variety of behaviors, but they have only few options for eachpredetermined situation. If a specific stimulus or releaser is shown, animals often take aunique fixed behavior. In this sense, animals’ pool of behaviors is poor. Many ingenuous
behaviors have only been obtained through a long history of selection for many
generations.
Humans show the same type of action patterns as animals do. The difference between
humans and animals is that humans have a wide variety of possible patterns, which aretaken at a specific situation. In this sense, humans have a broad range of patterns forthem to select in any situation. Selection occurs mainly as learning. When an experience
produces a bad result for a specific behavior, learning occurs very quickly, and a bad
behavior is excluded from the pool of behaviors. This experience can be transmitted toother members of the society. So the behavioral evolution for humans occurs for anindividual, or in one generation, whereas animal evolution requires many generations. If
we use terms of biological evolution, behavioral evolution is phylogenetic for animals
and ontogenetic for mankind. So the human behavioral evolution proceeds much more
rapidly than that of animals.
Flexibility of behavior, creative imagination, memory, causal reasoning, andcomparison of results are mankind’s specific capabilities. With these characteristics,
humans are able to invent new behavior, compare experiences, select a better pattern,
and learn from the best practice. Even when rational activity in each behavior is notevident, human behavior is well organized and designed.
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Evolutionary Economics in the 21st Century: A Manifesto

6.6

True levels of choice

In the neoclassical formulation, choices are made all at once. When a human being isendowed with an unlimited capacity for rational reasoning, he or she may produce goodresults. Using current and past information, humans can arrive at the best solution. Thisis the story supposed in the expected utility maximization model. However, humans live
in a complex environment, and their rationality is limited. In this situation, choices madeall at once do not produce good results. Humans know this does not work. In reality,
choices are made on several levels.
Take the example of Subsection 6.3. In the given situation Q, action A was taken.
What have we chosen in this case: action A or the rule Q ßA? The action to be taken is
the same. However, there is a difference in the level of choices. In the first case, action A
was chosen from among all other alternative actions. In the second, one rule was chosenfrom among several.
In a real-life situation, the difference becomes much clearer. For example, aninventory control of an automobile parts shop is cited. If you were the shop keeper, you
are requested to reduce two variables: the inventory and the risk to loose customers.
These two objectives are usually contradictory. When you reduce the inventory, thepossibility of selling out of an item increases, and customers may choose to buy the item
elsewhere. It will increase the possibility to lose customers.
Suppose that, every Monday, parts are replenished from the factory after an order isgiven at the end of the previous week. On each weekend, the shopkeeper must
determine, for each item, what quantity to hold at the beginning of the next week. This isan example of typical economic decision-making. The shopkeeper can make a previsionon the sales of each item and decide the best quantity for each item each weekend. Inorder to do this, the shopkeeper must know the probability distribution for each of theitems. Even if a shopkeeper has sufficient data to determine these distributions, it
requires a considerable amount of calculation. There is another method of controlling.
The shopkeeper starts with choosing a random quantity for each item. This is atemporarily determined target. At each weekend, the shopkeeper orders so as to secure a
temporal target for each item. When an item is sold out at mid-week, the shopkeeper
increases the target of the item, by approximately 20 percent, for example. On the other
hand, when an item remains for more than 5 weeks consecutively, the shopkeeper
reduces the target of that item by 10 percent. At the beginning, this control method may
not be very accurate. The shopkeeper may find himself sold out of some items and withtoo much remaining inventory of other items. However, as time passes, this method– 35 –

Y. SHIOZAWA

provides a plausible level of inventory, and the performance will improve. The best pointof this control method is simplicity. It requires no statistics and no laborious calculation.
In the first method, the shopkeeper chooses the best inventory for each item and foreach week. In the second method, the shopkeeper chooses the method. This method
contains some parameters, and the shopkeeper must choose a good pair of parameters.
When the parameters are given, the target inventory is calculated easily. So the real
selection is the choice of parameters. The adjustment speed depends on the parameters.
The choice of good parameters is a higher-level choice than the application of rules forcontrolling an inventory. It requires more time and wider experience than the simple
inventory control.
The choice between different types of rules is sometimes more subtle. There may not
be a readily best choice. Textbooks on inventory control do not compare different
methods directly. The result may change for different situations and purposes. It is quite
probable that several rules of control will continue to be employed simultaneously.
Evolutionists do not deny choices. The difference between evolutionists andneoclassical economists is that the latter has an obstinate tendency to suppose that peoplechoose everything every time, whereas evolutionists think that there are several levels of
choices and plausible levels are chosen for each situation.
7.

Knowledge and behavior

Knowledge is not usually thought to be an economic factor. However, as W. Arthur
Lewis (1955) has argued, knowledge is an important factor and a vital resource for the
economic growth of any society. Friedrich von Hayek, reporting that the market is asystem that enables knowledge of different people at different places to be coordinated,considered the use of knowledge as the most important element of economics.
Evolutionary economists now think knowledge is the core topic of evolutionary
economics.14)
Knowledge as a whole is a closely woven unity. But it can be decomposed into small
units, each of which can be expressed in the form of a sentence. These units ofknowledge can be transmitted from person to person through learning. Knowledge
satisfies the 5 conditions given in Subsection 3.4, and therefore each unit of knowledge
can be seen as a typical entity which evolves.

14)
The importance of knowledge is now expressed by various economists. See Loasby (1976; 1991),
Lackman (1986).

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Evolutionary Economics in the 21st Century: A Manifesto

In Section 3 three categories of evolving entities are discussed: commodities,
technologies and institutions. Each of these entities is closely linked to knowledge. A
commodity embodies many kinds of knowledge: how and where to procure materials,
how to produce the commodity with minimum cost, and how to promote it in face ofmany other competing commodities, and others. Technology is a set of guiding
principles which organize elements into a system with specific functions. These guiding
principles make an important part of human knowledge. Institutions are rules of thesociety. When they are memorized by the people as a part of knowledge, rules becomesocially effective. Even a delinquent considers the consequences of his or her
delinquency. The accumulation of knowledge stimulates the evolution of commodities,
technologies and institutions. In fact, the accumulation of knowledge is the engine of
economic development and gives the human economy a very different feature ofevolutionary process.
In the following, however, relations of knowledge to three other categories will not be
investigated. We will concentrate ourselves on discussing the link between knowledge
and behavior.
For more than 2,000 years, it has been believed that knowledge is connected to truth.
A proposition is a statement which can in principle be determined whether it is true or
false. In the traditional understanding, knowledge is a collection of true propositions.
This understanding of knowledge has been reinforced by various reasons. Philosophy
and logics have a long history to regard the contents of true propositions as typicalknowledge. Logics have been preoccupied with true propositions. Epistemology was thepart of philosophy which argues how and by what title we can get true knowledge.
Teaching at school also shows a strong tendency to tell that the knowledge is a collectionof true propositions. Science is a systematic effort to reorganize various propositions andto search true ones. In these circumstances, it is rather natural that people believe thatknowledge is a collection of true propositions.
However, this is only one half of the human knowledge. The other half of knowledge
consists of statements that can be considered to be useful or not useful. These statements
do not even take the form of a proposition. They can be a statement that tells what to doin which conditions. Contents of these statements are often called know-how, whereas
contents of true propositions are simply called truth.
Gilbert Ryle (1949) was the first person to consider that knowledge is composed of
two parts of different characters: knowing-that type of knowledge and knowing-how
type of knowledge. In economics knowledge of knowing-how type is much more
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Y. SHIOZAWA

important, for it is this type of knowledge that mainly supports our behavior. Knowledgeof this type takes a form of conditional directives: in such and such case, do this and that.
These statements can be expressed in the form of if-then rules. For example, let us
assume that the rule of conduct Q ßA is being considered. This rule is neither true nor
false. The value of Q ßA is the usefulness of this rule when it is adopted as a rule ofconduct. Logic is the science which examines knowledge of knowing-that type.
Knowledge of knowing-how type has no such discipline. Investigation of this type ofknowledge is not developed yet and stays in a very naive state. However, this does notmean that this type of knowledge is less important than the other. Indeed, humanbehavior is always coupled with this type of knowledge. Remind that behavior can be
decomposed into a series of if-then rules or CD transformations. When knowledge isunderstood to be of this type, it is easy to see that knowledge and behavior are the faceand back of the same coin.
Mankind possesses memory. Knowledge of all types is kept in the memory. In theearly era of mankind, memory was only supported by the brain. After the inventions ofletters, documents and libraries began to be used as extensions of memory. A large
accumulation of knowledge became possible. Memory is a base that enables mankind todevelop its economy in a cumulative way.
8.

A breakthrough with a new tool

Many economists agree that the neoclassical economics has drowned into the stagnatingstage. No breakthrough can be expected on the extension of the present research
program. Alternative frameworks have been proposed many times but they could not
replace neoclassical economics, because they could not produce research program whichis as powerful and productive as neoclassical economics. The reason why neoclassicaleconomics had became so productive was that it succeeded to incorporate mathematics
as analytical tools. Using diagrams and calculations, it was easy for economists toanalyze certain types of problems and obtain some results. But this productiveness there
and then became the trap for neoclassical economics. Usefulness of mathematicalformulae is connected to solvability of the formulated problems. Even if mathematics isa powerful tool, the situations that can be mathematically analyzed are rather limited.
Equilibrium was an important exception. This was the main reason why neoclassicaleconomics could not abandon equilibrium framework.
To propose a new theoretical framework is not sufficient for a coming breakthrough. It
is necessary to present a new tool, which is as powerful as mathematics was for– 38 –

Evolutionary Economics in the 21st Century: A Manifesto

neoclassical economics and suitable for the new framework. In order to consider thisproblem, let us start to examine the present state of the art of economic science.
8.1

The state of the art of economic science

For more than 100 years, economics has been based on equilibrium and maximization.
The main tool of analysis was mathematics. It started from the stage of counting thenumber of unknowns and the number of equations. Walras, in the 1870s, was satisfied toshow that two numbers were equal. From the 1930s, a new era started, and more refinedmathematics was introduced in order to show that the solutions really assume nonnegative values. In the 1950s, Arrow and Debreu succeeded, using a generalized fixedpoint theorem, in proving the existence of equilibrium under very wide assumptions. At
this stage, the general equilibrium became mathematically perfect.
At first, there was a kind of euphoria. Many people hoped that theory andeconometrics, with the aid of computers, would open a new road to a scientific andpowerful economics. However, after the initial enthusiasm, strong criticism was madeagainst the state of the art in the first half of the 1970s. The very framework of
economics was attacked. The demand function presupposes that consumers are perfectly
rational. The supply function presupposed that there are decreasing returns to scale to the
producers. In reality, people have a very limited rational capacity, and most production
firms operate with increasing returns to scale. This is a rather well-known result, and theanomaly of the economics was evident. Most economists know that many of the basic
assumptions in economics are unrealistic. Reconstruction from the very bases of theframework was required. But most economists are reluctant to reconstruct the economic
theory. Some economists claim that restructuring may require the loss of mathematics,
which has been the main drive to economics for more than 100 years.
The state of the art of economics can be compared to that of physics at the end of the
19th Century. At that time, it seemed that classical physics was firmly established, andnobody imagined that physics needed a fundamental reformulation. But at the beginningof the 20th Century physics had to accept two biggest revolutions in the physical science
i.e. the quantum theory of Max Plank and the relativity theory of Albert Einstein.
In the case of economic theory, at the beginning of the 21st Century, a renovation of
the economic theory is needed. This necessity is more evident than it was for physics atthe end of the 19th Century. Several important anomalies are observed at the very baseof economic theory. It would be fair to ask why there has not been a paradigm change
comparable to the one that occurred in the field of physics at the beginning of the 20th
Century. It is not because there are no geniuses, such as Albert Einstein or Max Plank.
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Y. SHIOZAWA

The history of economics can be divided into three periods. For the first 100 years, theeconomy has been investigated mainly through literal discourse. In the next 100 years,
mathematics was the leading tool for the development of modern economics. It started
with simple calculations of some partial differential coefficients. Now, a highlysophisticated mathematics is commonly used in different domains of economics.
However, the power of mathematics is approaching a saturation point. No longer canpeople expect mathematics to fuel the further development of economics. It is now timemarch to a different drummer.
There are many interesting topics and phenomena we want to analyze. However, thelack of suitable tools now obstructs the further development of economics. Therefore,
the problem can be set in an opposite way. The first step is to provide a new tool. With
such a tool or a new method, the fields of analysis can be enlarged and theories will
come afterwards. This aspirated tool may be multi-agent model analysis, or agent-based
simulations and analysis.
8.2

The merits of multi-agent models

A multi-agent model is a type of computer model in which agent classes play animportant role. Agents have their own rules of behavior and interact with each otherthrough a certain rule of combinations.
The general equilibrium and partial equilibrium theories contain agents called
producers and consumers. They are supposed to behave as theory dictates. In this broad
sense, microeconomic models are multi-agent models. However, there is a big difference
between microeconomic and multi-agent models. In the terminology of J. W. N. Watkins,
microeconomic models are “algebraic.” A typical situation is shown by the Arrow and
Debreu’s competitive equilibrium model. The production possibility sets are supposed to
be closed and convex, but no specifics were given. However, the existence ofequilibrium can be proved, thanks to a very general fixed-point theorem.
Multi-agent models are different. Each agent is defined to have a concrete set of
behavior rules. In any given situation, the behavior of a particular agent can be
determined. Multi-agent models are, in this sense, “numerical.” The behavior of any
agent can be calculated numerically from a set of relevant conditions.
Multi-agent models have four distinguished merits.
Firstly, models can include a variety of different agents. In the abstract microeconomic models, such as in Arrow and Debreu’s equilibrium model, each agent canhave different characters. However, in a detailed analysis, when, for example, there is anecessity to analyze the shift of equilibrium with the incremental variation of one– 40 –

Evolutionary Economics in the 21st Century: A Manifesto

variable, the agents are supposed to be identical. Without such simplifying assumptions,
it will be extremely difficult to analyze mathematically what happens in the model. In a
multi-agent model, the processes are computed numerically via computers. Different
characteristics of agents do not hinder the calculation of the process. The difficulty islimited to the time required to input data for each agent. Therefore, the variety of agents
does not cause problems.
Secondly, in the multi-agent models, the processes are defined in such a way that, ateach step, agents determine their actions, and the results of these actions are reflected in
the next step. This simple change in procedure can free people from the curse of
equilibrium. In the multi-agent models, it is not necessary to be confined to theequilibrium situation. At each step, the appropriate action is determined, and a marketmatching rule is used to determine the initial state of the next step. This step-by-stepanalysis was once recommended by the Swedish school economists, who called thismethod “period analysis”. However, without personal computers, the analysis became
too complicated, and period analysis did not produce a remarkable result. Now we havecheep and fast computing power. Ideas of period analysis can easily be incorporated into
multi-agent model analysis.
Thirdly, a multi-agent model does not necessitate maximization or equilibrium.
Positively, there is freedom from the traditional neoclassical framework. Some people
are bewildered with the new possibility, for they can postulate any kind of behavior to
the agents. Any type of behavior can easily be incorporated into the computer. The
instructions in the computer are actually programed. Any behavior that requires anintractable calculation is automatically excluded.
Finally, a multi-agent model can incorporate the evolutions of behaviors. In
Subsection 6.4, we reported that the most elementary forms of behavior can be given in
the form of CD transformations. If codes C and D are specified by binary digits (0–1vectors), CD transformation is nothing more than a classifier system. Just as J. H.
Holland did with his idea of a genetic algorithm, it is not difficult to incorporate
evolution in a multi-agent model.
As shown above, multi-agent models are astonishingly congenial to evolutionary
economics. Analytical tools that contribute to evolutionary economics should satisfy thefollowing five conditions:(1)

They can incorporate evolving entities into the model.

(2)

Entities can undergo mutations.

(3)

Entities can be replicated as a property of other agents.
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Y. SHIOZAWA(4)Interactions should be developed in a process.

(5)

Selections and evolution can be incorporated.

A multi-agent model can easily satisfy these conditions. For the moment, there is noother tools that satisfy the five conditions. Evolutionary games and replicator dynamics
satisfy some but not all of these conditions.
To summarize, multi-agent models provide a new powerful tool that extends far
beyond the equilibrium framework. It is useful to analyze the process from an
evolutionary perspective. Multi-agent models can be a trigger of shifting the economic
paradign to a new era.
8.3

The case of the U-Mart projectIn this Subsection, the U-Mart Project will be presented. This is a research project that
includes a part of the multi-agent model analysis, but it also has different features withdifferent aspects.
This project started with the name V-Mart in 1999. However, since there is aconvenience store chain called V-Mart in the United States, the name of the project waschanged to U-Mart. Economists and engineers were jointly involved in this project. Via
their teamwork, a large-scale computer program has been developed. The system isarticulated in two subsystems: a market server and a client server. It has also two
versions by the mode of experiments: a network server and a stand-alone server. The
market server receives bids from clients, determines prices, and executes clearing
operations. The client server provides an interface for trades with a simple click on thecomputer screen.
A U-Mart is, in fact, a virtual futures market in which one can sell and buy a stock
price index. The J30 index is used as a spot price. It is a stock price index, developed by
the Mainichi Newspapers. For the moment there is no real futures market for the J30
index. At the end of the market term, the futures price is evaluated by the value of theJ30 index. In the experiments we usually use real time series of the past J30 in order toavoid feeding arbitrary time series. In this way, the U-Mart market is a virtual market
that has some grounding in the real economy.
One of the special features of the U-Mart is that, in this market, both human andmachine agents (a program of trading actions) can participate on an equal footing.
Several public competitions have already been organized, openly inviting people tosubmit a program. Usually, at each competition, from 10 to 20 people participate as
human agents, as well as 50 or more machine agents. The total number of agents is, thus,
on the order of 80 to 100. People are being invited to participate in the competition as if– 42 –

Evolutionary Economics in the 21st Century: A Manifesto

they were in a competitive game. The objective is to obtain at the end of the session thehighest value of the money balance. Specialists of experimental economics criticize that
there are no real incentives in this game. In competitions that have taken place,participants become excited and often want a second trial chance and we think that nosuch incentives are necessary.
A U-Mart can be used as an education opportunity. Many of the U-Mart members
invited their students to participate in the game, first as human agents and second asmachine agents. This gives them a good chance to write down a program that works in asituation similar to real life. We also distribute a U-Mart system freely upon subscription.
The obtained price movements are, in most cases, satisfactory. When the participants
have no experience, the prices fluctuate roughly and abruptly. Many participants gobankrupt. In the next trial, participants became more cautious and try to avoid
bankruptcy. The price fluctuation becomes more refined, and the values remain near the
spot index value.15)
8.4

Possibilities of multi-agent simulations

A U-Mart played by machine agents alone is a typical example of multi-agent models.
Many things can be done that were impossible to achieve with a mathematical analysis.
One such possibility is the observation of a micro-macro loop. A micro-macro loop is
an important topic that is related to the very base of modern economic methodology.
Neoclassical economics assumes methodological individualism. After thismethodology, an economy can be constructed from the behavior of individuals. The
Arrow and Debreu model of a competitive economy is a good example. Given the
consumer preference, producer technology, and ownership distributions of resources,
equilibrium is defined in this construction. Equilibrium thus defined is thought toproduce the present state of the economy. Schumpeter (1925) called this doctrine
construction ab ovo (construction from an “egg” stage). Evolutionists have totallydifferent images of how the present state of the economy is formed. All knowledgesupported entities, i.e., commodities, technology, institutions, and individual behavior,
are results of past evolutionary processes. They are all path-dependent. Ownership
distribution of resources is also a result of past economic processes that are, in turn, aresult of close interaction of those entities. Evolving entities are a result of past selection
processes, and what remains active at present influences the development of theeconomic process itself.
15)

For the details of the U-Mart project, see http://u-mart.econ.kyoto-u.ac.jp/index-e.html.

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Y. SHIOZAWA

The micro-macro loop is a causal relationship of evolving entities (microindividual
behaviors and knowledge) and the total economic process (macroeconomy as awhole). If we observe the existence of micro-macro loops, methodological individualism
is not sustainable at all. The refutation of methodological individualism does not imply
that the methodological holism is acceptable. The latter must be abandoned as well. The
concept of the micro-macro loop forces us to get away from the old dichotomy ofindividualism and holism.
The importance of a micro-macro loop is evident, but it has not received sufficientattention. The reason is clear. We were lacking methods for treating these types of
causations. However, it is now expectable that the U-Mart will provide a concrete
example of a micro-macro loop. An investment strategy of day traders is to extend a buy
offer with a directed price that is one per cent higher and the same amount as a sell offerwith a directed price that is one percent lower than the starting price of the day. If both ofthe offers are concluded, the trader gains a two percent margin minus the cost of thetransaction. When the transaction cost is on the order of two percent, the above strategy
produces nothing. If the cost comes down to one percent, the day traders have a chance
to make money using the above strategy. This is only possible as long as the pricefluctuation or volatility is sufficiently large that both of the proposed offers are satisfied
with a high probability. However, this strategy is not valid constantly. When the traders
increase their volume of trade, these trades will influence the price movement, and thevolatility will be depressed. In multi-agent models, it is easy to achieve cases such as theones given in these examples.
An institutional study is also possible. In the U-Mart case, board information can bedisseminated in a different way, and the difference of behaviors and performances can beobserved. These topics are usually called “microstructure of the market.” So far, only
empirical studies have been under way. Multi-agent model simulation makes it possible
to analyze, on an experimental base, the effects of micro-structural differences. It may bepossible to produce a thin market intentionally in order to study the roles of market
makers. This study may lead to a low-cost market management and design engineeringof thin financial markets.
8.5

Some theoretical problems and difficulties to overcome

Multi-agent model experiments, as well as other experimental studies, such as the UMart with human agents, have a common problem. Results can be obtained wheneverexperiments are conducted. They may yield some knowledge. However, it will benecessary to determine what knowledge is substantial. It will also be necessary to– 44 –

Evolutionary Economics in the 21st Century: A Manifesto

determine how such knowledge can be obtained. In most multi-agent models, there is ahigh degree of freedom in choosing parameters. If the result remains to show a property
that is similar to another, it will be possible to conclude that differences of parameters
have little influence on the result. However, this would be true in a fortunate case only.
Similar problems are faced when experimental science began. In the case ofexperiments, there are standard sets of criteria to determine whether a claimed
observation is correct. An affirmative test in second experiments is one such criterion. In
the case of computer simulations, there are no standard procedures to confirm that an
observed result has been established as firm knowledge.
At this point, however, there is reason for optimism. Agent-based simulations andanalysis are the third mode of scientific research, which is just at the beginning stage.
The first mode was theoretical reasoning. It appeared somewhere in classic Greece. With
the aid of logics and mathematics, this research mode became well established. In
medieval Europe, this mode of reasoning fell down to a speculation without any
relevance to reality. Similarity to the present state of modern economics is observed. A
new mode of scientific research was then introduced about a millennium later. It was anexperimental method. Initially, the experimental method was closely associated withalchemy and occult science. There were many difficulties associated with theexperimental method; however, it ultimately became the primary method for research.
Multi-agent model experiments are a new mode of scientific research. It is natural that
this newly developed method would have many problems and deficiencies. It isnecessary to develop new fields of computational experiments. At the same time, it isalso necessary to examine reflexively the nature of knowledge obtained from suchcomputer experiments.
We are at a turning point for the economics. With the development of multi-agent
model experiments, various kinds of knowledge can be accumulated that would be
difficult to obtain with pure reasoning. The limits of mathematical methods will become
clearer. Multi-agent models will liberate economists from the traditional confines of theequilibrium and maximization. The third mode of scientific research will be recognized
as a necessary tool of economics. All these changes will contribute to the reconstructionof economics on a new basis. At that time, a real paradigm shift will occur, andeconomic science will take a new form, quite different from the present one, andcertainly very close to the evolutionist’s perspective and frame.

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Y. SHIOZAWA

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