Evolutionary economics give us better tools for growth

As we enter into the sixth year of subpar economic performance in the developed world, coupled with increasing talk of 'secular stagnation” (an admission from conventional economics that its growth recipes are lacking), it's time to consider that perhaps we are in need of a new approach to economics and economic policy.

Indeed, while the two dominant schools of U.S. economic thought - neo-Keynesian and neoclassical - capture important aspects of economic reality, they are incomplete because they give only limited attention to the issue at the heart of economic life: economic evolution.

For both schools, economies undergo little change, other than growing or contracting or moving to or away from price equilibrium or full employment. To be sure, adherents of both doctrines see the benefits of technological progress and see it as useful, but it is not at the core of their models. Because these doctrines emphasize the 'economy as machine,” policymakers have developed a mechanical view of policy; if they pull a lever (e.g., implement a regulation, program, or tax policy), they will get an expected result. Today the positive results from this strategy are lacking, to say the least.

In fact, economies are better understood as evolving ecosystems. The U.S. economy of 2015 is different, not just larger, than the economy of 2014. On any given day this year, approximately 620 patents will be issued, 434 new products put on the market, and 439 new production processes adopted. Firms in some industries will get bigger (the average number of employees in non-store retailers - the Amazon.coms - increased 0.03 percent a day in 2013), while others will get smaller. Industries will expand and contract at significantly different rates and firms will die and be born. Every day about 3,800 firms will close their doors for the last time and another 4,000 will celebrate their launch.

As a result, a more accurate model of advanced economies - and one that if followed would lead to a very different national economic agenda - is an evolutionary one, grounded in the work of mid-20th century economist Joseph Schumpeter. In this view, economies are 'organisms” that are constantly developing new industries, technologies, organizations, occupations and capabilities while at the same time shedding older ones that new technologies and other evolutionary changes make redundant.

Understanding that we are dealing with an evolutionary rather than static economy has significant implications for the conceptualization of both economics and economic policy. Enabling robust rates of evolution requires much more than the standard menu of prevailing schools' favored options: limiting government (for conservative neo-classicalists), protecting worker and 'consumer” welfare (for Keynesians) and smoothing business cycles (for both).

Using evolutionary economics as a guide, the principles of more effective economic policies become clearer. To start with policymakers need to get out of the way of natural evolutionary gain and loss. We see the opposite today, for example, with how taxi companies are seeking government help to limit transportation start-ups like Uber and Lyft and how car dealers fight against companies like Tesla selling cars directly.

Governments also need policies to incent organizations to evolve. A large number of market failures mean that sometimes organizations do not do what is either in society's interest or even in their own long-term interest. We see the latter most clearly in the rise of corporate short-termism which has all too often meant sacrificing long-term investment for today's market valuations.

Moreover to maximize evolution, especially technology-driven evolution, governments need a proactive innovation policy. This means government should play a key role in marshaling resources for innovation, not just traditional funding for basic science, but through incentives like prizes, funding of public-private research consortia and more robust funding for technology transfer.

At the end of the day, accelerating the rate of evolution is the most important thing economic policymakers can do. Bringing evolutionary economics to Washington will help us get out of the 50-year-old stale debate between the left and right and help craft an economic policy to reflect the realities of the 21st century economy.

' Robert Atkinson is President of the Information Technology and Innovation Foundation and author of Understanding and Maximizing America's Evolutionary Economy. This article first appeared on InsideSources.com. Comments: ratkinson@itif.org