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Evolutionary Alternatives toEquilibrium Economics

Some Suggested Applicationsajes_739 1155..1177

By JOSEPH E. PLUTA*

ABSTRACT. Built on the fictional concept of equilibrium, mainstreameconomics provides a method of analysis that, when paired with thecalculus, enables relatively easy identification of maximum andminimum values. Lacking empirical evidence of its behavioral assump-tions, the profession accepts such familiar claims as consumer maximi-zation of utility and business firm maximization of profit or revenue. Inplace of the relatively static concept of equilibrium, the Veblen-Myrdalnotion of circular and cumulative causation (CCC) arguably has greaterdescriptive capability and more penetrating insight for policy recom-mendations. This article traces the historical origins of both conceptsand argues that CCC offers considerable potential for a broad, dynamic,interdisciplinary, more thorough, and more accurate analytical frame-work. Specific examples of work that has been done along withsuggestions for future applications of this concept are given.

Introduction

The absence of an empirically verified “balancing of forces” or “stateof rest” in economic phenomena remains an embarrassment to themainstream of a discipline that seeks quantitative precision and con-firmation of theories using hard data. Equilibrium models that casuallyaccept Jeremy Bentham’s hedonistic utilitarianism and assume con-sumer rationality as well as maximization of utility subject to a budgetconstraint still grace the literature in leading professional journals.Despite voluminous research output that documents alternative firm

*The author is Professor of Economics at St. Edward’s University. Direct correspon-

dence to: Joseph E. Pluta, Department of Economics, 3001 S. Congress Ave., Austin, TX

78704; email: [email protected]. He would like to thank two anonymous referees for

helpful comments made on an earlier draft.

American Journal of Economics and Sociology, Vol. 69, No. 4 (October, 2010).© 2010 American Journal of Economics and Sociology, Inc.

motivation and strategy, businesses large and small still supposedlyachieve equilibrium when they either maximize profit, revenue, ormarket share (or perhaps minimize cost). Despite the arguments ofJohn Maynard Keynes to the contrary, macroeconomic models stillseek the ideal equilibrium with a high rate of economic growthaccompanied by little or no inflation and full employment. Despite theexistence of multiple prices in numerous markets, students are stilltaught that a single price results from independently determinedsupply and demand equations.

In place of the static notion of equilibrium, the more dynamiccircular and cumulative causation (CCC) framework has long heldsubstantial promise of greater explanatory power while (and likely,because of) incorporating a far wider array of both economic andnoneconomic variables. This article briefly surveys the origin of bothconcepts, illustrates in general terms the CCC method of analysis,documents recent research advances, and suggests some possiblefuture applications.

Background

Originally advanced in the physical sciences, equilibrium was uncriti-cally adapted for use in a fledgling economics profession seekingscientific stature. The great scientist Isaac Newton (1687) depicted theuniverse as a mechanism that was understandable and potentiallyreducible to mathematical laws.1 His law of gravity stated that heav-enly bodies remain in motion because of a balancing of forces thatprevent them from colliding, a rather impressive “equilibrium” inphysics and astronomy. As a result, much like the spring of a clock(Canterbery 1987: 29), the universe functions smoothly and continu-ously in endless harmony. Its complex precision, the argument con-tinues, was the work of a skillful, artistic Creator who, uponcompleting his project, left it alone to run itself. The perfection of thismechanism was due to laws of nature that, Newton believed, appliednot only to the cosmos but also to the smallest of entities within it.

Attracted to the novelty and logic of Newton’s arguments, manyintellectuals sought to apply them to areas outside of physics. Asthe 18th century began, leading European thinkers became increas-

1156 The American Journal of Economics and Sociology

ingly enamored of Newton’s mechanistic view and of the prospect ofscientific measurement. The task of humanity, some reasoned, was toassure that all activity was consistent with this natural law. Virtuallyno one questioned the legitimacy of applying principles that governinanimate objects to living human beings. So impressive were New-ton’s analyses that extending them wherever possible simply seemedlike the correct thing to do. Natural law led to the concept of anatural economic order. If a Supreme Being created a magnificentuniverse with all its components functioning so efficiently thatfurther intervention was unnecessary, what possible justificationcould there be for interfering with the natural operation of theeconomy? With this leap of faith and dubious logic, minimal gov-ernment intervention achieved a supposed scientific status thatmeshed nicely with existing cultural norms, further contributing to itsacceptance and popularity.

With the passage of time, a relatively large group of economists hascome to accept some scientific and economic concepts more thanothers but has consistently built upon Newton’s equilibrium model.His development of the calculus enabled easy identification ofmaximum and minimum values. Such calculations, tremendouslyuseful for charting the orbits of distant planets, were similarly madeunder rather carelessly inferred assumptions of business and con-sumer behavior: maximizing profit, minimizing cost, and maximizingsatisfaction. For want of a better term, this group of economists mightbe called the mainstream or descendants of the neoclassical school inthe tradition of Alfred Marshall and the marginalists. Its dominance ofthe profession has influenced economic thinking at least since the late19th century when neoclassical economists oversimplified AdamSmith’s metaphor of the invisible hand as presented in The Wealth ofNations while ignoring his wider interpretation of this concept in TheTheory of Moral Sentiments. David Ricardo’s principle of diminishingreturns and Bentham’s hedonistic utilitarianism provided additionalammunition in the marginalist quest for economic laws, which wereseen as advancing the discipline to a plane comparable with that ofthe physical sciences.

Despite its wide acceptance, the mainstream has always had itscritics who have also drawn a sympathetic and sizable following. In

Evolutionary Alternatives to Equilibrium Economics 1157

particular, the broad dissent of evolutionary economics, largelyignored by the mainstream in recent decades, arguably possessesgreater relevance because its methods adapt well to changing cir-cumstances. More impressed with the scientific principles of CharlesDarwin (1859), which emphasized dynamic evolutionary change,than the timeless physical laws of Newton, evolutionary economistsshun traditional orthodoxy and proceed from a different startingpoint while pursuing a considerably different direction in theiranalyses.

In search of more precision in its descriptions, the mainstream hasnarrowed its scope and become more analytical as well as morequantitative. Its models have abstracted from reality in an attempt toestablish economic laws that possess some predictive power. Inabstraction, some variables are omitted. The difficulty lies in choosingwhat is more important and eliminating what is less important. Sophis-ticated techniques of statistical inference have been devised to aid inthis selection process. Mainstream practitioners allege much success intheir methodological rigor and results.

Evolutionary economists, in contrast, argue that the largely staticmodels of the mainstream are inadequate for analyzing a world that isconstantly changing. Despite being mathematically impressive, thesemodels leave out much of what needs to be described and do noteven ask important questions that need to be asked. Evolutionaryeconomics rejects the claim that economic laws hold true for all timeand instead seeks to broaden rather than narrow the focus of eco-nomics. It emphasizes the need for interdisciplinary inquiry, sinceactual problems and issues do not cooperate by neatly confiningthemselves to the boundaries of any single discipline, and argues thatthe mainstream record has not been impressive in either describing orpredicting accurately.

For example, such recent topics as the wave of corporate scandals,the socioeconomic problems of developing countries, the motivationsof consumers, the effects of minimum wage laws, deregulation ofindustries, resistance to change, and a host of other contemporarymatters have either been inadequately or inaccurately explained usingmainstream tools. In particular, equilibrium and the maximizingassumptions behind it offer little or nothing in analyzing such issues.


Circular and Cumulative Causation: General Approach

In contrast to the market-regulated economy, the critique of evolu-tionary economics argues that the economy is regulated by severalinstitutions, of which the market is only one. Since institutions arehabits of thought (like custom and tradition), established social prac-tices (like human behavior and family life), and forms of organization(like business firms large and small, banks, governments, and a legalsystem), all of these things together influence the economy and its vastarray of prices. The market is a mechanism of allocation that isembedded in institutions and can thus be referred to as an institution.In this view, the ever-changing cumulative effects of adaptation, crisis,trial and error, instability, and movement tell us more about how aneconomy performs, how it is regulated, and how its prices are set thanequilibrium does. In other words, economic life is regulated more byinstitutions that vary by place and over time than by economic lawssuch as the laws of supply and demand, which are static and are oftenerroneously considered to be timeless.

Originally advanced by Adam Smith and by evolutionary schoolfounder Thorstein Veblen (1898), the CCC approach was developedmore fully by Swedish Nobel Laureate Gunnar Myrdal (1944), NicholasKaldor,2 K. William Kapp,3 and a number of contemporary scholars(Hall and Whybrow 2008; O’Hara 2008; and Toner 1999). A thoroughhistory of the intellectual roots of the concept along with furtherpost-Keynesian and other theoretical contributions has recently beenoffered elsewhere (Berger 2009b).

Equilibrium is disturbed by an outside event A that changes B,producing a new stable equilibrium. The change is one-directional,there are no feedbacks from B to A, and the story basically ends untilsome new outside disturbance is introduced. As a result, the analysisis fairly static and only partially accurate. Under CCC, A changes B,which then affects A, further impacting B, and so on. Other events (C,D, E) may also be affected by the initial disturbance. There is noequilibrium or stable resting place. In addition, the concept of equi-librium suggests or implies a benevolent or at least natural outcome,whereas under CCC, the continuous cycle may be proceeding eithertoward beneficial or harmful results.


Two contemporary examples, one with largely positive and theother with highly negative outcomes, illustrate how this conceptworks. On the positive side, suppose technological advance occurs.Mainstream supply and demand analysis would suggest that improvedtechnology (event A) increases supply, resulting in higher output andlower prices (event B). A new equilibrium is reached and is main-tained until a new, and completely independent, disturbance initiatesits own response.

Under CCC, however, multiple events result from the initialadvance in technology (event A). Clearly, the output of firms in agiven region that uses this technology increases (event B). But thisadded output also means the region is more productive (event C),which makes that region more competitive (event D) compared to itsneighbors with whom it trades. Greater competitiveness causesprices in the region to fall (event E), which will cause its exports toincrease (event F). Perhaps most importantly, greater exports causeoutput to rise again (event B), which causes the entire sequenceto repeat itself. Figure 1, adapted from a similar illustration in

Figure 1

Circular and Cumulative Causation with Generally Beneficial Outcome

Event A Event B Event CTechnological Advance Region’s Output Region’s

Increases Productivity Increases

Event DRegion’s

Competitiveness Increases

Event F Event ERegion’s Region’s Exports Price Level Increase Falls


Armstrong and Taylor (2000: 97), shows the generally beneficialoutcome of this whole process far more completely than mainstreamsupply and demand analysis.

Unfavorable results may occur in the following manner. Suppose alocal manufacturing firm in the Midwest shuts down and moves itsoperations to Mexico where labor is less expensive. Mainstreamsupply and demand analysis tells us that, in this Midwestern commu-nity or region, the exit of firms from the industry (event A) causessupply to fall, resulting in less output and higher prices (event B). Anew equilibrium is supposedly reached and the market remains in thisposition until some new disruptive event is forthcoming.

As Figure 2 illustrates (Pluta 2008: 167), the CCC framework pre-sents a somewhat different picture. Firm exit (event A) certainly causesoutput in the region to fall and the reduced availability of goodsmakes prices higher (event B). Event B, however, may further impactevent A, as lower output in a now economically depressed region maycause other firms to exit. This process may result in a rather substantialdownward economic spiral. Events A and B together will clearly causeunemployment to rise (event C), and many unemployed workers maylose their homes (event D). This may cause workers to seek jobs inother local businesses or to migrate from the area entirely (event E).The community itself will become economically depressed (event F),which will cause exit of yet more firms (event A) and a repeat of thecycle. Further, even more negative effects may be introduced as suchnoneconomic factors as increased psychological depression (event G),rising crime rates (event H), family discord (event I), and other events(J, K, L) result.

An even more complete picture would document that depressedeconomic conditions (event F) would lead to a decline in local taxrevenues (event M?) causing a fall in the quality of infrastructure(event N) including roads, public utilities, hospitals, and schools. Therise in unemployment (event C) likely causes a loss of dignity (eventO), especially among the young whose lives were full of promise, andeven gender role reversals in households (event P) as desperatewomen work for substantially lower wages than those previouslyearned by their spouses. The experiences in Michigan, in Elkhart,Indiana (where the nation’s unemployment rate was highest in 2008


and 2009), and in the Ruhr Valley of Germany all support the aboveextended scenario.

Some Historical and Contemporary Applications

It is well known that Myrdal was commissioned by the CarnegieCommission in the United States to study American race relations on

Figure 2

Circular and Cumulative Causation with Generally Harmful Outcome

Event A Event B Firm Exit Output Falls

(Prices Rise)

Event F Event C Community Unemployment

Becomes Rises Economically

Depressed

Event E Event D Workers Workers Leave Lose Area Homes

Event I Event H Event G Family Rising Crime Psychological Discord Rates Disorders

Events J, K, L Other

Noneconomic Problems


the eve of World War II, and many of the results of his study werebased on the CCC principle (Myrdal 1944: 381, 172, 198). His meth-odological approach and strategy behind the team he assembled hasrecently been documented in some detail (Cherrier 2009). AmongMyrdal’s arguments (Pressman 2006: 171–172), which drew on non-economic as well as economic factors, were the following:

1. Prejudice against African Americans produced lower standards ofliving for them. Observing these lower living standards, whiteAmericans felt their prejudice was justified. This generated addi-tional declines in African-American living standards relative towhites.

2. Poor educational opportunities for African Americans made itless likely that they would either enter the medical profession orbe knowledgeable about health and sanitation. Their lowerincomes often denied African Americans access to high qualityhealth care. As a result, they were more likely than whites to bein poor health, which made it more difficult to secure jobs thatpaid well. With lower incomes, African-American education islikely to remain inferior and the cycle repeats itself.

3. What can be done to reverse the downward cumulative processand turn it upward? American institutions such as churches,schools, trade unions, and government were designated byMyrdal to lead the charge in reducing prejudice, increasingeducational opportunities for minorities, guaranteeing the rightto vote without intimidation, and encouraging migration out ofthe then more racist South into regions that were more raciallytolerant and where better paying jobs existed.

This institutional change ultimately was a major factor in enhancingeconomic opportunities for African Americans and other minorities.The market adapted to these changing circumstances but was not initself an agent for change. It is hard to imagine what the concept ofequilibrium had to do with any of these monumental and progressivechanges in American culture.

Much economic analysis today uses Myrdal’s pioneering model withpenetrating insightful analyses and favorable results. CCC has beenused to explain complex relationships in American industry, including


how changes in one industry affect others and how disruptions bysuppliers reverberate throughout the production process. It also hasbeen used to analyze persistent poverty in depressed U.S. neighbor-hoods and in underdeveloped countries, the successful manufacturingstrategies pursuing economic growth in post–World War II Japan, andappropriate policies for encouraging growth in regions that seek it.The holistic approach that broadly views dynamic change holdsenormous potential as a multidisciplinary tool of analysis. In Myrdal’sown words:

The dynamics of this social system are determined by the fact that . . . thereis circular causation, implying that, if there is change in one condition,others will change in response. Those secondary changes in their turn willcause new changes all around, even affecting the condition whose changewe assumed initiated the process, and so on in further rounds. So thewhole system will be moving in one direction or another, and it may evenbe turning around. . . . There is no one basic factor; everything causeseverything else. This implies interdependence within the whole socialprocess. And there is generally no equilibrium in sight. (1978: 774)

Other Trouble Spots in Mainstream Analysis

Dissenters to the mainstream today suggest that in many markets,including those for gasoline, multiple prices are just as likely as anysingle price (McChesney, Shughart, and Haddock 2004; Fusfeld 2000:259). In these cases, they ask, of what value is an alleged singleequilibrium price no matter how elegant the mechanism that producesthis result? In fact, the mechanism may be seriously flawed if itpredicts a single price when multiple prices exist in reality.

More troubling is the fact that, in order to reach an equilibrium,several factors on both the demand side (tastes, income, expectations)and the supply side (technology, resource prices, number of firms)must be held constant. The important point raised by Veblen and hisfollowers is that all of these factors are, in fact, constantly changingand those changes are not only important but require explanation(Gordon 1980: 97–111). Further, the dynamics involved in all of thesefactors are frankly more interesting than whether or not somethingartificial called equilibrium is reached. For example, the story of hownew technology has been developed and its profound impact on


lifestyles, according to this critique, should be at center stage in thestudy of economics and not merely a factor assumed to be unchanged.Assuming away the most fascinating aspects of the process is neitherscientific nor particularly enlightening.

The market model also assumes that demand and supply arecompletely independent of each other. In other words, none of thefactors that determine demand also determine supply. This indepen-dence helps the model work smoothly and with minimal complica-tion. Veblen has shown instances, however, where this disconnectsimply is not true (O’Hara 2002: 89). If consumer incomes rise, forexample, demand for most goods will clearly increase. But the surgein income will also likely stimulate business investment in newtechnology, which will cause supply to rise as well. Similarly, anincrease in supply without higher incomes would not guarantee thatthe added output would be purchased. This could result in generaloverproduction and an economic downturn. The traditional marketmodel, however, would merely predict that lower prices would causequantity demanded to rise to the level of the new quantity supplied.

More recently, Philip O’Hara (2008: 384) presents an even morecompelling case for the interdependence of supply and demand byarguing that strong domestic demand can create a high-confidence,low-uncertainty environment conducive to increased investment and,therefore, greater supply. Further, greater economies of scale mayenhance productivity and innovation leading perhaps to even infra-structure and communications improvements, all because of an initialdemand, rather than a supply, stimulus.

Veblen’s disciples today also question the assumptions that “themarket way of doing things” is permanent, is inevitably spreading toall parts of the world, and is somehow part of a universally benevolentsystem (Fukuyama 1992). Such a naive scenario ignores the wealthand power possessed by corporate manufacturers, banks, and ahandful of individuals. The power of giant corporations that producegoods and the huge banks that finance their activities, both legal andillegal, is downplayed if not ignored in the mainstream market model.These are the same mammoth entities that manipulate governmentpolicy in their favor by making sizeable contributions to politicalcandidates who support their interests. Galbraith has offered some of


the most cogent observations of well-orchestrated corporate deceptionin this area.4 None of the mainstream oligopoly models (game theory,the cartel, dominant firm price leadership, various duopoly theories,and the kinked demand curve) offer similar insight into ethicallydubious corporate behavior.

Evolutionary economists see other problems with the idea of aunique price being determined by the laws of supply and demand.Over the years, several studies have documented fairly long periodswhen prices did not change despite the fact that several determinantsof demand and supply did. One of the more popular arguments hasbeen the theory of administered prices, originally advanced during the1930s by Gardiner Means.5 Among other things, this theory arguesthat, despite a fall in demand that would normally produce lowerprices, large firms with market power can conspire to prevent pricesfrom falling. When actual managers have been interviewed, priceshave been shown to be set by a strategy that estimates the firm’s costsand then adds in a mark-up according to a variety of possiblemethods.

A number of research efforts by institutional economists (Nichols,Pavlov, and Radzicki 2006) are currently under way to use cumulativecausation, administered pricing, the role of economic power, mark-upstrategies, path dependency, and other nonmainstream concepts todevelop a better explanation of how prices are determined. A pathbreaking work on post-Keynesian price theory has been offered byFrederic Lee (2006). Other promising areas of inquiry include graphi-cal analysis using the CCC framework (O’Hara 2008) and specificpolicy applications of CCC such as the funding process for publicschools (Hayden 2008). The graphical approach is reminiscent ofmulti-quadrant macroeconomic modeling, quite common in interme-diate macro texts that combined IS-LM analysis with aggregate pro-duction functions and aggregate demand/aggregate supply curves.

It has also recently been empirically documented (Hall and Ludwig2009) that Myrdal’s spread effects and backwash effects moreaccurately explain regional inequalities in Germany since its reunifi-cation than alternative explanations offered by the mainstream.Further, Myrdal’s theory of the state has been shown (Berger 2009a)to describe the role of corruption in the big business/government


relationship to account for the domination of certain sectors of theeconomy more accurately than any mainstream oligopoly theory.Finally, the superiority of Myrdal’s theoretical approach as a basis forspecific policy recommendations involving trade patterns and inter-national inequality has also been argued (Ho 2009).

Some Suggestions for Future Research

The long litany of current economic and social problems seeksexplanation and analysis that is multi-dimensional and interdiscipli-nary. In particular, CCC could add much to our understanding of suchdilemmas as: border issues (illegal immigration, drug wars, spread offlu viruses, trade barriers); budgetary processes at federal, state, andlocal levels; lines of communication in large corporate structures;traffic flows on both highways and railroads as well as in airline flightpatterns; goods-in/goods-out inventory management; relationshipsamong macroeconomic variables including the effects of monetaryand fiscal policy; and comparisons of arguments made by differentschools of economic thought.

Orthodox approaches do shed some light on such matters as theeconomic reasons for labor flows across borders, import/export pat-terns, and currency fluctuations. Typically, however, few noneco-nomic factors are incorporated into these analyses. These may includethe extent of hopelessness, family stress, and psychological disordersexperienced before and after migration occurs. A CCC diagram with agenerally harmful outcome, for example, might be constructed toillustrate effects of trade restrictions. A U.S. ban on Mexican produce(event A) would cause American demand for this range of products tofall (event B) causing a decline in Mexico’s agricultural sector (eventC) causing unemployment in Mexico to increase (event D) causingother Mexican industries to decline (event E) causing Mexico’s exportsto decrease (event F) causing a rise in Mexican migration to the UnitedStates (event G) causing an increase in border tensions (event H)causing Mexico to ban the importation of certain U.S. goods (event I)causing U.S. retaliation (event J), which would further increase Mexi-co’s unemployment (event D). This would inaugurate a repeat of thecycle (events E through J). Other noneconomic events, including


illegal activities, could also be added to the model along with culturalinfluences in the demand for foreign goods and the psychologicalfactors noted above.

In the field of public administration, charts traditionally describe themovement of proposed bills from various congressional sub-committees to their signing into law by the president or governor.Such scenarios, while useful as they currently exist, would increasetheir explanatory value if the CCC framework documented likelihoodof bills returning to committee of origin vs. potential for smoothpassage depending, for example, on the extent to which one partyexerts influence in both houses. Added complexity of such flow chartscan enumerate a rather large array of possible outcomes. Muchpioneering modeling in this area using the social fabric matrix hasbeen done by Gregory Hayden (2006a, 2008).

Similarly, organization charts in the management field often onlyscratch the surface in describing official lines of communication. Muchcan be gained by adapting decision tree analysis, often used to chartlikely sequences of proposed strategies, to a CCC format, which,although admittedly more complex, would enable a wider range ofpossibilities to be considered. The effectiveness of “unofficial” lines ofcommunication could also be incorporated into a CCC rubric.

Decision trees, for example, are frequently used in industry to showvarious steps in a merger process or in an investment strategy. In thelatter sequence, events shown in circular format might include theR&D investment decision, R&D success, sales, and profit. Uncertainresults of decisions are typically circled while results that require anadditional decision are usually indicated by a square. This serves toestablish a likely path in the necessary stream of decisions. A modifiedversion of decision tree analysis, known as an influence diagram,focuses on relationships between events connected by arrows, aformat very similar to CCC.

Traffic control diagrams are already similar to CCC models in theirsafety-motivated need to consider ALL possibilities, not only those thatare easy to model. Numerous econometric models are designed toquantify the effects of, say, monetary policy on economic growth butimplied causation has far too often been one-directional. The feed-back effects so explicitly considered in the CCC approach are only


beginning to be incorporated into these modeling efforts, often reluc-tantly. Finally, the financial crisis of 2008–2009 can be analyzed quiteeffectively using a CCC format based upon the financial instabilityhypothesis originally presented by Hyman Minsky (1986).

These are just a few areas where CCC has much to offer. In casessuch as these, results are empirically testable and, therefore, verifiable.This is in direct contrast to equilibrium models, the results of whichmust often be taken on faith.

CCC, System Dynamics, and the Social Fabric Matrix

Figures 1 and 2 were presented to show general CCC modelingtechniques that several researchers have used effectively. Morecomplex diagrams certainly exist and have generated much discussionconcerning their accuracy. George Richardson (1986, 1997) and DavidLane (2008), for example, have identified problems with causal loopdiagrams and have offered suggestions for avoiding the most commonpitfalls. Some of the more advanced models to date have beendeveloped in the area of system dynamics, whose approach consistsof using computer simulation to test both positive and negativefeedback loops, to study the link between system structure and timeevolutionary behavior, and to calculate stocks and flows.

Since a stock is any entity that accumulates or depletes over timeand a flow is the rate of change in a stock, stock and flow diagramshave numerous applications, including resource requirements in thedevelopment of new products, various product life cycle features, andfactors that contribute to growth or decline in specific industries. Atleast one stock-flow structure must be included in every feedbackloop with the dynamics of any system being determined by theaccumulation or decumulation resulting from the flow.

The interplay of positive and negative feedback loops determinesthe stability of a socioeconomic system. Positive feedback loopsinclude self-reinforcing processes that destabilize systems and lead toeither their growth or decline. Negative feedback loops stabilizesystems and involve processes that attempt to achieve specific goals.The time path adopted by the system depends on which of the loopsis dominant.


“Positive” does not necessarily imply desirable. Rather, it refers todirection of change. A positive feedback loop expands or promotes aprocess while a negative feedback loop reduces or inhibits a process.Both runs on a banking system and Ponzi schemes, for example, areparts of positive feedback loops where initial actions are amplified asmore people participate. Fortunately, in these cases and in others,there are limiting factors that stall progression in the cycle. Populationsize may limit more severely disastrous results of bank runs andfraudulent financial schemes. Examples of negative feedback loopsmight be automatic stabilizers, which modify fluctuations in GDP, andthermostats that set upper limits on heaters and lower limits on airconditioners and refrigerators.

Introduction of the feedback concept in the discipline of economicsis often credited to Arnold Tustin (1953) and A. W. Phillips (1954, 1957).Richardson (1991: 277–280), however, has shown even earlier influ-ences in the work of such diverse scholars as Smith, Mill, Marx, Walras,and Marshall. Some of the most insightful work on feedbacks may befound in the writing of Axel Leijonhufvud (1968, 1970), who reinter-preted the work of Walras, Marshall, and Keynes in feedback termsthrough the use of loop diagrams. By employing “deviation-amplifying”and “deviation-counteracting” loops, Leijonhufvud argues that Keyne-sian economics cannot be approached accurately in equilibrium termsbut rather must be interpreted dynamically. He goes on to argue thatsome of the differences between Keynes and the classical economistscan only be understood through the use of the feedback concept.

Use of CCC and system dynamics enables a research perspectivewhere exogenous factors can be internalized into models that makesuch factors endogenous. This is distinctly different from mainstreamequilibrium models, which are equipped to handle far fewer variablesand do not recognize the importance of feedback mechanisms.Models that include a wider range of variables arguably are morethorough and have greater predictive potential when analyzingcomplex socioeconomic problems. In recent years, some orthodoxmodels have broadened their approach by utilizing evolutionary con-cepts like path dependence and increasing returns. Some of thegroundbreaking work of Nobel laureate Paul Krugman,6 for example,involves application of the latter concept.


Hayden’s social fabric matrix (SFM) is

an integrated process matrix designed to express the attributes and rela-tionships of the parts as well as the integrated process of the whole inorder to define and appraise the real-world social, technological, andecological system context that contains the problem of interest. . . . Thefocus of the SFM is to provide a means to assist in the integration of diversefields of scientific knowledge, utilize diverse kinds of information in orderto describe a system, identify knowledge gaps in a system for futureresearch, analyze crises and opportunities within the system, evaluatepolicies and programs, and create social indicators for future monitoring.(2006a: 5, 73)

The technique uses matrix and digraph (directed graph) constructionsas well as feedback loops as the basis for long range planning. Criticalof both equilibrium as well as traditional benefit cost analyses anddrawing upon instrumental philosophy, the SFM requires specificationof values, beliefs, institutions, attitudes, technologies, and ecologicalcomponents. Its applications are numerous in both private industryand for policy decisions at all levels of government. How the SFM canbe used to systematically identify circular and cumulative socioeco-nomic structures has recently been outlined in some detail (Hayden2008).

Rich in its historical and interdisciplinary content, an early pathbreaking work in evolutionary economics was offered by DavidHamilton (1953). In a partial tribute to Hamilton, Michael Radzicki(2003) focuses on the former’s distinction between Newtonian andDarwinian methodology. As interpreted by Radzicki, change in New-tonian terms involves change within a given socioeconomic structurewhile change in Darwinian terms involves change of a given socio-economic structure. Radzicki concludes his article by arguing thatevolutionary economics, despite its innovative ideas, has failed toinfluence policy because of its “lack of powerful mathematical tools”compared to those of mainstream economics. To remedy this allegeddeficiency, he recommends “system dynamics computer simulationmodeling and agent-based computational economic modeling.”7 Hisarguments in this article and elsewhere are compelling and many ofthe tools used in both of these modeling approaches are indeedanalytically impressive.


It should be noted, however, that there still exists some amount ofdisagreement among those sympathetic to the methods of evolution-ary economics regarding the appropriate integration of system dynam-ics into the evolutionary approach. Many of these issues aresummarized in the recent dialogue between Radzicki and Tauheed(2007) and Hayden (2006b, 2008: 393–394), with the latter beingespecially critical of the plus (+) and minus (-) notation to show thehierarchy of constitutionality and rulemaking. Resolution of differ-ences such as these may well be an important step in establishing thepreferred methods to be used in an evolutionary alternative to themainstream approach.

The intention here is not to take sides in this debate but rather tosuggest how some techniques found in system dynamics and else-where can strengthen the CCC approach while others may be eitherinapplicable or unnecessary. To begin, CCC can contribute to Dar-winian change in socioeconomic structures in at least three ways thatRadzicki discusses in reference to system dynamics.8

First, because the technique itself is constantly evolving, changes inthe modeling process enable researchers to adapt their models basedon data availability and improvements in their own knowledge of thespecific relationships among variables. In the language of systemdynamics, the researcher’s mental models are refined based on infor-mation feedback from the real socioeconomic system. Second, shiftingloop dominance, most often the result of nonlinear relationships, canoccur as feedback relationships are redefined when simulation takesplace. Third, and perhaps most importantly, CCC models can helpidentify needed changes in behavior that has been dictated by previ-ous path dependence. When decisions become locked in as a resultof previously determined dynamic paths, respecification of relation-ships in the CCC approach can identify inefficiencies that those pathshave caused.

In a more generic sense, CCC can model specific components of theVeblen-Ayres technology vs. ceremonialism dichotomy as these forcesevolve in a given socioeconomic system. As Hamilton has explicitlystated:

Culturally conditioned activity . . . taking place within a cultural milieureveals two distinct, but not unrelated, aspects. Some activity is of the


nature of institutional behavior; that is, it is shaped by custom and habitenforced by the authority of myth and legend. This type of activity issubject to only gradual erosion. But all human activity is not of this nature.Continuity and cumulative development are apparent in human behavior.This second aspect of human behavior is instrumental or technological innature. Action in this area is subject to a matter-of-fact evaluation in whichonly demonstrable fact is relevant. But because of this evaluative process,this activity is subject to cumulative development. It is this aspect of humanactivity that is registered in cultural growth. (1953: 121)

In other words, noneconomic, and sometimes difficult to quantify,components of ceremonial behavior have the potential to contributesubstantially to the change of socioeconomic structures.

Despite its obvious strengths, system dynamics may be weak inincorporating difficult to quantify noneconomic variables. Two thatimmediately come to mind are family discord and psychologicaldisorders, both of which are shown in Figure 2. Additional variables ofthis type obviously exist and their effects upon socioeconomic systemsare substantial. As reported by Lane (2008: 8), it is still the view ofmany systems dynamicists that “qualitative diagrams are sufficient todo systems thinking.” A place for the type of diagrams shown in thisarticle, therefore, is warranted and such diagrams clearly are morethorough in their description than anything offered by neoclassicaltechniques.

Further, a vigorous debate still rages within the system dynamicscommunity as to whether diagrams even need to be backed bycomputer simulation. Several system dynamicists clearly believe thatdiagrams alone are sufficient.9 Some of those who support the needfor simulation argue that, when complicated relationships interact, thecomputer is needed to do what the human mind cannot (Lane 2008:6), a position that many economists, evolutionary or otherwise, wouldclearly dispute. Finally, it should be noted that causal loop diagramssuffer from the same ceteris paribus restraints that exist in neoclassicalequilibrium analysis.

Conclusion

The general public, academic specialists in fields other than econom-ics, and evolutionary economists believe the performance of the


economy should be evaluated by some criterion other than whether ornot something called equilibrium is reached. Criteria such as interna-tionally competitive education, effective health care, sufficient jobopportunities, efficient production of goods that consumers need,national security, safe neighborhoods, and a clean environment areamong those frequently mentioned by all the above groups as worth-while. Equilibrium has absolutely nothing to do with the attainment ofany of these goals.

Mainstream obsession with equilibrium is justified by one of theleading advanced microeconomics texts in the following way: “Thisfocus on equilibrium analysis is not due to the belief that equilibriumis necessarily more important than disequilibrium, but rather that theanalysis of behavior in disequilibrium is substantially more difficult”(Varian 1992: 1). In pursuit of a realistic picture, evolutionary econo-mists believe that, difficult though it indeed may be, “analysis ofbehavior” by a method other than equilibrium must be attempted.

Much has been accomplished in applying the CCC concept to issuesof contemporary relevance and in setting the stage for an analyticalnonequilibrium economics. Much remains to be done. The researchagenda suggested here offers possible avenues where further appli-cations of CCC might be especially fruitful.

Notes

1. For a thorough discussion of the influence of the physical sciences onthe early development of the discipline of economics, see Mirowski (1989).

2. Recent applications of Kaldor’s method may be found in O’Hara (2008)and Pressman and Holt (2008).

3. For a comparison of the approaches of Myrdal and Kapp, see Berger(2008).

4. For original statements of Galbraith’s positions, see Galbraith (2001). Anumber of his more pertinent arguments on this issue are summarized inDunn and Pressman (2005).

5. For an update of his thesis as well as more recent empirical evidence,see Means (1972).

6. Krugman, in fact, has long been sympathetic to methodologies used byevolutionary economists. See, for example, Krugman (1996).

7. Radzicki (2003: 164). The reference section of this article lists five of hisprevious articles that argue for increased use of system dynamics in institu-tional economic analysis.


8. Radzicki (2003: 156, 160) identifies a number of ways in which socio-economic structures can be changed. The three emphasized here appear toapply best to the CCC framework.

9. This argument is documented by Lane (2008: 20) although he himselfquestions whether diagrams without simulation are adequate.

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