Optimality and Natural Selection in Markets
AbstractEvolutionary arguments are often used to justify the fundamental behavioral postulates of competive equilibrium. Economists such as Milton Friedman have argued that natural selection favors profit maximizing firms over firms engaging in other behaviors. Consequently, producer efficiency, and therefore Pareto efficiency, are justified on evolutionary grounds. We examine these claims in an evolutionary general equilibrium model. If the economic environment were held constant, profitable firms would grow and unprofitable firms would shrink. In the general equilibrium model, prices change as factor demands and output supply evolves. Without capital markets, when firms can grow only through retained earnings, our model verifies Friedman's claim that natural selection favors profit maximization. But we show through examples that this does not imply that equilibrium allocations converge over time to efficient allocations. Consequently, Koopmans critique of Friedman is correct. When capital markets are added, and firms grow by attracting investment, Friedman's claim may fail. In either model the long-run outcomes of evolutionary market models are not well described by conventional General Equilibrium analysis with profit maximizing firms. Submitted to Journal of Economic Theory.
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Bibliographic InfoPaper provided by Santa Fe Institute in its series Working Papers with number 98-09-082.
Date of creation: Sep 1998
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Evolution; natural selection; equilibrium; incomplete markets;
Other versions of this item:
- D5 - Microeconomics - - General Equilibrium and Disequilibrium
- D6 - Microeconomics - - Welfare Economics
- D9 - Microeconomics - - Intertemporal Choice
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-06-12 (All new papers)
- NEP-EVO-2000-06-12 (Evolutionary Economics)
- NEP-IND-2000-06-12 (Industrial Organization)
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