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.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Santa Fe Institute in its series Working Papers with number 98-09-082.
Date of creation: Sep 1998
Date of revision:
Contact details of provider:
Postal: 1399 Hyde Park Road, Santa Fe, New Mexico 87501
Web page: http://www.santafe.edu/sfi/publications/working-papers.html
More information through EDIRC
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)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Winter, Sidney G, 1971. "Satisficing, Selection, and the Innovating Remnant," The Quarterly Journal of Economics, MIT Press, vol. 85(2), pages 237-61, May.
- Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211.
- Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
- Blume, Lawrence E. & Easley, David, 1982. "Learning to be rational," Journal of Economic Theory, Elsevier, vol. 26(2), pages 340-351, April.
- Dutta, Prajit K & Radner, Roy, 1999. "Profit Maximization and the Market Selection Hypothesis," Review of Economic Studies, Wiley Blackwell, vol. 66(4), pages 769-98, October.
- Sidney G. Winter, 1964. "Economic "Natural Selection" and the Theory of the Firm," LEM Chapters Series, in: Yale Economic Essays, pages 225-272 Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
- Ulrich Horst & Jan Wenzelburger, 2008. "On non-ergodic asset prices," Economic Theory, Springer, vol. 34(2), pages 207-234, February.
- Pablo F. Beker, 2004.
"Retained Earnings Dynamic, Internal Promotions And Walrasian Equilibrium,"
Working Papers. Serie AD
2004-14, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- Beker, Pablo F., 2008. "Retained earnings dynamic, internal promotions and Walrasian equilibrium," Journal of Economic Theory, Elsevier, vol. 139(1), pages 114-156, March.
- Beker, Pablo F, 2007. "Retained Earnings Dynamic, Internal Promotions and Walrasian Equilibrium," The Warwick Economics Research Paper Series (TWERPS) 813, University of Warwick, Department of Economics.
- Beker, Pablo F., 2004. "Are inefficient entrepreneurs driven out of the market?," Journal of Economic Theory, Elsevier, vol. 114(2), pages 329-344, February.
- Schipper, Burkhard C., 2009.
"Imitators and optimizers in Cournot oligopoly,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 33(12), pages 1981-1990, December.
- Burkhard Schipper, 2002. "Imitators and Optimizers in Cournot Oligopoly," Bonn Econ Discussion Papers bgse29_2002, University of Bonn, Germany.
- Burkhard C. Schipper, 2005. "Imitators and Optimizers in Cournot oligopoly," Working Papers 537, University of California, Davis, Department of Economics.
- Schipper, Burkhard C., 2005. "Imitators and Optimizers in Cournot Oligopoly," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 53, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Cherkashin, Dmitriy & Farmer, J. Doyne & Lloyd, Seth, 2009.
"The reality game,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 33(5), pages 1091-1105, May.
- Luo, Guo Ying, 2009. "Natural Selection, Irrationality and Monopolistic Competition," MPRA Paper 15357, University Library of Munich, Germany.
- J. Doyne Farmer, 1999.
"Market Force, Ecology, and Evolution,"
Computing in Economics and Finance 1999
651, Society for Computational Economics.
- David Johnstone, 2007. "Economic Darwinism: Who has the Best Probabilities?," Theory and Decision, Springer, vol. 62(1), pages 47-96, February.
- Weibull, Jörgen W., 1997. "What have we learned from Evolutionary Game Theory so far?," Working Paper Series 487, Research Institute of Industrial Economics, revised 26 Oct 1998.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel).
If references are entirely missing, you can add them using this form.