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Optimality and Natural Selection in Markets


  • Lawrence E. Blume

    (Cornell University)

  • David Easley

    (Cornell University)


Evolutionary 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.

Suggested Citation

  • Lawrence E. Blume & David Easley, 1997. "Optimality and Natural Selection in Markets," GE, Growth, Math methods 9712003, EconWPA, revised 09 Jul 1998.
  • Handle: RePEc:wpa:wuwpge:9712003
    Note: Type of Document - Acrobat; prepared with pdftex; pages: 33; figures: in a separate acrobat file.

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    References listed on IDEAS

    1. Blume, Lawrence E. & Easley, David, 1982. "Learning to be rational," Journal of Economic Theory, Elsevier, vol. 26(2), pages 340-351, April.
    2. 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.
    3. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211-211.
    4. Prajit K. Dutta & Roy Radner, 1999. "Profit Maximization and the Market Selection Hypothesis," Review of Economic Studies, Oxford University Press, vol. 66(4), pages 769-798.
    5. Alvaro Sandroni, 2000. "Do Markets Favor Agents Able to Make Accurate Predicitions?," Econometrica, Econometric Society, vol. 68(6), pages 1303-1342, November.
    6. Sidney G. Winter, 1971. "Satisficing, Selection, and the Innovating Remnant," The Quarterly Journal of Economics, Oxford University Press, vol. 85(2), pages 237-261.
    7. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
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    Cited by:

    1. Beker, Pablo F., 2008. "Retained earnings dynamic, internal promotions and Walrasian equilibrium," Journal of Economic Theory, Elsevier, vol. 139(1), pages 114-156, March.
    2. 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.
      • Dmitriy Cherkashin & J. Doyne Farmer & Seth Lloyd, 2009. "The Reality Game," Papers 0902.0100,, revised Feb 2009.
    3. David Johnstone, 2007. "Economic Darwinism: Who has the Best Probabilities?," Theory and Decision, Springer, vol. 62(1), pages 47-96, February.
    4. Schipper, Burkhard C., 2009. "Imitators and optimizers in Cournot oligopoly," Journal of Economic Dynamics and Control, Elsevier, vol. 33(12), pages 1981-1990, December.
    5. 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.
    6. Stephen Martin, 2017. "Behavioral Antitrust," Purdue University Economics Working Papers 1297, Purdue University, Department of Economics.
    7. Schipper, Burkhard C., 2009. "Imitators and optimizers in Cournot oligopoly," Journal of Economic Dynamics and Control, Elsevier, vol. 33(12), pages 1981-1990, December.
    8. Antonio Cabrales & Olivier Gossner & Roberto Serrano, 2017. "A normalized value for information purchases," Working Papers 2017-51, Center for Research in Economics and Statistics, revised 05 Jan 2017.
    9. Ulrich Horst & Jan Wenzelburger, 2008. "On non-ergodic asset prices," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 34(2), pages 207-234, February.
    10. Leoni, Patrick L., 2013. "Survival in Cournot games," Journal of Mathematical Economics, Elsevier, vol. 49(5), pages 429-434.
    11. J. Doyne Farmer, 2002. "Market force, ecology and evolution," Industrial and Corporate Change, Oxford University Press, vol. 11(5), pages 895-953, November.
    12. Hilbert, Martin, 2016. "Formal definitions of information and knowledge and their role in growth through structural change," Structural Change and Economic Dynamics, Elsevier, vol. 38(C), pages 69-82.
    13. Patrick Leoni, 2012. "Rational expectations and monopolistic trades," Journal of Economics, Springer, vol. 107(2), pages 129-140, October.
    14. Luo, Guo Ying, 2009. "Natural Selection, Irrationality and Monopolistic Competition," MPRA Paper 15357, University Library of Munich, Germany.
    15. Beker, Pablo F., 2004. "Are inefficient entrepreneurs driven out of the market?," Journal of Economic Theory, Elsevier, vol. 114(2), pages 329-344, February.

    More about this item


    evolution; natural selection; equilibrium; incomplete markets;

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D6 - Microeconomics - - Welfare Economics
    • D9 - Microeconomics - - Micro-Based Behavioral Economics


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