Evolutionary Economics

Each person’s interest follow from each person’s history. The role of money is one of the most important issues in the economy. However, the author’s reasons for dealing with it first are rooted not only in economic importance but also personal reasons. An account of these personal reasons will provide a rather unique viewpoint on of the research subject. My paternal ancestor was a samurai positioned “shoinban,” a regular member of the military guard of the inner palace of a feudal lord (Ogasawara Family). In the closing days of the Tokugawa shogunate, my great grand father was appointed to serve as a currency handling officer for his lord. He then became familiar with both for mint technology and money transactions. Due to his connection, my grandfather was successfuly employed as an operative officer by the Mint of the new Japanese government (Osaka Mint) at the begining of the new era established in 1868. Later, my grandfather changed his careers to enter the spinning industry, in which he then became an executive of one of the three major companies. This is a major reason why the author was interested in economics and the role of money. Readers will learn that the role of money will be seen deeply some historical dynamism, although this chapter never investigates the detailed history of money in general. This chapter will simply give a concise understanding an essential part of the creation of money during the modern times.

In their path-breaking and highly cited work, Frank et al. (J Econ Perspect 7(2):159–171, 1993), demonstrates that the more economists study, the more self-interested they become. In other words, cooperation will be reduced. In the real world, there are rare to achieve cooperation rather than compromise. The epoch-defining maker of the modern principles of political economy, Adam Smith focused his life’s work on self-interest as well as sympathy. Our interest will be rather why economics was confined to the intersection of exposure to the self-interest model with self-interest behavior. We at first start by learning the method to study science.

There is a historically famous story that equilibrium could not be attained even if time were taken infinitely. The notion of equilibrium will no longer have the classical strict meaning: equality between supply and demand. The dominance of HFT has actually forced the financial market into a new system where the physical distance from the transaction server at the trader’s location becomes a decisive factor to realize a transaction. Outside equilibrium, in contrast, we can observe that arbitrage opportunities will never disappear but rather reinforce themselves. Usually, a successful extra profit earner can then increase the size of his order if he follows the martingale rule. If he is successful, his earnings could double. In this case, his dynamics will have the same form as the rich-get-richer process. The dynamic description is depicted as a fractal map. The power law distribution will be deduced from it. It seems intuitively natural that the variance of expenditures among the richest is larger than that among average consumer because rich consumers are used to spending more for their particular purposes, such as purchasing ships or airplanes. Given a new society, the law of demand would be alternatively explained by focusing on another property: the variance of an income class increases as its class category rises from the bottom to the top. Here a usual meaning of the microscopic rationality will then be lost. In addition, we will learn various other topics for redomaining equilibrium economics. Interestingly, students studying disciplines other than economics occasionally question why the prisoner’s dilemma does not hold in real life. They sometimes have a strong sense of discomfort regarding an occurrence of such a dilemma. In fact, such dilemmas do not necessarily occur in daily life. To be sure, real life incurs irrational conclusions. In many cases, however, better solutions are occasionally found to solve dilemmas. The more the realties are added, the more the boundary condition will be imposed to find a particular solution. Thus, the tree of boundary conditions will grow until the original implication may be lost.

Myopic optimization around scarce resources makes the least use of available information. Such optimization was a winning strategy in the stage when big data was not common but is no longer effective. In reality, winning game differs from the maximizing payoffs. In this article, we focus on an ontological meaning of the game and the time development of the dilemma game. In particular, we are interested in the time development of the dilemma game. After examining the structure of the iterated game, we then introduce the Wolfram simulator by Chandler (Iterated games. http://​demonstrations.​wolfram.​com/​IteratedGames/​, 2011) to the original form. This is the presentation like “cellular automatons” (CA-like presentation) of the iterated game. We furthermore expand his original program to discuss TFT, ESS, Avatamsaka game, and the tagging mechanism. The use of CA-like presentation may renovate the traditional implications of the game solution.

Clearly, the biological notion of the multi-cellular organism entailing multi-level evolution in terms of computational complexity  is helpful for understanding society. This perspective enables the identification of the institutional factors and integrative character of modern evolving system s. The computational complexity, which is based on algorithms, engenders the possibility of the complex emergence of higher orders of institutions based on cooperation. In the case of the economy, the notion of “Markomata ” propounded by Mirowski (J Econ Behav Organ 63(2):209–242, 2007) plays a decisive role. Accordingly, the existence and competition between hierarchical economic institutions also implies problems of computational complexity, again with no definite direction or outcome as a likely result. Evolution itself is a profoundly complex process, and so it is when it happens to economic institutions. Economic institutions must serve as the coordinating device. Conversely, this device will function as a sensor mechanism for sustaining the underlying system. We have witnessed a number of debates centering on the polarity between Keynesian and Hayekian economic theories and on a “command and control” perspective versus an “unregulated market” perspective. A contemporary biologist, David Sloan Wilson, has proposed “e’v’onomics” (Wilson in Stop crying about the size of government. Start caring about who controls it. The Role of the State in the Economy, 2016) that highlights the significance of the multi-cellular organism. A multi-cellular organism is composed of trillions of cells that must be healthy at the cellular and organ levels for the multi-cellular organism to be healthy. In the same way, for a large-scale human society to work well, it must be organized as smaller-scale units that work well and are properly coordinated for the benefit of the whole. Clearly, the biological notion of the multi-cellular organism entailing multi-level evolution in terms of computational complexity is helpful for understanding society.

We now turn to a consideration of economic matters. In a previous section, we touched on the pioneering contributions of classical political scientists like William Harvey, William Petty, and François Quesnay, all of whom were medical doctors. These individuals conceptualized the economic system in a way that was similar to blood circulation as a kind of node-based network constituted by the circular processing of materials, resources, and services. Quesnay’s economic table was the first monumental achievement in this context. Over the course of the 20th century, the forms of this table have changed, as evidenced in Leontief’s input-output table and von Neumann-Sraffa’s production system. The input-output table has been selected here for empirical reasons.

An innovative feature of this book is its econocentric structure, focusing on digital designs. From the outset, econocentrism is linked with monetary exchange as the core engine of capitalism. Needless to say, monetary exchange and its ledger system will undergo significant innovations soon, sychronizing with the new stage of communication style backed by pervasiveness of quantum computing. In fact, the new coronavirus pandemic has changed lifestyles worldwide, which are unlikely ever to return to their original form. This great transformation will change the nature of the socio-economic system itself, which will be centered on digital designs. At present, money is stating to undergo a major revolution. Many books dealing with digital designs and innovations have been published, but few if any of them focus on monetary and analytical methods in the way that this present volume does. Dealing with the new attributes brought about by this great change will be beyond the scope of traditional economics. Digital tools such as blockchain, cryptocurrency, and crypt assets as well as distributive ledger systems, require new modes of analysis. First, the evolution of money and complex thinking necessary for understanding that change must be analyzed. Furthermore, the way that goods markets are mutually coordinated and the future of the labor market must be understood, points that are emphasized in the first section of the book. Second, other computational approaches to social dilemmas, crypt graphics, and the supply chain are introduced in the latter part. To facilitate understanding of the core engine of market capitalism, the detailed settlement mechanism in terms of an AI market experiment are also presented.

This article was originally designed to comment an unprecedented bibliometric study of evolutionary economics by Hodgson and Lamberg (2016). However, Hodgson only reported the historical trajectory and the current situations of evolutionary economics initiated by since Nelson RR Winter SG Nelson and Winter (1982). He gave an insightful consideration about the raison d’être of evolutionary economics. According to his opinion, evolutionary economics is still failing to equip the core theories. We naturally agree with his remarks on the current situations around evolutionary economics. We take this opportunity to squarely address the subject about how to insert the core theories into evolutionary economics. We argue that the alternative candidates to be replaced with the main stream core theories are in the following ordering:(1) the theory of production to invalidate myopic optimization, (2) the theory of preference to invalidate myopic optimization, (3) the SMD Theorem to invalidate invisible hand, and (4) the market mechanism to invalidate the efficient market hypothesis. Needless to say, the alternative theories shown in these arguments imply the reconstruction of economics. Finally, we address the current analysis of bibliometrics.

The discrete utility theory is treated in this chapter. In view of mainstream, the alternative one to the traditional choice theory must be the probabilistic choice theory of utility given by Luce (1959). Later, this method became well known by McFadden’s Nobel Prize in 2007 (McFadden, 1974) in the academic world but before the event rather famous in the practical field. Shortly after the release of Luce (1959), unfortunately, Debreu (1960), one of the most respectful general equilibrium theorist, declared that “Luce’s choice axiom” is inconsistent. Subsequently, therefore, the theoretical study of Luce’s choice axioms had only sporadic development in the academic world, and this type of Luce utility theory was rather limited to practical analysis. When Luce’s utility is algebraically considered, this is currently dealt with as the multinomial logit model, which can illustrate either successive choices or mode choices. Alternatively, it may be possible to derive the multinomial logit model type utility from the neoclassical assumptions. A restrictive assumption like Independence from Irrelevant Alternatives (IIA) is often not only required to be imposed but also to depend on the assumption that the set/subset of preference are universal. However, Saari pointed out that Debreu’s criticism was off the point, as Saari found (2005), that Debreu’s example on Luce’s theory was discussing a problem in which the number of constraint expressions was too excessive than the number of unknowns to deal with, and then that nothing could be determined. On the contrary, Saari escaped the narrow deterministic arguments to expand significantly the theoretical coverage of choice theory. In his framework, even Arrow’s Possibility Theorem (Namba, 1951) is simply a special case.

There exists an ambiguous attitude in economic theory toward referring to the details of exchange mechanisms as a social system. To date, in classical theories, the main research target has been the exchange mechanism for commodities in general. Instead of studying the exchange of the broader social or community system, recently, much work has focused on auction mechanisms for particular goods in the context of experimental design. However, the advent of the community currency and crypto-currency suggests that we should study the feasibility and sustainability of the broader system. In this article we will focus on systems of exchange with auctioneers and without auctioneers. We then examine the properties of bilateral exchange between randomly selected traders without auctioneers and explore the resulting properties of iterations of such transactions. Finally, we mention special issues of cryptocurrency in the face of the Byzantine General Problem and discuss a well-coordinated distributed system involving digital tools such as blockchain.

When production theory is discussed in traditional economic custom, somehow, either intermediate goods or price determination are often not examined precisely. The prices are usually fixed, while scarcity of resources is exceptionally attached importance. The efficiency of production is consequently forced to be adapted to a given price system of goods. However, this kind of restrictive treatments of production came up against several difficulties when the theory of international trade is argued in terms of Ricardo and Heckscher-Ohlin, i.e., comparative cost theory. The object of international transactions may not be limited to such resources as regulations are often imposed. It is rather important to trade not only among the different intermediate goods but also even among the same kinds of intermediate goods empirically shown in Ikeda (2016). Thus the introduction of intermediate goods for production is indispensable to develop the theory of international trade. Even in the 21st century, however, economists were still frustrated to escape from a special two country-two commodity case. Fortunately, by remarking geometry, Shiozawa (2007, 2016), Shiozawa et al. (2017), has been successful to establish a price determination in a more general case of three country-three commodity. In Shiozawa (2016), he smartly employed a sub-tropical geometry to examine a general case of international trade, i.e., three country-three commodity case. Behind his idea, there is the idea of Minkowski space of production, in particular, zonotope. This approach will give a different view of production set, and possibly suggest a further generalization more than three of the number of country and commodity. First of all, this article gives a brief look of the new essence of Shiozawa’s theory, and then gives by some numerical simulation a new characterization of international trade in line with Shiozawa’s theory. Furthermore, this article examines the effect of the introduction of free international trade. The introduction of the optimization rule to international trade results in drastic changes in network structures. Finally, the link with the network analysis and econophysics will be argued.

Lambert Adolf Jacob Quételet (1796–1874), the astronomer, first attempted to ground statistical sociology with the ‘average man’ (l’ homme moyen). He then exhibits an interesting question about the difference between criminals and ordinary people. Even if the probability distribution of crime occurrence is Gaussian, different theoretical backgrounds arise depending on whether crime is regarded as acquired or innate. If

it is considered acquired, there will be a uniform population with a certain probability of becoming a criminal, whereas if all criminals are congenital, there is a probability of being born a criminal. Quételet is also currently well known by the body mass index (BMI) scale, originally called the Quetelet Index. The obesity index is also attributed to him. He proposed that society be modeled using mathematical probability and social statistics, which brought the ‘enthusiasm for normal distributions’ of natural and social scientists in the 19th century. Indeed, from the discoveries of Bernoulli and de Moivre, it came to be thought that large amounts of data on completely chance events could be used to argue for nonchance regularities. Moreover, the large amounts of data that came to be accumulated with the industrial revolution were also thought to apply to population, industry and society. This was the birth moment of social statistics. It came to be thought that distribution laws such as the Gaussian normal curve could be recognised everywhere. In other words, if we can consider ‘normal size’, we can also talk about ‘normal distribution’. Clearly, everyone has the freedom to be or not to be a criminal. However, the probability may be already determined at birth. In this circumstance, unlimited freedom and responsibility could not be guranteed. From the dawn of the Enlightenment, the ideals of freedom and probabilistic design have not always been compatible. The enthusiasm of probability distribution, on the contrary, was rather irrelevant to ethics. As time evolved since the enthusiasim due to Quételet, various problems were addressed, such as ‘the existence of dependence or interaction between individual data, or the occurrence of unusually large scatter and fluctuations’, and the assumption of normality in asset price fluctuations, for example in economic examples, was dismissed. This is nothing but an achievement of econophysics, but this is a very recent one. Finally, we learn the Polya urn process as a good reference mechanism to grasp the evolution of the system.

In previous chapters we have seen the advent of a new society, with the growing complexity of the market and technological innovations. We demonstrated the move away from the Gaussian world towards that of heavy tail distribution. To fully understand the latter distribution, we need to recognize a generalized central limit theorem, where the Gaussian distribution is simply a special case. We are therefore able to investigate several stable distributions and expand our idea of price equilibrium as a stable distribution. We will also discuss the central issue of how the market economy can generate complex dynamics. First, we use the simplest trader dynamics system designed by Philip Maymin, and recreate his simulation dynamics for an automaton. This explicitly takes into account traders’ decisions in combined multiple layers: actions, mind states, memories of the trader and the market. These factors are normally regarded as influential components that govern price movements. In financial transactions, we dispense with psychological effects at individual and aggregate levels. These may no longer be secondary effects. We then observe the stochastic process how a complex network will be generated. Second, we then learn the multiagent trader’s dynamics, where the complexity of interactions between heterogeneous traders dominates the market.

Masanao Aoki was a great scholar who sincerely challenged to exit from the secular world fettered by the representative method of economic modeling. He resolutely focused on a stochastic dynamic system, i.e., cluster dynamics with a finite number of heterogenous agents of different types, which could change the methodological regime from the pure homogeneous agents to the actual world. The desired model may be described by partition vectors with multiple state. Aoki’s model has renovated the traditional restrictive views. In this chapter, by referring to the sole textbook of Masanao Aoki written in Japanese, we will introduce his insightful analytical methods.