Earl – Comparing comparative static analysis and evolutionary analysis

Comparative static analysis

Peter Earl on comparing comparative static analysis and evolutionary analysis

The following is abridged from pp.145-147 of Earl, P. E. (1995) Microeconomics for business and marketing: lectures, cases, and worked essays. Aldershot, Hants, England: E. Elgar:

The standard neoclassical approach to analysing changes in economic systems involves three basic stages:
(1)        Initially the economist models the decision-making units as if their goal is to maximize the value of some function (for example, a profit function or utility function) and as if they have found an equilibrium state that is stable…

(2)        Something of interest to the economic analyst is then assumed to take place unexpectedly—in the neoclassical economist’s jargon, ‘The system receives a shock’…

(3)        The economist then finds the new optimal point of equilibrium and checks it for stability. It is recognized that the system may be temporarily out of equilibrium if decision-makers need to use trial and error to discover the best position. However, the economist concentrates on the end state and ignores possible steps along the way to it on the presumption that it will not be affected by the adjustment process.
This way of analysing change is often said by critics to take place in logical time rather than historical time, owing to its presumption that history is reversible in the sense that, if the ‘shock’ is reversed, then the decision-making unit will return to the initial position of equilibrium. In the short run, of course, it might not be possible to reverse everything: for example, a change in wages might imply a change in technology; if wages changed back to their original level and there was a big difference between the new and secondhand prices of machinery, a switch back to the original technology might not occur until the machinery wore out.

Behavioura1/institutional economists are more interested in how economic processes work and are not worried if no equilibrium end state is implied by their models. On the contrary, they usually expect changes to continue without apparent end because each time one decision-making unit tries to adapt to a change this tends to cause a change in someone else’s decision-making environment. They also note that, in the course of coping with change, people discover new information, so a reversal of a change in their decision-making environments may not lead them to return to their original positions…  As a result of focusing on both irreversibilities and the linkages between elements of complex economic systems, those who adopt the evolutionary perspective recognize that quite small differences in commitments that people make at one point in history can have very major implications for the patterns of events that subsequently occur.

Last updated 8 September 2014