Author: Shawn Cunningham

How economies evolve

The economy is a mechanism by which different solutions are developed, tested and amplified. The mechanism of evolution to achieve this is to increase variety, select appropriate and fit designs and amplify them. Where the efforts of many competing solution developers are tested, i.e. where there is continuous competition for the most appropriate solution, designs are continuously refined through this process. This process is repeated at different levels within an economic system:

  • At the level of individuals, where their cognitive capacities allow them to generate and select between a variety of alternative ideas. They then try to convince others of their ideas, both informally and formally. Factors that contribute to the ability of individuals to generate alternatives include experience and education, but the cultural and social contexts are also important factors that make certain ideas even possible to consider.
  • Within organisations, where appropriate ideas, often in the form of routines or identifiable modules, are selected from a variety of alternatives and then acted upon.
  • At a more aggregate level in the society, where the offerings of different organisations that are deemed appropriate or desirable are selected by other actors. More successful designs thus gain prominence and more resources are allocated to create them, re- allocating resources away from less successful designs.

In the economy, the market takes on the role of the selection mechanism at the level of the society. In the market, the creativity of companies in solving important problems in a society are tested. Markets provide incentives for businesses to increase variety by trying new ideas. They also provide the tness function for selection by having multiple similar businesses compete for the demand of the customers. Finally, markets provide means to shift resources from un t to t designs, which leads to ampli cation. Good ideas are adapted and integrated into a wide range of different contexts.

Economic evolution occurs in different spaces. Nelson and Winter (1982) proposed that an economy changes due to an ongoing process of co-evolution between social and physical technologies [1].  Beinhocker (2006) adds a third space that he refers to as ‘business plans’.

The economy evolves through a co-evolution of physical and social technologies as well as business plans. While variety is created in all three of these domains, it is business plans that are eventually put to the test of selection in the real world.

Beinhocker (2006) describes the three co-evolutions as follows.

Physical technologies are methods and processes for transforming matter, energy and information from one state into another in pursuit of a goal or goals; they enable people to create products and services that are worth trading. A physical technology is not only the physical object itself, but both the design of the thing and the instructions and techniques to make and use it. The ability to learn how to use, make and adapt the physical objects is critical.

Physical technologies generally consist of modules that can be combined, re-combined and adapted in novel ways. Physical technologies are cumulative; each new breakthrough or novel arrangement creates a new building block and exponentially increases future development options as the stock of ‘modules’ or building blocks’ increases.

Central to the use of physical technologies is the ability to combine and recombine existing elements in different contexts. This requires creativity and the ability to learn and adapt.

An example of a physical technology is the use of a smartphone in a small business. The entrepreneur would not only have to acquire the physical phone itself, but also master the use of the phone. Furthermore, it needs to be integrated into management processes, for example by adapting how the company manages time by using the shared calendar function.

Social technologies are methods, designs and arrangements for organising people in pursuit of a goal or goals; they smooth the way for cooperation and trading products and services. For example, the ability to organise people into hierarchies, such as companies or other organisations, which can allocate resources to specialised functions and which can learn, is a social technology.

Like physical technologies, social technologies are modular. They can be captured as routines (for example administrative procedures), arrangements (for example a joint stock company) or even values (for example valuing team members’ opinions). As such, they are also cumulative, and each new module opens new possibilities for a variety of new combinations.

Social technologies are closely related to the concept of institutions in economics, but they go further. While North (1990:3) describes institutions as “the rules of the game in a society”, Beinhocker (2006) includes other aspects in his description of social technologies, such as structures, roles and processes.

Beinhocker (2006) argues that the real driver for increasing productivity in the Western world was changes in how companies organise and manage themselves, in other words, innovation in social technologies. This innovation is not just shaped by good managers inside a company, but also by the society’s de nition of such changes. For instance, an important social technology is the system of laws and regulations and how they are enforced in a society. Laws and regulations make it easier for strangers to cooperate, work together and trade.

Of particular interest for economic development are the social technologies in the form of institutions that emerge to reduce the costs of cooperation, search for and nd relevant information, and try new ideas. While some of these institutions may be associated with markets, or be seen to be ‘market supporting’, there are many that are hard to even directly associate with enterprises and markets. These institutions take the form of organisations that increase the ability of a society to learn, adapt and change, such as the educational system, or documentary programmes on public television. Depending on the sophistication of the economy, more of these organisations exist to fulfil an extremely diverse range of functions. Not all of these organisations are public organisations.


While some institutions that the economy needs to develop effectively could be associated with markets, or be seen to be ‘market supporting’, there are many that are hard to even directly associate with enterprises and markets..

This wide range of organisations are generally not at the centre of attention of development programmes. Market development programmes often focus narrowly on institutions that are directly relevant to specific sectors. They take into account certain institutions related to supporting functions and rules, but ignore the importance of institutions that are less obvious but nevertheless critical for the long-term viability of a market system. Examples of such institutions are organisations involved in all forms of education, technology development or industry promotion (such as standards bodies, testing facilities, etc.) that disseminate formal knowledge or create routines in the forms of regulations that can be adapted in other settings. In some cases, market development programmes might be aware of a range of formal supporting institutions, but still choose to work exclusively with enterprises at the micro level to upgrade them.

A range of organisations, often publicly funded, play the role of enabling discovery, reducing costs of exploration, and transforming codified knowledge into regulations, standards, organisations and development programmes. These organisations are often overlooked by development programmes.

A key challenge in economic development is to understand why certain kinds of institutions, both in the private sector but also the public sector, do not emerge on their own.

Business plans are developed by enterprises and other organisations that are competing for resources, acceptance and buy-in in the economy. Business plans play the critical role of melding physical and social technologies together under a strategy and then operationally expressing the resulting design in the real world. From an evolutionary perspective, the purpose of business plans is to discover what is pro table, ef cient or even possible in a given economic context.

According to Beinhocker (2006), a business is a person, or an organised group of people, who transform matter, energy and information from one state into another with the goal of making a profit. One could broaden this de nition and see businesses in the wider sense as public or private sector organisations, such as small enterprises, large rms, government departments and non-governmental organisations, which compete for resources. Business plans are thereby developed and implemented by the management team of these different types of hierarchies. These strategies could be formally captured in documents and plans, or could be more informal. The process of developing these business plans depends on factors from within the hierarchy, but it also draws on capabilities beyond the hierarchy in the broader institutional landscape.

While business plans create variety, there are two different methods of economic selection: ‘Big Men’  [2] and markets (Beinhocker, 2006). ‘Big Men’ mechanisms are associated with hierarchies and power, both on the level of individual companies and society at large.


In these hierarchies, selection is mandated rather than based on tness for purpose. This often leads to choosing poor business plans over good ones because they are chosen to conserve power in the hierarchical structure and/or to bene t the people in power.

Business plans create this variety for evolution to select from. There are two different methods of economic selection: ‘Big Men’ and markets. These two methods often build two layers of selection.

In reality, there is a dual layer system of business plan selection at work. The majority of economic decisions are still made by hierarchies – the hierarchies of rms, corporations and other organisations. Only small parts of designs are subsequently put to the test in a market.

This process creates an iterative loop of searching for ideas involving option generation, testing and selection. It starts within management structures and ultimately plays out in markets. Hence market economies are systems of competing hierarchies, with the visible evidence of this competition being the competence of management processes to create variety and pre-select designs to put to the test in markets.

Ampli cation of selected business models occurs as selected models are rewarded with more resources and are widely copied by others. Central to this process are enterprises, but they do not act alone. They are supported by a rich environment of organisations, formal and non-formal institutions and a broader societal context which shapes the market that serves as a selection mechanism.

Markets are important from an evolutionary perspective, but for different reasons than traditional economics teaches – namely being a mechanism for ef cient resource allocation. Markets

  • are evolutionary search mechanisms
  • provide incentives to create variety
  • provide a tness function and selection process
  • provide means to shift resources from un t to t, thus amplifying good solutions for survival.Beinhocker (2006:294) concludes: “Markets win over command and control not because of the ef ciency of allocation, but because of the effectiveness at innovation in disequilibrium”. Markets work because they enable a decentralised search and discovery process for solutions that meet the requirements of a speci c economy or society.


  1. Arthur (2013: p.14) defines technology as a “means to human purposes”, which could include not only industrial processes, machinery, medical procedures and algorithms (referred to as physical technologies), but also business processes, organisations, laws and institutions (social technologies). Thus technology is about knowledge of how to achieve things.
  2. The term ‘Big Men’ goes back to the concept of a ‘Big Men Society’ in the prehistory of humans, primates, where males competed with each other for sexual access to females. Later in human development, it was usually Big
    Men who led tribes and thereby also dominated decisions on economic affairs, providing the selection mechanism to choose one business plan over another one. Even today, much of the corporate world is still dominated by Big Men and not that many Big Women. Nevertheless, the latter can obviously play an equally important role in shaping selection


ARTHUR, B.W. 2013. Complexity Economics: A Different Framework for Economic Though. Santa Fe Institute.

BEINHOCKER, E.D. 2006. The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics. Boston, MA: Harvard Business School Press.

NELSON, R.R. & WINTER, S.G. 1982. An Evolutionary Theory of Economic Change.Cambridge, MA: Belknap Press of Harvard University Press.

NORTH, D.C. 1990. Institutions, Institutional Change and Economic Performance. New York: Cambridge University Press.

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