Economic growth models are profoundly inadequate because they ignore niche emergence, new research argues

Jane Jacobs in "The Nature of Economies" wrote that "development without co-development webs is as impossible for an economy as it is for biological development" ". However, many economists continue to develop growth models as if they were single-sector linear processes with capital, manpower, human resources, investment, savings, etc. As explained in a new paper led by Dr. Roberto Cazzolla Gatti, Associate Professor at the Tomsk State University in Russia and Research Fellow of the Konrad Lorenz Institute for Evolution and Cognition Research in Austria, just published in the Journal of Bioeconomics (Cazzolla Gatti R., Fath B., Hordijk W., Kauffman S., Koppl R., Ulanowicz R., On the emergence of ecological and economic niches, 2020 https://doi.org/10.1007/s10818-020-09295-4) this economic conception is largely inadequate. The self-catalytic emergence of economic niches in a sort of "adjacent potential" space cannot be ignored when it deals with development and growth.

The common economic notions of "general equilibrium" and "input-output table" reflect a certain understanding of economic autocatalysis. Furthermore, stories of evolution and self-sustaining growth are also well known. If we go back to Bernard Mandeville (1729) and Adam Smith (1776) we can even find an evolutionary history in which growth involves a growing "exchange diversity", which is diversity in the number of goods sold. Already in a 2017 article in the journal Ecological Modelling (Cazzolla Gatti R., Hordijk W. and Kauffman S. Biodiversity is autocatalytic. Ecological Modeling 346: 70-76, 2017) and in a 2018 article in the Journal of Theoretical Biology (Cazzolla Gatti, R., Fath, B., Hordijk, W., Kauffman, S., & Ulanowicz, R. (2018). Niche emergence as an autocatalytic process in the evolution of ecosystems. Journal of theoretical biology, 454, 110-117) the authors of this new research proposed that development and evolution should be seen as an open process through which differentiation from generality emerges, which then become other generality from which further differentiation emerges. As innovative as this idea is, Prof. Cazzolla Gatti and his colleagues found principles of this kind of approach also in economics and not only in Jane Jacobs but also in B. Mandeville, A. Smith, A. A. Young and others. Therefore, in this new paper, they add a new piece on their evolutionary puzzle suggesting that ecological niches emerge every time a new species evolves, and the more species emerge, the more ecological niches (exponentially) emerge (Figure 1) and, in the same way, economic niches emerge every time new goods and services evolve, and the more they enter the market, the more economic niches emerge (Fig. 2).

Ecological niches are occupied by the most fitting groups of species or by single species and, although two or more species can initially compete (or better find ways to avoid competition with the others by displacing their ecological niches), they usually evolve towards symbiotic relationships (endosymbiosis, mutualism, commensalism, etc.) by shifting their interactions from competition to cooperation, which allows the emergence of even more potential ecological niches. In the same way, economic niches are occupied by well-specialized companies or individual workers and, although companies or workers can initially compete (or rather find ways to avoid competition with others by displacing the economic niches), they usually evolve towards symbiotic relationships (cooperatives, corporations, etc.) that shift their interactions from competition to cooperation, which allows the emergence of even more potential economic niches.

Prof. Cazzolla Gatti and colleagues have, therefore, developed a meaningful notion of "economic niche". In economics, the word "niche" is used quite often. "However—they say—we don't know any good clear analysis of what an economic niche could be. In our scientific article, we have tried to define a notion of economic niche and to show that this definition is strongly correlated to that of "ecological niche" and constitutes a missing piece of the theory of economic growth". Indeed, economic growth models ignore cambio-diversity. If the economy is an evolutionary system, cambio-diversity must be at the center of economic growth, but we cannot have a fully coherent model in which cambio-diversity grows if the model does not consider a coherent notion of "niche".

Economist G. B. Richardson had fun with the paradoxes created by the notion of "perfect competition" in economics. In a "perfectly competitive" market, you have an infinite number of potential competitors waiting to enter. The slightest fragment of "economic profit" induces entry. But, Richardson wonders: "If we assume (as the theory does) "perfect information" won't all of those infinitely many potential entrants enter? But if they do, won't the resulting massive entry induce massive losses? Anticipating this, won't they abstain from entering? In this perfect competition scenario, the profit opportunity everyone knows about goes unexploited. And so on". An important part of what drives Richardson's paradoxes is the assumption of homogeneity of agents. Without the notion of an economic niche, the notion of agent heterogeneity is ignored. By introducing the notion of niche, however, the authors of the study were able to make the heterogeneity of the agents endogenous. All this emerges profoundly in Adam Smith's ideas on human equality, which he expressed forcefully in the first or second chapter of "The Wealth of Nations". In ecology, niche differences stabilize competitors' dynamics, avoiding their competition. The same seems true in economics: economic niches reduce competition between firms and increase the number of coexisting firms.

Thus, goods and economic relationships become increasingly diversified and complex over time. This autocatalytic complexity is a central feature of economic life which is largely absent from the dominant models of modern economics. "With this new research—Prof. Cazzolla Gatti declared—we try to correct this omission by developing an emergent market model that takes a cue from biological systems".

"Economic growth—write the authors in their paper—implies an increase in the variety of goods produced, defined by Roger Koppl et al. (2015) "cambio-diversity". But new goods require new markets. If a new good is to succeed, if it wants to add value to the system, it must be sold on the market. In other words, it must occupy an economic niche. A variety of products can be sold in a particular market, such as when apple pie and peach tart compete for dessert customers. In addition, a given product can be sold in multiple markets, such as when apple pies are sold in both London and Berlin. For this reason, all the great increases in the cambio-diversity that we have seen over time, from the development of "composite instruments" 300,000 years ago onwards, have required the emergence of new economic niches. For example, there must be a market for mouse pads before mouse pads can be successful in economics (Figure 2). A theory of growing diversity, therefore, requires a theory of the evolution of economic niches that parallels that of ecological niches."

This example of a mouse pad suggests Cazzolla Gatti and colleagues' fundamental intuition: each new economic niche generates further new economic niches exactly as it happens in ecology. "In fact, - Prof. Cazzolla Gatti and colleagues said—we have tried to provide this insight with solid analytical foundations by drawing on niche emergence models in biology that we previously developed. Therefore, our model is also a contribution to the evolutionary economy. Our niche emergence model reveals that cooperation is the fundamental and intrinsic feature of competition in the market. It is not surprising that previous writers have anticipated our views in various degrees, but our niche evolution model seems to contain new elements and seems to suggest a vision of competition and cooperation in market processes that today is not very appreciated and may not having been articulated precisely by scholars previously."

This group of evolutionary biologists, ecologists, economists, and complex system analysts, in their new article, argues that the economy can also be seen as an autocatalytic set, just like ecosystems, and this may explain the phenomenon of niche emergence in economic systems. First, they considered economic production functions as the equivalent of chemical reactions, which transform a certain number of "inputs" into a certain number of "outputs". For example, the inputs can be wood and nails, where the output is a table. Subsequently, they defined the "facilitation" of these production functions as the equivalent of catalysis in chemistry. For example, a hammer acts as a "catalyst" for creating the table. The hammer, in fact, is not consumed in the process but increases the speed with which it is possible to create (or favor the emergency of the) tables. Finally, they observed that the hammer itself is the product of some other productive function in the same economy and that its use is not limited to that of creating tables. Its multifunctionality offers many ways to contribute to the development of new products, thus extending its usefulness (fitness).

In this way, an economic network forms a self-sufficient autocatalytic set: all production functions are "catalyzed" (facilitated) by products of the same economic network and all these products can be made from a set of basic materials (raw materials) using production functions of that same economic network.

In synthesis, with their pioneering idea of the emergence of economic and ecological niches, Prof. Cazzolla Gatti and colleagues propose three fundamental aspects: 1) diversity itself creates even more diversity, so to address natural evolution and economic growth (cambio-diversity); 2) ecology and economics are both autocatalytic networks; and 3) the economic growth models currently in use are profoundly inadequate because they ignore the (almost entirely) unpredictable emergence of niches in a market network.

Could these innovative ideas change the course of unsustainable development of the economy that is destroying our planet's ecology?

More information:
Cazzolla Gatti R., Fath B., Hordijk W., Kauffman S., Koppl R., Ulanowicz R., On the emergence of ecological and economic niches, 2020 doi.org/10.1007/s10818-020-09295-4

Provided by Tomsk State University