Optimality and Natural Selection in Markets

Lawrence Blume and David Easley

Working Papers from Santa Fe Institute

Abstract: 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.

Submitted to Journal of Economic Theory.

Keywords: Evolution; natural selection; equilibrium; incomplete markets (search for similar items in EconPapers)
Date: 1998-09
New Economics Papers: this item is included in nep-evo and nep-ind
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Related works:
Journal Article: Optimality and Natural Selection in Markets (2002)
Working Paper: Optimality and Natural Selection in Markets (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:wop:safiwp:98-09-082

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