A.

Evolutionary Economics: Overview, History, Examples

Updated October 23, 2023

Reviewed by
ERIKA RASURE

What Is Evolutionary Economics?

Evolutionary economics is a theory proposing that economic processes evolve and that economic
behavior is determined both by individuals and society as a whole. The term was first coined
by Thorstein Veblen (1857-1929), an American economist and sociologist.

Understanding Evolutionary Economics

Traditional economic theories generally view people and governmental institutions as

entirely rational actors. Evolutionary economics differs, shunning rational choice theory and
instead pinpointing complex psychological factors as key drivers of the economy.

Evolutionary economists believe the economy is dynamic, constantly changing, and chaotic,
rather than always tending toward a state of equilibrium. The creation of goods and the
procurement of supplies for those goods involves many processes that change as technology
develops. Organizations that govern these processes and production systems, as well as
consumer behavior, must evolve as production and procurement processes change.

Evolutionary economics explores how human behavior, such as our sense of fairness and justice,
extends to economics and seeks to explain economic behavior and progress in relation to
evolution and evolutionary human instincts such as predation, emulation, and curiosity. In the free
market, the survival of the fittest model is rampant. Consumers have plenty of choices, few firms
can fully meet their needs and everything is in a constant state of flux, meaning that many
competitors will be obliterated.

One of the biggest lessons that most evolutionary economists agree on is that failure is good and
just as important as success. According to the theory, failure paves the way to economic
prosperity by encouraging greater efficiency and the development of better products and
services. It also teaches us more about how society's needs develop over time.

Examples of Evolutionary Economics

Like behavioral economics, the actions of companies are believed to be shaped by more than just
a goal to make a profit. Several factors influence and motivate decision-making, including local
customs and fear of not surviving.

History also plays a key role. Entire countries and economies are said to be heavily influenced by
their pasts. For example, nations in the former Soviet Union, who for years were governed by
strict regulations, are likely to struggle more to be creative because they were taught not to think
this way for decades. Conflicting histories mean that the same economic policy should not be
expected to have the same impact in every country.
History of Evolutionary Economics

American economist Thorstein Veblen came up with the term evolutionary economics. He
believed psychological factors presented better explanations for economic behavior than
traditional rational choice theory.

Veblen used an example of social hierarchy and status to make his point, noting that demand for
some goods tends to increase when the price is higher—otherwise known as conspicuous
consumption. Veblen drew upon many fields of study, including anthropology, sociology,
psychology, and Darwinian principles.2

Austrian economist Joseph Schumpeter also played an important role in the development of
evolutionary economics. His model of creative destruction described the essential nature
of capitalism as a relentless drive toward progress, expanding on Veblen’s early observations.

Schumpeter argued that human entrepreneurs are the main drivers of economic development
and that markets are cyclical, moving up and down, as companies constantly compete to find
solutions to benefit mankind.

Who was Thorstein Veblen? His Life, Career, and Theories

By THE INVESTOPEDIA TEAM
Updated September 29, 2022
Reviewed by CHARLES POTTERS
Fact checked by
KATRINA MUNICHIELLO

Who Is Thorstein Veblen?

Thorstein Veblen was an economist and sociologist who is best known for coining the term
"conspicuous consumption " in his 1899 book The Theory of the Leisure Class.1

Veblen was interested in the relationship between the economy, society, and culture. He
analyzed the social order and believed that people made purchases to signal their economic
status and accomplishments to others.

Veblen critiqued the consumption habits of the wealthy and questioned their values. He coined
the terms “conspicuous waste” and “pecuniary emulation” (striving to meet or exceed someone
else’s financial status). He also founded the school of institutional economics. Veblen lived from
1857 to 1929.

Understanding Thorstein Veblen

Veblen Good

Because of Veblen’s analysis, we have the concept of a Veblen good, a product whose demand
increases as its price increases because consumers consider it an exclusive status symbol—in
other words, a product that is consumed conspicuously .

A Veblen good is a product of high quality that stands in contrast to a Giffen good—an inferior
product with limited substitutes.
These goods are priced so high that only the very affluent can afford them. The higher the prices
of the goods, the less likely it is that other consumers can afford them, and buyers begin to
perceive them as a way to signal great wealth and success. If a Veblen good's price decreases,
demand will decrease because status-conscious consumers will see it as less exclusive. 4
Conspicuous Consumption

Veblen considered this conspicuous consumption to be inherently wasteful because of the large
real cost of producing Veblen goods. If lower-cost means of signaling social status could be
employed, then the resources consumed by the production of Veblen goods could instead be
used to produce more urgently needed goods and services.

Along with conspicuous consumption, Veblen criticized charitable activities of the rich and
conspicuous leisure (non-work time devoted to consumption activities), from which his book
draws its title. Veblen's theory is an important part of the critique of consumerism. 4

Production and Economics

Parallel to his critique of consumer culture, Veblen was also a critic of production for profit as
wasteful both in that it encourages conspicuous consumption and because it also often involves
reducing productive output in order to raise prices and profits. He believed that limits on
production by businesses to raise profits contributed to problems such as unemployment.

Veblen's other major contribution was the development of American institutional economics.
Rejecting what he saw as the static view of mainstream economics, which focused on individual
action and market equilibrium, Veblen instead believed that economic behavior was socially
determined based on a process of the historical evolution of social institutions. Human biological
instincts and psychological tendencies, in turn, shape these social institutions. 5

The Life and Career of Thorstein Veblen

Born in America to Norwegian immigrants, Veblen was an outsider and nonconformist with
unusual behavior and alternative views; he rejected neoclassical economics , Marxism, pragmatist
philosophy, and laissez-faire economics . He wanted to integrate economics with sociology and
history to show how the discipline was influenced by human biology and psychology. 2

The longest job of Veblen’s career was with the University of Chicago from 1892 until 1906,
where he started as a teaching assistant and advanced to become a research fellow, assistant
professor, and the managing editor of the Journal of Political Economy.26 His experiences in
academia led him to criticize the higher education system in another book, Higher Learning in
America.7

In the 1930s, when the economic depression had America reassessing capitalism and
consumption, Veblen's reputation soared, and his books were devoured. Many believed that the
roots of the worldwide depression could be found in his writings from decades earlier. Some say
his writings still have currency today.

Thorstein Veblen FAQs

What Is the Theory of the Leisure Class?

The Theory of the Leisure Class is a book by Veblen. It covers a variety of aspects of economics
and human behavior and underlines the idea of a shift in society from the economics of
production to the economics of consumption. The idea is that the leaders of society show their
power and status not by leading or creating but rather through conspicuous wastefulness. 8
Is Conspicuous Leisure Different From Conspicuous Consumption?

There is a difference between conspicuous leisure and conspicuous consumption. Conspicuous

consumption focuses on purchasing goods and services to demonstrate wealth while
conspicuous leisure focuses on behaviors and activities that display wealth.

What Are Industrial and Pecuniary Employments?

Industrial and pecuniary employments are the two different categories into which modern
economic institutions fall. Pecuniary employments deal with those employments that fall under
ownership and acquisition while industrial employments fall under craftsmanship and production.

What Is the Veblenian Dichotomy?

The Veblenian Dichotomy deals with technology and institutions. The use of technology is based
on the institution. Some institutions use technology for "ceremonial" purposes—in other words,
wastefully. Veblen believed that institutions should use technology in a more instrumental way,
one that is purposeful. The dichotomy lies in the existence of a social class that uses technology
ceremonially rather than instrumentally.

The Bottom Line

Thorstein Veblen was an economist and sociologist that examined human consumption. His
interest lay in understanding how economics, culture, and society interacted with each other. His
principal basis was that individuals made economic decisions to display their wealth and place in
society as opposed to making economic decisions that were more purposeful, an idea he coined
as "conspicuous consumption."

B. Folk-Urban Continuum
 LAST UPDATED:AUG 9, 2023
 READ TIME3 MINS
The Folk-Urban Continuum is a theoretical construct in anthropology and sociology that postulates a smooth
and gradual transition from rural, folk societies to urban, modern ones. The concept was first introduced by
American sociologist Robert Redfield in 1941 [1]. This anthropological paradigm provides a framework to
understand the interplay between cultural transformation, socio-economic change, and geographic migration
patterns.

Theoretical Framework of Folk-Urban Continuum

Redfield’s original theory suggests that the cultural shift from rural to urban is neither abrupt nor
dichotomous. Instead, it illustrates a continuous transition marked by nuanced modifications in lifestyle,
values, social structure, and the adoption of modernity.

 Folk Society: Rural communities, often described as ‘folk societies’, exhibit close-knit relationships,
homogeneous cultural practices, and an economy based on subsistence farming or traditional
artisanal crafts. The society’s norms and values are rooted in tradition and rarely change.
 Urban Society: On the other hand, urban societies are characterized by diverse cultural practices,
complex social structures, and an economy dominated by industry and services. These societies are
marked by constant change and adaptation.
 Folk-Urban Continuum: The continuum represents the gradational changes from folk to urban
societies. This transition often involves significant changes in socio-economic structures, cultural
norms, and individual attitudes towards tradition and modernity.

Evidence Supporting the Folk-Urban Continuum

Several studies and ethnographic evidence support the concept of the folk-urban continuum.

 Migration Studies: The continuous influx of people from rural to urban areas often results in the
formation of transition zones, sometimes referred to as ‘peri-urban’ areas. These regions exhibit
characteristics of both rural and urban societies, thus supporting the continuum concept [2].
 Cultural Adaptation: The progressive adaptation of rural migrants to urban lifestyle over time also
suggests a continuum. Initially, migrants maintain their rural cultural practices but gradually adopt
urban values and norms [3].
 Urbanization and Modernity: The spread of modernity and urban values into rural areas due to
technology and communication advances further corroborates the continuum theory.

The table below summarizes the main characteristics of folk and urban societies:

Characteristic Folk Society Urban Society

Relationships Close-knit Diverse, often impersonal

Subsistence farming,
Economy Industry, services
artisanal crafts

Social Structure Simple, homogeneous Complex, diverse

Cultural Practices Rooted in tradition Diverse, changing

Adaptation to
Slow, resistant Rapid, adaptive
Change

Criticisms and Limitations of the Folk-Urban Continuum

While the folk-urban continuum has been a useful tool in understanding societal transformation, it’s not
without its criticisms.

 The theory assumes that all societies undergo similar transitions, neglecting the variations in culture,
history, and economic development across different regions [4].
 It doesn’t account for the reverse phenomenon of urban to rural migration, often spurred by lifestyle
choices or economic downturns in urban areas.
 The theory doesn’t sufficiently consider the effects of globalization, which can influence rural
societies without the necessity of physical migration to urban centers.

Conclusion

The folk-urban continuum, despite its limitations, has contributed significantly to our understanding of
societal change. It helps anthropologists comprehend the fluid dynamics of culture, the interplay of tradition
and modernity, and the transformation of socio-economic structures. As societies continue to evolve in the
face of technological advancements and globalization, refining and updating theories like the folk-urban
continuum will be crucial for anthropology.

C. Linear stages of growth model

The linear stages of growth model is an economic model which is heavily inspired by the Marshall
Plan which was used to revitalize Europe's economy after World War II. It assumes that economic
growth can only be achieved by industrialization. Growth can be restricted by local institutions and
social attitudes, especially if these aspects influence the savings rate and investments. The constraints
impeding economic growth are thus considered by this model to be internal to society.[2]
According to the linear stages of growth model, a correctly designed massive injection
of capital coupled with intervention by the public sector would ultimately lead to industrialization
and economic development of a developing nation.[3]
The Rostow's stages of growth model is the most well-known example of the linear stages of growth
model.[3] Walt W. Rostow identified five stages through which developing countries had to pass to
reach an advanced economy status: (1) Traditional society, (2) Preconditions for take-off, (3) Take-
off, (4) Drive to maturity, (5) Age of high mass consumption. He argued that economic
development could be led by certain strong sectors; this is in contrast to for
instance Marxism which states that sectors should develop equally. According to Rostow's model, a
country needed to follow some rules of development to reach the take-off: (1) The investment rate
of a country needs to be increased to at least 10% of its GDP, (2) One or two manufacturing sectors
with a high rate of growth need to be established, (3) An institutional, political and social
framework has to exist or be created in order to promote the expansion of those sectors.[4]
The Rostow model has serious flaws, of which the most serious are: (1) The model assumes that
development can be achieved through a basic sequence of stages which are the same for all
countries, a doubtful assumption; (2) The model measures development solely by means of the
increase of GDP per capita; (3) The model focuses on characteristics of development, but does not
identify the causal factors which lead development to occur. As such, it neglects the social
structures that have to be present to foster development.[4]
Economic modernization theories such as Rostow's stages model have been heavily inspired by
the Harrod-Domar model which explains in a mathematical way the growth rate of a country in
terms of the savings rate and the productivity of capital.[5] Heavy state involvement has often
been considered necessary for successful development in economic modernization theory; Paul
Rosenstein-Rodan, Ragnar Nurkse and Kurt Mandelbaum argued that a big push model in infrastructure
investment and planning was necessary for the stimulation of industrialization, and that the private
sector would not be able to provide the resources for this on its own.[6] Another influential theory
of modernization is the dual-sector model by Arthur Lewis. In this model Lewis explained how the
traditional stagnant rural sector is gradually replaced by a growing modern and dynamic
manufacturing and service economy.[7]
Because of the focus on the need for investments in capital, the Linear Stages of Growth Models
are sometimes referred to as suffering from ‘capital fundamentalism’.[8]

 Traditional Society: This stage is characterized by a subsistent, agricultural based

economy, with intensive labor and low levels of trading, and a population that does
not have a scientific perspective on the world and technology.
 Preconditions to Take-off: Here, a society begins to develop manufacturing, and a
more national/international, as opposed to regional, outlook.
 Take-off: Rostow describes this stage as a short period of intensive growth, in which
industrialization begins to occur, and workers and institutions become
concentrated around a new industry.
 Drive to Maturity: This stage takes place over a long period of time, as standards of
living rise, use of technology increases, and the national economy grows and
diversifies.
 Age of High Mass Consumption: At the time of writing, Rostow believed that Western
countries, most notably the United States, occupied this last "developed" stage.
 Here, a country's economy flourishes in a capitalist system, characterized by mass
production and consumerism.

Figure 8.4. Rostow’s Stages of Economic Growth

Flowchart of Rostow’s Stages of Economic Growth

The flowchart starts at the bottom left with traditional society and moves up and to the right
through the following steps.
1. Traditional society
a. Limited technology; static society
b. Transition triggered by external influence, interests, or markets
2. Preconditions for take-off
a. Commercial exploitation of agriculture and extractive industry
b. Installation of physical infrastructure (roads, railways, etc.) and emergence of
social/political elite
3. Take-Off
a. Development of a manufacturing sector
b. Investment in manufacturing exceeds 10% of national income; development of modern
social, economic, and political institutions
4. Drive to Maturity
a. Development of wider industrial and commercial base
b. Exploitation of comparative advantages in international trade
5. High Mass consumption

D. Structural Functionalism.

Definition:
Structural Functionalism is a macro theory that looks at how all structures or institutions in society
work together. Examples of structures or institutions of society include: education, health care,
family, legal system, economy, and religion.

Key Concepts:

 Society is seen as an integrated whole, where all parts are interconnected.

 Every structure in society works together to play a vital function to maintain stability and the
well-being of its members.
 This theory focuses on the roles people perform and the idea that behaviour follows
established norms, which helps to maintain social order.
 Institutions and people are interconnected; when something shifts, either in the institutions
or in the people, the other has to change or compensate to restore the equilibrium.
 It can help to think of it this way: functionalists compare society to the human body; each
part of society serves a function, just like our organs do.

Key Figure:

Emile Durkheim: 1858-1917.

As a researcher and a theorist, Emile Durkheim is credited as the one who made studying sociology a
science. He did this through systematic examination of the ways in which social institutions and human
beings interact with each other and influence each other. Because he looked at the ways in which social
institutions or structures function, this theory became known as structural functionalism.

E. Conflict Theory.

Definition:

Conflict Theory is a macro approach that examines the role that power plays in society and how it
can be used to have control over others.

Key Concepts:

 Society is organized into two groups: those with and those without power.
 Those with the most power have the most wealth, prestige, and privileges, and therefore
are able to limit the less powerful. Exploitation can result.
 There is constant tension between the classes of society. Conflict theorists ask for whom is
society functioning? For whom is it not?
 Society is constantly experiencing change due to competition over resources, as observed
during the Industrial Revolution, where the small number of wealthy factory and business
owners were referred to as the bourgeoisie. The working class were known as the
proletariat. Because they did not have wealth nor power, the proletariat were really at the
mercy of the bourgeoisie who were maintaining their own position of power. For more
information, check out Wikipedia.

Key Figure:

Karl Marx: 1818-1883.

Marx observed power structures in society. He saw the distribution of power as being top heavy; that is,
power was tightly controlled by the few individuals at the top who had money and influence. They
constructed society to keep themselves in power and to minimize the influence of the masses, creating
class conflict.