Darwin Meets Schumpeter: Natural Selection Types and Environmental Changes in an Endogenous Growth Model

Abstract

In this paper, we propose an evolutionary extension of Schumpeterian endogenous growth model with multi-sector by introducing the three types of natural selection: stabilizing selection, directional selection, and disruptive selection. Based on them, the survival of firms is determined in each period. As a metrics of survival rates, we incorporate "firm fitness" in the economy into the well-known endogenous economic growth model. Moreover, in this model, firms can enter, exit, and move among sectors based on the fitness. In addition, the model permits us to simulate the economy's firm diversity as well as real growth rates in the three types of natural selection. Based on the model with them, we simulate the economy with or without "Unanticipated" Future Environmental Changes (UFEC) using the Monte Carlo method. In the no-UFEC economy of directional selection, the firm diversity of the economy converges to the lower level rather than the firm diversity of the stabilizing selection economy, but the real growth rate of it approaches highest level rather than the real growth rates of the stabilizing- and disruptive-selection economies. On the other hand, in the no-UFEC economy of disruptive selection, the firm diversity of it converges to the highest level rather than the stabilizing- and directional-selection economies, while the real growth rate of it approaches the same level of stabilizing-selection economy. Thus, directional selection in the no-UFEC economy is most effective for improving real growth rate in the steady state. However, the presences of UFECs alter the implications. After a UFEC occurs, the great fall-off of the real growth rate is observed in the economy of directional selection, while the real growth rate in the disruptive-selection economy is kept stable. This indicates that the UFEC economy of directional selection is weaker in the presence of UFEC such as innovations of general-purpose technology, climate changes, and social regime changes, because low diversity occurs. Contrastingly, the UFEC economy of disruptive selection after UFEC is more robust rather than the directional-selection economy, since the highest firm diversity occurs. Although the disruptive selection in the UFEC economy is not most effective for improving real growth rates in the long run.