Using Evolutionary Theory to Predict Economic Recovery

From The Wall Street Journal October 19, 2010 - Real Time Economics - WSJ

There are a lot of economic models that show the global recovery will be slow, but two scientists have come up with a novel explanation: evolution

In a new paper, Michael Deem, the John W. Cox Professor in Biochemical and Genetic Engineering and professor of physics and astronomy at Rice and co-author Jianku He a graduate student in physics and astronomy say that applying evolutionary theory to world trade shows the global recovery will take longer to recover.

"by treating the world trade network as an evolving system, theory predicts the trade network is more sensitive to evolutionary shocks and recovers more slowly from them now than it did 40 years ago, due to structural changes in the world trade network induced by globalization" , the authors say.

The concept of modularity, which in biology refers to a structure that is part of a larger system but can function on its own, is key to their findings. In evolutionary theory increased modularity leads to more complexity, and a greater ability to withstand shocks. But globalization has decreased modularity in world trade and led to a more homogeneous structure, leading to deeper recessions and longer recoveries.

This isn't necessarily at odds with economic theory. A 2008 working paper by M. Ayhan Koss, Christopher Otrok and Edward S. Prasad published by the international Monetary Fund looked at increased convergences among industrial countries amid a more globalized world, but noted some decoupling from emerging markets. Though emerging nations weren't able to make it through the recent recovery  unscathed, they have generally been recovering faster.

But, Deem and He also state that contrary to standard economic theory the more complex the trade structure - which could even take the form of protectionist measures - the faster the recovery process.