How Darwinian should an economy be?

This paper studies aggregate dynamics in a cobweb model where learning takes place through a selection mecanism, by which more successful …rms are replicated at a higher rate. The structure of the model allows to characterize analytically the aggregate dynamics, and to compute the e¤ect on welfare of alternative levels of selectivity. A central aspect is that greater selectivity, while bringing the distribution of …rm types closer to the optimal one at a given date, tends to make the economy less stable at the aggregate level. As in Nelson and Winter (1982), …rms di¤er in their labor/capital ratio. They do not choose it optimally, rather it is a characteristic of a …rm. The distribution of …rms evolves over time in a way that favors the most pro…table …rm types. Selection may be inadequate because …rms are being selected on the basis of incorrect market signals. Selection itself may reinforce such mispricing, thus generating instability. I compare economies that di¤er in the volatility and persistence of their productivity shocks, as well as the elasticity of labor supply. The key …ndings are as follows. First, a trade-o¤ arises since greater selection allows to better track shocks and limits mutational drift in …rm types; on the other hand, selection may strengthen cobweb oscillatory dynamics. Second, there seems to be a value in maintaining a diverse "ecology of …rms", in order to cope with future shocks. These observations explain the key results. Optimal selectivity is larger, the less "cobweb unstable" the economy, i.e. the more elastic the labor supply. Second, optimal selectivity is larger, the more persistent the aggregate productivity shocks. Finally, optimal selectivity is larger, the lower the variance of productivity innovations. The model can be extended to allow for …rm entry and trend productivity growth, and a selection process with memory. Empirical evidence suggests This paper was presented at the PSE macro workshop, the University of Surrey, Munich University, Ecole Polytechnique, and at the European Summer Symposium in Macroeconomics, Izmir, May 2013.