The Nature of Species Through the Eyes of an Economist

This paper builds a bridge between certain of the most basic principles of economics and those of evolutionary biology. It begins by extending Ronald Coase’s “The Nature of the Firm” to an investigation of how, as their environment evolves, species achieve adaptive efficiency by internalizing the development of various organs. It further employs an Edgeworth Box and Coase’s “The Problem of Social Cost” to illuminate the process of co-evolution. In relation to the factors that determine the internalization of functions within firms – transaction costs, complementarities, and scale – the paper analyzes the evolution of functions within and external to the boundaries of organisms within three types of species: cyanobacteria who internalize their essential functions, turtles that interact with the external environment instinctively, and humans capable of deliberative behavior. The paper proposes that the evolution from “simple” to “complex” systems has resulted from the switching of various functions and forms between species and the environment. As such, evolution resulting from both gene and idea innovation is likely to be most consequentially driven by this “switching” process, causing the species to become more deeply integrated with an evolving environment