Recent Evolutionary Theorizing About Economic Change

Recent Evolutionary Theorizing About Economic Change

Recent Evolutionary Theorizing About Economic Change By Richard R. Nelson I. Introduction Biological conception are more complex than those of mechanics Principles of Economics brings out two issues: The first is the heavy reliance by economists in their formal theorizing on the notion of equilibrium. The other is the appeal that biological conception

have or many economists, particularly when their focus is on economic change. Marshal clearly believed that our science should aim to understand economic change and not simply the forces molding and sustaining the current configuration of economic variables Introduction In recent years much of economic theorizing has been concerned with dynamics, and the

equilibrium, like those of Newtonian dynamics Marshall might observe that the equilibrium concept in these models still somehow has a static feel to it. Few economists confuse the formal static or dynamic equilibrium theory with the reality Some economic situations need to be understood as involving significant elements of novelty, so that the actors should be regarded as searching for a best action. Introduction There has been a resistance to building these

complication into formal models. This seems to have been Marshall concern. Marshall to make use of biological conception or metaphors. Many economists to consider individuals and organizations as entities that search and learn. Industrial organization economists sometimes characterize certain industries as young and others as mature Introduction Evolutionary or developmental language is used quite widely by economists to describe how the

structure of an economy, or an industry, or technology, or the law, changes over time. Marshall never had in mind simply applying biological theory to economics. Indeed, the fact that he felt himself forced to fall back on mechanical analogies tells us that he found it very difficult to develop a formal theory, based on biological conceptions, that he thought adequate for economic analysis. Introduction In the years since Marshall, not many economists have even tried to feel the

same tension as did Marshall. There is problematic on at least two counts. First, the farther the language of particularly explanation is from the logic of formal theory. And second, the argument draws too sharp a line between formal theorizing and verbal economic explanation. Introduction The real economic world is so complex, theorizing about it tends to proceed at least two different levels of abstraction.

Formal theorizing is one level. Economists also need to be understood as theorizing when they are trying to explain what lies behind the particular phenomena they are describing Winter and Nelson have called this kind of analysis appreciative theorizing Introduction The development of an industry, or the evolution of a technology, focus on certain variables and ignore others. Stories about economic growth, which often

involve evolutionary or developmental concept, and that of equilibrium theory. In fact the substance of theories using biological conceptions and equilibrium theories is not very different. In particular, the theories predict much the same things Introduction There is no real difference between saying that firms literally maximize, and saying that their behaviors have been learned through trial, error, and correction, and in some cases have been selected through the competitive process. Thus

extant actors behave as if they maximize. Some economists who use the language of development and evolution in telling their stories apparently do not believe that concepts like optimization and equilibrium can explain adequately the phenomena the are addressing. Introduction Many students of biological evolution strongly deny the proposition that optimization provides a meaningful explanation for the character of extant living forms.

The process of evolution is strongly path dependent and there is no unique selection equilibrium. Introduction The hearth of any explanation of extant living forms thus must be evolutionary analysis of how the particular equilibrium. Hodgson (1993) has provide an elegant analytic history of evolutionary theorizing in economics, and forceful argument that Marshall was right about Mecca.

Introduction Evolutionary economic theories has had several distinct, if connected, sources. One is the influence of developments in evolutionary theory in biology, and sociobiology, and the attempts to extend these lines of analysis to explain the evolution of human patterns of cooperation, coordination, and social

behavior more generally. Introduction There will be concerned mostly evolutionary analysis of long run and continuing economic change. Many physical system display properties that such dynamic models can explain and illuminate, is yet another stimulus to evolutionary theorizing in economics. Like Marshall, most of these writers, while drawn to biological conception or metaphors, have resisted simply transferring evolutionary concept

used in biology to their area of inquiry. II. The Characteristics of an Evolutionary Theory What are the characteristics of an evolutionary theory of economic change? A. Evolutionary Theory as a general theory One way to define evolutionary theory in general would be start from biology. The term evolution was in wide use long before it took on meaning as the name of a particular theory in biology Evolutionary theories also are central, of

course, in evolutionary in biology. The Characteristics of an Evolutionary Theory The concept of generation is used in biology, but does not apply easily to analysis of the evolution of technologies, firms, or institutions. On the other hand, in some of the theories considered here the new variety that is created as grist for winnowing is systematically oriented toward new departures that seem appropriate to the context.

The Characteristics of an Evolutionary Theory Keplers laws of planetary motion, together with Newtons gravitational theory that explains them, would not define an evolutionary theory. Rules out theories of change where all the action is random as certain models in economics that purport that within an industry the growth or decline of particular firms is a random variable.

The Characteristics of an Evolutionary Theory One can trace through the random process built into such models and predict the distribution of firm sizes at any time, for example that under certain specifications it will asymtotically become log normal. The industry gradually develops a structure in which only firm with these characteristics survive. B. Evolutionary in Biology Modern evolutionary theory recognize that

development of a living creature from its origins to its phenotypic characteristics at any time can be influenced by the environment. Modern evolutionary theory also recognizes a variety of learning experiences which shape the behavior of a phenotype. Evolutionary in Biology The notion of generations is basic to biological evolutionary theory. The phenotypes get born, live, reproduce (at least some of them do), and

die (in most species ultimately all of them do). On the other hand, the genes get carried over to their offspring, who follow the same generational life cycle. Thus the genes provide the continuity of the evolutionary system. Mutations also create new genotypes. Evolutionary in Biology For economists perhaps the most interesting question is whether, and if so in what sense, evolution can be understood to optimize fitness. The optimization notion here clearly has roots in

Herbert Spencers notion (1887) of survival of the fittest. Evolutionary stable strategy as the equilibrium solution to that game. The selection environment almost never is contstant C. Sociobiology As indicated, animal behavior has, for a long time, been a phenotypic characteristic of interest to evolutionary theorist. That behavior often involves, in an essential way, modes of interaction

with fellow members of ones species. The early work by Edward Wilson on biological bases of human social behavior carried over basically this model. Sociobiology Human culture was recognized as something that could be modified, and improved, from generation to generation, and which had its own rules of transmission. A basic genetic biological capacity of humans for the development and transmission of culture. The connection between the evolution of human behavior and culture,

and genetic evolution, as something far more complex than that assumed in the models of insect and bird societies. Sociobiology Each tries to break down culture into small gene like subunits, which are assigned term like meme, or culturgen. The simple technology-artifacts and beliefs employed as examples are a far distance for complex technologies like those associated with making semiconductors or aircraft, or scientific theories like that of

biological evolution itself, or system like patent law. Sociobiology Boyd and Richerson: Understanding the institutional complexity of modern societies will require the mating of micro-level theory like the one we have developed here with the more aggregated one of Nelson and Winter III. The Evolution of Particular Aspects of Culture

There are three key differences between the evolutionary theories. First, there are no ties whatsoever between the cultural selection criteria and processes and biological fitness. Second, How and Why a particular aspect of culture changed over time the way it did Third, evolutionary theorists coming from sociobiology, have by and large assumed selection mechanism are individualistic, transmission mechanism are person to person, and that memes like genes are carried by individuals

A. Sciense The proposition that science evolves has been around for some time, and there has been and continues to be a lively discussion about just how that evolutionary process works. Using Campbells term, the development of new scientific hypotheses, or theories, is to some extent blind, in their originators cannot know for sure how they will fare when they are first put forth. Thus new scientific theories are like mutation

B. Business Organization Alfred Chandlers research (1962,1990) has been concerned with understanding how the complex structures that characterize modern multi product firms came into existence. Chandlers fitness criterion is that the new organizational from solved an organizational problem. Companies competing with each other. The argument is that companies which found and adopted efficient managerial styles and structural forms early won out over their

competitors IV. Evolutionary Models of Economic Growth Fuelled by Technical Advance First, the theorizing is more complex in the sense that it involves a number of different variables, and the focus is on their coevolution. Second, the theory is expressed mathematically; in some cases the logical connection are developed as theorems. Third, the evolutionary theories presented here have been put forth by their authors as express alternatives to another theory in this case

neoclassical growth theory which they regard as too mechanical Evolutionary Models of Economic Growth Fuelled by Technical Advance The kind of analysis contained in neoclassical growth theory almost certainly was among the kind Marshall had in mind when he referred to theories based on mechanical concepts of equilibrium. Within that theory, economic growth is viewed as the moving equilibrium of market economy in which technical advance is continuously increasing the productivity of inputs

and the capital stock growing relative to labor inputs. Evolutionary Models of Economic Growth Fuelled by Technical Advance The explanation for the increase in labor productivity and per capita income that are the standard measure of growth. Technical advance is an essential element of the neoclassical account. The last few years have seen a number of interesting proposals to amend the simple neoclassical growth model so as to highlight that technical advance is to

considerable degree endogenous. However, these new neoclassical models are mechanicals in the same sense as are the old ones. Evolutionary Models of Economic Growth Fuelled by Technical Advance The process must be understood as an evolutionary one. A theory of growth in which technical advance and capital formation together drive growth, as in neoclassical growth theory, and which is capable of explaining the observed macroeconomic

pattern. Schumpeter developed a theory of endogenous technological advance, resulting from the investments made by business firms. Evolutionary Models of Economic Growth Fuelled by Technical Advance The earliest class of formal evolutionary growth models based by Winter & Nelson In these models, firms are the key actors, not individual human beings. Individual are viewed as interchangeable and their actions determined by the firms they are in.

The firms in these models are, from one point of view, the entities that are more or less fit. Firms can be regarded as merely the incubators and carries of technologies and others practice that determine what they do and how productively in particular circumstances. Evolutionary Models of Economic Growth Fuelled by Technical Advance The concept of routines is analytically similar to the genes in biological theory, or the memes or culturgens in sociobiology. The term routines connotes, deliberately,

behavior that is conducted without much explicit thinking about it, as habits or customs. On the other hand, within these models routines can be understood as the behaviors deemed appropriate and effective in the settings where they are invoked. Indeed they are the product of processes that involved profit-oriented learning and selection. Metaphorically, the routines employed by a firm at any time can be regarded as the best it knows and can do Evolutionary Models of Economic Growth Fuelled by Technical Advance

Three different kinds of firm routines. First, there are those that might be called standard operating procedure. Second, there are routines that determine the investment behavior of the firm. Third, the deliberative processes of the firm, those that involve searching for better ways of doing things. Evolutionary Models of Economic Growth Fuelled by Technical Advance Firm search processes provide the source of

differential fitness; firms whose R & D turn up better technologies will earn profits and grow relative to their competitors. The profitability of any firm is determine by what it is doing, and what its competitors do. Just as routines are analogous to genes, firms are analogous to phenotypes, or particular organism, in biological evolutionary theory. Evolutionary Models of Economic Growth Fuelled by Technical Advance The are profound differences. First, firms dont have a natural life span.

Second, unlike phenotypes (living organism) that are stuck with their genes, firms are not stuck with their routines. Indeed they have built in mechanism for changing them. At the existing moment of time all firms can be characterized by their capital stocks and prevailing routines. Evolutionary Models of Economic Growth Fuelled by Technical Advance Inputs employed and outputs produced by all firms then are determines prices. Given the technology and other routines used by each firm,

each firms profitability then is determines, and the investment rule the determines how much each firm expand or contracts. The theory described above can be evaluated on a number of counts. The individuals and organizations in these models act, as human do in the models of sociobiology, on the basis of habits or customs or beliefs. Evolutionary Models of Economic Growth Fuelled by Technical Advance While firm routine ca be regarded as the result of

a learning process, the implicit rationality. The theory can be judged by the appeal of the theory of technical progress built into it. The view is certainly evolutionary. evolution is going on at several different levels. New technological departures are being generated by individual firms. There is market selection on firms that are doing well. Evolutionary Models of Economic Growth Fuelled by Technical Advance Profitability determines the fitness of

technology, and of firms, and firms are the only organizational actors. However the central purpose of the models considered in this section is to explain economic growth at a macroeconomic level. Can they generate, hence in a sense explain, the raising output per worker, growing capital intensity, rising real wages, and a relatively constant rate of return on capital Evolutionary Models of Economic Growth Fuelled by Technical Advance Within these models a successful technological

innovation generates profits for the firm making it, and leads to capital formation and growth of the firm. Firm growth generally is sufficient to outweigh any decline in employment per unit of output associated with productivity growth. This latter consequence means that capital using but labor saving innovation now become more profitable. At the same time that labor productivity, real wages, and capital intensity are rising. Evolutionary Models of Economic Growth Fuelled by Technical Advance

These deduction of evolutionary growth theory would not surprise an advocate of neoclassical theory. IV. Economic Institutions and Their Evolution Two somewhat different intellectual streams have fed into the renewed interest economists have taken in institutions. Economists long have looked to differences across nation in their basic institution as an explanation for differences

in economic performance and living standards (see Hodgson 1988, for a fine review of the old institutional economics) IV. Economic Institutions and Their Evolution Over the past fifteen years or so, game theorists have come to be interested in institutions. An equilibrium is seen as institutionalized. One issue that has plagued both old and new research on institutions and their evolution has been how to define institutions.

IV. Economic Institutions and Their Evolution To refer to what the theorists of cultural evolution, or more specifically to those aspects of culture that affect human and organizational action. Under this perspective institutions refer to the complex of socially learned and shared values, norms, beliefs, meanings, symbols, customs, and standard that delineate the range of expected and accepted behavior in a particular context. This view of institutions is alive

Economic Institutions and Their Evolution The new economic institutionalists have a different intellectual starting place, and as note above have borrowed extensively from game theory. Thus Douglass North (1990) has proposed that institution are the rules of the game. the rule of the game determine how and why it is played as it is. Economic Institutions and Their Evolution Most historical accounts of institutions refer to

more concrete things: the form of modern corporation, or the modern research university, the financial system, and the particular kind of money in use, the court system, a nations basic legal code. The institution is really defined by the pattern and the norms. Harvard and The University of California were institutional exemplar of what was widely accepted research universities should be. Economic Institutions and Their Evolution In the same vein, the IMF, and GATT, were

particular organization, but also representing institutions, in being the particular manifestation of a set of norms and beliefs. Theory of institutional evolution must address. One is path dependency. Todays institutions almost always show strong connections with yesterdays, and often those of century ago, or earlier.

Economic Institutions and Their Evolution A second is that it almost certainly is necessary to think of evolutionary processes in the plural. Different kinds of institutions evolve in different ways. North (1990) argument: First, the major differences among nations in economic performance largely are due to differences in their institutions and how they have evolved. Economic Institutions and Their Evolution Second, the advanced industrial nations have

been extremely fortunate in this regard: one cannot attribute their relative well being to any special virtue and wisdom but rather to cultural and political contingencies.

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