Economic policy making in evolutionary perspective

Economic policy making is discussed from three different angles: the political economy of actual policy making (“what policy does do”), the analysis of policy instruments for given ends (“what policy could do”), and the debate on policy goals and their legitimization (“what policy ought to do”). Center stage in the evolutionary perspective is new, positive and normative knowledge which is unfolding during the policy making process and in its aftermath. It is argued that this implies regularities and constraints which extend and modify the comparative-static interpretations of public choice theory, economic policy making theory, and social philosophy. RID="*" ID="*" The author should like to thank three anonymous referees of this journal and the editor for helpful comments on an earlier version of the paper.     

Capitalism and democracy at a crossroads: the civilizational dimension

This paper evaluates Schumpeter's grand vision as reflected in his Capitalism, Socialism and Democracy, and elaborates it in conjunction with the so-called “globalization” trends characteristic of the wake of the twenty-first century. In addition to the evolutionary nature of his methodology, the institutionalist dimension of Schumpeter's definitions are brought to light. A case is made for a fundamental process of “uncreative destruction” as far as the institutional setup of the economy is concerned. The contention of this paper is that there is ample support in Schumpeterian analysis for a counterpoint to the liberal thesis that envisages the worldwide spread of individualism, market economies, and democratic forms of government.     

On bubbling dynamics generated by a stochastic model of herd behavior

This paper suggests a class of stochastic collective learning processes exhibiting very irregular behavior. In particular, there are multimodal long run distributions. Some of these modes may vanish as the population size increases. This may be thought of as “bubbles” persistent for a finite range of population sizes but disappearing in the limit. The limit distribution proves to be a discontinuous function of parameters determining the learning process. This gives rise to another type of “bubbles”: limit outcomes corresponding to small perturbations of parameters are different. Since an agent's decision rule involves imitation of the majority choice in a random sample of other members of the population, the resulting collective dynamics exhibit “herding” or “epidemic” features. RID="*" ID="*" We are grateful to two anonymous referees for the comments and suggestions. Correspondence to: L. Gaio     

A resource-based view of Schumpeterian economic dynamics

This paper seeks to offer a theoretical platform where the modern “resource-based view” of the firm might meet with evolutionary economics and the study of entrepreneurship, and with the economics of industrial organization. It does so by proposing the concept of the “resource economy” within which productive resources are produced and exchanged between firms. This is presented as the dual of the mainstream goods and services economy – where the “resource economy” captures the dynamic capital structure of the economy. The paper is concerned to bring out the distinctive principles governing resource dynamics in the resource economy, capturing competitive dynamics in such categories as resource creation, replication, propagation, exchange and leverage; evolutionary dynamics in terms of resource variation, selection and retention; entrepreneurial dynamics in terms of resource recombination and resource imitation, transfer and substitution; and industrial organizational dynamics in terms of resource configuration, resource complementarities and resource trajectories.     

Schumpeter and the `Schmollerprogramm': integrating theory and history in the analysis of economic development

This essay addresses the historical and institutional aspects of Schumpeter's thought. It suggests that Schumpeter prepared a pluralist research agenda, formulated in accordance with the conceptual perspective of the German Historical School, as presented by major scholars such as Schmoller, Sombart, Spiethoff and Max Weber. Schumpeter's notion of development, with its emphasis on the correspondence of economic and socio-cultural evolution, is therefore to be viewed in the context of the comprehensive Schmollerian approach. Moreover the ethical-evolutionary components of Schmoller's ideas point at the vital role of the German Historical School in the elaboration of a modern evolutionary economics in Schumpeterian terms. The essay concludes that the Schmollerprogramm is going to inspire further developments in Schumpeterian economics, as the integration of theory and history continuously marks the research agenda of evolutionary approaches to economic development.     

Where Schumpeter was nearly right – the Swedish model and Capitalism, Socialism and Democracy<--RID="*"-->

In Capitalism, Socialism and Democracy Joseph A. Schumpeter concluded that socialism would eventually displace capitalism in Western democracies. This would come about as a result of the superior performance of capitalism. We extract six “stylized” propositions that are essential elements of Schumpeter's prediction about the fate of capitalism. These propositions are confronted with the development of the Swedish economy. The three main results of the analysis are: (1) The evolution of the Swedish economy closely followed Schumpeter's predictions until about 1980: Large firms became increasingly predominant in production and innovative activity, ownership of firms became more and more concentrated, individual entrepreneurship waned in importance, the general public grew increasingly hostile towards capitalism, and by the late 1970s explicit proposals for a gradual transfer of ownership of firms from private hands were launched. (2) Design of tax and industrial policies fueled a development of the economy along the lines predicted by Schumpeter. In general, the policies discouraged private wealth accumulation. In particular, the policies favored concentration of firms and concentration of private ownership. (3) The turning point away from the path to socialism coincides with real world developments that disclosed two major flaws in Schumpeter's analysis. First, the ever more obvious failure of socialism in Eastern Europe went against Schumpeter's assertion that socialism can work. Second, Schumpeter, who thought that modern technology would make the giant corporation increasingly predominant, did not foresee the revival of entrepreneurship that took place in the Western countries around 1980.     

Endogenous fluctuations in the demand for education

Abstract. Enrollment rates to higher education reveal a quite large variation over time which cannot be explained by productivity shocks alone. We develop a human capital investment model in an overlapping generations framework that features endogenous fluctuations in the demand for education. Agents are heterogeneous in their beliefs about future wage differentials. An evolutionary competition between the heterogeneous beliefs determines the fraction of the newborn generation having a certain belief. Costly access to information on the returns to education induces agents to use potentially destabilizing backward looking prediction rules. Only if previous generations experience regret about their human capital investment decisions, will agents choose a more sophisticated prediction rule that dampens the cycle. Access to information becomes key for stable flows to higher education. RID="*" ID="*"We would like to thank Cars Hommes, Florian Wagener, seminar participants at the University of Amsterdam, participants of the workshop on ‘Skill Needs and Labor Market Dynamics’ at the Wissenschaftszentrum Berlin für Sozialforschung (WZB) for helpful discussions, and an editor of this Journal and three anonymous referees for their comments. Tuinstra's research is supported by the Netherlands Organisation for Scientific Research (NWO) under a MaG-Pionier grant. Neugart acknowledges financial support from the German Ministry of Education. Parts of the research were done while Tuinstra was visiting the WZB and when Neugart was visiting CeNDEF. Correspondence to: The research for this paper was done while the first author was affiliated with the Wissenschaftszentrum Berlin für Sozialforschung.     

Nash and Walras equilibrium via Brouwer

Summary. The existence of Nash and Walras equilibrium is proved via Brouwer's Fixed Point Theorem, without recourse to Kakutani's Fixed Point Theorem for correspondences. The domain of the Walras fixed point map is confined to the price simplex, even when there is production and weakly quasi-convex preferences. The key idea is to replace optimization with “satisficing improvement,” i.e., to replace the Maximum Principle with the “Satisficing Principle.” Received: July 9, 2001; revised version: February 25, 2002 RID="*" ID="*" I wish to thank Ken Arrow, Don Brown, and Andreu Mas-Colell for helpful comments. I first thought about using Brouwer's theorem without Kakutani's extension when I heard Herb Scarf's lectures on mathematical economics as an undergraduate in 1974, and then again when I read Tim Kehoe's 1980 Ph.D dissertation under Herb Scarf, but I did not resolve my confusion until I had to discuss Kehoe's presentation at the celebration for Herb Scarf's 65th birthday in September, 1995. RID="*" ID="*"Correspondence to: C. D. Aliprantis     

A class of fair distribution rules à la Rawls and Sen

Summary. This paper discusses and develops “non-welfaristic” arguments on distributive justice à la J. Rawls and A. K. Sen, and formalizes, in cooperative production economies, “non-welfaristic” distribution rules as game form types of resource allocation schemes. First, it conceptualizes Needs Principle which the distribution rule should satisfy if this takes individuals' needs into account. Second, one class of distribution rules which satisfy Needs Principle, a class of J-based Capability Maximum Rules, is proposed. Third, axiomatic characterizations of the class of J-based Capability Maximum Rules are provided. Received: July 30, 1999; revised version: March 11, 2002 RID="*" ID="*" We are grateful to an anonymous referee of this journal, Professors Marc Fleurbaey, Nicolas Gravel, Ryo-ichi Nagahisa, Prasanta Pattanaik, Kotaro Suzumura, Koich Tadenuma, and Yongsheng Xu for their fruitful comments. An earlier version of this paper was published with the title name, “A Game Form Approach to Theories of Distributive Justice: Formalizing Needs Principle” as the Discussion Paper No. 407 of the Institute of Social and Economic Research, Osaka University, and in the proceedings of the International Conference on Logic, Game, and Social Choice held at Oisterwijk in May 1999. That version was also presented at the 3rd Decentralization Conference in Japan held at Hitotsubashi University in September 1997, at the annual meeting of the Japan Association of Economics and Econometrics held at Waseda University in September 1997, and the 4th International Conference of Social Choice and Welfare held at University of British Colombia in July 1998. This research was partially supported by the Japanese Ministry of Education and the Ministry of Health and Welfare. Correspondence to: N. Yoshihara     

Darwinism in economics: from analogy to ontology

Several social scientists, including ‘evolutionary economists’, have expressed scepticism of ‘biological analogies’ and rejected the application of ‘Darwinism’ to socio-economic evolution. Among this group, some have argued that self-organisation is an alternative to biological analogies or Darwinism. Others have seen ‘artificial selection’ as an alternative to natural selection in the socio-economic sphere. Another objection is that Darwinism excludes human intentionality. It is shown that all these objections to ‘biological analogies’ and ‘Darwinism’ are ungrounded. Furthermore, Darwinism includes a broad theoretical framework for the analysis of the evolution of all open, complex systems, including socio-economic systems. Finally and crucially, Darwinism also involves a basic philosophical commitment to detailed, cumulative, causal explanations. For these reasons, Darwinism is fully relevant for economics and an adequate evolutionary economics must be Darwinian, at least in these fundamental senses. However, this does not undermine the need for auxiliary theories and explanations in the economic domain.     

A spectre is haunting the world – the spectre of global capitalism

Individual property rights are fruitful for economic development because they civilise self-interest by forcing it to serve the common good. The history of previous property rights “cycles,” however, shows that their ability to do this deterioriates over time because the laws of property fall under the control of those whom property is meant to discipline. Irresponsible ownership then intensifies inequality until a breaking point is reached. The present cycle is no exception, but its breaking point has been postponed by the growth of the democratically-inspired welfare state. Globalisation is now eroding the financial basis of this, because mobile capital can escape taxation, leaving labour to carry the burden. The main thrust of this movement is now found in the World Trade Organisation, whose control of intellectual property and commitment to free trade in money as well as goods, can only increase inequality between countries as well as within them. It represents individual property rights which are out of any form of social control, since there is no global mechanism for civilising self-interest. Schumpeter's sense of the impending demise of capitalism, if not of its replacement by socialism, may yet be vindicated.     

Regulation of the evolution of the architecture of a network by tensors operating on coalitions of actors

Socio-economic networks, neural networks and genetic networks describe collective phenomena through constraints relating actions of several actors, coalitions of these actors and multilinear connectionist operators acting on the set of actions of each coalition. We provide a class of control systems governing the evolution of actions, coalitions and multilinear connectionist operators under which the architecture of the network remains viable. The controls are the “viability multipliers” of the “resource space” in which the constraints are defined. They are involved as “tensor products” of the actions of the coalitions and the viability multiplier, allowing us to encapsulate in this dynamical and multilinear framework the concept of Hebbian learning rules in neural networks in the form of “multi-Hebbian” dynamics in the evolution of connectionist operators. They are also involved in the evolution of coalitions through the “cost” of the constraints under the viability multiplier regarded as a price.     

Environmental tax policy in a model of growth cycles

Summary. The purpose of this paper is to consider environmental taxation which would control emissions of firms in a model of growth cycles. In the model presented below, the economy may experience two phases of growth and environmental quality: “the no-innovation growth regime” and “the innovation-led growth regime”. Aggregate capital and environmental quality remain constant in the no-innovation growth regime, while they perpetually increase in the innovation-led growth regime. The paper shows that the tax plays a key role in determining whether the economy stably converges to one of the two regimes or fluctuates permanently between them. It also shows that there is a critical level of the tax and that the economy obtains higher growth rates of capital and environmental quality by raising (or reducing) the tax if the initial tax is below (or above) the critical level. Received: April 2, 2001; revised version: March 21, 2002 RID="*" ID="*" This research reported here was conducted within the research project “Project on Intergenerational Equity” at Institute of Economic Research, Hitotsubashi University. I am deeply grateful to an anonymous referee for his or her insightful comments, which greatly improved the paper. I also thank Hiroshi Honda, Yasuo Maeda, Yuji Nakayama, and participants in workshops at Hitotsubashi University, Kyoto University, Nagoya University, Osaka University, University of Tsukuba, Yokohama National University, and University of Tokyo for their valuable comments and suggestions. Any remaining errors are mine.     

Knowledge of growth and the growth of knowledge

The central theme of this address is the complicated relationship between the growth of the economy and the growth of knowledge. This theme is explored with the help of a single concept “restless capitalism” which is used to capture the idea that capitalism in equilibrium is a contradiction in terms precisely because the growth of knowledge cannot be meaningfully formulated as the outcome of a constellation of equilibrating forces. This theme is explored through a discussion of growth accounting, the relationship between innovation, markets and institutions and, as an example, the development of innovation in the field of ophthalmology. We also discuss some pioneering contributions made by Simon Kuznets and Arthur Burns to the discussion of evolutionary growth. From this Schumpeterian perspective we see the economy as an ensemble not an aggregate entity and so see more clearly the importance of microdiversity in the relationship between growth of knowledge and growth of the economy.     

Persistent unemployment and co-ordination issues: an evolutionary perspective

Abstract. In this paper we look at unemployment as a phenomenon which reflects the co-ordination problems that characterize out-of-equilibrium processes of adjustment. The analysis carried out shifts the focus from structural factors to the economic process. It shows that unemployment cannot be satisfactorily explained – and policy interventions devised – by focusing only on specific characters of the technology or confining the analysis to structural factors concerning the labour market. The co-ordination mechanisms of adjustment processes rather than the fundamentals of the economy appear, in this light, as the main determinants of differences in unemployment trends in different economies; and monetary policy comes back to the center of the stage as an essential element of the working of these mechanisms. RID="*" ID="*" We thank anonymous referees for their very useful comments, and Elena Lega for the helpful support to the simulation analysis carried out. Correspondence to: J.-L. Gaffard     

Multimarket contact and inter-firm cooperation in R&D

Research joint ventures (RJVs) have been widely acclaimed for their alleged ability to restore private incentives to undertake R&D. Economists have, however, also sounded the alarm concerning the opportunities RJVs may create for collusion between partners. The danger of anti-competitive behavior increases significantly when repeated R&D collaboration occurs between firms that also “meet” in many product markets. This phenomenon is shown to be present in a large set of U.S.-based RJVs. The question is about the incentive trade-off: Are the alleged advantages of RJVs in terms of enhancing incentives for R&D sufficient to overcome the potential disadvantages in terms of decreasing incentives for R&D due to simultaneous multiproject and multimarket contact? Significant foreign participation, high technological and market uncertainties, and the set up of “porous” RJVs may operate as a check to anti-competitive behavior.     

Routines and incentives in group tasks*

The artificial context “Target the Two” has been used in experiments to explore some of the features of routinization and learning. Two agents must learn to coordinate their actions to achieve a common goal, without being allowed to use verbal communication. This article reports an experiment, in which we compare the degree of routinization and the performance of players in two treatments. Each treatment submits players to the same sequence of starting configurations, but differs in terms of the payoff function. In the first treatment (A), the payoff is based on the number of moves required to achieve the goal, whereas in the second treatment (B) the payoff depends on the time required for completion. We observe that (1) in treatment B subjects tend to play in a more “routinized” way and (2) treatment B reduces the time spent on play, but does not decrease the resources (the number of moves) used, relative to treatment A.     

Evolutionary economics and the counterfactual threat: on the nature and role of counterfactual history as an empirical tool in economics

Counterfactual conditional statements are ubiquitous in any scientific endeavour. This paper contains an analysis of the nature of counterfactual conditionals and the conditions under which they are considered assertable by scientists. The paper then applies this analysis to the use of counterfactuals in evolutionary economics, arguing that because evolutionary economics is inherently concerned with historical processes it cannot avoid the use of counterfactual history as one of its tools of empirical analysis. We discuss the strengths and pitfalls of counterfactual history. We argue that because evolutionary economics starts from the foundation that randomness may be inherent in any economic system, the very aspects of evolutionary economics that make counterfactual history a desirable empirical tool also make that tool difficult to employ. RID="*" ID="*" We thank the participants of the International Seminar on Evolutionary Economics as a Research Programme in Stockholm, May 1997, for many helpful comments. We also thank Lorri Baier for many helpful substantive and textual comments. Correspondence to: R. Cowan     

Inefficient Markov perfect equilibria in multilateral bargaining

We study a complete-information alternating-offer bargaining game in which one “active” player bargains with each of a number of other “passive” players one at a time. In contrast to most existing models, the order of reaching agreements is endogenously determined, hence the active player can “play off” some passive players against others by m oving back and forth bargaining with the passive players. We show that this model has a finite number of Markov Perfect Equilibria, some of which exhibiting wasteful delays. Moreover, the maximum number of delay periods that can be supported in Markov Perfect Equilibria increases in the order of the square of the number of players. We also show that these results are robust to a relaxing of the Markov requirements and to more general surplus functions. Received: November 19, 2001; revised version: August 20, 2002 RID="*" ID="*"This paper grew out of my dissertation submitted to Stanford University. I am deeply indebted to my advisor, Paul Milgrom, for his insights and guidance. I would also like to thank Douglas Bernheim, Sushil Bikhchandani, Harold Demsetz, Bryan Ellickson, Avner Greif, Peter Hammond, David Levine, Bentley Macleod, Joe Ostroy, John Pencavel, Jean-Laurent Rosenthal, David Starrett, Robert Wilson, Bill Zame and especially John Riley and Jeff Zwiebel for their helpful comments. I am grateful to an anonymous referee for extremely constructive suggestions.