Capitalism and democracy in the 21st Century: from the managed to the entrepreneurial economy*

 This paper explains how and why the developed countries are undergoing a fundamental shift away from a managed economy and towards an entrepreneurial economy. This shift is shaping the development of western capitalism and has triggered a shift in government policies away from constraining the freedom of business to contract through regulation, public ownership and antitrust towards a new set of enabling policies which foster the creation and commercialization of new knowledge. The empirical evidence from a cross-section of countries over time suggests that those countries that have experienced a greater shift from the managed to the entrepreneurial economy have had lower levels of unemployment.     

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.     

Schumpeter and the revival of evolutionary economics: an appraisal of the literature

During the last two decades we have seen a revival of interest in the works of Joseph Schumpeter and “evolutionary” ideas in economics more generally. A professional society honouring Schumpeter's name has been founded, and linked to it we have had for more than fifteen years now a professional journal devoted to this stream of thought. However, it has been argued that, despite these developments, the link between Schumpeter's own work and the more recent contributions to evolutionary economics is in fact rather weak. This paper considers this claim. Based on an analysis of Schumpeter's contribution to economics the paper presents an overview and assessment of the more recent literature in this area. It is argued that although there are important differences between Schumpeter's work and some of the more recent contributions, there nevertheless remains a strong common core that clearly distinguishes the evolutionary stream from other approaches (such as, for instance, so-called “new growth theory”). RID="*" ID="*" Many people have contributed to this paper in various ways. Jon Hekland at the Norwegian Research Council started it all by asking me to make an overview of the contribution from “evolutionary economics” to our understanding of contemporary economies. Several people helped me on the way by supplying written material, comments and suggestions, and I am indebted to all of them. Brian Arthur, Stan Metcalfe, Keith Pavitt, Erik Reinert, Paolo Saviotti and Bart Verspagen may be particularly mentioned. A preliminary version was presented at the conference “Industrial R&D and Innovation Policy Learning – Evolutionary Perspectives and New Methods for Impact Assessment” organised by the Norwegian Research Council (“SAKI”) at Leangkollen, Asker, April 18–19.2002. I wish to thank the discussant, Tor Jakob Klette, and the participants at the conference for useful feedback. Moreover I have benefited from comments and suggestions from the editors and referees of this journal. The final responsibility is mine, however. Economic support from the Norwegian Research Council (“SAKI”) is gratefully acknowledged.     

Capitalism, profits and innovation in the new techno-economic paradigm

Innovative profits (of the kind conceptualized by Schumpeter) are today being increasingly created through international corporate networks for technological development. Such profits through innovation are encouraged by newer more flexible organizational forms, and further encouraged (unlike in the conventional perspective on profits and on the incentive to innovate) by knowledge flows between firms. Our empirical evidence, based on US patent data, shows that multinational companies are currently more likely to develop abroad technologies which are less science-based, and less dependent upon tacit knowledge. However, within the science-based industries firms may generate abroad some technologies which are heavily dependent on tacit knowledge, but normally in fields that lie outside their own core technological competencies. We find some evidence of a convergence in corporate technological diversification across large firms, facilitated by the now common spread in the use of information and communication technologies (ICT) as an integrator of formerly separate technological systems. This has led smaller firms to diversify, but giant firms to consolidate activity around those technologies that have become most interrelated.     

Schumpeter and Steindl on the dynamics of competition

This paper compares and contrasts the contributions of Joseph Alois Schumpeter and Josef Steindl to the competitive paradigm. Both reject the static nature of traditional profit maximizing analysis and the analytical device of a representative firm. Instead they both opt for a dynamic framework in which there is a key role for innovation. Differences emerge in terms of the characteristics of individual firms that nurture the competitive struggle and are responsible for technical change. The maturation process of a capitalist economy, whereby a natural progression will involve an increase in concentration, as prescribed by Schumpeter and Steindl is also explored, as is criticism of their analyses. Finally the holistic approach to competitive modelling, a legacy of these two economists, is expounded and challenges for the future identified.     

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.     

Multiple attractors and global bifurcations in a Kaldor-type business cycle model

We consider a Kaldor-type discrete-time nonlinear business cycle model in income and capital, where investment is assumed to depend both on the difference between normal and current levels of capital stock, and on the difference between the current income and its normal level, through a nonlinear S-shaped increasing function. As usual in Kaldor business cycle models, one or three steady states exist, and the standard analysis of the local stability and bifurcations suggests that endogenous oscillations occur in the presence of only one unstable equilibrium, whereas the coexistence of three equilibria is characterized by bi-stability, the central equilibrium being on the boundary which separates the basins of the two stable ones. However, a deeper analysis of the global dynamic properties of the model in the parameter ranges where three steady states exist, reveals the existence of an attracting limit cycle surrounding the three steady states, leading to a situation of multistability, with a rich and complex dynamic structure.     

The hunt for S-shaped growth paths in technological innovation: a patent study*

Since the works by the business cycle theorists in the 1930s, no attempts have been made to study empirically the long term evolution paths of individual technologies starting with long time series. This is an empirical exploration and confirmation of the now almost assumed image or metaphor of the way technology develops; that it follows an S-shaped growth path which is commonly associated with a similar shaped diffusion function of entrepreneurial activity. The paper also confirms the diversity of technology dynamics and explores how technological cycle takeoffs appear to be clustered within certain historical epochs. The results have implications for our understanding of the evolution paths of individual technologies, and of the evolution of technological systems and waves of innovation. By use of computational statistics, logistic growth functions are fitted to US patent stocks, 1920–1990, at a detailed level of aggregation, including chemical, electrical/electronic, mechanical, transport and non-industrial technologies. Some practical considerations when developing an empirically testable model of innovation cycles are addressed in the paper as well.     

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.     

The old and the new: the evolution of polymer and biomedical clusters in Ohio and Sweden

This paper examines the rapid growth of the polymer-based and biomedical clusters in Ohio and Sweden – two regions of similar size and with similar traditions undergoing similar industrial restructuring. Two issues are addressed: First, why has growth been so strong in these particular clusters, i.e., can we identify the sources of the growth and dynamics in these sectors? Second, why do these two clusters differ in Ohio and Sweden in terms of size, level and type of activity, number and composition of actors, size structure of firms and growth patterns over the last couple of decades? In particular, what is the role of public policies as well as cultural, historical, and geographic factors? Our main conclusions are (1) that there is strong path dependence in both clusters in both countries, and (2) that the key to rapid development is a high absorptive capacity combined with rapid diffusion to new potential users. Our policy discussion addresses these issues.     

Heterogeneous traders and the Tobin tax

To study the effectiveness of the Tobin tax, we develop a model of heterogeneous interacting agents. Traders either speculate on the basis of technical or fundamental analysis, or abstain from the market, a decision which depends on profit considerations, as well as communication between agents. Simulations generate stylized facts such as unit roots in exchange rates, fat tails for returns, or volatility clustering. The imposition of a Tobin tax leads to a crowding out of speculators and stabilizes the dynamics. However, the decreasing impact of fundamentalists triggers misalignments if tax rates are too high. RID="*" ID="*" Presented at the Economic Dynamics Workshop, Leiden, June 2002, and at the Computational Economics and Finance Workshop, Eltville, October 2002. I thank the participants for helpful discussions, especially Carl Chiarella, Cars Hommes, Seppo Honkapohja, Alan Kirman, Thomas Lux, Stefan Reitz, and Didier Sornette. I also thank two anonymous referees for their constructive comments.     

Debt, growth and inflation in large European economies: a vector auto-regression analysis

This paper attempts to empirically test the hypothesis that whether debt matters in the EU. This has been performed by examining the potential adverse effects of debt in large European economies on investment, inflation and growth. Using the hybrid cointegration and vector autoregressive models, the findings, based on the period 1970–97, suggest that debt causes significant adverse effects on investment, but its impact on growth is not clear-cut. Moreover, debt appears to be inflationary in most cases in the long run, though produces no clear short run pattern on inflation.     

The denominations of US coins: a case of institutional evolution

Abstract. The system of denominations of US coins, which the paper treats as a quasi-genetic trait of the US monetary system, has not been constant since inception but rather has evolved over time in the sense of being subject to innovation and selection. However, all the innovations have disappeared, as have a number of the original denominations. Abstract theories of optimal systems of denominations provide a good explanation of one selection factor, but other important influences include limiting the number of separate denominations and accommodating the requirements of decimal counting. However, even some innovations that ultimately disappeared survived for decades.     

What is the systems perspective to Innovation and Technology Policy(ITP) and how can we apply it to developing and newly industrialized economies?

Despite recent advances in the Evolutionary and Systems Perspectives to Economic Change (SI), confusion still exists about how to apply it to the design and implementation of Innovation & Technology Policy (ITP) in concrete settings. Since the ‘Normative’ aspects of SI are framed in terms so general to make them insufficient or inadequate as guides and tools for actual policymaking, a presumption exists that additional theoretical and conceptual knowledge is required. Thus a major objective of this paper is to contribute to the development of a realistic and ‘grounded’ theoretical framework for Technology and Innovation Policy which is particularly relevant both for the promotion of Business Sector R&D and of hi tech (especially IT) industries in Top Tier and other Industrializing Economies. A second objective is to contribute directly to the capability of successfully applying this conceptual framework in concrete policy settings. Rather than justifying ITP the paper focuses on characterising and applying “Salient Normative Principles or Themes” of the SI perspective to ITP. Several concrete examples are given and the notions of Policy Process, (Country) Program Portfolio Profile and Policy Environment are introduced.     

Bargaining power, effective demand and technical progress: a Kaleckian model of growth

Following the Kaleckian tradition, this paper presents a demand-ledgrowth model in which the distribution of income is fully endogenised.This is done by introducing claims on income by workers andfirms. The bargaining power of these two groups affects, throughdistribution, the patterns of accumulation and inflation. Inturn, the bargaining power of workers is affected by the rateof change of employment. The paper discusses the model's static and dynamic implications,including the effects of exogenous and induced technical progress.The model confirms all the typical Kaleckian results, includingthe fact that increases in real wages may lead to acceleratingaccumulation as well as inflation. It also produces a new result:it is possible that an increase in the rate of change of labourproductivity may not lead to an increase in the rate of changeof employment.     

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.     

Transferring exploration and production activities within the UK's upstream oil and gas industry: a capabilities perspective

Following Richardson (1972), capabilities comprise tacit, personal, subjective and context-specific knowledge that may be shared in practice only with difficulty across small, task oriented groups within firms or other types of organisation, and are expressed in the form of activities. The definition has been influential, and its focus on tacit knowledge has, arguably, encouraged research activities in the form of studies adopting experimental and simulation techniques, while providing less impetus for complementary empirical inquiry. This paper presents an empirical inquiry into an aspect of the development of capabilities in the UK's upstream oil and gas industry promoted by the changing organisation of activities across oil companies and contracting and supply companies. The main argument is that researchers can gain partial and subjective access to capabilities – distinct from activities – because individuals involved in the industry articulate and codify understandings of capabilities through practical theorising and commercial experimenting. Such articulation and codification plays an important role in the development of capabilities in industrial contexts.     

A comparison of diffusion approximations and actual limits in birth and death processes of noisy evolution

The stationary distribution of a birth and death process may not be approximated by a diffusion. The general situation is illustrated on the “musical chairs” model by Binmore et al. (1995). This model is shown to generate outcomes which are not captured by the concept of the ultralong run equilibrium selection introduced in Binmore et al. (1995).     

The demand for distinction and the evolution of the prestige car

This paper studies the demand for a distinction good – the prestige car – and examines how this demand for distinction influences the evolution of the product. We focus on two very different sorts of distinction car: the Rolls Royce and the Ferrari. These two examples help us to articulate two polar approaches to the demand for distinction: distinction through antiquity and distinction through novelty. The paper sets out a model of the demand for distinction, and uses it to describe two trajectories along which the prestige car – and the demand for it – may evolve.     

Optimal freeware quality in the presence of network externalities: an evolutionary game theoretical approach

New software products often face difficulty in achieving market penetration. A potential remedy is to offer a freeware version of the software to encourage initial adoption and establish a larger user base for the software, thereby increasing the commercial version's value to adopters in future periods. However, to avoid complete cannibalization of the commercial version, the freeware version's quality must be sufficiently low and the price of the commercial version must not be too high. We model the effect of these two decision variables, price and freeware quality, on the adoption of software using static and evolutionary game theory.