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.     

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.     

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.     

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.     

Religion and economic growth: was Weber right?

Evidence of falling wages in Catholic cities and rising wages in Protestant cities between 1500 and 1750, during the spread of literacy in the vernacular, is inconsistent with most theoretical models of economic growth. In The Protestant Ethic, Weber suggested an alternative explanation based on culture. Here, a theoretical model confirms that a small change in the subjective cost of cooperating with strangers can generate a profound transformation in trading networks. In explaining urban growth in early-modern Europe, specifications compatible with human-capital versions of the neoclassical model and endogenous-growth theory are rejected in favor of a “small-world” formulation based on the Weber thesis.     

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).     

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.     

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.     

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.     

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.     

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.     

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.     

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.     

Coping with Preference Anomalies in Cost–Benefit Analysis: A Market-Simulation Approach

This paper proposes a methodological strategy for cost–benefit analysis (CBA) which does not require the assumption that individuals’ preferences satisfy standard coherence conditions, and so renders CBA immune to the problems generated by preference anomalies. The proposal treats CBA as an exercise in market simulation, based on the measurement of surplus. Anomalies occur when surplus measurements vary according to the hypothetical payment mechanism used. In such cases, the mechanism that is the “closest market analogue” should be used. This approach is used to resolve problems associated with some familiar anomalies, including inconsistencies between “citizen” and “consumer” valuations, and endowment effects. JEL classifications: D61, D63, Q51     

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.     

Complexity and the limits to learning

In this paper we look at the manner in which ideas coming from complexity science change our understanding of the cognitive powers of agents that is really necessary to explain the evolution of markets and of firms. The general ideas behind complex systems dynamics and evolution are presented and then two examples are treated in detail. The first in an evolutionary model of a market in which some new product is developed by competing firms and their “task” is to find a strategy in terms of quality and price that will be sustainable. This essentially requires agents/firms to discover mutually compatible strategies, and to create thereby sustainable market niches. The second example considers the internal structure of firms, in terms of their constituent working practices and skills. It demonstrates that it is precisely their ignorance of the consequences of adopting any particular practice that generates diversity in the emergent capabilities of firms, exploring the dimension of potential demand and therefore leading to a successful and sustainable business sector. The work supports the notion that the cognitive abilities that are involved are not about deduction and logic, as a traditional view of rationality might suggest, but are about the development and contraction of interpretive frameworks, which will be different for each player. The paper links these examples to a general recognition of the idea that complex, multi-agent systems evolve through successive “structural attractors”—multi-dimensional dynamical systems—with temporary structural stability. Because real systems contain both the structure and deviations from it, then there is a constant probing of structural stability and the possibility of qualitative change to a new structural attractor. This resembles the ideas in biological evolution related to “punctuated equilibria,” but it also links this to the idea of emergent and evolving networks of interaction, never of course near thermodynamic equilibrium.      

The economic contribution of information technology: Towards comparative and user studies

By what process does technical change in information technology (IT) increase economic welfare? How does this process result in increases in welfare at different rates in different countries and regions? This paper considers existing literature on measuring the economic benefits from information technology, emphasizing comparative issues and user studies. Following Bresnahan and Trajtenberg (1995), we call the invention associated with customizing the technological frontier to the unique needs of users in particular regions “co-invention”, placing emphasis on understanding how its determinants vary across users in different regions. We develop a framework for understanding the processes behind value-creation, demand-side heterogeneity and co-inventive activity. Then we discuss why these processes make measuring the welfare benefits from advances in information technology particularly difficult. We highlight the metrics currently available for measuring the economic pay-out of the IT revolution and identify which of these vary meaningfully in a comparative regional context. Finally, we finish with observations about further areas of research.     

Coalitional stability under perfect foresight

Summary. We analyze strategic social environments where coalitions can form through binding or nonbinding agreements and actions of a coalition may impose externalities upon the welfare of the rest of the players. We define a solution concept that (1) captures the perfect foresight of the players that has been overlooked in the literature (e.g., Harsanyi [10] and Chwe [6]) and (2) identifies the coalitions that are likely to form and the “stable” outcomes that will not be replaced by any coalition of rational (and hence farsighted) players. The proposed solution concept thereby offers a notion of agreements and coalition formation in complex social environments. Received: February 12, 1996; revised version: March 3, 1997