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     

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.     

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.     

Interactive expectations

In modeling expectation formation, economic agents are usually viewed as forming expectations adaptively or in accordance with some rationality postulate. We offer an alternative nonlinear model where agents exchange their opinions and information with each other. Such a model yields multiple equilibria, or attracting distributions, that are persistent but subject to sudden large jumps. Using German Federal Statistical Office economic indicators and German IFO Poll expectational data, we show that this kind of model performs well in simulation experiments. Focusing upon producers' expectations in the consumption goods sector, we also discover evidence that structural change in the interactive process occurred over the period of investigation (1970–1998). Specifically, interactions in expectation formation seem to have become less important over time. RID="*" ID="*"We would like to thank Ulrich Witt, Director of the Evolutionary Economics Unit, The Max Planck Institute for Research into Economic Systems, Jena, Germany, for providing the intellectual stimulus for this project and arranging the necessary financial support from the Max Planck Society to facilitate our collaboration. Thanks are also due to the IFO Institute for providing the data for this study. However, the usual caveat applies.     

Knowledge, consumption, and endogenous growth

In neoclassical theory, knowledge generates increasing returns – and therefore growth – because it is a public good that can be costlessly reused once created. In fact, however, much knowledge in the economy is actually tacit and not easily transmitted –and thus not an obvious source of increasing returns. Several writers have responded to this alarming circumstances by affirming hopefully that knowledge today is increasingly codified, general, and abstract – and increasingly less tacit. This paper disputes such a trend. But all is not lost: for knowledge does not have to be codified to be reused and therefore to generate economic growth.     

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.     

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.     

Knowledge and markets

An economy is a coordinated system of distributed knowledge. Economic evolution occurs as knowledge grows and the structure of the system changes. This paper is about the role of markets in this process. Traditionally, the theory of markets has not been a central feature of evolutionary economics. This seems to be due to the orthodox view of markets as information-processing mechanisms for finding equilibria. But in economic evolution markets are actually knowledge-structuring mechanisms. What then is the relation between knowledge, information, markets and mechanisms? I argue that an evolutionary theory of markets, in the manner of Loasby (1999), requires a clear formulation of these relations. I suggest that a conception of knowledge and markets in terms of a graphical theory of complex systems furnishes precisely this.     

Satiation in an evolutionary model of structural economic dynamics

This paper presents the problem of satiation of consumption and technology in relation to a model of evolutionary endogenous growth. The model represents an attempt to provide an evolutionary economic micro foundation to Pasinetti's scheme of the structural economic dynamics of an economy that is based on only labour and knowledge. The micro foundation is based on a set of rules that makes endogenous the demand coefficients, the labour coefficients, and the number of available sectors. Through process innovations firms increase their productivities with respect to individual goods, but a growth slowdown takes place unless the benefits from specialisation are exploited at still higher levels. Another cause for slowdown is related to an Engelian hierarchy of goods. As the standard of living grows, existing sectors and consumption goods satiate, so new sectors need to be provided by product innovations in a sufficient pace to keep up with the labour that is displaced from old sectors.     

Evolutionary economics and economic geography

This article attempts to explore how key notions from Evolutionary Economics, such as selection, path-dependency, chance and increasing returns, may be applied to two key topics in Economic Geography. The first issue is the problem of how to specify the (potential) impact of the spatial environment on new variety in terms of technological change. Evolutionary thinking may be useful to describe and explain: (1) the process of localized `collective' learning in a regional context, (2) the adjustment problems that regions may be confronted with in a world of increasing variation, and (3) the spatial formation of newly emerging industries as an evolutionary process, in which the spatial connotation of increasing returns (that is, agglomeration economies) may result in a spatial lock-in. The second issue is the problem of how new variety may affect the long-term evolution of the spatial system. We distinguish three approaches that, each in a different way, apply evolutionary notions to the nature of spatial evolution. This is strongly related to the issue whether mechanisms of chance and increasing returns, rather than selection and path-dependency, lay at the root of the spatial evolution of new technology.     

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     

Competitive selection, self-organisation and Joseph A. Schumpeter

Post-Schumpeterians have tended to use biological analogies to understand economic evolution, in contrast to Schumpeter himself. In this paper it is argued that the biological analogies used tend to be outdated and that Schumpeter espoused an intuitive understanding of the evolutionary economic process that is closely related to modern conceptions of self-organisation, suitably adapted for application in socioeconomic systems. Using a self-organisation approach, competition can be understood without recourse to biological analogy, in terms of general systemic principles that operate in the presence of variety. Viewing economic evolution in terms of complex adaptation in self-organising systems yields nonequilibrium and nonlinear perspectives that parallel Schumpeter's own intuitions, reinvigorating them as the basis of evolutionary economic thinking in the new Millennium.     

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.     

Convergences with Schumpeter: An essay Hirschman has yet to write

The paper explores the contributions of Joseph Schumpeter and Albert Hirschman to our understanding of the dynamics of modern democratic capitalist economies and suggests that much of their respective work displays intellectual overlap and complementarity. It is primarily focused upon the role of economic and political processes as forces of change and adjustment and the necessary degree of built-in inertia required to permit orderly rather than chaotic responses.     

Theoretical perspectives on strategic environmental management

Strategic Environmental Management (SEM) incorporates into firms' core strategies the transformation of products and processes that they believe an environmentally concerned society will increasingly demand. Significant threads have to do with the discovery of cost savings and market opportunities from reducing environmental impacts. SEM, like the environmental regulation hypothesis associated with Michael Porter, implies that society's efforts to reduce external environmental costs often lead to identification of hitherto-ignored or undeveloped profit possibilities. This would be surprising from the standpoint of neoclassical economic theory, to the extent that SEM utilizes available information about the potential costs and benefits of projects. Within the framework of evolutionary, capabilities-based theories of the firm, however, this discovery and its exploitation in SEM make perfect sense. Capabilities theory would imply that firms' intrinsic path dependence may previously have obscured such opportunities. This paper examines the theory of SEM, its implications for neoclassical and capabilities theories of the firm, and survey results drawn from the author's work with member companies in a regional pollution prevention roundtable. RID="*" IDI have enjoyed the able and insightful research assistance of Justin Vernon. Cooperation from the companies that participated in the survey, and financial support from Allegheny College and its Center for Economic and Environmental Development, are gratefully acknowledged. Reviewers for this journal provided numerous, valuable suggestions. Responsibility for the material herein remains mine alone.     

Reflections on the perspectives of the global economy from the point of view of emerging economies

 Recently a number of emerging economies, with high inflation and various kinds of imbalances have experienced what has come to be referred to as dollarization– the phenomenon of currency substitution where the dollar gradually replaces the national currency in the performance of its fundamental functions. The phenomenon is most commonly encountered as a component of the exchange-rate-based stabilization programs implemented in a number of emerging economies in Latin America, Asia and the Middle East. The fundamental issue we want to explore is whether this process forces the monetary authorities of emerging economies to act with their hands tied, as if caught in a trap. It is argued that when the expansion of liquidity and domestic credit is determined by the quantity of foreign-exchange reserves, an independent monetary policy vanishes and national sovereignty itself is shackled. Since this scenario typically occurs in a world of increasing globalization of finance, this paper also discusses (with reference to emerging economies) the risks and implications of capital inflows for macroeconomic policy autonomy, economic instability, and vulnerability to external shocks.     

Uncertainty and the size distribution of rewards from innovation

 Previous research has shown that the distribution of profit outcomes from technological innovations is highly skew. This paper builds upon those detailed findings to ask: what stochastic processes can plausibly be inferred to have generated the observed distributions? After reviewing the evidence, this paper reports on several stochastic model simulations, including a pure Gibrat random walk with monthly changes approximating those observed for high-technology startup company stocks and a more richly specified model blending internal and external market uncertainties. The most highly specified simulations suggest that the set of profit potentials tapped by innovators is itself skew-distributed and that the number of entrants into innovation races is more likely to be independent of market size than stochastically dependent upon it.     

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.     

Firm routines,customer switching and market selection under duopoly

This paper explores the dynamics of market selection for an industry in which firms employ relatively simple pricing, production and investment routines and in which consumers switch between rival firms in response to price differentials but do not all do so instantaneously. The key issue is whether market processes result in the elimination of less efficient firms by their more efficient rivals. That is to say, do such processes unfailingly increase the efficiency with which available economic resources are used? In the context of duopoly, we show that the survival of the more efficient firm is not guaranteed and that, more generally, the outcome depends upon the speeds with which firms adjust prices and capacities and with which customers switch between rival firms.