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.     

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.     

Market institutions and economic evolution

Our cognitive limitations cause us to rely on institutions to guide reasonable behaviour; market institutions reduce the costs of search, negotiation, and monitoring entailed in making single transactions. The making of markets requires an investment of immaterial capital, the major share of which typically is provided by those who expect to be very active on one side of the market. This `external organisation' provides producers with information for the development of new products; by simplifying transactions it also allows consumers greater scope for developing consumption capabilities. Thus the evolution of institutions guides the evolution of goods and services.     

The role of innovation and quality change in Japanese economic growth

This paper explores the use of time series data to isolate quality change in the Japanese economy using a hedonic procedure. We argue that the traditional approach to hedonic estimation based upon panel data sets of different brands in a given product area is extremely resource intensive and, thus, unlikely to be adopted by official statistical bodies outside of key areas, such as computers. This paper adopts a “top-down” approach to see whether more traditional measures of technical change, such as patents, can be used to separate pure inflation from quality change. If this is possible, it offers a much simpler route to estimate the role of quality change in economic growth and performance. In practice, we extend the analysis not only to include patents, but other forms of intellectual property that might reflect technology and attribute changes, such as designs, utility models and trademarks. We begin by taking a longer-term historical perspective, exploring the development of indigenous inventive capacity in Japan during the early years when R&D data are not available. It is possible to show that the rise in utility models pre-dates the main growth in patenting activity, suggesting the development in more low-level indigenous creative work prior to higher level inventive activity. The principal aim of this paper, however, is to demonstrate that it is possible to develop robust models to explain changes in the producer price index in Japan, which can then be used to re-examine Japanese growth performance over the period from about 1960. If the official Japanese statistical body has fully accounted for quality change in the price indices (i.e. produced fully quality-constant price deflators), then the official estimates of growth will be correct. However, we provide strong evidence that this is not the case. Changes in quality, proxied by the IP variables, are important determinants of prices in Japan over the period 1960 to 1995 as a whole. Indeed, we provide evidence that the true rate of growth of the Japanese economy, taking into account the rate of quality change, is significantly higher than that suggested in official statistics.     

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.     

Genetics, family structure, and economic growth

Recent biomedical research shows that roughly three-quarters of cognitive abilities are attributable to genetics and family environment. This paper presents a growth model that characterizes the role of the intergenerational transmission of genes and the effect of family environment on growth trajectories. If the average human or physical capital stocks are sufficiently low, the model shows that the economy will be caught in a poverty trap. Conversely, countries with more resources will converge to a bala nced growth path where the average rate of genetic transmission of skills from parents to children determines the long-run rate of output growth. Increased genetic diversity (or income inequality) is shown to raise the fertility rate and reduce output growth in the transitional dynamics. Thus, nature and nurture are able to explain a variety of countries' growth experiences.     

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.     

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.     

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.     

Actions influenced by a social network

A simple framework is presented in which, each period, each of N individuals chooses among K alternatives. Individual actions are interrelated through a social network which arrays the strength of influence of each person on each other person. Emphasis is on the role of the network. The framework accommodates a variety of particular contexts, suggests theorems, and unifies a sizable part of the fragmented literature on network interaction.     

Industrial policy, competence blocs and the role of science in economic development

Government is studied as supporter of science and of the transformation of scientific discoveries into new technology and firm formation. The importance of scientific discovery outside academe is recognized as is the experimental nature of the transformation process entailing frequent business failure. Competence bloc theory is used to understand the minimum set of actors with competence needed for the incentive structure to be complete and the risk of losing the winners minimized. Competence bloc analysis also helps clarify the theoretical foundations of industrial policy and useful roles for science parks. I find that to succeed as a catalyst for industrial competitiveness park management should be less concerned with science and technology and more with the economics of the transformation process.     

Weber, Schumpeter and Knight on entrepreneurship and economic development

This paper interprets the discussion on entrepreneurship and economic development that started off with Weber's papers on the Protestant Ethic. Weber sought the reason for the relatively rapid growth of the Occident in the rational, Calvinist attitude to life. Calvinism – in his view – exactly suited a society of free labourers, who were not tied to master and soil by extra-economic considerations as in tribal and feudal societies. Schumpeter gave an alternative explanation, emphasizing the importance of innovation and entrepreneurship. Knight, who stressed neither rationality nor innovation but uncertainty and perceptiveness as the sole source of progress and profits, followed up German language writing on this subject. Only the investor who can detect hitherto hidden qualities in people can gain. The paper demonstrates how these three authors influenced each other. The debate between these three authors has raised many issues of governance and organization that feature contemporary thinking.     

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.     

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 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.     

Beyond natural selection and divine intervention: The Lamarckian implication of Adam Smith's invisible hand

Adam Smith's invisible hand metaphor (IH) is examined in light of two different accounts of the origin of traits: Charles Darwin's theory of evolutionary optimization and William Paley's theory of divine intervention. Smith's stand supersedes both accounts. For Smith, intermediating drives, such as the sexual one, neither arise accidentally and favored according to their fitness à la Darwin nor planted by the Deity à la Paley. For Smith, such drives are adopted in light of their ultimate end. Smith did not provide an account of how the drives are connected to their far-reaching, invisible beneficial ends or why do agents become dimly aware of that causality.     

Heterogeneous beliefs and learning in forward looking economic models*

We study a class of forward looking economic models with heterogeneous agents in a bounded rationality setting. The agents employ the same recursive learning rule to update beliefs but are characterized by different memory parameters. The peculiarity of the learning mechanism is that the learning rate is not vanishing in the limit. Differently from what is obtained in the case of a vanishing learning step, i.e., the stability conditions in the heterogeneous agents case are those of the representative agent model, we show that heterogeneity matters for the expectational stability of a stationary perfect foresight equilibrium and that the stability parameter restrictions with heterogeneous agents are stronger than in the case of homogeneous agents.     

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.     

Growth and equilibrium indeterminacy: the role of capital mobility

Summary. The paper presents a human capital driven endogenous growth model which, in general, permits a multiplicity of equilibrium balanced growth paths. It is shown that allowing for perfect capital mobility across countries increases the range of parameter values for which the model permits equilibrium indeterminacy. As opposed to the closed capital markets case, simple restrictions on preferences are no longer sufficient to eliminate the indeterminacy. Intuitively, under perfect capital mobility agents are able to smooth consumption completely. This induces an economy with open capital markets to behave like a closed economy with linear preferences thereby increasing the possibility of equilibrium indeterminacy. Received: 18 November 1998; revised version: 10 August 1999     

The power of ESS: An experimental study

Abstract. Our experimental design mimics a traditional evolutionary game framework where players are matched pairwise to play a symmetric 33 bimatrix game that has two Nash equilibria. One equilibrium is an evolutionary stable state, or ESS; the other is an equilibrium in dominated strategies. Our primary experimental result is the observation that the ESS becomes extremely attractive when subjects have minimal information about the payoff functions, although the dominated equilibrium assures the highest equilibrium payoff. The attractiveness of the ESS is only moderate when players are completely informed about the 33 payoff matrix. Correspondence to: S.K. Berninghaus