Schumpeter’s ‘conduct model of the dynamic entrepreneur’: scope and distinctiveness

Schumpeter formulated a ‘conduct model’ of entrepreneurial behaviour. Received wisdom has emphasised the economic functions of Schumpeter’s entrepreneur, neglecting behavioural aspects. Schumpeter’s model is examined; it posits a continuum of behaviours which are ‘entrepreneurial’, that rely on socially situated, tacit knowledge and are expressions of conscious, subjective rationality. Schumpeter’s model excluded unconscious optimisation and decision rules derived from bounded rationality. Comparisons are drawn with modern neoclassical, Austrian, and the older behavioural characterisations of entrepreneurial behaviour. The newer ‘effectuation’ model of entrepreneurial behaviour is also contrasted with Schumpeter’s approach. We find, among other things, that modern Schumpeterian economics associated with Nelson and Winter is not a natural continuation of Schumpeter’s model. However, some developments in neo-Schumpeterian economics, including the effectuation model deriving from the older behavioural tradition, are congruent with both the original ‘conduct model’ and Schumpeter’s directions for further research.     

Don’t blame the P2P file-sharers: the impact of free music downloads on the purchase of music CDs in Canada

This study measures the extent to which P2P file-sharing activities act as substitutes or complements to music purchases in markets for CDs. The paper breaks with the mainstream economics approach which dominates the music file-sharing discussion. Whereas such models assume relationships at the micro level (e.g. between file-sharing and purchases) based on observations made at the macro level, our evolutionary economics approach measures the direct effects using micro data representative of the Canadian population. The behavioral incentives underpinning free music downloading, novel to this paper, are the multiple effects of: ‘unwillingness to pay’ (market substitution), ‘hear before buying’ (market creation), ‘not wanting to buy a whole album’ (market segmentation), and ‘not available in the CD format or on electronic pay-sites’ (market creation). Although the two first mentioned incentives significantly influence CD album purchases—i.e. there is a negative and significant market substitution effect and a positive and significant market creation effect—on the whole, these two effects ‘cancel’ one another out, leading to no association between the number of P2P files downloaded and CD album sales.     

Exchange and evolution

This paper offers an extension of the distinction of [Kohn, Cato Journal, 24:303–339 (2004)] between the two paradigms of modern economic theory—value and exchange—as derived from the generic–operant framework of [Dopfer and Potts, The general theory of economic evolution, Routledge, London, (2007)]. I argue that Austrian and evolutionary economics can be analytically unified about a general framework of rule coordination and change that I shall call the generic value paradigm. This is an analytic generalization of Kohn’s “exchange paradigm” that will allow us to redefine his conception of the “value paradigm” as the operational value paradigm in terms of the economics of known and fully exploited opportunities. The generic value paradigm, in turn, underpins the economics of the growth of knowledge and the evolution of the economic order as an open-system process due to the origination, adoption, and retention of novel generic rules. Austrian economics is then circumscribed as a special case of the more general “generic” analysis of the coordination and evolution of economic rules.      

The Study of Ethnicity and Nationalism Needs Better Categories: Clearing up the Confusions that Result from Blurring Analytic and Lay Concepts

Synopsis It has been difficult to make progress in the study of ethnicity and nationalism because of the multiple confusions of analytic and lay terms, and the sheer lack of terminological standardization (often even within the same article). This makes a conceptual cleaning-up unavoidable, and it is especially salutary to attempt it now that more economists are becoming interested in the effects of identity on behavior, so that they may begin with the best conceptual tools possible. My approach to these questions has been informed by anthropological and evolutionary-psychological questions. I will focus primarily on the terms ‘ethnic group’, ‘nation’, and ‘nationalism’, and I will make the following points: (1) so-called ‘ethnic groups’ are collections of people with a common cultural identity, plus an ideology of membership by descent and normative endogamy; (2) the ‘group’ in ‘ethnic group’ is a misleading misnomer—these are not ‘groups’ but categories, so I propose to call them ‘ethnies’; (3) ‘nationalism’ mostly refers to the recent ideology that ethnies—cultural communities with a self-conscious ideology of self-sufficient reproduction—be made politically sovereign; (4) it is very confusing to use ‘nationalism’ also to stand for ‘loyalty to a multi-ethnic state’ because this is the exact opposite; (5) a ‘nation’ truly exists only in a politician’s imagination, so analysts should not pretend that establishing whether something ‘really’ is or is not ‘a nation’ matters; (6) a big analytic cost is paid every time an ‘ethnie’ is called a ‘nation’ because this mobilizes the intuition that nationalism is indispensable to ethnic organization (not true), which thereby confuses the very historical process—namely, the recent historical emergence of nationalism—that must be explained; (7) another analytical cost is paid when scholars pretend that ethnicity is a form of kinship—it is not.     

The evolution of IT innovations in Swedish organizations: a Darwinian critique of ‘Lamarckian’ institutional economics

Fundamental correspondence and analogies between the evolution of technological and biological innovations call for an ‘innovation Darwinian’, ‘universal Darwinian’ or ‘memetic’ approach to understanding technology innovation. Neo-institutional, in fact pseudo-Lamarckian evolutionary economic theory, represented by North, Nelson and Winter, Freeman and others, is criticized. Pseudo-Lamarckian (“by volition”) evolution is explained and analyzed on Darwinian grounds (as intentional and artificial selection), as is Schumpeter’s definitions of creative and imitative innovation. Data from a web survey among Swedish public and private organizations in 1999 are studied. Data show that Darwinian co-evolutionary interaction between producers and users or clients provide essential conditions and stronger influence on creative IT innovations than both ‘Lamarckian’ strategies and competition.

The Costs of Implementing the Majority Principle: The Golden Voting Rule

In a context of constitutional choice of a voting rule, this paper presents an economic analysis of scoring rules that identifies the golden voting rule under the impartial culture assumption. This golden rule depends on the weights β and (1−β) assigned to two types of costs: the cost of majority decisiveness (‘tyranny’) and the cost of the ‘erosion’ in the majority principle. Our first main result establishes that in voting contexts where the number of voters n is typically considerably larger than the number of candidates k, the golden voting rule is the inverse plurality rule for almost any positive β. Irrespective of n and k, the golden voting rule is the inverse plurality rule if β ≥ 1/2 .. This hitherto almost unnoticed rule outperforms any other scoring rule in eliminating majority decisiveness. The golden voting rule is, however, the plurality rule, the most widely used voting rule that does not allow even the slightest ‘erosion’ in the majority principle, when β=0. Our second main result establishes that for sufficiently “small size” voting bodies, the set of potential golden rules consists at most of just three rules: the plurality rule, the Borda rule and the inverse plurality rule. On the one hand, this finding provides a new rationalization to the central role the former two rules play in practice and in the voting theory literature. On the other hand, it provides further support to the inverse plurality rule; not only that it is the golden rule in voting contexts, it also belongs, together with the plurality rule and the Borda method of counts, to the “exclusive” set of potential golden voting rules in small committees. We are indebted to Jim Buchanan, Amichai Glazer, Noa Nitzan, Ken Shepsle, and an anonymous referee for their useful comments.     

A simple note on herd behaviour

In his ‘Simple model of herd behaviour’, (Banerjee A (1992) A simple model of herd behaviour. Q J Econ CVII:797–817) shows that—in a sequential game—if the first two players have chosen the same action, player 3 and all subsequent players will ignore his/her own information and start a herd, an irreversible one. In this paper, we analyse the role played by the tie-breaking assumptions in reaching the equilibrium. We show that: players’ strategies are parameter dependent—an incorrect herd may be reversed; a correct herd is irreversible.

Ambiguity attitude, R&D investments and economic growth

The process aimed at discovering new ideas is an economic activity the returns from which are intrinsically uncertain. We extend the neo-Schumpeterian growth framework to investigate the role of strong uncertainty in the innovative process. In particular, we postulate that, when deciding upon R&D efforts, investors hold ‘ambiguous beliefs’ about the exact probability of arrival of the next vertical innovation, and that they face ambiguity via the α −MEU decision rule (Ghirardato et al., J Econ Theory 118:133–173, 2004). Along the balanced growth path, the higher the agent’s ambiguity aversion (α), the lower the R&D efforts and the economic performance. Consistent with cross-country empirical evidence, this causal mechanism suggests that, together with the profitability conditions of the economy, different ‘cultural’ attitudes towards ambiguity may help explain the different R&D efforts observed across countries.     

On the evolutionary edge of migration as an assortative mating device

In a haystack-type representation of a heterogeneous population that is evolving according to a payoff structure of a prisoner’s dilemma game, migration is modeled as a process of ‘swapping’ individuals between heterogeneous groups of constant size after a random allocation fills the haystacks, but prior to mating. Migration is characterized by two parameters: an exogenous participation-in-migration cost (of search, coordination, movement, and arrangement-making) which measures the migration effort, and an exogenous technology—of coordinating and facilitating movement between populated haystacks and the colonization of currently unpopulated haystacks—which measures the migration intensity. Starting from an initially heterogeneous population that consists of both cooperators and defectors, a scenario is postulated under which ‘programmed’ migration can act as a mechanism that brings about a long-run survival of cooperation.

Politics, selection and the public interest: Besley’s benevolent despot

This paper is an assessment of Besley’s attempt to orchestrate a rapprochement between public choice theory and conventional public economics—with its characteristic normative orientation towards public policy. In this paper, I first try to set the Besley enterprise in the context of earlier work—focussing on my own work with Buchanan (The Power to Tax and The Reason of Rules). I then direct attention to three aspects of the Besley enterprise: whether selecting for competence depends on having solved the motivation problem (either by incentive or selection means), how selection mechanisms might be supported institutionally and the possibility that selection processes might create incentives at the ‘dispositional’ level.

Stochastic strategy adjustment in coordination games

Summary. The paper explores a model of equilibrium selection in coordination games, where agents from an infinite population stochastically adjust their strategies to changes in their local environment. Instead of playing perturbed best-response, it is assumed that agents follow a rule of ‘switching to better strategies with higher probability’. This behavioral rule is related to bounded-rationality models of Rosenthal (1989) and Schlag (1998). Moreover, agents stay with their strategy in case they successfully coordinate with their local neighbors. Our main results show that both strict Nash equilibria of the coordination game correspond to invariant distributions of the process, hence evolution of play is not ergodic but instead depends on initial conditions. However, coordination on the risk-dominant equilibrium occurs with probability one whenever the initial fraction contains infinitely many agents, independent of the spatial distribution of these agents. Received: March 14, 2000; revised version: June 21, 2001     

Social Market Economy: origins,meanings and interpretations

This paper investigates various possible meanings of ‘Social Market Economy’—60 years after its political initiation in Germany. We focus on the variety of intellectual sources that influenced the formation and interpretation of the concept in Germany during the first half of the last century. Our particular attention is on Müller-Armack’s definition of a rather dualistic concept of ‘social’ versus ‘market economy’ and the subtle differences it has with an original (Freiburg School) view of ordo-liberalism that lends itself more easily to a constitutional economics perspective.

Optimal pricing and capacity choice for a public service under risk of interruption

We develop rules for pricing and capacity choice for an interruptible service that recognize the interdependence between consumers’ perceptions of system reliability and their market behavior. Consumers post ex ante demands, based on their expectations on aggregate demand. Posted demands are met if ex post supply capacity is sufficient. However, if supply is inadequate all ex ante demands are proportionally interrupted. Consumers’ expectations of aggregate demand are assumed to be rational. Under reasonable values for the consumer’s degrees of relative risk aversion and prudence, demand is decreasing in supply reliability. We derive operational expressions for the optimal pricing rule and the capacity expansion rule. We show that the optimal price under uncertainty consists of the optimal price under certainty plus a markup that positively depends on the degrees of relative risk aversion, relative prudence and system reliability. We also show that any reliability enhancing investment—though lowering the operating surplus of the public utility—is socially desirable as long as it covers the cost of investment.     

The process and a simple logic of ‘meso’. Emergence and the co-evolution of institutions and group size

‘Summing-up’ aggregation of micro decisions contrasts with structural emergence in complex systems and evolutionary processes. This paper deals with institutional emergence in the ‘evolution of cooperation’ framework and focuses on its size dimension. It is argued that some ‘meso’ (rather than ‘macro’) level is the proper level of cultural emergence and reproduction. Also Schumpeterian economists have discussed institutions as ‘meso’ phenomena recently, and Schelling, Axelrod, Arthur, Lindgren, and others have dealt with ‘critical masses’ of coordinated agents and emergent segregations. However, emergent group size has rarely been explicitly explored so far. In an evolutionary and game-theoretic frame, ‘meso’ is explained in terms of a sustainably cooperating group smaller than the whole population. Mechanisms such as some monitoring, memory, reputation, and active partner selection loosen the total connectivity of the static and deterministic ‘single-shot’ logic and thus allow for emergent ‘meso’ platforms, while expectations ‘to meet again’ remain sufficiently high. Applications of ‘meso-nomia’ include the deep structure of ‘general trust’ and macro-performance in ‘smaller’ and ‘well networked’ countries which helps to explain persistent ‘varieties of capitalism’.     

Coevolution of human speech and trade

We propose a paleoeconomic coevolutionary explanation for the origin of speech in modern humans. The coevolutionary process, in which trade facilitates speech and speech facilitates trade, gives rise to multiple stable trajectories. While a ‘trade-speech’ equilibrium is not an inevitable outcome for modern humans, we find it is a relatively likely scenario given our species evolved in Africa under climatic conditions supporting relatively high population densities. The origin of human speech is not independent of economic institutions—the economics of early human trade can provide additional insight to help explain the physiological emergence of human speech.      

The Economics and Bioeconomics of Folk and Scientific Classification

Synopsis This paper is the product of a collaboration between a biologist (Ghiselin 1997) who works on the philosophy of classification and an economist (Landa 1981, 1994) who works on the ‘Economics of Identity’: how and why people classify people based on identity in the context of a theory of ethnic trading networks. In developing the ‘bioeconomics’ (the synthesis of economics with biology) of classification, we crossed a number of disciplinary boundaries—anthropology, economics, sociology, biology, and cognitive psychology including evolutionary psychology’s ‘fast and frugal’ heuristics. Using a bioeconomics approach, we argue that folk classifications—the classifications used by ordinary persons—have much in common with scientific classifications: underlying both is the need for economy of information processing in the brain, for the efficient organization of knowledge, and for efficiency of information acquisition and transmission of information to others. Both evolve as a result of trial and error, but in science there is relatively more foresight, understanding, and planning.     

Synergy Goes to War: A Bioeconomic Theory of Collective Violence

Synopsis Synergy – here defined as otherwise unattainable combined effects that are produced by two or more elements, parts or individuals – has played a key causal role in the evolution of complexity, from the very origins of life to the evolution of humankind and complex societies. This theory – known as the ‘Synergism Hypothesis’ – also applies to social behavior, including the use of collective violence for various purposes: predation, defense against predators, the acquisition of needed resources and the defense of these resources against other groups and species. Among other things, there have been (1) synergies of scale, (2) cost and risk sharing, (3) a division of labor (or, better said, a ‘combination of labor’), (4) functional complementarities, (5) information sharing and collective ‘intelligence’, and (6) tool and technology ‘symbioses’. Many examples can be seen in the natural world – from predatory bacteria like Myxococcus xanthus to social insects like the predatory army ants and the colonial raiders Messor pergandei, mobbing birds like the common raven, cooperative pack-hunting mammals like wolves, wild dogs, hyenas and lions, coalitions of mate-seeking and mate-guarding male dolphins, the well-armed troops of savanna baboons, and, closest to humans, the group-hunting, group-raiding and even ‘warring’ communities of chimpanzees. Equally significant, there is reason to believe that various forms of collective violence were of vital importance to our own ancestors’ transition, over several million years, from an arboreal, frugivorous, mostly quadrupedal ape to a world-traveling, omnivorous, large-brained, tool-dependent, loquacious biped. The thesis that warfare is not a recent ‘historical’ invention will be briefly reviewed in this paper. This does not mean that humans are, after all, ‘killer apes’ with a reflexive blood-lust or an aggressive ‘drive’. The biological, psychological and cultural underpinnings of collective violence are far more subtle and complex. Most important, the incidence of collective violence – in nature and human societies alike – is greatly influenced by synergies of various kinds, which shape the ‘bioeconomic’ benefits, costs and risks. Synergy is a necessary (but not sufficient) causal agency. Though there are notable exceptions (and some significant qualifiers), collective violence is, by and large, an evolved, synergy-driven instrumentality in humankind, not a mindless instinct or a reproductive strategy run amok.      

Alternative evolutionary theories: A historical survey

Our overview has the objective of making our study relevant to bioeconomists. The need for the ‘alternatives’ to the Synthetic Theory of Evolution in social-economic studies was substantiated, for example, by Colombatto (Journal of Bioeconomics, 5, 1–25, 2003), who maintains that the natural-selection theory is ‘ill suited’ to describing evolutionary processes in economics. He proposed an alternative ‘non-Darwinian’ approach by equating the ‘non-Darwinian’ approach with a definite version of neo-Lamarckism. Yet, as we will show, there is a palette of alternative approaches within and beyond the neo-Lamarckism. We hope to give bioeconomists more choice in their theoretical modeling and constructing of analogies between biology and economics. It will also be shown that in the light of suggested definitions the concept of ‘universal Darwinism’ recently discussed in bioeconomics makes little sense as a generalizing category. In addition, in the concluding part of the paper we demonstrate that the majority of alternative approaches are far from being pigeonholed as archaic and once and for all wiped off the theoretical landscape. On the contrary, in recent years one can observe some revival of interest in the theoretical ‘heresies’.      

Assignment models and reneging

Summary. We consider a non-cooperative assignment model where we show that any subgame perfect equilibrium is stable, and that an appropriate refinement criterion leads to the p-optimal outcome. We then consider a model with reneging and derive some interesting properties of this game. We show that in this case ‘unraveling’ may occur. Furthermore, the resulting outcome can be either stable, or unstable. Received: July 1, 1997; revised version: May 30, 1998