Evolutionary economics program and scope

Research Program and Ontology 2 Evolutionary Economics - An Interpretative Survey Dynamics: Long-run View and Population Thinking 4 Evolutionary Approaches to Population Thinking and t

Evolutionary Economics: Program and Scope

RECENT ECONOMIC THOUGHT SERIES

Editors:

William Darity, Jr

University of North Carolina

Chapel Hill, North Carolina, USA

Other books in the series:

James K Galbraith University of Texas at Austin Austin, Texas, USA

Schofield, Nonnan: COLLECTIVE DECISION-MAKING: SOCIAL CHOICE

AND POLITICAL ECONOMY

Menchik, Paul L.: HOUSEHOLD AND FAMILY ECONOMICS

Gupta, Kanhaya L.: EXPERIENCES WITH FINANCIAL LIBERALIZATION Cohen, Avi J., Hagemann, Harald, and Smithin, John:

MONEY FINANCIAL INSTITUTIONS AND MACROECONOMICS Mason, P.L and Williams, R.M.:

RACE, MARKETS, AND SOCIAL OUTCOMES

Gupta, Satya Dev: THE POLITICAL ECONOMY OF GLOBALIZATION Fisher, R.C.: INTERGOVERNMENTAL FISCAL RELATIONS

Mariussen, A and Wheelock, 1.: HOUSEHOLDS, WORK AND ECONOMIC

CHANGE: A COMPARATIVE INSTITUTIONAL PERSPECTIVE Gupta, Satya Dev: GLOBALIZATION, GROWTH AND SUST AINABILITY Gupta, Satya Dev: DYNAMICS OF GLOBALIZATION AND DEVELOPMENT Medema, Steven G.: COASEAN ECONOMICS: LAW AND ECONOMICS AND

THE NEW INSTITUTIONAL ECONOMICS

Peoples, James: REGULATORY REFORM AND LABOR MARKETS

Dennis, Ken: RATIONALITY IN ECONOMICS: AL TERNA TIVE

PERSPECTIVES

Ahiakpor, James C.W.: KEYNES AND THE CLASSICS RECONSIDERED Wolfson, Murray: THE POLITICAL ECONOMY OF WAR AND PEACE Jain, A.K.: ECONOMICS OF CORRUPTION

Wheelock, J and Vail, 1.: WORK AND IDLENESS: THE POLITICAL

ECONOMY OF FULL EMPLOYMENT

Dean, James M and Watennan, A M.C.: RELITION AND ECONOMICS:

NORMATIVE SOCIAL THEORY

Gupta, Kanhaya: FOREIGN AID: NEW PERSPECTIVES

MacDonald, R and Stein, J.: EQUILIBRIUM EXCHANGE RATES

Chilcote, Ronald M.: THE POLITICAL ECONOMY OF IMPERIALISM:

CRITICAL APPRAISALS

Silber, Jacques: HANDBOOK ON INCOME INEQUALITY MEASUREMENT Elsner, W and Groenewegen, 1.: INDUSTRIAL POLICIES AFTER 2000 Young, W And Zilberfarb, B.: IS-LM AND MODERN MACROECONOMICS

Evolutionary Economics: Program and Scope

Library of Congress Cataloging-in-Publication Data

Evolutionary economics : program and scope / edited by Kurt Dopfer

p cm (Recent economic thought ser ies ; 74)

lncludes bibliographical references and index

ISBN 978-94-010-3869-0 ISBN 978-94-010-0648-4 (eBook)

Copyright © 2001 by Springer Science+Business Media New York

Originally published by Kluwer Academic Publishers in 2001

Softcover reprint ofthe hardcover Ist edition 2001

AlI rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photo-copying, recording, or otherwise, without the prior written permission of the publisher, Springer Science+Business Media, LLC

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Research Program and Ontology

2 Evolutionary Economics - An Interpretative Survey

Dynamics: Long-run View and Population Thinking

4 Evolutionary Approaches to Population Thinking and the Problem of Growth and Development

5 Evolutionary Perspectives on Economic Growth

vi

Statics: Division of Knowledge and Valuation Principles

6 The Evolutionary Principles of American

Neoinstitutional Economics

7 Knowledge and Meliorism in the Evolutionary Theory

Statics: Agency, Firm and Economic Structure

10 Early Signs of a Revolution in Microeconomics

Carsten Herrmann-Pillath Lehrstuhl fUr

gesamtwirtschaftliche und institutionelle Entwicklung Universitat WittenlHerdecke Alfred-Herrhausen-Str.50 D-58448 Witten

Germany

Richard Langlois Department of Economics University of Connecticut

341 Mansfield Road Box U-63, Room 328 Storrs, CT 06269-1063 U.S.A

Misericorde

1700 Fribourg Switzerland

MarcR Tool

5708 McAdoo Avenue Sacramento, CA 95819-2516 U.S.A

Ulrich Witt Max-Plank-Institut zur Erforschung von Wirtschaftssystemen Abteilung Evolutionsokonomik Kahlaische Strasse 10

07745 Jena Germany

1 EVOLUTIONARY ECONOMICS:

FRAMEWORK FOR ANALYSIS

Kurt Dopfer*

Major Streams: Classical, Neoclassical and Evolutionary Economics What is evolutionary economics? What are its paradigmatic-ontological foundations, and what would an evolutionary research program for economics look like? How do evolutionary ideas fit in with existing research programs and teaching curricula? Questions like these need to be considered

by economists given the increasing number of publications which employ an

• This introduction includes only references that relate to the work of the contributors or to the literature mentioned there I acknowledge gratefully valuable suggestions and comments

by Felicia Fai, John Gowdy, Brian Loasby, Matthias Klaes, Jason Potts, Klaus Rathe, Rolf Steppacher, Jack Vromen and Ulrich Witt A token of gratitude goes also to Pascal van Griethuysen, Lukas Hagen and Silvia Brandli for their editorial assistance, and to Juli Irving- Lessmann for her substantial assistance with regard to my English prose All blame for the work as it stands should go to my address

2 EVOLUTIONARY ECONOMICS: PROGRAM AND SCOPE

evolutionary approach and the establishment of new scientific societies and journals which carry the label "evolutionary" The present volume brings together ten papers by economists who have made outstanding contributions

to various fields of evolutionary economics

The classical economists of the second half of the 18th century detached economics from moral philosophy, developing it into an independent discipline The new discipline dealt with two grand questions Firstly, how could order arise from the interactions of autonomous individuals without governmental intervention? This question became central after the social

schemes of the ancien regime that regulated occupations and prices broke

down and the citizens became largely autonomous in making their own decisions in the market place Following Ferguson's recognition that market order is "the result of human action, but not the execution of any human design" (quoted in Langlois' and Sabooglu's paper), Adam Smith was the first to provide cues for an understanding of how markets could organize themselves and order could, in a context of autonomous and self-interested individuals, arise spontaneously

The second historical phenomenon that has called for a theoretical explanation was the rapid development of industry propelled by technological progress such as the invention of the steam engine and the power loom The new technological dynamic was accompanied by a broad sectoral shift from agriculture to industry, structural changes in the areas of employment and consumer demand, and far-reaching institutional changes The classical model was directed towards the grand question of whether the rapid growth of the industrial economy could eventually solve the problem

of subsistence, or whether the new industrial regime represented merely another chapter in a "dismal science" Robert Malthus and David Ricardo developed the pessimistic doctrine of classical economics; Smith, in turn, was more optimistic, pointing in his writings to the advantages of the division of labor and specialization When we look back from our position in the 21 st century at the past two hundred years, we can see that Smith's optimistic view is in accord with the actual development of the industrial countries Analyzing the secular course of economic history, John Stuart Mill took up the question of the long-run "Stationary State" and introduced thereupon the distinction between economically "advanced" and "backward" countries It is remarkable that all the classical economists, including Malthus, Ricardo, and later Karl Marx, were ultimately optimistic about the future secular course of mankind Modern evolutionary economics has taken

EVOLUTIONARY ECONOMICS: FRAMEWORK FOR ANALYSIS 3

the grand questions of classical economics further and it seems that, with its

feu saere, it is likely to share the optimism of the progressive canon of the

classicals

The origins of modem neoclassical economics are to be found in the marginal revolution of the second half of the 19th century The research program of neoclassical economics took on its independent form by solving the classical water-diamond value problem and, later, by proving the existence and stability of an economic equilibrium In formulating their

"pure" theory the proponents of neoclassical economics, such as Hermann Gossen, Leon Walras, William Jevons, and Vilfredo Pareto, relied on the paradigm of classical mechanics The physicists of the 18th century recognized that equilibrium was a particularly interesting concept in the framework of the dynamics of relative changes in the motions of bodies or particles Physical states of rest (a special case in dynamics) could be described by means of equilibrium equations, and early modem philosophy, which clung to a belief in harmony, was largely inspired by this idea The mechanical representation of market order in terms of an equilibrium between resources was a hallmark of neoclassical economics

However, the "new" doctrine was distinct also in that it largely turned away from the second major concern of the classicals - economic development and growth The neoclassical growth theory of the second half

of the 20th century described economic growth on the basis of a trajectory that represented a sequence of equilibrium regimes Technological progress

"disturbed" an established equilibrium, and the forces immanent in the market restored it at a new level The endogenous growth theory of the last two decades has tried to integrate the key factor of change - economic knowledge - into the theory of economic growth The papers by Richard R Nelson and Brian Loasby show how these reinterpretations relate to an evolutionary approach to economic growth

Neoclassical economics became accepted as the mainstream only after World War II For over a hundred years from the middle of the 19th century there were a great many ideas and theoretical models in economics and a paradigm hiatus existed The question of economic growth and development was still the grand theme of the other schools The interest of the

"dissidents" was in "historical" theory not "pure" theory The Scottish school, the German Historical school and the American (Veblenian) Institutionalist school, all developed theoretical models of their own

English-4 EVOLUTIONARY ECONOMICS: PROGRAM AND SCOPE

Scientific development appears to follow much the same pattern as economic and social development Innovations initially create what appears

as the "chaos of pluralism", which lasts for a certain time The scientific ideas then fluctuate around a bifurcation point and, as a result of what are often the most minor of causes, the adoption of a theoretical variant is increased cumulatively and the development of a whole discipline is locked into a dominant theoretical variant In his paper Ulrich Witt highlights the path dependence effects in economics and its rationale can be also used to explain how neoclassical economics became the mainstream into which the discipline of economics has "collapsed" We can find few clues in the history of economic thought which would explain why, in the 1930s and 1940s, neoclassical economics, rather than the then competing institutional

or related theories, became the dominant paradigm in economics One reason for this may be the failure of institutional economics, which stressed its superior relationship with reality, to develop economic policies during the Great Depression ofthe 1930s

Contemporary evolutionary economics has also taken up again the second major question of the classical research agenda: the evolution of the economic system In terms of the history of economic thought, it can be linked with the models of the historical school, institutionalism and other

"evolutionary" strands in economics The connections with the precursors of evolutionary economics are specifically drawn in several of the papers, particularly those of Paul D Bush and Marc R Tool (on Veblen), and Richard N Langlois and Miifit M Sabooglu (on Hayek)

An important question is whether the relationship between the neoclassical and evolutionary models is like that between fire and water, or whether it is instead a complementary one so that cross-fertilization or even

a synthesis between them is possible This issue is addressed explicitly in Nicolai Foss' paper From the current literature it appears that there is some theoretical convergence in these areas Proponents of neoclassical theory deal with questions of institutions and evolutionary game theory, and proponents of evolutionary economics take up neoclassical subjects However, just as the convergence between the eastern and western economic systems foundered on the incompatibility of their basic political viewpoints, the convergence in the area of the two theoretical approaches may founder

on the irreconcilability of the physical-mechanical and the evolutionary paradigms Nelson and Winter's work, "An Evolutionary Theory of Economic Change" has been widely recognized as a paradigmatic

institutional-EVOLUTIONARY ECONOMICS: FRAMEWORK FOR ANALYSIS 5

milestone and some of the perennial issues of an evolutionary approach to economics are taken up anew in Nelson's contribution to this volume An interesting question is whether, with the present developments in economic theory, we are at a bifurcation point comparable with those of the middle of the 19th century or the 1930s and 1940s I think that we are indeed experiencing a third paradigmatic bifurcation However, we cannot be more specific than just stating that, at the present time, a pluralistic attitude seems more and more accepted in the theoretical discourse in economics The increase in pluralism may result in a "theory chaos" and, to the extent this is due to theoretical innovations, the future is, as Loasby demonstrates in a more general context, radically uncertain

Synopsis

The intellectual environment of evolutionary economics is at present still largely dominated by the neoclassical paradigm The survival chances of an evolutionary approach are thus also dependent on its ability to adapt to that environment The teaching curricula and research programs of contemporary economics can be divided into the domains of macro and microeconomics

on the one hand, and of static and dynamic economics on the other One concern when selecting and classifying the papers of this volume was to integrate the evolutionary approaches and models with the existing research program and teaching curricula of economics

Section I deals with foundational issues Ulrich Witt's paper gives an

"Interpretative Survey" and, in discussing the most important contributions

of modem evolutionary economics, provides us with various inductive building blocks which make it possible to reconstruct economics along evolutionary lines "from below" The paper by Carsten Herrmann-Pillath on the "Ontological Foundations of Evolutionary Economics" is, in contradistinction, conducted in a deductive fashion He brings out the ontological basis of evolutionary economics, tracing paradigmatic differences back to ontological differences Taken together, the two papers show the fruitful interplay between induction and deduction within the framework of an integrated - abductive - discovery process Witt's inductive building blocks are "theory laden" and Herrmann-Pillath's ontological-deductive scheme is developed by taking examples from evolutionary economics From an interim appraisal of this abductive process

6 EVOLUTIONARY ECONOMICS: PROGRAM AND SCOPE

given in Section 1 of this volume, we can conclude that, with respect to the

ontological basis of evolutionary economics, there is a unite de doctrine

Sections 2 and 3 deal with topics in evolutionary macroeconomics which can be divided in evolutionary macro statics and evolutionary macrodynamics An evolutionary macrostatics is concerned with the analysis

of "deep" economic structures, comprising the division of knowledge and labor, principles of an evolutionary value theory as well as generic complementarities and interdependencies In contrast, evolutionary macrodynamics deals with changes in the "deep structure" over time and looks for endogenous explanations of economic growth and economic development With respect to macrodynamics, J Stanley Metcalfe discusses the concepts of population thinking and variety Richard R Nelson's paper

on "Evolutionary Perspectives on Economic Growth" argues along the same line of a dynamic macroeconomics Paul D Bush and Marc R Tool examine macro static issues from the the perspective of American pragmatism and

"neoinstitutional" economics (Tool's term, 1953) Langlois and Sabooglu take an alternative position, discussing the aspects of "Knowledge and Meliorism in the Evolutionary Theory of F A Hayek"

Evolutionary microeconomics can analogously be divided into the two areas microdynamics and microstatics The dynamic aspects of an evolutionary microeconomics are discussed in the papers by Brian Loasby and Richard H Day Loasby stresses the importance of imagination and internal selection processes for the explanation of firm related or macroeconomic evolutionary processes Day emphasizes the agency-environment relationship and discusses "adapting, learning and economizing" as key concepts for an evolutionary microeconomics Jacques Lesourne detects in recent discussions (following the title of his contribution) "Early Signs of a Revolution in Micro Economics" and suggests looking at the micro areas and macro areas in a more differentiated way by introducing a "meso-level" at this stage of theory formation In his paper Nicolai Foss discusses the reconstruction of some of the major evolutionary theories of the firm and relates them (both as competitors and complements) to transaction and contract theories

The following introduction will provide the reader with a framework for the analysis This will, on the one hand, facilitate a systematic assessment of the various papers within the larger framework of evolutionary economics The "Framework for Analysis" thus presented is the result of the interpretation of the papers in this volume The framework, on the other

EVOLUTIONARY ECONOMICS: FRAMEWORK FOR ANALYSIS 7

hand, will make it possible to view evolutionary economics as a whole Essential questions will be: what are the paradigmatic-ontological foundations of evolutionary economics? what are its key analytical categories and what are its major theoretical propositions?

Evolutionary Ontology of Economics

Herrmann-Pillath's paper demonstrates that every theoretical model in a science like economics that makes statements about reality is necessarily based on ontological premises, even when these are not stated explicitly Following his arguments, the proponents of neoclassical economics not only fail to make their ontological premises explicit, but the content of their premises are also inappropriate as axiomatic foundations of economics Some equilibrium economists (such as Gerard Debreu) have indeed argued that there is no need for economics to establish a link between theory and reality and that economists can live quite well with this paradoxical ontology Generally, mainstream economists seem to avoid ontological questions because these appear to them to be too abstract and they see no possibility of building a bridge between philosophy and theory The two levels of abstraction are certainly quite different, and the reservations of mainstream economists are in this respect understandable Therefore, in what follows, we shall introduce a set of analytical concepts - as bridging concepts between ontological and theoretical statements - rather than attempt to establish a direct relationship between ontology and economic theory

The two key categories of an evolutionary ontology are information and energy Briefly, " the very essence of reality is information Yet, we identify a primordial good, i.e., energy, which is a necessary condition for preserving and maintaining structures as storages of information." (Herrmann-Pillath, p 91) Another ontological category that is relevant for economics - as a science of life - is bimodality In life, the mind plays a key role in establishing the fundamental evolutionary dynamics of reality, and it

is useful to attempt to establish the axiomatic construction of reality on the basis of a distinction between a subject world, which the mind takes into account, and an object world, which is characterized by criteria unrelated to the mind As Herrmann-Pillath argues, "our theories must include human beings and their own view of the world in terms of their individual beliefs-

8 EVOLUTIONARY ECONOMICS: PROGRAM AND SCOPE

including ontological ones " (Herrmann-Pillath, p 98) The implications of

a bimodal approach are both theoretical and epistemological "Human mind must be an integral part of any ontology of economics, and ontology entertains a reflective relationship with ontology There is no way to pull the scientific observer out of the world." (op cit.) The choice of ontology not only determines the framework of premises of economic theory, it also determines the epistemology which provides criteria for the validity of theories The premise that the world and knowledge develop in a co-evolutionary way belongs to theory and to epistemology "Evolutionary ontology presupposes both an open set of possible states of the world and of possible states of knowledge It furthermore assumes that changes of possible states of knowledge are crucial forces of changing possible states of the world This is called the principle of creativity , Human knowledge is not perfectly true but quite the other way round, systematically false." (Herrmann-Pillath, p 104) At the theoretical level, creativity brings phenomena such as innovations, surprise, and radical uncertainty into the analysis At the epistemological level, it suggests starting from the fallibility

of human knowledge and accepting the idea that radical uncertainty, and thus "systematically false" statements, represent the m~or epistemological principle of science

Herrmann-Pillath's paper is in the spirit of the organic process philosophy of Peirce and Whitehead Bush and Tool refer in their paper to the close relationship between this philosophical strand and American pragmatism, especially as developed by Dewey In the following, some ontological concepts will be discussed based both on the papers in this volume and on the original philosophical positions In a next step these concepts will be used to establish analytical and theoretical concepts Our prime intention is to develop a set of "empirical axioms", i.e., assumptions about economic reality whose validity is not further questioned The empirical axiomatics builds on three propositions:

1 Real phenomena are actualizations of ideas

2 Actualizations are matter-energy manifestations III space and time

3 Real phenomena evolve

A real phenomenon constitutes an actualization (a) of a generic idea (g),

a = a(g) We call an idea any imagination that is brought about by a human

EVOLUTIONARY ECONOMICS: FRAMEWORK FOR ANALYSIS 9

thought proces~ Ideas can be articulated in language and can thus be transported into the social domain connecting the humans via verbal (as well

as non-verbal) communication Language can be conceived as "codified imagination", which implies that there is no "objective" language independent of human imagination An idea is called generic if it is instrumental in bringing about cognitive and behavioral processes Generic ideas are in this respect practical and are associated in economics with the notion of productive knowledge

There is another kind of economic knowledge that refers to the opportunities and constraints an individual faces in an economic environment It represents knowledge about the state of the world, not about how the world operates It is the knowledge, for instance, about the relative prices in the lemon market or about a given technological opportunity set in

an industry This kind of "opportunity knowledge" is the major ingredient of

a decision theoretic approach The evolutionary life as expounded by the notions of innovation, adaptation and learning do not figure in the research agenda of this approach Accordingly, the concept of generic idea has no meaning, and the distinction between generic and non-generic knowledge-essential for an evolutionary approach - naturally fails to make an appearance Economic opportunities and constraints may change; what evolves are the generic ideas that are causal powers underlying that change Evolutionary economics is essentially about change in generic knowledge, and involves, as Witt points out, transition from one actualized generic idea

to another, a(g,) ~ a(g2)

Proposition 2 starts from the premise that real phenomena represent carriers of generic knowledge Real phenomena, for instance an individual, firm or market, constitute wholes that are composed of several generic carriers The whole of an entity can, on the one hand, be represented as connections between generic ideas, and on the other hand, as connections between knowledge carriers A composite of all connections represents an organization The connection of ideas represents the "imagined" organizational design, the latter the actual organization embedded in the minds of people or knowledge carriers Proposition 2 states that any real phenomenon, such as a firm, or a commodity as its productive end result, constitutes itself a physical actualization of generic knowledge The whole

of a real phenomenon can be understood from this angle as connections of resources The process of matter-energy actualizations can be stated theoretically in terms of transformations and transactions The resources

10 EVOLUTIONARY ECONOMICS: PROGRAM AND SCOPE

connections can be viewed as representing the surface structure, the generic knowledge connections the deep structure of an economic entity The distinction is essential, and we shall return to it

Reducing the assumptions to a set of "empirical axioms" enables the essential difference between an evolutionary and a physico-mechanical (non-evolutionary) paradigm to be recognized With the latter, g represents a law, and the task of theory is to formulate laws which apply universally in space and time The generic idea, which enables real phenomena to be actualized,

is thus assumed to be invariant An evolutionary theory starts from exactly the opposite premise It assumes that the generic idea, which is part of the theory, changes over time, i.e., g is a "variable law" The task of a theory is therefore to make theoretical statements about-+ gj-l -+ gj -+ gj+l rather than

to formulate a universally valid law g Laws are evolutionary products and,

as elements of an evolutionary trajectory that by its nature explains change, are only temporarily valid Laws are, as Peirce expresses it, "habits of nature" The relationship with Veblen's "habits of thought" discussed in the paper by Bush and Tool is obvious Richard Day shows that, within the framework of a behavioral theory of economics, a habit is always a process, and he calls this process "habiteration"_

The ontological position taken has far-reaching methodological consequences Singular phenomena cannot simply be classified as members

of a class which can be characterized by an unchanging law g Pillath contends that the Aristotelian position, pre-Darwinian materialism, and neoclassical economics share the idea of "immutable classes" and that this is exactly the methodological premise that is questioned in an evolutionary model "The true intellectual revolution caused by Darwin was just the demonstration that one could theorize about singular processes of change with neither adopting an essentialist (i.e ontological) interpretation

Herrmann-of general terms (species in the context Herrmann-of biology) nor adopting a nominalist (i.e onto logically relativist) attitude." (Herrmann-Pillath, p 109) This means that the difference between the individual and the general dissolves, i.e "singular phenomena (variation as a chance phenomenon) become properties of individuals and hence classes named by general terms if they spread across a population through inheritance and selection Although singular phenomena as such cannot be theorized about, the whole process of variation and selection can be " (op cit., p 110) - an insight whose profound theoretical implications are explored in Stanley Metcalfe's contribution

EVOLUTIONARY ECONOMICS: FRAMEWORK FOR ANALYSIS 11

Singularity exists, firstly, because a generic idea is first actualized, and the consequent plurality arises in the process of its diffusion in a population Against the background of this type of plurality, singularity acquires its status within a sequence of actualizations Second, singularity relates to the ontological status of a generic idea The content of an idea cannot be multiple; it is in the nature of an idea to be different An idea is singular by its very nature The difference between a traditional nomological model and

an evolutionary model is that the former is looking for a universal singularity and the latter is looking for a rationale for changing generic singularities Third, real phenomena are singular as actualizations They can occupy only one place in a space-time context; they are historically singular in that they exclude other actualizations there

Analytical Concepts of Evolutionary Theory

The following three analytical concepts correspond to the ontological concepts introduced:

of ontology, Herrmann-Pillath suggests distinguishing between subject and object with regard to the carriers of generic ideas defining the subject as carrier of knowledge and the object as carrier of information

The notion of process is understood in the following as the transfer of a generic idea from one carrier to another Since we have conceived a real phenomenon as a composite of co-ordinated parts, it can also be conceived

as a composite of structured information which is exchanged between the parts Knowledge thus appears as an interdependent process of continuously exchanged information Over time, the flow of information leads to a change

in the knowledge base, defined as information structure of the carrier The knowledge base, conceived as an emergent information structure, appertains

12 EVOLUTIONARY ECONOMICS: PROGRAM AND SCOPE

to both subject and object We can, for example, speak of the knowledge base of an individual or of a firm Knowledge in a narrower sense must, however, be understood as self-referential, as it relates not only to the mode

of structure and emergence, but also to an authority, who has the capability

to know, that is, to (de-)code, reflect on, and comprehend information Knowledge in this narrower sense, as suggested by Herrrnann-Pillath, is always subject-related and self-referential

The third analytical category refers to the notion of an formative causality It has two dimensions: structure and process "Structural causality" is concerned with the co-ordination of the parts into a whole, the organization of a phenomenon "Processual causality" is an analytical device for grasping the dynamics of a generic idea over time

evolutionary-Theoretical Concepts of Evolutionary Economics

As with the theoretical notion of an economically relevant carrier, we distinguish between the economic individual, defined in the previously mentioned sense as an autonomous subject, and a socially organized unit, say the firm or the household The answer to the question of what should represent the theoretical unit in economic analysis depends on how we want

to represent and further develop theoretically the domains of an (evolutionary) micro and macroeconomics In what follows, we choose the firm as the theoretical unit of economic analysis In a bimodal perspective, the essential point is that the socially organized unit (the object) is made up

of subjects

The theoretical category of the generic idea plays a paramount role in a theory that deals with economic evolution A generic economic idea represents a potential for economic actualizations Any economic actualization, like production or transaction, is dependent both on generic ideas and on matter-energy All of these can be singly or in combination a constraint on economic actualization Knowledge accumulated in the past can become a constraint on the realization of economic options and, combined with (neoclassical) budget constraints, will make up the "internal opportunity set" of a decision-maker However, given its evolutionary dynamics, generic knowledge above all creates a potential We do not use the concept of the potential for the physical resources necessary for the actualization; these represent the (physical) conditions of actualization

EVOLUTIONARY ECONOMICS: FRAMEWORK FOR ANALYSIS 13

Economic evolution thus depends on knowledge potentials and physical conditions, e.g., neoclassical constraints In the short term, it is the specific physical constraints which determine the productive development; in the long term, it is the self-generating power of an economic system to create knowledge potential which reduces or removes these constraints

In terms of economic knowledge, we distinguish between subjective and objective generic knowledge We conceive subject related generic ideas as epistemological rules, or, according to Loasby, "reference standards as problem-selectors appropriate as a way of organizing thought" (Loasby,

p 266) Loasby distinguishes between four generic standards, which, in different ways and to different degrees, enable decision making to be based

on economic rationality A first such "mind-routine" is historically oriented

"The largest category is that of historical standards: a record or recollection

of some past situation which is believed to be relevant." (Loasby, p 266) The reason that we use history as a focus for deduction, and thus call on it for future oriented decisions, is that "we believe that the future will be in many respects like the past so that we are able to plan for it." (op cit) The

"historical standards", like the nomothetic sciences, assume that past and future are symmetrical The previous criticism of the notion of invariant laws expressed in this connection shows the weakness of historical standards as a guide to decision-making "External standards of comparison" provide another strategic rule (Loasby, p 267) The notion of external standards is relevant for a class of path dependence models, which are discussed in Witt's paper In these models it is explicitly assumed that individual decisions are dependent on the relative frequency with which others have decided for or against a variant The historical standards and the external standards have in common that they are supported by experience, i.e., by the past

Loasby introduces two further standards which relate to the future

"Planning standards actually refer to the future as it was envisaged at the time of a past decision: outcomes are judged in relation to what had been intended " (Loasby, p 269) Planning standards are used in "budgetary control systems" or in Cyert and March's "model of aspiration-achievement gaps" Planning standards are popular for setting quantitative targets like financial benchmarks or inflation and unemployment targets A fourth standard covers "imaginative standards - visions of what might be." (Loasby

p 270) Planning standards are only as reliable about the future as imagination is, and the use of the past oriented standards I and 2 cannot

14 EVOLUTIONARY ECONOMICS: PROGRAM AND SCOPE

replace the process of imagination "Shackle's idea is due for reconsideration

by economists, especially by those who believe that Schumpeter was even partly right in believing that entrepreneurial "figments of the imagination" are the major sources of economic development." (Loasby, p 268) The epistemological view, which is linked to imaginative standards leads to a particular assessment of future possibilities in economic contexts The phenomenon of uncertainty, especially novelty related radical uncertainty, necessarily puts an economic agent in an economic situation where mistakes and losses must be expected From an evolutionary perspective, however, uncertainty is associated with imagination or the generation of new potential, and it is exactly with the creation of uncertainty (a paradox from a neoclassical viewpoint) that economic agents expect profits and an improvement in the economic situation

Richard Nelson (extending his earlier work with Sidney Winter) introduces another concept of the economic "gene": the routine Nelson relates the concept of the routine primarily to the organization of the firm and conceives it as an "organizational gene" "Standard operating procedures" are one kind of routine, which "determine how and how much a firm produces under various circumstances, given its capital stock and other constraints on its actions that are fixed in the short run." (Nelson, p 171) A second kind of routine "determines the investment behavior of the firm, the equations that govern its growth or decline " (op cit.) Both these routines can be combined with different epistemic-cognitive standards introduced by Loasby Theoretical considerations and empirical observations could lead to

a plausible and empirically robust typology of economically relevant generic ideas A third kind of routine, which is, as a kind of "meta-routine", relevant for looking for routines, are "those that involve searching for better ways of doing things While in principle within these models search behavior could be focused on anyone of the firm's prevailing routines - its technologies, or other standard operating procedures, its investment rule, or even its prevailing search procedures - in practice, in all of them search is assumed to be oriented to uncover new production techniques or to improve prevailing ones." (Nelson, p 171) The search routine improves the ability to search, which generally improves the ability to adopt new routines (of all three kinds) The accumulation of generic knowledge improves the ability to deal creatively with the environment which feeds back - an important case

of cumulative circular causation - to the process of knowledge formation

EVOLUTIONARY ECONOMICS: FRAMEWORK FOR ANALYSIS 15

An interesting question with regard to the theoretical exposition of routines is what the objective world of an economy looks like Loasby's routines are primarily subject related, while Nelson relates them to the object domain of socially organized subjects who make up the firm The object world, however, also consists of artefacts It makes sense to distinguish theoretically between routines which relate to collective behavior and object rules which relate to the actualization of artefacts or physical resources Again, routines can be divided into those which relate to social relationships and those which relate to dealing with instruments Bush and Tool suggest interpreting technologies as instrumental behavior rather than to conceiving them only as artefacts, and they compare these with social behavior, defined

by prevalent attitudes and values Technology is an artefact, but it is one that requires specific ways of behaving which are governed by institutions Generic ideas cover a broad field and it seems that the ability to achieve analytical transparency in this field will largely determine further theoretical progress in evolutionary economics as a behavioral science

The general concept of rule can be taken to represent the class of all economically relevant generic ideas, where routines may be seen to stand out

as the first among equals The following figure provides an overview

Rules

"Economic gene"

/ ""

Epistemic rules: Poiesic rules:

Routines Artefactual designs

designs Fields of inquiry: Cognitive Economics Behavioral Economics Resources Economics

Figure I Taxonomic Scheme of Economic Genes

Specifically, we understand by a routine a deductive system that generates a thinking or behavioral process in recurrent economic situations Economic rules, which relate to the actualization of artefacts, do not represent routines

16 EVOLUTIONARY ECONOMICS: PROGRAM AND SCOPE

They do not involve cognitive-deductive processes Machines have no knowledge in the subjective sense mentioned, they have no consciousness,

no feelings, and no intentions Lesourne contends that Pareto's Homo

oeconomicus has no subjective attributes, and Herrmann-Pillath criticizes the

physico-deterministic nature of that construct The neoclassical Homo

oeconomicus is, like an automaton or an artificial brain, an artefact in this sense The essential aspect of artefacts is that their generic idea represents a blueprint For example, the chromosomes of the human gene contain the blueprints of humans We can call a generic idea, which has the ability to give matter-energy an (external) form, a "poiesic rule" (from the Greek

"poiesis", meaning production) In economics, "poiesic rules" relate to the blueprints of technologies, of machines, buildings, or consumer items These entities are the product of a design which has been actualized by using matter-energy Patents are given for a blueprint that can be physically actualized, not simply for an idea This is different from copyright which protects property in ideas which are not physically (in the sense of poiesically) actualized The dynamics of resource change (as described by neoclassical theory) is paralleled by the evolution of generic knowledge in the form of economic poiesic rules Nelson suggests that the construction of

an individual house, that is the actualization of a poiesic rule, represents in itself not yet evolution Evolution involves always change in generic knowledge, such as artefactual blueprints, epistemic-cognitive standards, or behavioral routines Not the house, but the generic ideas employed for its construction are the subject of evolution

A further theoretical category refers to the causality concept Bush and Tool discuss within the research program of American (original)

"neoinstitutional economics", Veblen's causality concept of circular and cumulative causation Generally, circularity means that variable A influences variable Band B has repercussions on A The question is why and how circular causation arises In relation to generic ideas, causation means that an

"internal relation" (to use Whitehead's term) or that a connection exists between A and B We find this type of relationship in economics in Smith's and Hayek's concept of the division of knowledge as discussed in the papers

of Loasby and Langlois and Sabooglu In its actual occurrence, we find internal connections in the division of labor whereby the factor "labor" refers

to the actualization of knowledge in a work process The division of labor represents the "surface structure" of the divided activities; the division of knowledge represents the "deep structure", the logic of the knowledge

EVOLUTIONARY ECONOMICS: FRAMEWORK FOR ANALYSIS 17

connections, of the complementarities, and the division of the stock of knowledge between the different firms, branches, and industries

The notion of cumulative causation relates to the evolution of the divided knowledge The creation of knowledge occurs spontaneously It is not only order that develops spontaneously, as Langlois and Sabooglu, following Hayek's lead, demonstrate; so too does the creative act of generating new ideas, as Witt and Loasby argue The generation process defined in this way represents a spontaneous "uncaused cause" In a subsequent phase a generic idea is macroscopically adopted in a population, i.e., it diffuses in a particular spreading pattern In this context, Metcalfe highlights the significance of population thinking and Witt probes into economic diffusion models Circularity plays a dual role in cumulative causation On the one hand, there is circularity, as Day suggests, between individual adaptation and the selective environment On the other hand, there is also circularity, which develops out of the dynamics of an established regime This circularity, as Metcalfe and Witt show, spreads across evolutionary regimes, as it is assumed that an old regime causally supports the emergence of a new regime

Microeconomics and Macroeconomics: Resource Aggregates and

Beyond

Many sciences are classified on the basis of criteria that refer to the scale of the phenomena studied Modern physics ranges from the microscopic domains of particle and quantum physics to the macroscopic domains of astronomy and cosmology The research domain of modern economics is conventionally subdivided into the domains of microeconomics and macro-economics There are practical reasons for this distinction, given the division

of labor required by a highly developed science Compartmentalization is often simply the result of progressive differentiation However, the distinc-tion between the micro and macro domains may also be inspired by the notion that reality is typically made up of a whole composed of many parts and that a theoretical understanding of the essential features of reality can be obtained only by grasping the nature of both the whole and its parts

The market system is the subject matter of modern economics Microeconomics and macroeconomics are distinct disciplines of a general market theory Microeconomics, such as neo-Walrasian general equilibrium

18 EVOLUTIONARY ECONOMICS: PROGRAM AND SCOPE

theory or post-Marshallian supply and demand schedules, deal with the issue

of market co-ordination where there is a large number of autonomous agents The analytical scope of general equilibrium theory is - though traditionally considered to belong to the branch of microeconomics - typically macroscopic since it deals with the co-ordination of all market activities involving all the agents and all the commodities and production factors of an economic system The theory refers to the macroscopic features of the markets, in its own terms, as "general" and does not consider them as a

"whole" The distinction is between the general (general equilibrium theory) and its segments (partial equilibrium theory), not between the whole (macro) and its parts (micro)

Conventional macroeconomics bundles individual decisions into various aggregates, such as investment, consumption, and saving, and makes propositions about their behaviors and relationships The behavior of the macro aggregates is seen as dependent on invariant behavioral propensities, like the propensities to invest, consume, and save The 'whole' of an econo-

my is thought of as a structure of resources that relates to a structure of variant behavioral propensities There is no behavioral model that would explain endogenously the structure and the dynamics of the resource re-lationships It is the resources themselves that "behave", for instance, the market price determines the quantities of resources demanded and supplied and vice versa, the marginal propensity to invest depends on the interest rate which, in tum, depends on the marginal propensity to save which is the inverse of the marginal propensity to consume, et cetera A change in resources is brought about by an exogenous change in one or several of the resource magnitudes and not by an endogenously conceived change in individual or collective behavior Conventionally, modem micro and macroeconomics operate at the surface level of resource motions leaving the complexity of the deep structure in limbo, notably that of institutions and technologies The generic structure that underlies the resource relationships

in-is not explained and in-is seen as belonging to some realm of "nature" that influences the parameters of the economic resources in a "natural" way There is, for example, a "natural rate" of (un)employment due to a dominant technological structure or, less frequently (though Keynes has emphasized it), due to a given institutional setting of an economy

Evolutionary micro and macroeconomics look at the generic structure of

an economy The analysis of structured resource aggregates is part of the theoretical program; this surface structure is, however, seen as intrinsically

EVOLUTIONARY ECONOMICS: FRAMEWORK FOR ANALYSIS 19

interlinked with a deep generic structure Methodologically, the analysis of the surface aggregates relies more on a descriptive account and the analysis

of the deep structure more on an explanatory account The crucial issue is how to distinguish between the micro and the macro domains in economics

in a way that allows the essential features of the generic structure of an economic system to be highlighted Moreover, how do the static and dynamic characteristics of the generic structure interrelate with the surface structure of the resource relationships? Here we can argue that the familiar concepts of the representative agent, the homogeneous linear production function, and the unstructured aggregates cannot serve as a point of departure, since our primary focus is on the analysis of structure and process

Micro and Macroeconomics: the One and the Many

The ontological concepts introduced help us to rethink the notions of micro and macro In terms of the criteria of scale, we can distinguish between the

"one" and the "many" The distinction seems to be straightforward, for instance, "one" individual could be considered as belonging to the microscopic realm The question is, however, is it an actual individual or the idea of an individual that makes for singularity? As suggested, the existence

of an individual entity implies a physical actualization (a) of a generic idea (g), a = a(g) A generic idea gj allows multiple actualizations al(gj), , an(gj) If all individuals were "representative", g could be dropped in the same way as a constant can be dropped in mathematics Homo oeconomicus, for instance, operates on the basis of the invariant-homogenous generic idea

of perfect rationality The right hand side of the relationship a = a(g) would

be of no interest, since "a" would not represent a dependent variable, and the set of all individuals could be written as aI, an (without introducing g, assuming al = = an) The concept of "many" would relate to actualizations only By contrast, an evolutionary approach typically also assumes a variety

of generic ideas, gjI, , gjn' Introducing "Population Thinking", Stanley Metcalfe points to the essential ontological aspect that "variety is not an interfering complication that hides the underlying reality; it is the underlying reality and it is the prerequisite for change" (Metcalfe, p 150)

Figure 2 provides an overall view of the essential theoretical terms Singularity and plurality are plotted vertically, generic ideas and matter-energy horizontally In the upper left hand box we have singular generic

20 EVOLUTIONARY ECONOMICS: PROGRAM AND SCOPE

ideas gji, which provide a blueprint for the ontogenesis of a single actual entity, for instance, a knowledge base for the activities of a firm The second type of singularity refers to the generic pool gj, of which the generic idea mentioned is a member In biology this represents a species, and the term can be applied analogously in economic analysis An actual entity represents

a single actualization ai of gj, ai = ai (gji) The totality of actual entities, or carriers of generic ideas, represents a population a* = a* (gj), where a* =

aJ, , an (both in upper right hand box) We have a plurality of actualizations but a singularity with regard to the generic idea that is being actualized Economic applications include, following the line of Nelson's paper, routines and technological trajectories

~ Categories Generic Idea(s) Matter-Energy

Figure 2 Singularity and Plurality in Evolutionary Economics

An evolutionary population is defined as a set of members that belong to a common generic class Not only are there many species, gJ, , gk (lower left hand box) and different populations, a*J, , a*k (lower right hand box), each

of them also has many "children" that themselves have different traits, gjl, , gjn, where j stands for the "representative" generic idea that defines the

"gene pool" of population gj, and 1, n for its actual members The population characteristics "are constructed from data on all members of a population, they are descriptive aggregates, they are not representative of any individual they are representative of that entire population." (Metcalfe,

EVOLUTIONARY ECONOMICS: FRAMEWORK FOR ANALYSIS 21

p 150) In a selection model population can be defined in terms of the characteristics of a selective environment to which some agents are commonly exposed

The microscopic (members) and macroscopic (population) aspects, combined with the concept of heterogeneity or variety, constitute the essential core of an evolutionary explanation of structure and process In a nutshell, novelty generation, such as mutation, operates at a microscopic level within the domain of an individual, while the variety increased in this way is subject to reduction on the basis of selection forces that operate at the macroscopic level of a population

In general, the sequential logic of the overall process can be stated in three phases

stabilization based on high frequency adoption

The order of the three phases of the process regime is irreversible Origination comes before selective adoption, and that comes before stabilized adoption Since actualizations occur in time, time has an "arrow"

We call the total sequence ofthe three phases an evolutionary regime, Rj

Evolution represents a genealogy of regimes ~ Rj _1 ~ Rj ~ Rj +1 ~

The arrows indicate regime transitions Their rationale and significance for grasping the genealogical processes are discussed in the papers by Witt and Nelson - we shall return to these

A Fractal Approach

The question is, what are the criteria that can be used to determine the different scale dimensions (e.g., micro and macro) of the generic elements and their actualizations? We could simply use a quantitative criterion and assign the singularity of real phenomena to the micro area and their plurality

to the macro area This is a valid procedure but it only applies to the relative frequency of the actualizations We have assumed that every real entity, for example, a firm, is a complex of internal connections, and this implies a

22 EVOLUTIONARY ECONOMICS: PROGRAM AND SCOPE

plurality of generic elements What matters for analyzing the plurality of generic elements is determining the type of "deep structure" Plurality acquires a qualitative character In qualitative terms, plurality stands for a whole *{a,b, n,}, where *{ } denotes an organization which defines the connections between a,b, n

ji = Fractal dimension j of fractal identity /

ji= Dimension 1:

internal relations of firm, complementarities

between knowledge elements, blueprints and routines,

represents knowledge- and capability base of firm

/2 = Dimension 2:

internal relations of industry, organization of industry,

complementarities in industrial district

Figure 3 Micro and Macro(meso)economics: A Fractal Approach

In Figure 3, the systemic whole of the internal connections is represented by the circular linkages between the generic elements a, b, , e We can look at this composite as an nth scale dimension (e.g micro, meso, macro) within a system The questions are, where is this composite situated in a system with

n dimensions? and what are the criteria that can be used to determine its

EVOLUTIONARY ECONOMICS: FRAMEWORK FOR ANALYSIS 23

place in the systemic whole? Referring to the economic system, we assume that the inner circle in Figure 3 represents the micro unit of the firm The next dimension is given by the frequency of its actualizations The sum of the firms with the generic characteristics, a, form, for example, a branch or

an industry, A = Iaj A next higher dimension relates to the connections between the different branches or industries *(A, B, , E) In this perspective, we can conceive a single branch or industry as an element of mesoeconomics, as discussed in Lesourne's paper It is essential to recognize that the individual branches or industries of this generic unit are structured homologously with the deeper level The sign *( ) thus stands not only for the firm (where the inputs are assembled) but also for an industrial sector defined by homologous generic connections We can therefore propound that, with regard to the "deep" generic connections, there is an identity between the level of the firm and the level of the industrial sector The mathematical paradigm of fractal theory provides a useful analytical tool that does allow us to represent the connections between identical phenomena which have different dimensions The organization, or the whole of the generic connections, represents the fractal argument, i.e., the type of "self-identity" that is repeated in n fractal dimensions

The self-identity of two levels is shown in Figure 3 by the inner and outer circles which are produced by linking the individual elements and their individual sets The criterion of fractal dimension relates here to the frequency of actualizations The singular element a) is part of the deeper fractal dimension (firm), the plurality of all actualizations a) au (industry)

is a singular element of the higher fractal dimension (industrial district, industrial cluster) This is defined as a whole by the self-identical structure for all firms and all branches The different dimensions (I and 2) ofthe self-identical structure are determined only by the frequency of the actualizations (number of firms)

In a next step, the essential question is how the individual branches in an industrial sector or district are connected with one another at the next higher level of the structured composite How do the industrial sectors or districts connect with a whole economy? Once again we begin with the idea of a

"relational" parameter which defines the generic connections characteristic

of the division of labor and knowledge The distinctions between the dimensions now refer to the various courses of an increasingly complex generic structure and no longer to the frequency of the actualizations or the degree of aggregation The concept of dimensionality refers to the status of

24 EVOLUTIONARY ECONOMICS: PROGRAM AND SCOPE

an entity as a part or as a whole The internal firm connections a, , e, for example, represent a part of a larger structure of a division of knowledge and labor Given these qualitative features, it is not possible to determine a higher dimension only on the basis of quantitative criteria that refer to frequencies The distinction between actualization frequencies and generic characteristics indicates the role that an evolutionary approach can possibly play in the theoretical reconstruction of modem macroeconomics Leontief's input-output table in an evolutionary perspective represents the analysis of observable actualizations defined in terms of a resources matrix Developing the evolutionary framework further, it also involves making the structure of the division of knowledge explicit and showing the invisible structure of the generic interdependencies and complementarities that represent the "causal matrix" ofthe resources structure

Macro and Microeconomics: the Whole and its Parts

So far we have taken a primarily technological perspective The generic elements and interdependencies have been considered to represent physical resources designed to execute techno-economic tasks The carrying out of these tasks, however, also requires cognitive and behavioral processes The individual elements in such a process are not carriers of poiesic ideas, e.g technical blueprints, but carriers of cognitive and behavioral routines A restatement of the micro-macro dimensions that builds on a cognitive-behavioral approach refers to statements about the structure of the carriers as well as about the processes that they "carry" We allow for the complexity of both by introducing the notion of hierarchy that is associated with the dynamics of the three process phases that constitute an evolutionary regime Figure 4 depicts the overall system as a hierarchy The vertical axis plots the levels of hierarchical integration and systemic complexity, the horizontal axis plots the various system levels, L = 1, 2, 3 Level 1 constitutes a whole G" which is an element g2 of the whole of level 2, G2• The latter is, in tum,

an element of the whole of the next level Generally, the g's stand for the elements and G stands for the whole of the connected elements, whereby g and G represent the micro and macro domains Any theoretical unit thus represents an irreducible composite of micro and macro The status of micro and macro changes as we ascend the levels of the hierarchy, turning low

EVOLUTIONARY ECONOMICS: FRAMEWORK FOR ANALYSIS 25

level macro into high level micro Micro and macro consequently (also) depend on the perspective of the theory maker

Nested Hierarchy

Level of Integration

and Systemic Complexification Open Organization

Phylogenesis Closed Organization

Ontogenesis

Subject Biological Outfit

G 1 = whole orIevel 1

gl - element (onevell)

L-_ _ _ -:-: ::: -:-::~ :-::- Levels (L J)

Levell Level 2 Level 3

gl - G 1: whole of level I Is element of level I

Figure 4 Micro and Macro as levels in System Hierarchy

In Figure 4, the total economic system is defined by a nested hierarchy of three levels The first relates to the human individual and the second to the micro scale of a social unit The first and second levels can be differentiated

on the basis of the bimodal ontology introduced earlier The first level represents the subjective world and the second the objective world The third level represents the macro scale of a social unit We associate the economic subject, the firm, and the market with the three successive levels In terms of the nested hierarchy, the subject (5) is embedded in the micro social unit of the firm (E), and it, in tum, is embedded in the macro social unit of the market (M),

5cFcM,

26 EVOLUTIONARY ECONOMICS: PROGRAM AND SCOPE

where c stands for "is a nested element of' Following our exposition, each level constitutes a generic potential which permits processes to be actualized The notation c means that an element of a lower level, for instance S, constitutes the initial phase of a process that relates to the next higher level In Figure 4, g2 (Gt oflower level) represents the first phase of a process that takes place at level G2 Macroscopic processes develop in the second phase (diffusion, selection, etc.) and in the third phase (retention, stabilization, etc.) of the higher level G2 A process regime Rj is thus analogously made up of a microscopic and a macroscopic domain

More specifically, the distinction is between an "agens" (micro level) and

a context (macro level) In the initial phase, the agens generates and possesses knowledge which the other members of the context do not have The new variant is not "revealed" to the public and the process is, as Witt calls it, in a pre-revelation phase In the second phase the information about the new variant reaches the macro context which Witt calls analogously the post-revelation phase

Generic ideas represent instructions for relationships between tasks and thus enable the co-ordination of activities that make up a whole We conceive the stock of generic knowledge, that represents the ability to co-ordinate, as an organization All three generic levels are thus characterized

by a particular type of organization At the subject level, the organization relates to the generic ability of humans to think Their biologically inherited organization gives humans the capability to adopt cultural rules, like cognitive standards for decision-making and behavioral routines Humans, therefore, also have an acquired organization, a generic knowledge stock for what Loasby calls "organizing thoughts" We call the culturally acquired generic knowledge stock a subject's neural-cognitive disposition, and distinguish it from a subject's biological (pre )disposition The former is associated with Thorstein Veblen's concept of "habits of thought" which is a recurrent theme in the paper by Bush and Tool

Conventional neoclassical economics does not distinguish between the subject on the one hand, and the firm or the household as social units on the other They both represent simply elementary units that maximize expected utility under constraints In one case, it is the individual who maximizes expected utility, in the other case it is the firm The internal connections, the knowledge base, and the routines used have no place in micro theory because statements about decision-making are based on the assumption of perfect knowledge (about the decision-making algorithm and about the

EVOLUTIONARY ECONOMICS: FRAMEWORK FOR ANALYSIS 27

relevant environment) Within an evolutionary model a distinction is made between an "internal" organization, i.e., the neural-cognitive disposition of the subject, and an "external" organization, i.e., the social mechanism of the firm, which organizes collective knowledge

The micro organization of the subject and the firm have commonalities as well as differences They are similar in that, in both cases, the organization achieves goals within a "closed" context Subjective intentions reside in the brain, objective ones reside within the social boundaries of the firm We can generally conceive micro units in their self-reference to their boundaries as

"closed organizations"

The idea of a multiplicity of intentions is more evident in relation to a social context than it is in relation to a subject Herrmann-Pillath, however, refers in his paper to recent models of "modular man" who has to decide not only between different preferences, but also between different intentions Lesourne's notion of genuine autonomy of the subject can also be interpreted against this background The social organization differs from the cognitive-subjective in that it cannot call upon the biological substratum of neuro-physiological structures Instead, it depends on social communication for agreement about the intentions and for co-ordination of the activities The social unit of the firm is constituted as a carrier of subjective-autonomous intentions or interests The task of the organization of the firm

is to bring its socially represented intentions and interests into agreement with those of the individual The principal-agent model and the new institutional economics have introduced the concepts of asymmetrical information and the hierarchy as an incentive and control mechanism Foss discusses the usefulness, compatibility, and inherent limitations of these models within the framework of an evolutionary theory of the firm

The organization of the third level of the economic system's hierarchy has no comparable mechanism which would co-ordinate the interests and activities of the individuals on the basis of a single overall objective function The organization is an "open" one The prime exemplar of an open organization is the market There may be market-like transactions within the firm but they are "bounded" in terms of their co-ordination and (not un-) intended consequences The market within the firm thus represents - unlike the market "outside" - an organisationally bounded, i.e closed organisation Langlois and Sabooglu specifically discuss in their contribution Hayek's theory of the openly organized market as a "spontaneous order"

28 EVOLUTIONARY ECONOMICS: PROGRAM AND SCOPE

Ontogenesis and Phylogenesis

Evolutionary change means "genesis" which can relate to an organism or a population In the former case, we speak of ontogenesis, in the latter of phylogenesis Whether, in a particular case, we conceive change as ontogenesis or phylogenesis depends on the level of the hierarchy we want

to make statements about In the lower domain, which connects the individual and the firm (in Figure 4 the first and second levels), the individual relates to a process of ontogenesis and the firm (as a population)

to a process of phylogenesis We can take a further step downwards and also consider the brain as a knowledge generating agens and a context of selective adoption Models are currently being developed in neurophysiology which link the chaos of spontaneous generation of knowledge to processes of selection In a similar vein Loasby argues that, in the cognitive domain, generation of variety and reduction of variety are brought about by the same process

The notion of phylogenesis defines the boundaries of the subject-matter

of a discipline Foss discusses the role that an ontogenetic and phylogenetic analysis can play in the context of an evolutionary theory of the firm He argues that neoclassical and evolutionary economics are in agreement that the firm is the explanans and not the explanandum In economics the firm is

an ontogenetic unit which, by definition, is part of a larger phylogenesis The question of whether the individual human being or the firm is an adequate ontogenetic unit in economic analysis can, depending on the theoretical viewpoint, be answered in different ways Nelson observes that in many of the recent evolutionary models "firms are the key actors, not individual human beings Individuals are viewed as interchangeable, and their actions determined by the firms they are in" (Nelson, p 170) Regardless of whether

we consider the human agent or the firm as the micro unit, evolutionary economics is concerned with the phylogenesis of markets, industries, or the economic system as a whole The explanandum is thus the third level of the system's hierarchy and, depending on the theoretical predilection, the first and/or the second level can be brought in as an explanans Yet, to the extent that evolutionary economics opens the black box of the individual or of the firm, the micro unit has also a future as an explanandum Evolutionary economics tackles complexity by entering the system's hierarchy on various levels, and what stands eventually for the explanandum and the explanans depends on the perspective of the course of inquiry taken

EVOLUTIONARY ECONOMICS: FRAMEWORK FOR ANALYSIS 29

Microeconomics: Generic Theory of the Firm

The notion of ontogenesis can be specified, against the background of bimodal ontology, on the basis of the distinction between the neural-cognitive and the socially organized micro unit

Ideas are generated on the basis of a neural-cognitive disposition Loasby discusses the significance of imagination and Witt highlights aspects of human creativity There is a "guided variation" and a "guided selection" at the "internal" level of the subject There is, thus, no Darwinian "blind variation" or "objective" selection mechanism A concept which mirrors those of guided variation and of guided selection is the "trial and error procedure" discussed by Day Trial represents problem identification in spontaneous search (guided variation) and error represents the recognition that some of the trials are unsuccessful (guided selection)

All knowledge is, as Bush and Tool argue on the basis of American pragmatism, "context bound" The subject who generates knowledge decides about the transmission of that knowledge into a social context, i.e., whether, and in what way, the knowledge will become a "seed" for macroscopic adoption in a social context, i.e a firm or a market The human will is an essential factor in the process of going from the pre-revelation phase to the post-revelation phase and its role is, as Lesourne points out, a decisive criterion for the distinction between the subject world and the object world The bridging concept, which links the internal and external worlds, is behavior Thoughts must be communicated socially- a point that is essential for a deeper theoretical understanding of the "mechanisms" of diffusion processes The social context does not involve any (subjective) cognition or thought processes; it represents the domain of behavior The task of a behavioral theory of the firm is to show how the firm's organization determines behavior that relates to economic evolution Novelty generation (phase 1) is associated with an organization which enables collective knowledge to be generated Nelson focuses in his contribution on the role of research and development inside and outside the firm Foss discusses the role that "organizational learning" can play in the generation of knowledge and compares the explanatory power of recent organizational models with that of contractual and transaction models

The aspects of adaptation and learning (phase 2) that relate to an evolutionary theory of the firm are discussed along various lines in Day's contribution The complex relationships between the (clearly

30 EVOLUTIONARY ECONOMICS: PROGRAM AND SCOPE

distinguishable) concepts of survival, competence, and satisfaction are shown Survival fosters the ability to adapt, defined as the "interactive adjustment of behavior to environment" (Day, p 278) The adaptation process is closely linked with the ability to learn The success of an analysis

of adaptation and learning processes depends largely on a theoretical understanding of the "agent-environment system" Adaptation and learning are prime applications of the principle of circular and cumulative causation

"One must take account of the internal dynamics of the agent in a constant environment and, to close the system, how the environment changes as a result of action taken by the agents Given this circular dynamics, adaptation does not involve all behavior because an organism may also be impelled to action by its internal conditions, that is to say, behavior can change even in the absence of any external stimulus" (Day, p 278)

Adaptation does not yet mean survival which involves behavior that is

"well-adapted to environmental conditions" Survival is a desideratum and,

if adaptation is defined in relation to survival, we are dealing with a normative concept Bush and Tool use a normative concept of adaptation when discussing instrumental behavior in economic institutions Survival is not the only desideratum; Day distinguishes between behaviors that relate to survival and economizing that is an "adjustment of behavior to improve satisfaction"(Day, p 278) Economizing can endanger survival- a paradox

in neoclassical economics - if it is itself not integrated as a side condition into the "economizing function" which makes satisfaction possible Witt argues that humans as a species do not necessarily consider economizing as synonymous with survival related adapting since the former might have detrimental consequences for the environment

The phase of accommodating and stabilizing (phase 3) self-generated or imported knowledge largely takes place in the context of the firm Routines emerge in a process of routinization, that is, in the repeated use of an economic rule The capability of a firm to generate and adopt knowledge depends on the existing knowledge stock of the firm There is circular formative causation where additional information restructures the knowledge base of a firm which improves its performance with regard to production and search of additional information that again restructures its knowledge base and so on

Evolution starts - ontogenesis becomes phylogenesis - when a new variant crosses the boundaries of a firm and becomes a "seed" for macroscopic adoption in a branch or industry

EVOLUTIONARY ECONOMICS: FRAMEWORK FOR ANALYSIS 31

Variety, Population, and Darwinian Thinking

Variety is a major theoretical category of an evolutionary economics Variety at the meso level points to the differences between firms in a single branch or industry The grand questions of an evolutionary theory of the firm relate, following Foss, to the explanation of the variety between firms:

• Why do we observe such a wide dispersion of returns among firms, even within the same industry?

• Why does this dispersion seem to be so persistent?

• Why do firms exhibit different rates of growth?

• Why do firms, even in the same industry, have different boundaries, strategies, organizational structures, etc.?

An evolutionary model is anchored in various ways in the concept of variety The self-generation of variety represents the "evolutionary engine" that propels the system's dynamic The Darwinian approach is sometimes reduced to the selection mechanism, but selection is only possible when there is variety to be selected from

Metcalfe outlines in his paper the essentials of a general "Population Approach" and suggests to distinguish between a two-stage and three-stage model The logic of an evolutionary process "has often been elaborated as a two stage process involving prior variation and subsequent selection While this schema takes us a long way in evolutionary dynamics it is so patently only a part of any evolutionary theory The crucial step is to realise that any selection process destroys the variety on the existence of which it depends Developmental processes provide the answer to this puzzle so that evolution becomes a three-stage scheme involving the generation and destruction of variety of behaviour" (Metcalfe, p 152)

The two-stage model considers the post-revelation phase, a reduction that allows the theoretical aspects of selection to be brought into clear focus In Day's paper the unity of the concepts of fitness, adaptation, and selective environment is brought out within the "agent-environment system" While Day stresses the micro side of the circular process and provides a detailed account of the behavioral features, such as trial and error, adaptation, and learning, Metcalfe highlights the macroscopic aspects providing a formalisation of evolutionary macro-processes on the basis of the replicator equation The model brings into focus the dynamics of relative frequencies,

32 EVOLUTIONARY ECONOMICS: PROGRAM AND SCOPE

competing agents and populations, selective environments, differential fitness, differential profitability and differential growth - essential elements

of an evolutionary theory of economic growth

Phase 1: Generation of novelty: Re-generation of

variety (Metcalfe) Pre-revelation Phase (Witt)

Phase 2: - Adoption of novelty: Reduction of variety:

Post-revelation Phase (Witt)

- Internal selection (Loasby)

- Learning, environmental

adaptation and economizing

(Day)

Selection, Path dependency

Phase 3: - Cognitive-behavioral Reduced variety:

Figure 5

adaptation of novelty (Foss) Stable structure

- Routine, repetitiously

em-ployed economic gene (Nelson)

The three-stage model builds on the replicator dynamic and connects it with novelty and pre-revelation aspects The model starts thus from the micro domain In biology, the Mendelian inheritance theory has led to the development of the synthetic (neo-)Darwinian theory In economics, where the gene carriers are cognitive instances, explanatory models must be developed in recognition of human creativity and imagination We recall here Loasby's Shackleian themes, and Nelson's emphasis on the role of human inventiveness in research and development The generation process

of the first phase nevertheless also has a macroscopic aspect For one thing, innovative actors are embedded in an environment and, for another, the macroscopic variants adopted in the past influence the generation of new variants Bush and Tool discuss the first aspect on the basis of a model