An Evolutionary Theory of Economic Change (Belknap Press)

An Evolutionary Theory of Economic Change (Belknap Press)

Richard R. Nelson, Sidney G. Winter

Language: English

Pages: 452

ISBN: 0674272285

Format: PDF / Kindle (mobi) / ePub

This book contains the most sustained and serious attack on mainstream, neoclassical economics in more than forty years. Nelson and Winter focus their critique on the basic question of how firms and industries change overtime. They marshal significant objections to the fundamental neoclassical assumptions of profit maximization and market equilibrium, which they find ineffective in the analysis of technological innovation and the dynamics of competition among firms.

To replace these assumptions, they borrow from biology the concept of natural selection to construct a precise and detailed evolutionary theory of business behavior. They grant that films are motivated by profit and engage in search for ways of improving profits, but they do not consider them to be profit maximizing. Likewise, they emphasize the tendency for the more profitable firms to drive the less profitable ones out of business, but they do not focus their analysis on hypothetical states of industry equilibrium.

The results of their new paradigm and analytical framework are impressive. Not only have they been able to develop more coherent and powerful models of competitive firm dynamics under conditions of growth and technological change, but their approach is compatible with findings in psychology and other social sciences. Finally, their work has important implications for welfare economics and for government policy toward industry.

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itself did not. This, of course, is consistent with the interpretation, noted above, that technological knowledge is articulated knowledge. It is the sort of thing that can be recorded, stored at negligible cost, and referred to when needed . The small group of "learning by doing" models depart from this tnidi tion, but they remain an unconnected and unexplored annex to orthodox doctrine about production capa­ bilities. To the extent that different firms do different R&D and to the ex. tent that

neglecte d . . Presumably there i s n o room for dispute concerning the existence of these phenomena, and little room for disputing their importance . Yet in orthodox economic modeling, they are either absent entirely, or, in discussions that admit technological change, treated in an awkward and inhibited fashion. We argued in Chapter 1 that the source of the inhibition is largely to be found in the orthodox com­ mitments to optimization and equilibrium, but perhaps it derives also from an

costly, time-consuming process of copying an existing pattern of productive activity. Though in our modeling we abstract from the costs and make the simplest assumption about the time required, this is still a very different concept from the orthodox one, which is concerned entirely with the structure of ex a n te possibilities. To put i t another way, our assumption relates t o what can b e accomplished starting from the status quo of a functioning routine, whereas the long-run orthodox theory

in a single period, the starting value kt for such a transition would itself h ave to exceed R. However, since the firm must have some technique (e, a) and kt > R :> K (e, a), = 5. It is not the case however, that a particular routine is necessarily unprofitable when total industry capacity is extremely large. For price might be low enough so that a large amount of capacity is entirely shut down, yet high enough so that a small amount of capacity operated with an appropriate technique and rule

assumptions of the model would necessarily take over the center of the stage. The discussion above has been quite general. We have demon­ strated that it is plausible to think of "along the rule," "search," and "selection" as involving different aspects of firm behavior and that under plausible. models the effects of each of these mechanisms would be standard. Although specific perverse cases can be con­ structed, it seems unlikely that it would be possible to produce a plausible model in which

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