DECON Conference 2022

Developing evolutionary economics ideas by celebrating the fortieth anniversary of “An Evolutionary Theory of Economic Change”

The main theme of this year’s conference on Decision Economics (DECON 2022) is inspired by and dedicated to the seminal work published by Richard R. Nelson and Sidney G. Winter in 1982, An Evolutionary Theory of Economic Change, which continues to be of essential reference to this day in research on the basic question of how firms, industries and, more generally, organisations, change over time and how structural change emerges by adaptive evolutionary processes. From institutions and organisations to production activities, from market dynamics up to social structures, everything is involved in processes of change and emergence, intertwined interaction, instability, systemic risk, intricate networks, uncertainty, designed destabilisation, continuous research, adaptation, improvements, replacement activities, perpetual transformation, recontextualisation, reinvention, structural rearrangements—and so are our daily lives. But why and how do such changes actually occur? In a world of ineluctable uncertainty, what can economic theory and evidence tell us about these changes and where they might lead? And how are problems and interpretations framed to induce hypotheses to be tested, especially in the most involved fields such as innovation and entrepreneurship as well as individual and organisational decision-making?

Faced with such an array of questions and related challenges, DECON 2022 recognises and emphasises that the evolutionary theory advocated by Nelson and Winter is currently the most influential and rapidly developing branch in the methodological and theoretical paradigm of evolutionary economics. Still relevant today, it raises significant objections to the heroic standard economics assumptions—nothing but mechanistic and utilitarian assumptions underlying the framework of utility theory—concerned with the hyper-rational choice, subjective utility maximisation, also known as maximising behaviour, as well as the market equilibrium sine-qua-non requirements (Arrow, 1990 [1987]), which have all proved crippling, dogmatic, and ineffective especially in microeconomics and its aggregate developments and implications, over and above the analysis of innovation, but also of economic progress and development, the complexity of decision contexts, and the dynamics of competition between and within firms—not to mention hidden assumptions concerning the social structures of societies. Perhaps most notably and systematically, standard utility theory misrepresents or simply overlooks institutional, evolutionary, behavioural, and cognitive outcomes deriving from economic interactions and thus explain very little, even being capable of adapting to any outcome and intervening awkwardly and unevenly in such matters; at the same time, a genuinely evolutionary approach must identify the actual dispositions that help bring out behaviours, rather than the enunciation of ultimately empty, even heroic, conceptual generalisations. The key issue is that the focus on Darwinian, evolutionary foundations requires that theories and their assumptions in the cognitive and social sciences be explicable with our knowledge and understanding of human evolution (Hodgson, 1999, 2004). This is why Nelson and Winter borrow from life science and modern biological evolution the concept of natural selection to develop an evolutionary theory of business behaviour and decisions relevant to the processes driving economic progress. Specifically and in line with Veblen (1899, 1919), Nelson and Winter conceive economic evolution as a continuous, imperfect, and non-teleological process of variation, replication, and competitive selection—hence Darwinian and, even earlier, Lamarckian—affecting a diverse population of different organisations, institutions, and networks, the same way as habits, customs, routines, cultures, and ideas. Within this conception, evolution is not necessarily progressive, it is certainly neither predictable nor predetermined, while is not vulnerable to criticism based on epigenetic or unfolding views of evolution itself. As it is well-understood since Nelson and Winter (1982), the evolutionary modelling thus developed has become commonplace enough to merit widespread acceptance, and the evolutionary ideas against this background have been applied to areas ranging from microeconomics to game theory, and from the analysis of complex networks to business economics and market dynamics.

This new mindset has contributed to the strengthening of institutional economics as well, particularly in making more explicit what organisations and institutions are, how they arise, how they can be studied empirically, and what forces impact and involve their evolving interactions and relationships. Among others, it illustrates why and how organisations and institutions are affected by the past, why they can change, why they differ so much from society to society and from one culture to the next, and why it is challenging to develop policies aimed to change them. Winter (2014) definitely argued that evolutionary economics has always been about understanding the antecedents, causes, and consequences of technological change along with the implications of technology. Studying technological change, indeed, is essential not only for the reconstruction of earlier socio-economic dynamics but also for understanding how present-day societies and the underlying economic structures confront the process of innovation (Schumpeter, 1934 [1912, 1926, 1931, 1935]; Nelson, 1995; Foster, 1997; Nelson & Winter, 2002; Witt, 2003).

Equally important, since evolutionary economics originates from a predominantly naturalistic ‘decision-making’ perspective, which is—for the most part—underpinned by a positive, rather than a normative approach to the problem of decision-making, it contrasts markedly not only with the neoclassical approach to economics grounded in the basic utility framework but also with constructive criticisms and challenges raised by Herbert A. Simon (1984) specifically regarding what he claimed were the alleged continuous improvements in the ability to adapt to the external environment, without any guarantee of reaching any maximum of fitness of the individuals, either separately or as an aggregate, whether local or global: "If we are considering this kind of system, whose environment has a multitude of local maxima, we cannot understand the system unless we know something of the method and history of its evolution. Nor is there any reasonable sense in which such a system can be regarded as ‘fittest’. This is not just an in-principle objection to confounding hill climbing with optimization. In a myopic hill-climbing system, it may be difficult or impossible to move from a local maximum to another that is in view across a deep valley." (Simon, 1996 [1969], p. 47 ; see also Simon, 1978). It contrasts, too, with Hodgson’s (1999) reconstruction when he recalled that Nelson and Winter do not regard their theory to be at odds with the standard economic paradigm—from which they even borrow some analytical tools such as the aggregate production function along with producer equilibrium conditions and the related macroeconomic models that incorporate those underlying production functions—but as an analysis that assimilates standard economics as a special case (see also Roncaglia, 2019, especially due to the lack of a theory of value within evolutionary and institutional economics).

All things considered, Nelson and Winter (1982) showed the hypo articulation of standard microeconomics, which barely and roughly describes what (and how) firms do within the context of a production economy and its mathematical representation as a vector set of possibilities, working primarily on technological innovation, one of the key issues in the economic analysis and debate of the time: “The production possibility set is a description of the state of the firm’s knowledge about the possibilities of transforming commodities.” (Arrow and Hahn, 1971, p. 53). However, this parsimonious description actually hides a multitude of unspecified heuristics, starting with the nature of that knowledge. Above all else, Nelson and Winter draw attention both to the widely controversial assumptions about the sources, conversion and application of knowledge, and the inadequately investigated blurred edges of the production set, together with the producer, the industrial and technical knowledge. In this vein, how to effectively specify that multitude of heuristics and integrate technical progress into economic modelling? How to build upon established laws to provide grounded heuristics that can help yield an ultimate, wholesome scientific paradigm for evolutionary economics?

The above and some broader questions and issues about the intellectual forces operating in the development of evolutionary economics will be examined in the course of the conference together with the founding topics of DECON. The challenge is undoubtedly both theoretical and paradigmatic, but also rigorously methodological and empirically grounded as it applies to all aspects of business behaviour and concerns the economic behaviour of individuals and all organisations, too, while providing cognitive and practical applications.

 

References

- Arrow, K. J., and Hahn, F. H. (1971). General Competitive Analysis. San Francisco, CA: Holden-Day.

- Arrow, K. J. (1990) [1987]. Economic Theory and the Hypothesis of Rationality. In Eatwell J., Milgate M., & Newman P. (Eds.), Utility and Probability, pp. 25-37. Palgrave Macmillan, London.

- Boulding, K. E. (1981). Evolutionary Economics. Beverly Hills, CA: Sage Publications.

- Foster, J. (1997). The Analytical Foundations of Evolutionary Economics: From Biological Analogy to Economic Self-Organization. Structural Change and Economic Dynamics, 8(4):427-451.

- Hodgson, G. M. (1999). Evolution and Institutions: On Evolutionary Economics and the Evolution of Economics. Cheltenham, UK: Edward Elgar.

- Hodgson, G. M. (2004). The Evolution of Institutional Economics. New York: Routledge.

- Nelson, R. R. (1995). Recent Evolutionary Theorizing About Economic Change. Journal of Economic Literature, 33(1): 48-90.

- Nelson, R. R., and Winter, S. G. (1982). An Evolutionary Theory of Economic Change. Cambridge, MA: Harvard University Press.

- Nelson, R. R., & Winter, S. G. (2002). Evolutionary Theorizing in Economics. Journal of Economic Perspectives, 16(2): 23-46.

- Roncaglia, A. (2019). The Age of Fragmentation. Cambridge, UK: Cambridge University Press.

- Schumpeter, J. A. (1934) [1912, 1926, 1931, 1935]. The theory of economic development. Cambridge, MA: Harvard University Press. Originally published as “Theorie der Wirtschaftlichen Entwicklung”, Munich and Leipzig: Duncker & Humblot, 1912; II ed. 1926; III ed. 1931; IV ed. 1935.

- Simon, H. A. (1978). Rationality as Process and as Product of Thought. The American Economic Review, 68(2): 1-16.

- Simon, H. A. (1996)[1969]. The Sciences of the Artificial, (3rd ed.). Cambridge, MA: MIT Press.

- Veblen, T. B. (1898). Why is Economics Not an Evolutionary Science? Quarterly Journal of Economics, 12(3): 373-397.

- Veblen, T. B. (1899). The Theory of the Leisure Class: An Economic Study in the Evolution of Institutions. New York: Macmillan.

- Veblen, T. B. (1919). The Place of Science in Modern Civilization and other Essays. New York: Huebsch.

- Winter, S. G. (2014). The Future of Evolutionary Economics: Can We Break Out of the Beachhead? Journal of Institutional Economics, 10(4): 613-644.

- Witt, U. (2003). The Evolving Economy: Essays on the Evolutionary Approach to Economics. Cheltenham, UK: Edward Elgar.