An Evolutionary Theory of Economic Change (Belknap Press)
Richard R. Nelson, Sidney G. Winter
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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.
institutional fact o f life that in the Western market economies -the economies that growth theory purports to model -much technical advance results from profit-ori ented invest ment on the part of business firms. The profits from successful inno vation are dis equili brium phenomena, at least by the standard of equilibrium proposed in the models in question . They stem largely from the lead over competitors that innovation affords . And it is also a fact of life that the success of innovation
economic world is far too complicated for a firm to understand perfectly; therefore the attempts of firms to do well must be under stood as being conditioned by their subj ective models or interpreta tions of economic reality . These interpretations tend to be associated with strategies that firms consciously devise to guide their actions . Such strategies differ from firm to firm, in p art because of different interpretations of economic opportunities and constraints and in part because
change in technology and economic organization that has transformed the human situa tion in the course of the past few centuries. Among policy i ssues regarding the world economy today, none present a more critical mix of promise and danger than those that reflect the wide disparities in present levels of economic d evelopment and the strains that afflict societies struggling to catch up. In the advanced economies, mean while, successful mod ernization has brought forth new concerns about the
specialized individual routines involved , and t o recall the meaning o f a set of messages sufficiently rich to dif ferentiate all the req ui re d performances from one another. They must do so in spite of the long time intervals elapsing between the per formances of at least some specialized routines and the receipts of some p articular messages. (That there are such intervals is of course 6. We have already noted in Chapter 3 the limitations of the "chief engineer" and "book of blueprints"
the innovation - changing the routine- in general will not be closely predictable until a reasonable amount of actual operating experience with it has been accumulated. There is, how ever, more to be said about the relations of routine behavior and in novation than to observe that these concepts are commonly (and appropriately) regarded as opposed ideas . Our final task in this chapter is to explore some of the subtler connections between routin ization and innovation, and ultimately to