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Evolutionary economics program and scope

Evolutionary Economics:
Program and Scope


RECENT ECONOMIC THOUGHT SERIES
Editors:
William Darity, Jr.
University of North Carolina
Chapel Hill, North Carolina, USA

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

Other books in the series:

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 SUSTAINABILITY
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: ALTERNATIVE
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

edited by

Kurt Dopfer
University of St. Gallen

"
~.



SPRINGER SCIENCE+BUSINESS MEDIA, LLC


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)
DOI 10.1007/978-94-010-0648-4
1. Evolutionaryeconomics. 2. Neoclassical school of economics. I. Dopfer, Kurt. II.
Series.
HB97.3 .E957 2001
330.1--dc21
2001029843

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, photocopying, recording, or otherwise, without the prior written permission of the
publisher, Springer Science+Business Media, LLC

Printed on acid-free paper.


Contents

vii

Contributing Authors

INTRODUCTION
1 Evolutionary Economics - Framework for Analysis
~rt~~r

1

FOUNDATIONAL ISSUES
Research Program and Ontology
2 Evolutionary Economics - An Interpretative Survey
Ulrich Witt
45
3 On the Ontological Foundations of Evolutionary
Economics
Carsten Herrmann-Pillath

89

EVOLUTIONARY MACROECONOMICS
Dynamics: Long-run View and Population Thinking
4 Evolutionary Approaches to Population Thinking and
the Problem of Growth and Development
J. Stanley Metcalfe
141
5 Evolutionary Perspectives on Economic Growth
Richard R. Nelson

165


vi

Statics: Division of Knowledge and Valuation Principles
6 The Evolutionary Principles of American
Neoinstitutional Economics
Paul D. Bush and Marc R. Tool

195

7 Knowledge and Meliorism in the Evolutionary Theory
of F. A. Hayek
Richard Langlois and MOfit M. Sabooglu
231

EVOLUTIONARY MICROECONOMICS
Dynamics: Selection, Adaptation and Learning
Processes
8 Selection Processes in Economics
Brian Loasby

253

9 Adapting, Learning and Economizing
Richard H. Day

277

Statics: Agency, Firm and Economic Structure
10 Early Signs of a Revolution in Microeconomics
Jacques Lesourne
299
11 Evolutionary Theories of the Firm: Reconstruction
and Relations to Contractual Theories
Nicolai Foss
319
Subject Index

357


Contributing Authors

PauiD. Bush

Nicolai J. Foss

Department of Economics
California State University
Fresno
5245 North Backer Avenue
Fresno, CA 93740-0020
U. S.A.

Department of Industrial
Economics and Strategy
Copenhagen Business School
Howitzvej 60, 6th floor
DK-2000 Copenhagen F
Denmark

Richard H. Day

Carsten Herrmann-Pillath

Department of Economics
University of Southern
California
University Park
Los Angeles, CA 90089-0253
U.S.A.

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

Kurt Dopfer
Institute of Economics FGN
Universitiit st. Gallen
Sandrainstrasse 21
9010 St. Gallen
Switzerland

Richard Langlois
Department of Economics
University of Connecticut
341 Mansfield Road
Box U-63, Room 328
Storrs, CT 06269-1063
U.S.A.


viii

Jacques Lesourne
Conservatoire National des Arts
et Metiers
2, Rue Conte
75003 Paris
France
Brian Loasby
Department of Economics
University of Stirling
Stirling, FK 9 4LA
United Kingdom
J. Stanley Metcalfe
School of Economic Studies
University of Manchester
Dover Street Building
Oxford Road
Manchester M13 9PL
United Kingdom
Richard R. Nelson
School ofIntemational & Public
Affairs
Columbia University
420 West 118th Street
New York, N.Y. 10027
U.S.A.

Miiftt M. Sabooglu
Institut des Sciences
Economiques et Sociales
Universite de Fribourg
Bureau 5116B
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 IrvingLessmann 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 20 th 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 EnglishScottish school, the German Historical school and the American (Veblenian)
Institutionalist school, all developed theoretical models of their own.


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 institutionalevolutionary paradigms. Nelson and Winter's work, "An Evolutionary
Theory of Economic Change" has been widely recognized as a paradigmatic


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 agencyenvironment 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 coevolutionary 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
time.
3. Real phenomena evolve.

III

space and

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 knowledgeessential 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 (nonevolutionary) 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. HerrmannPillath 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
of general terms (species in the context 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:
1. Carriers of knowledge.
2. Generic ideas as components of a process.
3. Evolutionary-formative causality.
The analytical notion of carrier says that generic ideas have an authority
for their actualization. A knowledge carrier defined in this way can be, for
example, an individual or a firm. The high degree of abstraction of the
concept allows for both theoretical applications. Following the bimodal route
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 evolutionaryformative 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.
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:
Routines

/""

Cognitive routines,
e.g. strategic standards,
heuristics or algorithms
Fields of inquiry: Cognitive Economics

Figure I.

""

Poiesic rules:
Artefactual designs

Behavioral routines
Blueprints,
individual and collective e.g. for technologies,
behaviors
production and organizational
designs

Behavioral Economics

Resources Economics

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 macroeconomics. 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 distinction 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


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