Technological regimes and paradigms: a core concept of evolutionary economics

ESST Module 4: Unit 2Andreas Reinstaller

Remember? The three central question in economics and how Neoclassical economics approaches them

Central questions:“How is economic

activity coordinated?”

“What explains prices?”

“How is wealth created and redistributed?”

Neoclassical approach: Coordination: Markets

coordinate. Is a market in equilibrium all production and consumption plans correspond. There is perfect coordination

Prices: Utility and profit maximization under full information leads that prices embody all information on intrinsic evaluation of goods by consumers and production costs

Growth: Economy as a whole is in a continued but moving equilibrium which is brought about by the coordination mechanisms.

Evolutionary Economics: Competition as an evolutionary process

Coordination: frequency adjustment on the population level. Firms that are not adapted to the social environment/market on which they act will leave the industry, while others may enter.

Prices: reflect intensity of competition on the market, costs, accumulation levels and the growth of demand of the market

Growth: Competition drives the innovation process, which in turn generates growth.

Biology Economics

Fitness Profitability

Genes Routines

Phenotypes Firms

Selection Competition

Cross-over Learning, innovating

Mutation Inventing

Unit of Selection: FirmBounded rationality: firms and other economic agent may act rationally, but within limits.Technologies are complex systems

The representation of technological and organizational learning: rational and bounded rational choices

Location on the fitness landscape

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From G. Gavetti and D.Levinthal (2000),in: ASQ, vol. 45, p. 116

logical Incrementalism(evolutionary)

local experimentation (evolutionary)

cognitiverepresentations(evolutionary)

rational (neo-classical)model

Technology as a complex system: well behaved production sets vs. rugged technological landscapes

A smooth (Neoclassical)technology landscape

Fitness

Fitness

A rugged (evolutionary)technology landscape

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Technological interdependence: Local search and lock-in

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From: Reinstaller and Hölzl (2002), The Babbage Principle after Evolutionary Economics: On the complex roots of labour displacing technical change, submitted paper.

Implication: Even ifa firm would know all available routines and dispose over all possible skills, technological interdependence may lead to solutions that from a purely technical and economic standpoint are suboptimal.

Technological Paradigms: the core concept of evolutionary economics What is a paradigm?

“A model and a pattern of solution of selected technological problems, based on selected principles derived from natural sciences and on selected material technologies”, Dosi (1982), p.152

Within a paradigm problem solving behaviour is developed: The selected principles generate routines, heuristics (more later). Together they constitute relevant knowledge.

Technological regimes: Depending on the selection environment and the underlying technology industrial sectors will show specific patterns of development (more later)

Technological trajectories. Once a paradigm is chosen, the technological artefacts developed within this paradigm are improved. This improvement pattern is a technological trajectory.

Generating new Knowledge. How did the economic mainstream try to overcome some of the shortcomings of its Growth theory? A recap of Endogenous Growth theory.

Remember the variable “A” in previous lecture.

Human capital models explain A, through previously accumulated human capital of a nation -> explains growth differentials between developed and less developed countries.

R & D models: same as above, but instead of having fuzzy human capital we have quality ladder due to R & D: countries investing more in R & D have higher growth

Learning by doing models: past levels of investment (accumulation) trigger a learning effect.

Critique Human Capital: The notion of

Human Capital alone does not take into account the complex dynamics of learning and knowledge creation. If we want to understand the process of growth we need to look at learning processes

R & D: linear STI model (see later)

Learning by doing: just a small extension to “Solow” model. But does not remarkably improve the empirical performance of the model.

Generating new knowledge. What is knowledge? A definition.

Knowledge is structured information on a system or a subset of its elements that allows to predict the behaviour of that system. This entails a process of structuring information during which elementary pieces of information on the system are put into causal relation with each other, and a hierarchy of causal relations is set up.

From: A.Reinstaller (2002), “The use of Genetic Programming in Evolutionary Economics by Bernd Ebersberger and Andreas Pyka. A note.”, manuscript (referee report)

Generating new knowledge. What is knowledge? Different types.

Aristotle’s knowledge taxonomy: Knowledge has been at the centre of analytical interest from the very beginning of civilisation. Epistèmè: knowledge that is

universal and theoretical: "know-why."

Technè: knowledge that is instrumental, context-specific and practice-related: "know-how."

Phronesis: Knowledge that is normative, experience-based, context-specific and related to common sense: "practical wisdom."

Knowledge has been divided into four categories (Lundvall and Johnson, 1994): Know-what: knowledge about

“facts”. Know-why: knowledge about

principles and laws of motion in nature, in the human mind and in society.

Know-how: skills – i.e. the ability to do something.

Know-who: involves information about who knows what and who knows what to do (network knowledge).

On the location of knowledge Embedded in individuals Embedded in organisations

and institutions (shared codes of communication, shared routines, shared methods for problem solving and searching) .

Knowledge is tacit or codified Tacit knowledge cannot be

easily transfered. -> No Blueprint character.

Even codified knowledge cannot always be easily transfered -> absorptive capacities

Person: Substantive and

procedural Skills Formal knowledge

Organizational routines and heuristics Combination of They are the “genes” of

the evolutionary process

The characteristics of technological knowledge

Technological knowledge has characteristics of a public good, i.e. non-rivalry and non-excludability make it easily accessible to others

Uncertainty: it is difficult to assess further developments and market opportunities

Cumulativeness: it builds on previous knowledge

This has also an advantage: it generates externalities and spillovers (i.e. the social rate of return is higher than the private one)

The disadvantage is that it may lead to underinvestment, hence some protection is needed (attained by patent protection, industrial secrecy...)

Operationalising the concept of technological paradigms: technological regimes and trajectories, or what’s the effect on an industry?

A Technological Regime is a particular combination of: opportunity conditions (scarce or pervasive) appropriability conditions (high or low appropriability) cumulativeness (dependence on previous technological

achievements) knowledge base (degree of taciteness and complexity, i.e. relieance

one or several different sciences and knowledge bases) These factors determine development path, the technological

trajectory, of each single technology in the regime. This gives rise to specific development patterns of industries, as it

has an influence on Competition in that industry The Market structure in that industry Technical change in that industry

A technological regime is the manifestation of technological paradigms.

Technological regimes: The extreme cases: Schumpeter Mk. I, Schumpeter Mk II

There are roughly two distinct regimes that are distinguished:

Schumpeter Mark I: high opportunity low appropriability low cumulativeness example: machine tool or mechanical industries

Schumpeter Mark II: high opportunity high appropriability high cumulativeness example: chemicals, electronics

Assessing EE and Scot: Characteristics of evolutionary processes

Processes which generate variation in the pool of characteristics in a population

Processes which restrict and guide possible patterns of variation in behaviour

Processes which change the relative frequency of different entities within the population

Processes which determine the rate at which the above three processes change

Processes which determine the overall direction of evolutionary change

Source: Metcalfe, J.S. (1998), Evolutionary Economics and Creative Destruction, London, p. 23

Relating Evolutionary Economic Theory to SCOT, ISCOT Unit of analysis: social actors

(individual, company, institution, government…) grouped into relevant social groups for the development of a technology

Inducement to engage into research: problems in society

Generation of variety: different technological communities produce solutions, or “facts” that are channeled into the pool of possible solutions

Selection mechanisms: value set of a society (e.g. religion) in filtering relevant problems, relevant social groups select the final design.

Main conclusion: technologies are socially constructed

EE Unit of analysis: business firm

grouped into industries Inducement to engage into

research: technological opportunity; “need is the mother of invention” view is partially rejected.

Selection mechanism: market. Firms that are better adapted to social circumstances (embodied in characteristics of demand) survive. (genotype: routines, phenotype: firm)

Main conclusion: economic development is a evolutionary process in which better adapted firms survive. What makes it better adapted is left open -> SCOT is here complementary

Relating Evolutionary Economic Theory to SCOT, II

By Marc Dijk (2001), A generic process-model ofscience and technology development, ESST 2001, term paper, Maastricht.

General conclusion comparison SCOT - EE

The two approaches are complementary, as both are evolutionary! SCOT explains parts of the problem which are not explained by EE, i.e. it provides an accurate description of the “selection” environment in which business firms and industries act. EE explores how the evolutionary selection mechanism actually acts upon business firms. The focus of EE is narrower as it lies on the exploration of the dynamics of the creation of wealth, and is not interested in problems of wider concern.