Posts filed under ‘Evolutionary Economics’
| Dick Langlois |
Surprisingly, the following passage is not from O’Driscoll and Rizzo (1985). It is the abstract of a new paper by Brian Arthur called “Complexity Economics: A Different Framework for Economic Thought.”
This paper provides a logical framework for complexity economics. Complexity economics builds from the proposition that the economy is not necessarily in equilibrium: economic agents (firms, consumers, investors) constantly change their actions and strategies in response to the outcome they mutually create. This further changes the outcome, which requires them to adjust afresh. Agents thus live in a world where their beliefs and strategies are constantly being “tested” for survival within an outcome or “ecology” these beliefs and strategies together create. Economics has largely avoided this nonequilibrium view in the past, but if we allow it, we see patterns or phenomena not visible to equilibrium analysis. These emerge probabilistically, last for some time and dissipate, and they correspond to complex structures in other fields. We also see the economy not as something given and existing but forming from a constantly developing set of technological innovations, institutions, and arrangements that draw forth further innovations, institutions and arrangements. Complexity economics sees the economy as in motion, perpetually “computing” itself— perpetually constructing itself anew. Where equilibrium economics emphasizes order, determinacy, deduction, and stasis, complexity economics emphasizes contingency, indeterminacy, sense-making, and openness to change. In this framework time, in the sense of real historical time, becomes important, and a solution is no longer necessarily a set of mathematical conditions but a pattern, a set of emergent phenomena, a set of changes that may induce further changes, a set of existing entities creating novel entities. Equilibrium economics is a special case of nonequilibrium and hence complexity economics, therefore complexity economics is economics done in a more general way. It shows us an economy perpetually inventing itself, creating novel structures and possibilities for exploitation, and perpetually open to response.
Arthur does acknowledge that people like Marshall, Veblen, Schumpeter, Hayek, and Shackle have had much to say about exactly these issues. “But the thinking was largely history-specific, particular, case-based, and intuitive—in a word, literary—and therefore held to be beyond the reach of generalizable reasoning, so in time what had come to be called political economy became pushed to the side, acknowledged as practical and useful but not always respected.” So what Arthur has in mind is a mathematical theory, no doubt a form of what Roger Koppl – who is cited obscurely in a footnote – calls BRACE Economics.
| Dick Langlois |
I just learned (via Rajshree Agarwal) of the passing, at a young age, of Steven Klepper. Steven was an acquaintance of many years, a stand-up guy as well as a great researcher. His work on the lifecycle of firms and the role of spinoffs is a model for how to do good empirical work in organization and technology. By coincidence, this new paper (with Russell Golman) crossed my screen only a few minutes after I learned the news.
Geographic clustering of industries is typically attributed to localized, pecuniary or non-pecuniary externalities. Recent studies across innovative industries suggest that explosive cluster growth is associated with the entry and success of spinoff firms. We develop a model to explain the patterns regarding cluster growth and spinoff formation and performance, without relying on agglomeration externalities. Clustering naturally follows from spinoffs locating near their parents. In our model, firms grow and spinoffs form through the discovery of new submarkets based on innovation. Rapid and successful innovation creates more opportunities for spinoff entry and drives a region’s growth.
| Dick Langlois |
In September I will be part of a symposium on “Institutions and Economic Change,” organized by Geoff Hodgson’s Group for Research in Organisational Evolution. The workshop will be held on 20-21 September 2013 at Hitchin Priory, Hitchin, Hertfordshire, England. Here is the program and call for participation:
Masahiko Aoki (Stanford University, USA)
“Between the Economy and the Polity: Causation or Correlation. Theory and a Historical Case from China”
Francesca Gagliardi (University of Hertfordshire, UK)
“A Bibliometric Analysis of the Literature on Institutional Complementarities”
Geoffrey Hodgson (University of Hertfordshire, UK)
“A Manifesto for Legal Institutionalism”
Jack Knight (Duke University, USA)
“Courts and Institutional Change”
Suzanne Konzelmann (Birkbeck College, University of London, UK)
“‘Picking winners’ in a Liberal Market Economy: Modern Day Heresy – or Essential Strategy for Competitive Success?”
Richard Langlois (University of Connecticut, USA)
“The Institutional Revolution: A Review Essay”
Ugo Pagano (University of Siena, Italy)
“Synergy, Conflict and Institutional Complementarities”
Abstracts are available on this GROE webpage: uhbs-groe.org/workshops.htm
This workshop is designed to provide in-depth discussion of cutting-edge issues, in a forum that permits the attention to detail and definition that is often lacking in larger, conference-style events. The expected maximum number of participants is 50. Our past Workshops have filled up rapidly, so please book early to avoid disappointment. The workshop will include a poster session where participants may present their research, as long as it is related to the workshop theme. To apply to be included in the poster session send an abstract of your paper to Francesca Gagliardi (firstname.lastname@example.org). To reserve a place on the workshop please visit store.herts.ac.uk/groeworkshop
| Dick Langlois |
This summer I am directing a two-week summer school on “Modularity and Design for Innovation,” July 1-12. I am working closely with Carliss Baldwin, who will be the featured speaker. Other guest speakers will include Stefano Brusoni, Annabelle Gawer, Luigi Marengo, and Jason Woodard.
The school is intended for Ph.D. students, post-docs, and newly minted researchers in technology and operations management, strategy, finance, and the economics of organizations and institutions. The school provides meals and accommodations at the beautiful Hotel Villa Madruzzo outside Trento. Students have to provide their own travel. More information and application here.
This is the fourteenth in a series of summer schools organized at Trento by Enrico Zaninotto and Axel Leijonhufvud. In 2004, I directed one on institutional economics.
| Lasse Lien |
Here’s a link to the “online first” version of a new Org. Science paper by Peter and myself. This one has been in the pipeline for some time, and we’ve blogged about the WP version before, but this is the final and substantially upgraded version. Please read it and cite it, or we will be forced to kidnap your cat:
The survivor principle holds that the competitive process weeds out inefficient firms, so that hypotheses about efficient behavior can be tested by observing what firms actually do. This principle underlies a large body of empirical work in strategy, economics, and management. But do competitive markets really select for efficient behavior? Is the survivor principle reliable? We evaluate the survivor principle in the context of corporate diversification, asking if survivor-based measures of interindustry relatedness are good predictors of firms’ decisions to exit particular lines of business, controlling for other firm and industry characteristics that affect firms’ portfolio choices. We find strong, robust evidence that survivor-based relatedness is an important determinant of exit. This empirical regularity is consistent with an efficiency rationale for firm-level diversification, though we cannot rule out alternative explanations based on firms’ desire for legitimacy by imitation and attempts to temper multimarket competition.
| Peter Klein |
This year marks the thirtieth anniversary of two major contributions to strategy and organization, Nelson and Winter’s Evolutionary Theory of Economic Change and Lippman and Rumelt’s “Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency under Competition.” Both tried to explain inter-firm performance differences without reference to market power or random shocks. Interestingly, as Ruff Coff points out, both were aimed at economists, but had little impact there, instead becoming foundational contributions to the emerging strategy field. Here’s a concise summary of Lippman and Rumelt from Peter Zemsky:
Lippman and Rumelt (1982), in the first formal theoretical paper inspired by the distinctive concerns of the strategy literature, demonstrate how superior performance can arise without assumptions of imperfect competition and market power, which are the defining features of the IO approach. In their model there are a large number of potential entrants that can pay a fixed cost to enter an industry. The key assumption is that there is imperfect imitability so that each entrant’s cost function is determined by an independent draw from a known distribution. In equilibrium, firms with bad draws exit and the remaining firms on average must have abnormal returns even when in the case where the firms are all small and have no market power. Ex ante however expected profits from entry are zero. The paper remains an outstanding example of high quality theorizing in strategy. Barney (1986) in his paper on strategic factor markets applies the same reasoning in his verbal argument that from an economics perspective superior performance must be the result of luck.
L&$ also explain the background and context of their article in a new video.
Kirzner’s theory of entrepreneurship is another example of a contribution intended to change the conversation in economics — by shifting attention from equilibrium states to adjustment processes — that seems to have little impact upon its intended audience, while becoming hugely influential in a different field (entrepreneurship).
| Lasse Lien |
An important selling point for the consulting industry is that consultants can presumably help a firm identify and implement “best practice.” Surely the consulting industry is an important channel for disseminating knowledge of better ways of doing things, but identifying what constitutes best practice for a given firm in a given situation is no trivial task, and even if the best practice could be identified, transferring it will be a significant challenge.
This begs the question of whether there is a best practice for identification and transfer of best practices, and whether the consulting industry has identified and adopted such a practice. According to this paper Benjamin Wellstein and Alfred Kieser, the consulting industry in Germany is nowhere near a best practice for best practice. This goes for for both inter- and intra-industry transfer. I’ll bet my hat that this finding holds everywhere.
Well, I guess as long as the consulting industry keeps finding better practices for transferring better practices, we shouldn’t be too disappointed that there is no best practice for best practice. (HT: E.S. Knudsen)
| Peter Klein |
This year’s DRUID conference, “Innovation and Competitiveness: Dynamics of Organizations, Industries, Systems and Regions,” is 19-21 June 2012 in Copenhagen. See the call for papers below the fold. Submission deadline is 29 February. (more…)
| Peter Lewin |
The October 2011 issue of the Journal of Economic Behavior & Organization is a special issue on the work of James Buchanan, guest edited by Pete Boettke, arising out of a recent FFSO conference. In addition to Boettke, the contributors are Kliemt, Marciano, Munger, Leeson, G. Vanberg, Voigt, Horwitz, Besley, Coyne, and Horn on a variety of topics. Amartya Sen and Elinor Ostrom contributed short appreciations. This issue is full of good stuff on a variety of topics.
I focus here on the lead article by Pete Boettke somewhat clumsily entitled, “Teaching Economics, Appreciating Spontaneous Order, and Economics as a Public Science.” For my part, this article alone makes the issue worthwhile getting. Boettke presents an overview of the many facets of Buchanan’s work (and as they developed over his career) helpfully connecting and contrasting it with Hayek. Some of these ideas are directly relevant to the organization and management context.
At the risk of distorting oversimplification, we may say that whereas Hayek concentrated on the problem of rationalistic hubris, Buchanan concentrated on the problem of opportunistic behavior. Both are inevitable and related problems of social systems, and each of their works thus complements the other. In a nutshell, each is an in-depth protracted examination of the knowledge problem and the incentive problem, respectively.
As points of emphasis in their respective works, Hayek concentrated on the limits on man’s knowledge at the abstract level, and the contextual nature of the knowledge residing in the economy at the concrete level, while Buchanan stressed the institutional/organizational logic of politics and the systemic incentives that different rule environments generate. In both, however, the central message of same players, different rules, produce different games is seen throughout their work in comparative political economy. To Hayek the puzzle was how to limit the rationalistic hubris of men, to Buchanan the puzzle was how to limit the opportunistic impulse of men. Both found hope in what they called a “generality norm” embedded in a constitutional contract — no law shall be passed, or rule established which privileges one group of individuals in society.
Hayek uses an evolutionary approach and Buchanan a “veil of ignorance” contractarian approach. But both are surely applicable to organizations of all types.
| Peter Klein |
The European Group of Organizational Studies (EGOS) is having the 2012 annual conference in Helsinki, July 2-7. The overall theme is design, and one of the subthemes is “Self-reinforcing Processes in Organizations, Networks and Professions,” a subject sure to interest many O&Mers. See the links above for details. Blurb after the fold: (more…)
| Lasse Lien |
If you don’t think this title is cool there is something very wrong with you. Here is the associated abstract:
Abstract: In the spirit of the many recent simple models of evolution inspired by statistical physics, we put forward a simple model of the evolution of such models. Like its objects of study, it is (one supposes) in principle testable and capable of making predictions, and gives qualitative insights into a hitherto mysterious process.
And this is the essence of the simple model(2):
- A physicist runs across or concocts from whole cloth a mathematical model which is simple, neat, and contains a great many variables of the same sort.
- The physicists has heard of Darwin (1859), and may even have read Dawkins (1985) or some essays by Gould, but wouldn’t know Fisher (1958), Haldane (1932), and Wright (1986) from the Three Magi, and doesn’t dream that such a subject as mathematical evolutionary biology exists.
- The physicist is aware that lots of other physicists are interested in annexing biology as a province of statistical physics.
- The physicist interprets his multitude of variables as species or (if slightly more sophisticated) as genotypes, and proclaims that he has found “Darwin’s Equations” (cf. Bak et al. (1994)), or, more modestly, has made an important step towards eventually finding those equations.
- His paper is submitted for review to other physicists, who are just as ignorant of biology as he, but see that it’s about equivalent to the other papers on evolution by physicists. They publish it.
- The paper is read by other physicists, because at least it’s not another derivation of specific heats on some convoluted lattice under a Hamiltonian named for some Central European worthy now otherwise totally forgotten. Said physicists think this is cutting-edge evolutionary theory.
- Some of those physicists will know or discover simple, neat models with lots of variables of the same type.
What could substitute for physics and evolution here if we wanted to make a social science analogy? I think game theory could play the role of physics in many cases. What else?
| Peter Klein |
Market competition is often characterized as an evolutionary selection process. “[O]ne of the main functions of profits is to shift the control of capital to those who know how to employ it in the best possible way for the satisfaction of the public. The more profits a man earns, the greater his wealth consequently becomes, the more influential does he become in the conduct of business affairs” (Mises, “Profit and Loss,” 1951). Within a given population, then, the market process selects for those individuals with the greatest levels of entrepreneurial skill. But can the emergence of entrepreneurial skill as a human trait itself be explained in terms of natural selection? Here’s one attempt:
Evolution and the Growth Process:
Natural Selection of Entrepreneurial Traits
Oded Galor, Stelios Michalopoulos
NBER Working Paper No. 17075, May 2011
This research suggests that a Darwinian evolution of entrepreneurial spirit played a significant role in the process of economic development and the dynamics of inequality within and across societies. The study argues that entrepreneurial spirit evolved non-monotonically in the course of human history. In early stages of development, risk-tolerant, growth promoting traits generated an evolutionary advantage and their increased representation accelerated the pace of technological progress and the process of economic development. In mature stages of development, however, risk-averse traits gained an evolutionary advantage, diminishing the growth potential of advanced economies and contributing to convergence in economic growth across countries.
This is a (mathematical) theory paper with “entrepreneurship” modeled as tolerance for risk, so some readers will find the execution less interesting than the idea. But it is good to see these kinds of big-picture issues addressed in the mainstream literature.
| Nicolai Foss |
The Journal of Institutional Economics, now in its seventh year of operation, is emerging as an important outlet in the intersection of new and old institutional economics, evolutionary economics and other more or less heterodox approaches. In addition, Geoff Hodgson and Benito Arrunada, the editors, are doing a splendid job of attracting contributions, not only from luminaries such as Richard Posner, but also from important non-economist thinkers whose work may have a bearing on economic issues (e.g., philosopher John Searle and evolutionary anthropologist Robin Dunbar).
The most recent issue of JoIE features a special issue on “Business Routines.” The SI includes particularly thoughtful essays by Ulrich Witt and Jack Vromen. As readers of this blog will know, probably ad nauseam, Teppo Felin and I have repeatedly discussed the troubling lack of micro-foundations for understanding the emergence, stability, change, etc. of routines (and other similar constructs, like capabilities). We also have a paper in the SI, launching related, but different critiques. Specifically, we explicate the behaviorist and empiricist foundations of the organizational routines and capabilities literature and the extant emphasis placed on experience, repetition, and observation as the key antecedents and mechanisms of routines and capabilities.
This paper is followed by three comments by Sidney Winter, Brian Pentland, and Geoff Hodgson and Thorbjørn Knudsen, respectively, that take critical (in the case of Pentland, extremely critical) issue with various aspects of our argument. Winter and Knudsen and Hodgson raise many fundamental points, but unfortunately Pentland has thoroughly misunderstood the nature of the micro-foundations projects we advocate, and therefore concludes that all we add to the field is “confusion.” Although there is no such thing as bad publicity, Teppo and I are working on a rejoinder to these comments. More to come!
| Peter Klein |
Note that the chart nicely illustrates not only the competition among formats, but the industry’s overall decline. Indeed, “creative destruction” is a good name for the the damage done to the creative arts by the recording industry’s approach to digital media.
| Peter Klein |
Responsibilities abroad kept me from attending the recent Douglass North celebration, but the University of Missouri was well represented by a group of energetic and enthusiastic PhD students, who sent me the following report:
The conference on Legacy and Work of Douglass North was an outstanding meeting with discussions on the past, present, and future of the New Institutional Economics. Top scholars discussed the contribution and influence of North (and the New Institutional Economics) in a diverse range of fields, covering everything from the impact of the initial contributions to the outlook for continued research.
It’s hard to summarize the insights and contributions from six paper sessions, Elinor Ostrom’s keynote, and the roundtable on North and the Rise of the New Institutional Economics. One takeaway was the depth and breadth of North’s contributions – many speakers were North coauthors working on a wide variety of topics, from many different perspectives (economics, political science, history, cognition, etc.). North’s influence is huge across the social sciences.
One burning issue: what’s the next step for New Institutional Economics? Besides bridging or integrating Northean institutional analysis with Williamsonian organizational economics, many speakers emphasized the need to be more rigorous, to examine more details, to go farther than the “big picture” studies that are so prominent in the field. There are too many grand, sweeping claims, and not enough mundane, middle-of-the-road analysis. (John Nye, for example, expressed concern that some Northean ideas are very difficult to operationalize, a particular problem since younger scholars are confronted with very high standards for formalization, empirical technique, etc.) (more…)
| Peter Klein |
Washington University, St. Louis is hosting a major international conference, 4-6 November, on the Legacy and Work of Douglass North. The all-star panel includes Lee Alston, Robert Bates, Joel Mokyr, Elinor Ostrom, Ken Shepsle, Barry Weingast, and many others. The conference is organized by Wash U’s Center for New Institutional Social Science.
In other conference news, the CFP for next year’s Atlanta Competitive Advantage Conference, 17-19 May 2011, has been posted. Featured presenters include Jay Barney, Joel Baum, and Rebecca Henderson.
| Dick Langlois |
In addition to the review of Doug Puffert’s book that Peter discusses in his most recent post, EH.net has also just issued reviews of two books on economic growth that should be of interest to O&M readers. One is of Michael Heller’s Capitalism, Institutions, and Economic Development. I hope this one gets wide circulation despite being an expensive Routledge title. The other is of Matt Ridley’s The Rational Optimist: How Prosperity Evolves. That one should get a lot of attention.
| Dick Langlois |
The most recent number of Industrial and Corporate Change is a special issue: Management Innovation-Essays in the Spirit of Alfred D. Chandler, Jr. Guest editors are Bill Lazonick and David Teece. Some interesting articles and definitely many interesting contributors. Yours truly was not involved — indeed, I didn’t learn about it until the table of contents appeared in my inbox. But I am cited in at least four of the papers. Indeed, the paper by Susan Helper and Mari Sako, both of whom I admire greatly, spends considerable time comparing my argument with Chandler’s. For the most part, I don’t disagree with their assessment except in respect of spin (more on which in a moment); but at one point they make an assertion that had me scratching my head.
Some argue that as a central tendency, the buffering and coordination functions of management are devolving to the mechanisms of modularity and the market — informational decomposition, flexibility, and risk spreading (Langlois, 2003: 377). In contrast, in Chandler’s world, “Increased specialization must, almost by definition, call for more carefully planned coordination if the volume of output demanded by the mass market is to be achieved” (Chandler, 1977: 490). The disagreement lies in different assumptions made. Langlois assumes that thickness of the market is exogenously given or that it is already established, while Chandler assumes that the mass market is something that has to be developed. Chandler’s view seems more correct here. (Helper and Sako 2010, p. 420)
Hello? One can argue that I have spent most of my career making precisely the point they attribute to Chandler: it’s the basis of the theory of dynamic transaction costs. Neither markets nor firms snap into existence but evolve slowly and — as I often quote Brian Loasby as pointing out — both require managerial coordination. (more…)
| Dick Langlois |
A former student of mine (thanks, Don) sent me a link to a fascinating piece in the Proceedings of the Royal Society called “Rationality in Collective Decision-making by Ant Colonies.” Here’s the abstract.
Economic models of animal behaviour assume that decision-makers are rational, meaning that they assess options according to intrinsic fitness value and not by comparison with available alternatives. This expectation is frequently violated, but the significance of irrational behaviour remains controversial. One possibility is that irrationality arises from cognitive constraints that necessitate short cuts like comparative evaluation. If so, the study of whether and when irrationality occurs can illuminate cognitive mechanisms. We applied this logic in a novel setting: the collective decisions of insect societies. We tested for irrationality in colonies of Temnothorax ants choosing between two nest sites that varied in multiple attributes, such that neither site was clearly superior. In similar situations, individual animals show irrational changes in preference when a third relatively unattractive option is introduced. In contrast, we found no such effect in colonies. We suggest that immunity to irrationality in this case may result from the ants’ decentralized decision mechanism. A colony’s choice does not depend on site comparison by individuals, but instead self-organizes from the interactions of multiple ants, most of which are aware of only a single site. This strategy may filter out comparative effects, preventing systematic errors that would otherwise arise from the cognitive limitations of individuals.
| Peter Klein |
Thanks largely to the organizing efforts of my colleague and former O&M guest blogger Randy Westgren, a group here at Missouri is examining evolutionary models in economics and organization theory. The centerpiece is a philosophy of science seminar directed by André Ariew, a leading American scholar in the philosophy of biology, especially Darwin and evolutionary theory.
I’ll let Randy explain:
The course is PHL 9830. Normally it is a traditional philosophy of science seminar aimed at graduate students in the department of philosophy, but we hijacked it to examine a specific theme. The subject focus is evolutionary theory applied to biology, economics, and management. There are three general types of questions we ask, (a) clarification, (b) conceptual, and (c) general philosophy of science. (more…)