Modern Evolutionary Economics

The 1982 book “An Evolutionary Theory of Economic Change” by Richard Nelson and Sidney Winter has become a true social science classic, and is the most cited work within the field of innovation studies. However, contrary to the authors’ own aspirations, its uptake by fellow economists has been rather limited. The main purpose of the present volume by Richard Nelson, Giovanni Dosi and other prominent names in the evolutionary economics community is to increase the interest for evolutionary economics among economists of other persuasions, primarily by highlighting what evolutionary economics has to offer in terms of an improved understanding of central economic issues. However, the book is also aiming at a broader audience than just economists. The text is easy to read and understand and does – apart from an appendix on formal modelling (which is not essential for understanding the rest) – not require prior training in economics (or mathematics for that sake).  

The book consists of seven chapters. The first chapter by Nelson is concerned with what evolutionary economics is about and how it compares with other approaches (such as neoclassical economics). Among the characteristics emphasized by Nelson are an evolutionary outlook, i.e., capitalism as an evolving system driven by innovation, and a more realistic perspective on how economic actors (e.g., firms) operate, that, is routine-guided change in an uncertain environment (with “satisficing” rather than optimizing behaviour). Competition, in this perspective, is not only about prices but also about technology, i. e., innovation and diffusion. A major advantage of this perspective, the book argues, is that it is consistent with the large heterogeneity among economic actors that is documented over and over again by research, but which neoclassical economics has problems in explaining.

Chapter 2 by Nelson and Dosi, entitled “Technological Advance as an Evolutionary Process”, explains central concepts (e.g., (dominant) designs; technological trajectories; technological paradigms) and presents important findings from innovation studies on factors that influence innovation, whether on the demand or supply side. It also delves into the attempts from Schumpeter onwards to study the differences in innovation across sectors and industries. To some extent, the chapter can be read as a crash course in innovation studies. For example, the chapter contains several well-informed discussions (or mini-surveys) of central issues in innovation studies, such as the role of science – or patenting – for innovation. In addition, the chapter contains an appendix by Dosi on formal modelling of relevance for the topic of the chapter.

Although the perspective advocated by Nelson and Winter in their 1982 landmark volume did not go well with fellow economists, it got a much warmer reception among scholars in fields such as organization science or management, who found it to be a welcome addition to their theoretical arsenal on how to analyse firm behaviour. The story is presented by Constance Helfat in Chapter 3 of the volume on “The Behaviour and Capabilities of firms”. As she explains, in Nelson and Winter’s approach, firms’ knowledge is stored in the form of routines for dealing with various issues that arise, and retained – and modified – through use. However, as Nelson and Winter pointed out, sometimes it may be necessary to fundamentally change or develop entirely new routines, for example as a response to changes in the external environment, and this requires routines for how to do so. Much of the subsequent research has been concerned with such “dynamic capabilities”, and the chapter presents a guide to the voluminous literature that has emerged in this area.

The fourth chapter, by Andreas Pyka and Nelson, focuses on “Schumpeterian Competition and Industrial Dynamics”. It extends the analyses of previous chapters by going into more detail on general features of industry evolution (or industrial dynamics), such as the existence of “industry life cycles”, drawing on the extensive research on these matters by the late Steve Klepper and others. The chapter also contains an appendix by Sidney Winter on so-called “History-Friendly Modelling”, i.e., computer-based simulations of industry evolution, which is yet another strand of research inspired by the Nelson-Winter approach. As for the future of this type of research, Winter points out that such analyses would be more compelling if built on better information on firm routines and decision rules, and highlights this as an important topic for future research in this area.

In chapter 5, entitled “Evolutionary Perspectives on Long Run Economic Development”, Pyka, Pier Paolo Saviotti and Nelson argue that the way forward for evolutionary economics should not necessarily be the development of a general model (or approach) that explains everything. Rather they suggest to develop more specialized models (or approaches) based on evolutionary perspectives for the analysis of specific issues. Two examples are offered in the chapter, a one sector growth model (drawing on the original Nelson-Winter contribution) and a multi-sector growth model developed by Pyka and Saviotti. The latter, which is inspired by Luigi Pasinetti’s earlier analyses of the roles of product innovation and demand for long run economic growth, is further elaborated in a separate appendix. The chapter also contains a discussion of the role of institutions in long run economic growth, which flags this as an important, albeit somewhat neglected issue, requiring more attention by economists of all persuasions.  

Chapter 6, written by Keun Lee and Franco Malerba, focuses on a central issue in economic research from the time of Adam Smith onwards, namely what it takes for poor nations – the latecomers – to catch up economically with the richer ones. The chapter, entitled “Economic Catch-up by Latecomers as an Evolutionary Process”, contains extensive references to the literature on the subject. The main argument of the authors, following earlier contributions by the late Korean development scholar Linsu Kim and others, is that capability-building is a must for countries that wish to catch up. The focus is particularly on evidence from Korea and Taiwan, two countries that have managed to escape the “middle-income trap”, which according to the authors constitutes a major hurdle for many countries. The authors put forward several interesting hypotheses in their discussion of the possible reasons for this although a proper assessment would probably require a broader set of comparator countries and variables.

In the final chapter (7), Kurt Dopfer and Nelson sum up the discussion, point to issues for future research (for which applying an evolutionary perspective might be relevant) and, towards the very end, express the hope that more professional economists will find the approach presented in the book fruitful. However, to succeed with that it might have been helpful to show more clearly how the evolutionary approach would be relevant for issues that are high on agenda today and that both economists and other social scientists are concerned about. Although some such issues (global warming, inequality, financialization) are mentioned in passing in the final chapter there is not much on what an evolutionary perspective may contribute. Arguably, to demonstrate that in a convincing manner separate chapters on these issues might have been warranted. Another topic that attracts a lot of interest, and on which evolutionary economists usually have had a lot to say, concerns technological “revolutions” (and opportunities arising from such evolutionary dynamics), e.g., digitalization, AI, renewable energy etc., but this does not figure very prominently in the volume either. Furthermore, as the authors admit, institutions are not well integrated into the analysis. For instance, the discussion on innovation systems, except for so-called sectoral systems, is very brief and arguably not up to date. There is even less on policy, innovation policy, for example, is hardly mentioned. Thus, although what is presented in the book clearly falls squarely within “modern evolutionary economics”, there may be even more to it.

Richard R. Nelson et al. (2018), Modern Evolutionary Economics – An Overview, Cambridge University Press, 272 pages