Evolution in Markets and Institutions

This introductory chapter discusses how hypotheses on innovative activities can be developed. These hypotheses should account for the epistemological problems implied by the occurrence of novelty, the crucial feature of endogenous change in the economy. The involved problems suggest population thinking, a typical attitude of theories dealing with evolution. Two generic features resulting from such a perspective, frequency-dependency and selection effect, are explored together with their common ground in the notion of replicator dynamics. The paper concludes with a reappraisal of classical notions of competition, the coordinating power of markets, and long run tendencies in the economy.

The paper argues that, even in the absence of bureaucratic inertia, the transition from one convention to a superior one can be blocked. Because of the self-reinforcing mechanism generated by coordination effects, the economy can be locked-in to an Pareto-inferior convention. In the framework of evolutionary game theory, convention appears to be an evolutionary stable strategy. We show that the endogenous diffusion of a superior convention is possible but requires the presence of some social or cultural differentiation in order that coordination effects can be localized. The social or cultural links provide no information about the structure of the game, but help people to coordinate themselves by providing external points of reference. We construct a model where matching between agents respects a certain localization of interactions related to social or cultural similarity. These results are used to enlighten the surprising success of japanese labor management in US and UK transplants.

Contrary to most writings in the field of evolutionary economics which have a strong microeconomic flavor, here a macroeconomic evolutionary model will be presented in order to deal with the macroeconomic employment effect of technical change where there is just one old and one new technology. Several authors who favour an evolutionary approach to the theory of technical change share an optimistic view with respect to the macroeconomic employment effect of technical change. In the paper we are dealing with the question of whether this optimistic view is a necessary result of an evolutionary approach to technical change or rather of some other characteristic of the models used. It is shown that the evolutionary approach to technical change is not inherently optimistic or pessimistic with respect to the employment effects. Rather it is the labour market behaviour that will decide, whether the employment effects of technical change are positive, negligible or even negative.

Two lines of reasoning on very long term socio-economic change, which was a basic issue of classical economic thinking, are confronted: New Institutional Economics (NIE) and Evolutionary Economics (EE). It is demonstrated that EE offers an explanation which is both more consistent and more comprehensive. The case in point is the first economic revolution.

The existence — under certain conditions — of sunspot equilibria in overlapping generations models is a well-known theoretical result, but a lot of research has still to be made to understand whether and how such equilibria may occur as a consequence of a dynamic process.

In this paper, we explore a model with individuals having simple utility functions and discover situations in which the dynamic processes of expectations and observed prices do not converge in spite of the existence of static equilibria. In other words, unfounded beliefs do still have a permanent influence on the real economy but induce erratic evolutions.

A concept for modelling nonlinear economic dynamics is presented and exemplified by a concrete model. Generally, a configuration of macro-economic variables is considered whose probabilistic evolution is coupled to the decision making of agents and is described by a master equation. The transition rates in the master equation are modelled in terms of utility measures of the agents. Nonlinear dynamic meanvalue equations can be derived from the master equation.

The concrete model describes firms producing substitutable durable commodities. They compete with respect to the quality of their products and a positive feedback between quality enhancement and customer’s reaction to quality is assumed. The case of two competing firms is treated explicitely. It is shown that beyond a critical value of a “competitivity parameter” a homogenous market will develop into an inhomogenous one with a winner and a loser firm.