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The book illustrates the considerable advances in modern evolutionary economics and addresses core questions of economic behaviour, interaction of heterogeneous actors in uncertain environments and the possibility of aggregating observations on a macro-economic level. It presents the foundations of economic change as the major building blocks of an economic approach that focusses on complex processes driven by endogenous innovation as well as crisis. The theoretical considerations are complemented by econometric studies to demonstrate the relevance of evolutionary-economic thinking to improve our understanding of the most challenging issues related to economic growth and development.



Introduction: Foundations of Economic Change—Behavior, Interaction and Aggregate Outcomes

The theme of the 15th International Joseph A. Schumpeter Conference, held from July 27 to 30, 2014 in Jena (Germany), was “Foundations of Economic Change—Behavior, Interaction and Aggregate Outcomes”. This topic was intended first to cover core dimensions of innovation driven evolutionary economic development and to be broad enough to attract a wide range of papers from evolutionary economics, economics of innovation, science and technology studies, complexity economics, behavioral economics, institutional economics, regional economics, and others more. Secondly, the topic was chosen in order to represent the research achievements, agendas and programs that have been developed in Jena since 1991: institutionally to mention here are the Max Planck Institute of Economics with its focus on evolutionary and behavioral economics as well as entrepreneurship, completed by and cooperating with research projects on economics of innovation, behavioral economics and entrepreneurship at the Department of Economics and Business Administration at the Friedrich Schiller University, as well as the University’s research major “Social and Economic Change” with research projects in psychology, sociology, law, regional sciences, ethics, and political sciences; major research training groups located in Jena that trained and advised young scholars from all over the world have been pushing these research topics: the DFG graduate school (GRK 1411) “The Economics of Innovative Change”, the International Max Planck Research School on “Adapting Behavior in a Fundamentally Uncertain World”, and the Jena Graduate School “Human Behavior in Social and Economic Change”. Third, and finally, the choice of behavior, interaction and aggregate outcomes followed a specific rationale: that of representing the multilevel focus of analysis and the ‘division of labor’ of Neo-Schumpeterian and Evolutionary economists that over the years committed themselves to uncover the dynamic nature of economic phenomena from the individual and single technology (in production and consumption) up to changes in whole systems. In this sense, the title of the conference was at the same time a tribute to (and a suggestion to proceed on) the inquiry of the Economy from a systemic and systematic viewpoint.
Uwe Cantner, Andreas Pyka

Foundations of Economic Change


Foundations of Economic Change: An Extended Schumpeterian Approach

This paper employs the Schumpeterian approach to the development of economies in order to identify the core building blocks of a theory of endogenous economic change. Borders and insights are widened by combining concepts and findings from behavioral economics, from evolutionary economics, and from complexity economics. Actor heterogeneity, on the one hand, and mechanisms of actors’ interaction, on the other, are suggested to be fundamental elements of that theory. Theoretical analyses and empirical accounts are presented, achievements are discussed, and further avenues of research are suggested.
Uwe Cantner

Behavior and Cognition of Economic Actors in Evolutionary Economics

An evolutionary perspective on the nature of economic activity requires a theory of human behavior and cognition that highlights human creativity and innovativeness, while at the same time recognizing that in many arenas of economic life change is slow and more routine aspects of behavior obtain. It is proposed that Herbert Simon’s conception of human behavior as largely “bounded rational” is capable of suiting both aspects. However, to be able to encompass the enormous advances humans have achieved over the years in their ability to meet a variety of wants, a theory of behavior and cognition suitable for evolutionary economics needs to recognize the evolving cultural context of economic behavior and cognition.
Richard R. Nelson

Upward and Downward Complementarity: The Meso Core of Evolutionary Growth Theory

We propose that the concept of complementarity can take two distinct meanings in evolutionary economics: one referring to Adam Smith’s notion of increasing specialization and the division of labour, which we denote ‘downward complementarity’ (wholes into new parts); and a second type that refers to the discovery of emergent complementarity between extant or new components and products, which we call ‘upward complementarity’ (parts into new wholes). We outline this new conception and explore some of its analytic and theoretic implications.
Kurt Dopfer, Jason Potts, Andreas Pyka

Aggregate Outcomes


Global Dynamics, Capabilities and the Crisis

The financial crisis started in 2007–2008, initially in the US, but its consequences have been felt throughout the global economy. However, its effects were far from uniform. While parts of Asia and Africa continued to grow fast, Europe experienced a large set back. This paper emphasizes three important factors: differences across countries in technological development; differences in capacities to exploit the opportunities offered by technology; and differences in the ability to compete in international market. A formal model, based on this approach, is developed and applied to data for 100 countries in the period 1997–2012. Empirical indicators reflecting the various factors are developed, a dataset constructed and econometric estimates of the model performed. The results are used to explore the factors behind the slowdown in economic growth, with a particular emphasis on the continuing stagnation in Europe. A major factor turns out to be the increased financialization of the economy. The negative effect of the growth of finance prior to the crisis is especially pronounced for the countries that suffered most during the crisis.
Jan Fagerberg, Martin Srholec

Convergence or Divergence: A Nonparametric Analysis on China’s Regional Disparity

By applying key notions of evolutionary economics, this study develops an analytical framework to explain the differentiated evolutionary paths of convergence and divergence in the economic growth across China’s provinces since 1978. We adopt the nonparametric approach in the study, including both univariate and multivariate kernel density estimation. We find evidence that the convergence in economic growth across provinces does not take shape. Instead, a divergence exists in the economic growth of China. Furthermore, the evolutionary dynamics revealed by our kernel estimation suggests that the disparity of the economic growth rate continuously increases since 1978, not only among different provinces, but also among different areas within a single province.
Xiang Deng, Jianping Li, Jing Song

Micro to Macro Evolutionary Modeling: On the Economics of Self Organization of Dynamic Markets by Ignorant Actors

The Micro to Macro model MOSES, for Model of the Swedish Economic System, is presented as a synthesis of Austrian/Schumpeterian and Swedish/Stockholm school economics. That connection unfortunately failed to be achieved at the time, as Swedish economists abandoned their ambition to take their Ex ante Ex post analysis down to the micro level for neoclassical static equilibrium economics, and therefore also failed to establish a Swedish platform for evolutionary economics. I argue that evolutionary models have to be micro based to make sense as driven by entrepreneurial competition and selection among autonomous market agents, be economy wide as an economic system, and should feature endogenous evolutions of firm populations, a complex dynamic that makes the model unsolvable for a market clearing equilibrium. The initial state dependency of such highly non linear selection models furthermore makes them unavoidably empirical. Since empirical models are always related to a case economy, the Moses model has been drawn up within the general theoretical framework of what I call an Experimentally Organized Economy (EOE), and applied to the Swedish economy. The estimation/calibration problems associated with such models are addressed, and the empirical credibility of the surprise economics that they generate discussed.
Entrepreneurial entry drives competition and growth of the Micro to Macro model economy through a Schumpeterian type Creative Destruction process, that however also endogenously both raises the rate of exit, changes the population of actors, and lowers (because of the consequent structural change) the reliability of market price signaling as predictors of future prices. Simulation experiments suggest that an optimal growth maximizing rate of firm turnover exits.
When MOSES is deprived of its micro based evolutionary features and firms are aggregated to sectors a traditional computable general equilibrium (CGE) sector model is shown to emerge as a special case. The static equilibrium properties of that model, however, are incompatible with the operating domain of the dynamic MOSES model, and a neoclassical capital market equilibrium comes out as an undesirable state to aim policies for. I conclude by demonstrating that the Wicksellian Cumulative Process can be nicely fitted into the Micro to Macro model.
Gunnar Eliasson

Firms Navigating Through Innovation Spaces: A Conceptualization of How Firms Search and Perceive Technological, Market and Productive Opportunities Globally

The main contribution of this paper is a theory-based conceptual framework of innovation spaces, and how firms must navigate through them to innovate. The concept of innovation systems—at the regional, sectoral and national levels—have been highly influential. Previous literature developing the concept of innovation systems has stressed the importance of institutions, networks and knowledge bases at the regional, sectoral and national levels. This paper primarily draws upon an evolutionary and Schumpeterian economics perspective, in the following three senses. The conceptualization of ‘innnovation spaces’ focuses upon how and why firm search for innovations is influenced the opportunities within certain geographical contexts. This means that the firm create opportunities and can span different context, but they are influence by the context in term of the access, flow and co-evolution of ideas, resources, technology, people and knowledge, which help stimulate business innovation in terms of products, process and services. The paper concludes with an agenda for future research and especially the need to focus on globalization as a process of intensifying linkages across the globe.
Maureen McKelvey

A Proposal for a ‘National Innovation System Plus Subjective Well-Being’ Approach and an Evolutionary Systemic Normative Theory of Innovation

It is argued that development of a ‘National Innovation System plus Subjective Well-being’ (NIS+SWB) approach would be a natural extension of current research into innovation systems, ‘happiness’ research and attempts to develop a normative theory of innovation that tries to avoid what can be called the long-run fallacy of normative innovation economics, i.e. the axiomatic assumption that innovation and economic growth are always desirable. After reviewing the literature on national innovation systems and recent contributions, from diverse literatures, relevant to the development of a normative theory of innovation, some of the implications of a NIS+SWB approach are explored. In particular, it is argued that the approach requires an evolutionary systemic normative theory, because of the systemic and co-evolving nature of both the NIS and SWB. This has to be clearly distinguished from individualistic (micro-level) welfare theory, although both are best seen as complementary. Confusing societal and micro-level analysis is an example of the ecological fallacy. Further, the choice of SWB measure is highlighted. It is suggested that life satisfaction is the currently preferred SWB measure for a NIS+SWB approach. However, more research into a merger of SWB research and Sen’s capability approach seems called for. Last but not least, some general implications of a NIS+SWB approach for innovation policy are discussed.
Hans-Jürgen Engelbrecht



Confounded, Augmented and Constrained Replicator Dynamics

Complex Selection Processes and Their Measurement
The quantitative methodology derived from replicator dynamics for empirical studies of economic evolution is becoming increasingly well developed in theory but is rarely applied in practice. One reason is the relatively naïve nature of current methods, which focus on the evolution of a single characteristic in a single environment. This assumption constrains the analysis of real selection processes in which firms operate in several markets and their products have several characteristics that interact to determine fitness. This entails that measurement of economic selection becomes confounded: characteristics that are associated with firm growth are not becoming more frequent in the population. The reason for confounded selection is that characteristics interact to augment or constrain the rate and direction of evolution and one-dimensional, single trait replicator dynamics cannot cope with confounded selection. The contribution of this paper is to develop an approach that serves to explicitly analyse confounded selection. The primary elements of the method are the selection gradients of the characteristics and the covariance matrix of the characteristics. Based on these, the method motivates a taxonomy of selection based on the interaction of characteristics. Applying the method to a population of firms will shed light on potentially confounded selection. It will reveal the indirect effects of characteristics on selection and the augmentation and constraints created thereby.
Jacob Rubæk Holm, Esben Sloth Andersen, J. Stanley Metcalfe

The Roots of Growth: Entrepreneurship, Innovation and the Capitalist Firm

The spectacular growth record of capitalist economies in the past 200 years is frequently attributed to entrepreneurship and/or innovation. This cannot be the whole story, because entrepreneurship has a far more widespread historical and geographical distribution than these high-growth countries, and occurs particularly in rather stagnant societies; innovation contributes to economic growth, but it is unclear why it has become so much more prevalent in capitalist societies, or why it takes a form that is growth-promoting in that context. Thus, entrepreneurship and innovation only contribute to dynamism in a particular institutional context: a real economy that is dominated by capitalist firms, which are able to purchase all their inputs including labour, making it easy to change the technology, workforce, product, location, etc.
Because entrepreneurship and innovation have tended to be analysed in capitalist societies, this extra component has been taken for granted. But it is not a natural, ubiquitous feature—it has its specific history, notably the development of “entity shielding” that protects the firm from its shareholders as well as from outsiders, enabling it to accumulate assets, including premises and equipment, as well as less tangible items such as expertise, relationships and reputation.
These features of the capitalist firm shape entrepreneurship and innovation, and make them effective. The central imperative to make a profit provides direction for entrepreneurs and innovators, and the potential rewards of success provide an incentive both for their performance and for their choosing these roles. The capitalist firm’s flexibility of inputs gives scope for the inventiveness of entrepreneurs and innovators, and its potentially large market magnifies the success of their efforts.
Michael Joffe

The Journey of Innovation

From Incremental to Radical Innovation and High-Tech Innovation Cascades: The Case of Biotechnology
This paper argues that innovation has itself evolved, from the slow, path-dependent, and foreseeable world of technological trajectories, to the less predictable world of innovation cascades, after incorporating the analysis of radical innovation in the last three decades. Innovation cascades are long series of radical innovations in one or in related technological domains. Two types of innovation cascades are distinguished in the paper: those emerging before the Industrial Revolution and the modern high-tech ones. The previous innovation cascades usually petered out fairly soon by lack of institutional support, as inventors and innovators were individuals or companies trying out their luck in the market place in a less than friendly environment. Present day innovation cascades benefit from numerous innovating firms, research universities and government laboratories, science, technology and innovation policies, increasing numbers of countries investing in R&D and innovation, as well as reduced costs of access to information, communication and transportation. Today’s innovation cascades tend to be more extended through time and space. Their systemic effects are also more widely diffused in global terms.
Jorge Niosi

Schumpeterian Incumbents and Industry Evolution

This essay explores the role of established firms in the evolution of innovative industries. Both direct and indirect contributions are discussed. Besides innovation in their own industries, established firms are often among the pioneering entrants into related markets. They enable spin-off entrepreneurship and provide exit options for startups through acquisition. Furthermore, established firms help shape and directly support public research activities. The multiple roles of established firms, their interaction with new entrants in the innovation process, and the dynamics on industry evolution in an increasingly globalized world are not sufficiently well understood.
Guido Buenstorf

Incremental by Design? On the Role of Incumbents in Technology Niches

An Evolutionary Network Analysis
In this paper, we study the evolution of governance structures in technological niches. At the case of public funded research projects and the resulting cooperation networks related to smart grid and systems in Denmark, we raise the questions which actors over time inherit a central position—associated with high influence on the development of research trajectories—in the network. We are particularly interested in what role incumbent actors, connected to the old regime of fossil based energy production, play in shaping future technological trajectories. The protected space theoretically created by such public research funding offers firms an environment to experiment in joint learning activities on emerging technologies, shielded from the selection pressure on open markets, thereby facilitating socio-technological transitions. Generally, the engagement of large incumbent actors in the development of emerging technologies, particularly in joint research projects with entrepreneurial ventures, is positively perceived, as their resource endowment enables them to stem large projects and bring them all the way to the market.
However, growing influence of incumbents might also alter niche dynamics, making technology outcomes more incremental and adapted to the current technological regime. Potential influence on rate and direction of the technological development can to a large extend be explained by actors’ positioning in the network of the niche’s research activities. We create such a directed network of project consortium leaders with their partners to analyze if network dynamics of joint research projects in technological niches favor incumbent actors in a way that they are able to occupy central and dominant positions over time. To do so, we deploy a stochastic actor-oriented model of network dynamics, where we indeed discover path-dependent and cumulative effects favoring incumbents. Our findings suggest a development of the network towards an incumbent-dominated structure.
Daniel S. Hain, Roman Jurowetzki

Entrepreneurs’ Over-optimism During the Early Life Course of the Firm

Recent research on cognitive biases in decision making suggests that over-optimism critically influences entrepreneurs’ decisions to establish and sustain new firms. This paper looks at entrepreneurs’ over-optimism during the early life course of the firm, in order to uncover the dynamics and persistence of over-optimism. We use a representative sample of start-ups in the Netherlands, which we divide into solo self-employed and employer firms. We find that while there is a persistence of over-optimism for the solo self-employed, namely initial over-optimist are more likely to be overoptimistic in subsequent periods; this is not the case for the employer firms.
Zornitza Kambourova, Erik Stam



Knowledge Spillovers Through FDI and Trade: The Moderating Role of Quality-Adjusted Human Capital

The paper extends the findings of the Coe and Helpman (Eur Econ Rev 39(5):859–887, 1995) model of R&D spillovers by considering foreign direct investment (FDI) as a channel for knowledge spillovers in addition to imports. Deeper insights on the issue are provided by examining the inter-relationship between knowledge spillovers from imports and inward FDI. Furthermore, human capital is added to the discussion as one of the appropriability factors for knowledge spillovers, with special focus on its quality-content, using journal publications and patent applications. Applying cointegration estimation method on 20 European countries from 1995 to 2010, the direct effects of FDI-related as well as import-related spillovers on domestic productivity are confirmed. Furthermore, a strong complementary relationship is found between knowledge spillovers through the channels of imports and inward FDI. When considering quality-adjusted human capital, countries with better human capital are found to benefit not only from direct productivity effects, but also from absorption and transmission of international knowledge spillovers through imports and inward FDI. Finally, technological distance with the frontier does not appear to play a role in the absorption of import and FDI related knowledge spillovers.
Muhammad Ali, Uwe Cantner, Ipsita Roy

Export, R&D and New Products: A Model and a Test on European Industries

In this article we extend the model developed by Bogliacino and Pianta (Indus Corp Change 22:649, 2013) on the link between R&D, innovation and economic performance, considering the impact of innovation on export success. We develop a simultaneous three equation model in order to investigate the existence of a ‘virtuous circle’ between industries’ R&D, share of product innovators and export market shares. We investigate empirically—at the industry level—three key relationships affecting the dynamics of innovation and export performance: first, the capacity of firms to translate their R&D efforts in new products; second, the role of innovation as a determinant of export market shares; third, the export success as a driver of new R&D efforts. The model is tested for 38 manufacturing and service sectors of six European countries over three time periods, from 1995 to 2010. The model effectively accounts for the dynamics of R&D efforts, innovation and international performance of European industries. Moreover, important differences across countries emerge when we split our sample into a Northern group—Germany, the Netherlands and the United Kingdom—and a Southern group—France, Italy and Spain. We find that the ‘virtuous circle’ between innovation and competitiveness holds for Northern economies only, while Southern industries fail to translate innovation efforts into export success.
Dario Guarascio, Mario Pianta, Francesco Bogliacino

Using Simulation Experiments to Test Historical Explanations: The Development of the German Dye Industry 1857–1913

In a simulation experiment, building on the abductive simulation approach of Brenner and Werker (Comput Econ 30(3):227–244, 2007), we test historical explanations for why German firms came to surpass British and France firms and to dominate the global synthetic dye industry for three decades before World War I while the U.S. never achieved large market share despite large home demand. Murmann and Homburg (J Evol Econ 11(2):177–205, 2001) and Murmann (Knowledge and competitive advantage: the coevolution of firms, technology, and national institutions. Cambridge University Press, 2003) argued that German firms came to dominate the global industry because of (1) the high initial number of chemists in Germany at the start of the industry in 1857, (2) the high responsiveness of the German university system and (3) the late (1877) introduction of a patent regime in Germany as well as the more narrow construction of this regime compared to Britain, France and the U.S. We test the validity of these three potential explanations with the help of simulation experiments. The experiments show that the second explanation—the high responsiveness of the German university system—is the most compelling one because unlike the other two it is true for virtually all plausible historical settings.
Thomas Brenner, Johann Peter Murmann

The Marshallian and Schumpeterian Microfoundations of Evolutionary Complexity: An Agent Based Simulation Model

The analysis of the Marshallian and Schumpeterian microfoundations of endogenous innovation enables to draw a line between the new emerging evolutionary complexity from biological evolutionary analysis and to overcome its limits. The paper integrates the Marshallian process of imitation and selection with the Schumpeterian creative response. In Marshall initial variety is given and exogenous, the dynamics of the process is driven by the selective diffusion of the best practice and long-term equilibrium stops the generation of externalities; firms are not expected to try and react to unexpected mismatches between planned and actual product and factor market conditions. In Schumpeter firms are allowed to try and react; the quality of knowledge externalities supports their creative response and may keep the system in a self-sustained process of growth. The Schumpeterian creative response can be regarded as a special case of the Marshallian dynamics that takes place when externalities—available to all firms including most performing ones—enable the introduction of innovations that account for the reproduction of superior performances and variety. The levels of reactivity of agents and of the quality of knowledge externalities, provided by the system, account for the growth of output and productivity. This hypothesis is tested by means of an agent based simulation model that shows how these microfoundations of endogenous innovation are able to generate aggregate dynamics based upon the interaction between individual decision making and system properties.
Cristiano Antonelli, Gianluigi Ferraris

Understanding the Complex Nature of Innovation Network Evolution

In this article, we suggest a theoretical framework to explain how and why innovation networks emerge, change and eventually dissolve over time. We argue that network evolution is a multi-faceted phenomenon that needs to be studied at multiple levels. Our framework is based on the notion that network change is a result of exogenous and endogenous determinants. At the heart of our framework, we focus on four elementary network change processes at the micro level: the entry and exit of actors, and the formation and termination of the links between them. We integrate the actors’ knowledge endowments and strategic orientations to emphasize the role of actor-specific decision making processes in explaining the emergence of characteristic network patterns over time. In doing so, we add still missing pieces of the puzzle to the contemporary network evolution literature.
Muhamed Kudic, Jutta Guenther

Why Does Sports Equipment Sometimes Become Too Sophisticated and Expensive? A Case Study of the Overshooting Hypothesis in Board Sports

This paper investigates innovation overshooting in equipment-based sports, using windsurfing as a case study. Sports, in particular equipment-based, “lifestyle” sports can experience a rapid rise in popularity but eventually technology-driven competition leads to equipment overshooting the capabilities and financial budgets of users. This ‘innovation overshoot’ leads to a decline in participation and the eventual collapse of the market for the sport’s equipment. This progression can have significant adverse consequences for industry and allied sectors of the economy. Models of endogenous overshooting are established in the study of finance and business cycles, and more recently have been extended to the music and design industry. This paper extends this idea to the sports equipment sector where we find clear evidence of technological and market overshooting.
Stuart Thomas, Jason Potts
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