The Evolution of Economic and Innovation Systems

It is argued that the explosive growth experienced in much of the World since the middle of the 19th Century is due to the exploitation and use of fossil fuels which, in turn, was made possible by capital good innovations that enabled this source of energy to be used effectively. Economic growth is viewed as the outcome autocatalytic co-evolution of energy use and the application of new knowledge associated with energy use. It is argued that models of economic growth should be built from innovation diffusion processes, unfolding in history, rather than from a timeless aggregate production function. A simple ‘evolutionary macroeconomic’ model of economic growth is developed and tested using almost two centuries of British data. The empirical findings strongly support the hypothesis that growth has been due to the presence of a ‘super-radical innovation diffusion process’ following the industrial deployment of fossil fuels on a large scale in the 19th Century. Also, the evidence suggests that large and sustained movements in energy prices have had a very significant long term role to play.

Both exogenous and endogenous growth theories in neoclassicaleconomics ignore the resource constraints and wavelike patterns in technology development. The logistic growth and species competition model in population dynamics provides an evolutionary framework of economic growth driven by technology wavelets in market-share competition. Learning by doing and knowledge accumulation ignores the interruptive nature of technology advancement. Creative destruction can be understood by using knowledge metabolism. Policies and institutions co-evolve during different stages of technology life cycles. Division of labor is limited by the market extent, numbers of resources, and environment fluctuations. There is a trade-off between the stability and complexity of an ecological-industrial system. Diversified patterns in development strategy are shaped by culture and environment when facing learning uncertainty. The Western mode of division of labor is characterized by labor-saving and resource-intensive technology, while the Asian and Chinese modes feature resource-saving and labor-intensive technology. Nonlinear population dynamics provides a unified evolutionary theory from Smith, Malthus, to Schumpeter in economic growth and technology development.

A model of the innovation – subjective well-being (SWB) nexus is needed to advance our understanding of the welfare implications of innovation. Building on an earlier contribution by Swann (G. M. Peter Swann, 2009, The Economics of Innovation, Edward Elgar, Cheltenham, UK), I first assemble the major building blocks of such a model and then discuss some of the many potential linkages between them. A central feature is the inclusion of multiple SWB impacts of processes as well as of outcomes. Some general issues that would have to be addressed in any empirical application are also discussed. SWB impacts are to be used as an additional indicator in the assessment of innovation, not as something to be maximised. By taking SWB into account, new insights might emerge that could result in either strengthening or modifying existing innovation policies, or in novel policies.

Neo-Schumpeterian evolutionary economics has, since the early works of Nelson and Winter, defined evolution as the change of the mean of a characteristic of a population. This paper trancends the previous paradigm and explores novel aspects of evolution in economics. Within the traditional paradigm change is provided by directional selection (and directional innovation). However, the full definition of evolutionary processes has to include two important types of selection that change the variance without necessarily changing the mean. Stabilizing selection removes any outlier and diversifying selection promotes the coexistence of behavioural variants. This paper emphasizes the need for an integrated analysis of all three types of selection. It also demonstrates that the evolutionary algebra provided by Price’s equation increases the intellectual coherence and power of thinking about selection and other aspects of evolutionary processes. Directional, stabilizing and diversifying selection are then related to fitness functions that can produce the different types of selection; and the functions are used for simple simulations of the change of the population distribution of a quantitative characteristic. Finally, the paper adds to evolutionary economics a novel way of using Price’s equation to decompose the statistics of the changes of the frequency distributions. The changes of mean, variance, skewness and kurtosis are all decomposed as the sum of a selection effect and an intra-member effect. It is especially the signs of these effects that serve to define and characterize the different types of selection. Both this result and the general analysis of the types of selection are of relevance for applied evolutionary economics.

By examining the socioeconomic and political background, we show how China’s regional policy was affected by various factors. We do this in different periods of time, accounting for the conditions in different regions to get an understanding of the policy and how it has evolved over time. From an evolutionary economics perspective, we evaluate the strengths and weaknesses of the regional support policy for China’s western regions, specifically their impact on the economic and social development in these regions. We illustrate the path of change which the regional support policy for the western regions has followed. Using this perspective, we explore the links between evolutionary economics and regional policy changes in China.

Complexity science provides a general mathematical basis for evolutionary thinking. It makes us face the inherent, irreducible nature of uncertainty and the limits to knowledge and prediction. Complex, evolutionary systems work on the basis of on-going, continuous internal processes of exploration, experimentation and innovation at their underlying levels. This is acted upon by the level above, leading to a selection process on the lower levels and a probing of the stability of the level above. This could either be an organizational level above, or the potential market place. Models aimed at predicting system behaviour therefore consist of assumptions of constraints on the micro-level – and because of inertia or conformity may be approximately true for some unspecified time. However, systems without strong mechanisms of repression and conformity will evolve, innovate and change, creating new emergent structures, capabilities and characteristics. Systems with no individual freedom at their lower levels will have predictable behaviour in the short term – but will not survive in the long term. Creative, innovative, evolving systems, on the other hand, will more probably survive over longer times, but will not have predictable characteristics or behaviour. These minimal mechanisms are all that are required to explain (though not predict) the co-evolutionary processes occurring in markets, organizations, and indeed in emergent, evolutionary communities of practice. Some examples will be presented briefly.

Emergence is a generic property that makes economies become complex. The simultaneous carrying out of agents’ intentional action plans within an economic system generates processes that are at the base of structural change and the emergence of adaptive complex systems. This paper argues that goals and intentionality are key elements of the structure of rational human action and are the origin of emergent properties such as innovation within economic complex systems. To deal with the locus and role of goals and intentionality in relation to the emergence of complexity we propose an analytical approach based on agents’ action plans. Action plans are open representations of the action projected by agents (as individuals or organizations), where the means (actions) and objectives (or goals) are not necessarily given, but produced by agents themselves.

Despite its importance as a formative influence in evolutionary biology, the notion of isolation has received relatively little attention in evolutionary economics and its application to technological innovation. This paper makes the case that isolation, in many guises, is a pervasive and permanent feature of the economic landscape and that its implications for technological innovation deserve further analysis. Isolation and potential implications for innovation are discussed in the early part of the paper and case studies of two military innovations are then used to illustrate the value of explicitly recognising various forms of isolation in explaining observed aspects of innovation process and outcomes.

While the prospects for the world economy, especially advanced economies, are uncertain, and the fundamental solutions to important problems such as environmental problems have not yet been found, the emergence or development of new technological paradigms is expected. The emergence of technological paradigms is a most important phenomenon in economic development. In this paper, the relationship between science and technology will be classified using four diagrammatic models, and the hierarchy of technological paradigms and the characteristics of each hierarchy will be clarified in order to consider the emergence of these technological paradigms. In addition, this paper mentions the implications for the corporate strategy of R&D, science and technology policy, and economic theory.

Parts of Asia continue to enjoy high economic growth—this rapid growth however does not extend to all regions of Asia, and within geographic regions growth disparities remain high. This paper features applied and complex models for regional economic development. In a pioneering approach that makes explicit the complex connections needed to spur growth in trade, this South Asia-focused study details a unique method to assess how Aid for Trade (AfT) investments interact with agents of economic change, such as consumers and producers and traders of intermediate and final goods and to evaluate their potential to reduce the cost of bringing more products to more markets. Furthermore, it presents a new tool for policy makers to foster regional economic integration and pursue the overarching development objective of more inclusive growth across a region. The paper shows how modeling restructuring across geographies can visualize policy choice hitherto unseen and unrecognized.

The models exhibit structural changes in the regional South Asia economy through the decreases in intra-regional trade transaction costs which are influenced by a set of investment based policy choices. The cost reduction pattern and the nature of non-linear and distributed interactions between the geographic elements of the agent-based system allow it to functionally restructure itself over time. When low growth sections of the regional economy are integrated into evolving regional and global trade networks and agent-based relationships, the benefits of high economic growth are extended to low growth sections of a regional economy, as is made visually apparent in Geographic Information System (GIS) map-based simulations. The paper will review representations of regional development models in terms of their assumptions (peeled away like an onion) and in terms of their level of complexity, very much in the tradition of Peter Allen’s classification system. Traditional mechanical models of regional economic development assume away structural change with the assumption of completeness of network connections among agents in the system, thereby imposing a simplifying homogeneity on economic agents that significantly reduces explanatory power.

This chapter is concerned with policy and the role of the European Technology Platforms as new experimental policy tools for structuring change. The problem discussed here concerns a change in the current European energy system towards a better integration of low-carbon technologies enabling it to reach its climate goals for 2020. The chapter’s research strategy stresses the importance of relations rather than the determinism of technology or ideas. As a result, the chapter’s structural analysis shows how firms in the modern European economy work, on a collective level, from within the political system to create new institutional structures in the economy. A major social network analysis examines how connectivity in two specific European ‘technology’ platforms’ networks has changed and evolved in relation to researching the solutions to solving major societal problems, and therefore has also driven innovation towards new business opportunities. The analysis shows how connectivity and network relations play an important role in innovation, as opposed to arm-length anonymous interactions as presumed in mainstream economic thinking.

This article aims to provide some elements of an evolutionary theory of property rights. It applies a systems-based capital-theoretic perspective to explain the formation and transformation of property rights structures. The approach emphasizes how entrepreneurs create capital combinations by connecting capital goods—defined widely to include property rights, such as patents—in their production plans. Their actions change complementarity relations between property rights as used in production. We treat the property rights structure as a complex adaptive system that exhibits increasing structural complexity as it evolves. Entrepreneurs discover gaps in the property rights system. As they organize production to exploit profit opportunities, entrepreneurs regroup existing intellectual property rights (IPR) into new modules, such as patent pools, that encapsulate more complex combinations of basic building blocks of intellectual property. A patent pool constitutes an interpolation of a new meso level within the macro IPR structure. We apply our framework to the first of the patent pools for digital video compression technology used in digital television and DVDs.

During the 1970s also the industrialized BSR economies had introduced elements of centralized planning that restricted free entrepreneurial activities. By the Soviet collapse stagnation had therefore also brought the need for entrepreneurship onto the policy agenda of Western BSR nations. Institutional obstacles to economic progress were gradually being dismantled. Historic developments in the BSR have therefore accidentally staged a unique economic policy experiment. Using a competence bloc based method of identifying the role of the entrepreneur in observed macroeconomic catch-up, we can distinguish between the relative roles in economic progress among the BSR economies of improvements in local entrepreneurial environments, and of individual entrepreneurial action. We found that successful catch-up among the formerly planned BSR economies still has a long way to go, and that policy focus should be set on improving the local entrepreneurial environments to support both new firm formation for long run development, and to encourage immediate FDI for short term effects. Significant obstacles to trade and ownership transactions, however, remain across the BSR. Hence, success in catch-up should be expected to differ significantly among the BSR countries.

We propose a policy competition among the transition countries in improving their entrepreneurial environments to beat each other in long run catch-up performance, that will benefit both catch-up of individual economies, and growth of the entire BSR economy.

Cooperation can benefit and hurt firms at the same time. An important question then is: when is it better to cooperate? And, once the decision to cooperate is made, how can an appropriate partner be selected? In this paper we present a model of inter-firm cooperation driven by cognitive distance, appropriability conditions and external knowledge. Absorptive capacity of firms develops as an outcome of the interaction between absorptive R&D and cognitive distance from voluntary and involuntary knowledge spillovers. Thus, we offer a revision of the original model by Cohen and Levinthal (Econ J 99(397):569–596, 1989), accounting for recent empirical findings and explicitly modeling absorptive capacity within the framework of interactive learning. We apply that to the analysis of firms’ cooperation and R&D investment preferences. The results show that cognitive distance and appropriability conditions between a firm and its cooperation partner have an ambiguous effect on the profit generated by the firm. Thus, a firm chooses to cooperate and selects a partner conditional on the investments in absorptive capacity it is willing to make to solve the understandability/novelty trade-off.

The present work aims at contributing to the recent stream of literature which attempts to link the Neo-Schumpeterian/Evolutionary and the Post-Keynesian theory. The paper adopts the Post-Keynesian Stock Flow Consistent modeling approach to analyze the process of development triggered by the emergence of a new-innovative productive sector into the economic system. The model depicts a multi-sectorial economy composed of consumption and capital goods industries, a banking sector and two households sectors: capitalists and wage earners. Furthermore, it provides an explicit representation of the stock market. In line with the Schumpeterian tradition, our work highlights the cyclical nature of the development process and stresses the relevance of the finance-innovation nexus, analyzing the feed-back effects between the real and financial sides of the economic system. In this way we aim at setting the basis of a comprehensive and coherent framework to study the relationship between technological change, demand and finance along the structural change process triggered by technological innovation.

An evolutionary approach to economics recognises that the economy is an open system subject to change from within. One important evolutionary feature is the emergence of dominant firms in many important sectors of the global economy. We argue that these firms have distinguishing characteristics that contribute to their evolutionary fitness and have powerful impact on the process of innovation. We designate these firms as mega-firms.

We locate the distinctive competitive advantage of the mega-firm in its ability to cope with restless knowledge. The mega-firm imagines and then pursues its products, technology and resources. It does not take its environment as given. It develops extensive capabilities from the specialised knowledge of large numbers of individuals, thereby reaping economies through the coordination of a division of labour. Importantly, firm capabilities expand organically from the interaction of the knowledge of individuals, enhanced by introspection and creative problem solving, which provides potential protection for the firm against the ravages of creative destruction in the competitive process. Most importantly, the mega-firm organises itself to enhance innovation without destroying cohesion, which means that its structure and functions are both historically specific and changing over time. Thus, the mega-firm is a restless firm.

This paper studies the relation between firm managerial capacity in doing innovation and firm profitability. The approach taken is at the intersection of evolutionary/neo-Schumpeterian theory and the resource-based view of the firm. Utilizing a stochastic frontier analysis, we provide a direct measure of the innovation management capacity which is then plugged into a profit margin equation, augmented by the traditional Schumpeterian drivers of profitability. We run both ordinary least squares and quantile regressions.

Results show evidence of an average positive effect of the innovation managerial capacity on firm profitability, although quantile regressions show that this mean effect is mainly driven by the stronger magnitude of the effect for lower quantiles. This means that less profitable firms (i.e. the smaller ones in our sample) could gain more from increasing managerial efficiency for innovation in comparison to more profitable (larger) businesses.

The role of productivity change and city-specific characteristics on economic growth are analyzed for German cities. Productivity change is measured by the Malmquist index and its components, which are estimated by non-parametric data envelopment analysis. The nested structure as well as the interaction between industries within cities and over time is accounted for by estimating multilevel models. It is shown that there are differences for industrial growth for different cities and years. Therefore, the use of multilevel models is required. Schumpeter’s creative destruction is found to hold for efficiency change on industrial growth. Efficiency change measures the catching-up to the best practice production function, reducing both value added growth and employment growth. Technological progress shifts the best practice production function and leads only to a rise in value added growth and not in employment growth. The estimations indicate a converging growth of urban industrial value added while employment growth diverges.

With this study we intend to define a methodology capable to deal with the task of evaluating and planning the interdependent dynamics of growth for some European countries together with their foreign partners. To that aim we employ a nonlinear differential equations system representing a disequilibrium model based on a Schumpeterian evolutionary context with endogenous technology. We use such a model in order to disentangle the interrelationships occurring among countries for the critical variables considered. That is, we succeed in evaluating the contribution to growth of a country with respect to another one in terms of the variables involved. We address and corroborate the validity of our conjectures on the importance of the business services in the innovation and production processes by presenting also a minimal model. Further, we provide an evaluation of the convolution integral of our differential system to determine the necessary initial conditions of the critical variables for policy purposes. We then perform a sensitivity analysis to assess per each country the effectiveness of some possible efforts in order to gain stability.

This paper presents a simulation model of the internet access services market. The model is based on neo-Schumpeterian evolutionary theory, as well as on the contemporary institutional theory. One key driver of the internet sector has been the significant technological opportunities. However, competition in the internet access services market has proved less intense than in other technology-driven industries in most countries, including other segments of the internet sector itself. Usual theoretical approaches do not adequately explain this empirical observation. Our hypothesis is that institutional mechanisms were determinant for the dynamics of competition. Institutions are broadly understood as socially shared, formal or informal, recurring rules of behaviour or thought. To test this hypothesis, a sectoral agent-based simulation model is proposed, modelling with some detail both demand and supply agents’ behaviours. Model parameters and initial conditions were calibrated using empirical data from the Brazilian market. The competitive mechanisms unveiled by simulation were clearly dependent on institutional processes, particularly at user preferences setting and informal business rules adoption. Institutional phenomena were strong enough to produce results that are significantly different from other technologically dynamic industries.

In this paper we analyze the impact of micro-, meso-, and macro-economic determinants on firm productivity growth from an evolutionary and systemic perspective, in small and medium-sized Argentinean enterprises during 2006–2008. This period is characterized by strong employment and productivity growth. In this context, increases in productivity are explained better by innovation rather than falling employment. The microeconomic dimension is tackled by resorting to innovation results (product and process), which in turn are estimated through innovation efforts, following the well-known Crepon, Duguet, and Mairess (CDM) approach. The meso dimension is considered in terms of each firm’s position in the competitive space; that is, whether each firm’s productivity level is below or above the sector average. The macro determinant of changes in productivity considered here is the expansion of domestic demand, estimated by the sectoral apparent consumption. The results show that the micro and meso dimensions contribute to explaining firm-level productivity growth. Innovation results, estimated through innovation efforts and linkages, explain productivity growth. The firm’s position in the competitive space shows a U-shaped relationship with productivity growth. Finally, sectoral demand does not seem to have any impact on our study.