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This is an analysis of the wide theoretical context and consequential work of Richard Nelson and Sidney Winter. We assume as a norm for this chapter that we must do an embryological analysis of their texts, and those of contemporary thinkers. We begin by disentangling the avalanche of new ideas in the early individual works of Nelson and Winter. This flow of frames and concepts evolving, and the torrent of new questions that they pose, become interlaced and crystalize during their joint contributions in the 1970s and 1980s. In these decades we can distill the essence and critical development of Nelson and Winter in dialectic opposition with 20 th Century standard economics. The advances achieved during the 1990s and 2000s, with new protagonists coming to the front, lead us to the frontier of evolutionary economics. Then, the sudden irruption of the recession in 2008, and the sequence of shocks that have transmuted the global economy during the last decade, have unchained crucial innovations in evolutionary economics that expand the field far beyond the consolidated "beachhead".
The Foundational Evolutionary Traverse of
Richard R. Nelson and Sidney G. Winter
Isabel Almudi
Francisco Fatas-Villafranca
University of Zaragoza (Spain)
This is an analysis of the wide theoretical context and consequential work of Richard
Nelson and Sidney Winter. We assume as a norm for this chapter that we must do an
embryological analysis of their texts, and those of contemporary thinkers. We begin by
disentangling the avalanche of new ideas in the early individual works of Nelson and
Winter. This flow of frames and concepts evolving, and the torrent of new questions
that they pose, become interlaced and crystalize during their joint contributions in the
1970s and 1980s. In these decades we can distill the essence and critical development
of Nelson and Winter in dialectic opposition with 20th Century standard economics.
The advances achieved during the 1990s and 2000s, with new protagonists coming to
the front, lead us to the frontier of evolutionary economics. Then, the sudden irruption
of the recession in 2008, and the sequence of shocks that have transmuted the global
economy during the last decade, have unchained crucial innovations in evolutionary
economics that expand the field far beyond the consolidated “beachhead”.
Key words: Economic Theory; Economic Thought; Evolutionary Economics
Chapter, Routledge Handbook in Evolutionary Economics (2023).
Dopfer K, Nelson R, Pyka A, Potts J (eds). Routledge. London
1. The Context
The principle that marginal subjective valuations and their interpersonal confrontation
in exchanges is a fundamental aspect of market order and relative price formation, was
almost simultaneously stated by William Stanley Jevons, Carl Menger and Leon Walras
in the early 1870s. This principle is now regarded as one of the pillars of modern
economics. During the 19th C, the objective value theory of the Classics had been
questioned. The scheme pioneered by Adam Smith and David Ricardo, that reached a
systematic presentation in John Stuart Mill’s Principles of Political Economy, had
become the object of critical attacks from different angles: from the German Historical
school and the continental schools of law and philosophy; from alternative views that
existed in France and Italy (Cournot, Dupuit); but also in England, where Alfred
Marshall knew well the work of von Thünen, and had begun thinking of an improved
and combined supply-demand scheme. These 19th C debates led to the configuration of
the marginalist revolution with their subjective value theory. In a few decades, the role
of objective costs from the supply side was also well integrated in the theory, and the
impact of the modern approach was permeating, in its distinct variants, wide realms of
political economy. We find it in the work of Wicksell and the Austrian economists
Wieser and Böhm-Bawerk; and it engenders the neoclassical paradigm from Pareto and
Edgeworth, to the market theory of supply-demand equilibrium in Pigou and Marshall.
Of course, there were remarkable exceptions: Karl Marx worked along classical paths
to establish his Hegelian-but-materialist revolutionary view (enormously influential
during the 20th C after the Russian revolution). And from a very different viewpoint,
the Old American Institutionalist school with Thorstein Veblen as the leading figure,
developed its theory of the social groups, focusing on concrete habits, lifestyles and
studying the origins of economic institutions. It was precisely Veblen the first who
wondered whether economics, perhaps, should be considered an evolutionary science
(Veblen, 1898).
This could be a brief description of the theoretical landscape at the beginning of the
20th C, from which the Neoclassical and Austrian schools of economics (with their
remarkable differences) ended up prevailing as the mainstream approaches, at least
during the first two decades of the century. Notwithstanding the importance of social
categories and market processes recognized by economists at the time, the inquiry in
both schools was primarily posed in terms of individual agents organizing their
allocative action around subjective perceptions and budget constraints, and interacting
with profit-led firms constrained by market prices and the state of technique (Robbins,
1932). In the Austrian side Mises and Hayek were extending their frame to deal with
the monetary causation of cycles; in the neoclassical realm, the rigorous and rich
analysis of Marshall and Pareto were quickly integrated by John R Hicks (1939).
Favorable to the use of mathematics in economic analysis, the neoclassicals fostered
the use of linear algebra and differential calculus in the synthetic comparative static
methodology conveyed by Samuelson (1947) (relying on the implicit function theorem,
classic constrained optimization techniques, and the correspondence principle for
dynamical adjustments). As we can see in Allen (1960) this central core of
microeconomic inquiry was culminated by WWII. Drawing on these mainstream
schools, but moving in different doses away from them, we observe in the 1930s six
strong theoretical breakthroughs that were to shape 20th C economics. These
breakthroughs conformed the training and early context of Nelson and Winter.
The first novelty was that a small research program which began as a technical problem
(trying to delimit the conditions for a Walras-Cassel equilibrium to exist), became
(through the framing of Wald, the technical intuition of von Neumann and the support
of Divisia and Allais) the theoretical core of neo-Walrasian general equilibrium theory
(GET). This research gained its central place after the war with Arrow and Debreu
(1954) and Debreu (1959), all the way to Dierker (1974). These authors solved correctly
the technical problems left by Walras and Pareto, and broke the previous compromise
of neoclassical economics with differential calculus. More precisely, by extending the
implementation of convexity theory, separation theorems and topological methods in
neo-Walrasian settings, Arrow, Debreu and McKenzie found conditions to explain: (i)
how prices for present and future markets could be instantaneously determined, from
the coordination of demand-supply (consumption-resources) plans (devised by
axiomatically characterized maximizing consumers in private ownership economies),
and supply-demand (output-input) plans (devised by profit maximizing firms owned by
consumers); and (ii) how are these market equilibrium prices, related to Pareto-optimal
states of neo-Walrasian economies. The Arrow-Debreu-McKenzie model was path-
breaking in neoclassical theory, it was part of Nelson and Winter early career, and it
turned out to be -through Arrow and Hahn (1971)- a key reference for economists in
the second half of the 20th C.
The second innovation was mostly technical. During the thirties we can observe the
prefiguration of econometrics and quantitative statistical methods as the privileged tool
for contrasting economic theories. The work of Kuznets (1929), the econometric views
of Tinbergen (1939), Frisch (1933), Koopmans (1936), Haavelmo (1943) and, later on,
the advances within the Cowles commission oriented by Koopmans and colleagues in
Koopmans (1950), all established the classic econometric program which necessarily
influenced the training of our protagonists. A reference to understand the econometric
program in the fifties and sixties, as well as how econometrics have benefited in recent
decades from the advances in electronic devices, may be Theil (1978). In this text we
can see how inferential statistics and the testing of parametric hypothesis, multiple
regression analysis and maximum likelihood, confidence intervals, estimation,
validation, prediction and control, all were implemented to quantify and test the
economic theories of the time. It is also remarkable an alternative quantitative line of
research at the Cowles foundation, that developed in different directions the models of
Leontief. Thus, Koopmans, Dantzig, Simon, Samuelson and Solow (Koopmans, 1951)
introduced linear programming and activity analysis in economics, influencing the
early ideas of Nelson and Winter.
The third theoretical breakthrough of the interwar period was the work of John M.
Keynes (1936), very much induced by the 1930s economic crisis, and considered the
source of many analytical developments that followed. Although, perhaps, the truly
path-breaking pieces in Keynes General Theory were the role of radical uncertainty in
explaining the volatility of expectations and investment, the trembling nature of the
demand for money, and the fragility of effective demand in maintaining aggregate
equilibria with full employment (Keynes, 1937; Alchian, 1955; Shackle, 1979), it must
be recognized that the most influential immediate interpretations of Keynes were not
so far from the mainstream. We refer to the works by Alvin Hansen and, mostly, to the
article by John R Hicks (1937) -the IS-LM model, later extended with the mathematical
tools provided by Samuelson (1947). This approach led to the Keynesian-Neoclassical
synthesis of Modigliani, Tobin (1955), Blinder and Solow (1973) and the large
econometrically-estimated models for policy in Klein and Goldberger (1955). Even the
early Milton Friedman (1957) was involved in these extensions. This interpretation of
Keynes was of paramount importance in establishing macroeconomics as a field, and
in searching for the micro-foundations of consistent macro-models that oriented policy
(Tobin 1955, 1969). They considered Keynesian pathologies as problematic temporary
states in the short-run that, once the prescribed stabilization policies were implemented,
could be amended to restore the general equilibrium neoclassical predictions in the
long-run (Solow 1956; Tobin, 1965; Phelps 1970). Of course, there was an alternative
reception of Keynes contribution by some direct students and collaborators of Keynes
in Cambridge. These were the so-called post-Keynesians. They perceived in Keynes a
much stronger critique to the functioning of market economies, as we can see in the
works of Joan Robinson, Kalecki, Harrod, Kaldor or Saraffa. Although we may note
that their works were, perhaps, as tributary to Keynes as they were to Marx or Ricardo,
their interpretations pointed out to essential phenomena, such as dynamic increasing
returns, structural change and imperfect competition; these works led to the growth
models of Pasinetti (1981) and have become very influential in evolutionary economics
(Shiozawa et al. 2019).
The fourth notable development in the interwar period has to do with the renewal and
relocation of the leading Austrian thinkers. Hayek moved to LSE and much later to the
University of Chicago. He developed, in fruitful essays, the notions of dispersed, tacit
and practical knowledge, as well as the idea of spontaneous orders in capitalism driven
by entrepreneurial discovery processes, price information and market interactions. In
Hayek (1937, 1945, 1967) the scattered and non-fully articulated nature of knowledge
in individuals, markets and organizations, and the role of prices as coordinating signals,
is co-prefigured in relation (and friendship) with Michael Polanyi (1962, 1967) and
Karl Popper (1945). Meanwhile, Mises (1949) finished in New York his monumental
Human Action, in which he defines in depth the position of the Austrian school of
economics (in critical controversy with Lange and others) regarding the Socialist
calculation debate. Drawing on his praxeology and extending previous Austrian
insights, Ludwig von Mises explores the multidimensional set of wants and capabilities
co-existing in modern societies, and the enormous informational and computational
requirements that a society must face to cope with the income generation and
distribution questions of what, how and to whom produce. In relation with this, it is
also during this period that Joseph A Schumpeter moved to Harvard. In the USA,
Schumpeter completed his initial work on entrepreneurial innovations and their
disruptive effects (Schumpeter 1934), and came up with his results on long-cycles, and
on the routinized character of corporate R&D. It is interesting, on the one hand, how
Schumpeter vindicates in this period the figure of Karl Marx; but, on the other hand, he
demolishes key Marxist conceptions (Schumpeter, 1942). In his Capitalism, Socialism
and Democracy Schumpeter argues that, in analyzing capitalism, we are dealing with
an evolutionary process.
The fifth innovation of the period is a new stream of institutional thought that, focusing
on organizational, legal, social, and non-market aspects, and showing a remarkable
interest in economic history and the study of cases, were to shape with time the New
Institutional Economics (Coase, 1937; Williamson, 1975, 1985; North, 1991, 2003).
While maintaining a certain tension with the atomistic market equilibrium approach
that we have found in neoclassical economics, but also delimiting clear differentiations
with the (exclusively) market-processual view of the Austrians, this school obtained
interesting results regarding the following themes: the detailed study of multifaceted
organizations and the problems of uncertainty in modern societies (Knight 1921, 1951;
Alchian, 1950); the nature of firms and its peculiarities, boundaries and motivations in
particular sectors (Coase, 1937); the problems of transaction costs, social cost vs private
costs, and market miss-allocations (Coase, 1960); property rights, externalities, and
information problems (Alchian 1950; Demsetz, 1967; Alchian and Demsetz, 1972).
This approach will be influential in Nelson and Winter, and more so when combined
with the Carnegie School.
The final breakthrough from the interwar period, that conditioned the context of Nelson
and Winter, came from certain parallel advances that happened in mathematics during
the 1930s, 1940s and 1950s. We refer to some developments in the mathematics of
evolution, and in Game Theory. These advances became, to a certain extent, partially
synthesized in the 1980s with the work of John Maynard-Smith (1982) -Evolutionary
Game Theory. We can begin by noting that one of the most remarkable scientific
advances during the first quarter of the 20th century, was the integration and unification
of Mendelian genetics and Darwinian principles in mathematical biology. Regarding
the influence on our protagonists, the seminal work of Ronald Fisher (1930) conveyed
formulations of concepts such as selection, replication and stochastic mutation that
played a role in evolutionary economics. Posterior studies on covariance selection
mathematics by Price (1972), and in replicator dynamics [synthesized in Schuster and
Sigmund (1983) or in Hofbauer and Sigmund (1998)], were also influential in Nelson
and Winter and their school. From a different angle, but in a partially convergent
direction, John von Neumann and Oskar Morgenstern (1944) posed their theory of
strategic behavior in the book Theory of Games and Economic Behavior. They provided
just the beginning of the theory. Probably, it was through the work of John Nash in the
1950s, who formulated his notion of equilibrium and applied topological tools and fixed
point theorems to prove that every finite game has an equilibrium, that game theory
became consolidated. Although John Nash suggested a possible mass-population
evolutionary interpretation of his equilibrium concept, it was not until the work of
Maynard-Smith in the 1970s and 1980s that the attention of game theorists turned away
from refining notions of rationality and equilibria, to the study of learning. We want to
anticipate that these mathematical instruments were useful for our protagonists. We
find them among the bundle of technical resources that Nelson and Winter used when
they began modeling populations of heterogeneous agents displaying differential
growth rates, with the agents being rule-driven, random innovations appearing, and the
levels of market competitiveness being seen as analogous to fitness levels. For the time
being, we leave here the context, and move to the study of the initial questions and
problems that our protagonists faced.
2. Economic order and Firm theory in the early Sidney Winter
The article by Alchian (1950) condenses three important preliminary insights which,
taken together, will mark the early efforts of Sidney Winter. In this article, Armen
Alchian rises, firstly, the question of how economic theory can deal with the problem
of market order and price formation in continuously changing and radically uncertain
environments; secondly, he suggests that a fruitful way to tackle this problem, without
dispensing entirely with mainstream economics, may be studying firm adaptation
processes and their outcomes in the long-run; and, thirdly, Alchian proposes that the
methodology to face these challenges relies on the combination of economic theory
with the theory of stochastic processes (Feller, 1957). The third (methodological)
suggestion was taken seriously by mainstream economics, but the first and second
points were largely ignored (Stokey et al. 1989). On the contrary, the young Sidney
Winter took the three challenges altogether, and began addressing the problems of
market functioning, price formation and planning in multisector settings, and how firm
adaptation efforts may cope with uncertain dynamic environments.
In order to understand how our author was gradually facing and combining his thoughts
on the three Alchian challenges, we must primarily figure out (through the early texts)
which were the skills, direct research contacts, and preliminary explorations of Winter.
Regarding the overall context presented in the previous section, we see in the texts how
Winter becomes interested in, at least, four of those lines of advance. The first line
consists of a profound knowledge and (critical) interest in the nascent literature on neo-
Walrasian GET. This is clear in Winter (1969), but also in mentions by other authors -
such as Hal Varian (1980)- who, in the preface for his advanced microeconomics
textbook, recognizes that the chapters on General Equilibrium Theory, Welfare
Economics and the Theory of the Firm all draw on the lecture notes by Sid Winter and
Daniel McFadden at the University of Michigan. Both in Michigan, and later at Yale
University, Winter shows an advanced knowledge of the neo-Walrasian approaches and
techniques. Apart from his comments to the fundamental theorems of welfare
economics, it is remarkable his familiarity with the literature on preference aggregation
and axiomatic social choice, as established by Arrow (1951) and later Sen (1970). This
is very important because he will end up (much later) thinking against this tradition,
that he perfectly knows.
Secondly, and this is surely due to the proximity of Winter to Koopmans, Simon, the
Cowles Foundation (already established at Yale in those years) and RAND, Winter was
highly involved in the frontier research of the time on representing technology in
multisector Activity Analysis models. The influence of Koopmans, Dantzig, advances
in convexity theory, linear programming, multisector linear technology settings, and
the Kuhn-Tucker results in the fifties (partly influenced by Game Theory), is enormous
in the young Winter, as it can be seen in Winter (1965, 1967; and later in 1981, 1982).
This is essential at least for two reasons: first, because it will influence, at least partially,
the posterior characterization of technology and technological advance in evolutionary
models with Richard Nelson. And also, second and very remarkable, because the
contributions of Winter to: i) the literature on turnpike paths in von Neumann (1945)
and Radner (1961) models; ii) to the study of linear economies with many activities á
la David Gale (1960; see also 1955, 1956); and iii) to the assimilation of linear
programming as a development of Leontief analysis -as in Koopmans (1951), or in
Dorfman, Samuelson, Solow (1958), all this kept Sid Winter significantly away from
the Macroeconomic Keynesian aggregate models of the time. This is essential, because
it reveals, in the young Winter, a conviction with regard to the need of encompassing
multiple interconnected activities and multisector settings to explore economic order in
large economies. This will become later (with Nelson) a strong interest in structural
change; and it shows a perception of the fact that the mainstream translation of
microeconomics into macroeconomics, through typological thinking in permanent
(even moving) equilibrium, is a closed way.
Thirdly, Sidney Winter presents an increasing passion for methodological discussions
(Alchian 1950; Friedman, 1953; Koopmans, 1957), that will eventually lead him to a
deep interest for very foundational questions such as what is economics as a science,
and how to achieve empirically significant advances in economic theory. This will
become very clear in later works (Nelson and Winter 1982; Nelson and Winter 2002).
Finally, fourth, from the study of the three Alchian challenges and the reading of
Friedman on the methodology of positive economics, Winter (1964) comes up with a
critical view of the characterization of firms as profit-maximizers on well-defined
technology-choice sets. He progresses gradually towards the assimilation of the
behavioral theory of the firm (Simon 1947; Cyert and March 1962). These topics are in
line with the institutionalist concerns in the thirties, and connect directly with the
contributions of the Carnegie School to organization theory, and the notion of bounded-
rationality by Simon (1957, 1983). These interests are clear in Winter (1964) but reach
scale in the 1970s. In Winter (1964), the author faces the Alchian challenges and the
Friedman defensive argument, by wondering what does it mean considering firm theory
as a theory on how firms adapt their behavior to market changes. By taking seriously
the Friedman conjecture that: i) firms react to market conditions; ii) the survival of the
fittest and the exit of unviable firms clean over the initial set of firms; and iii) therefore
the fittest and prevailing firms in the long-run should be those behaving as if they were
profit-maximizers, Sid Winter realizes that the problem is not that simple. To begin
with, in theorizing about the firm we must consider, at least, three key processes:
1) A cognitive process through which firms acquire information dependent on the
state of the world but conditioned on their specific organizational form.
2) A decision process, which is dependent on the information acquired but also on
the internal conditions of the organization. Processes 1) and 2) can be formally
captured in a typical Marschak and Radner (1972) formulation.
3) Processes of entry-exit in which the appearance-disappearance of specific
identifiable firms is paired with their concrete organizational traits conditioning
1) and 2). This is very important because the Friedman argument seems to
privilege the role of market exit, but it does not consider well the entry of new
organizational variants. Moreover, Friedman did not distinguish in his “natural
selection” defense of profit maximization between actions and organizational
It is remarkable that in his 1964 essay, Winter already combines behavioral and
organizational ideas (as those presented above) with proto-evolutionary formulations,
and even he provides us with a preliminary notion of firm routine. These ideas, and
once the collaboration with Richard Nelson has slightly begun, appear developed in the
magisterial paper by Winter (1971) in the Quarterly Journal of Economics. In this
article, Sidney Winter’s combination of behavioral, evolutionary, technological and
mathematical new ideas appear perfectly interlinked. Drawing on the behavioral
critique that orthodox firm theory neglects the real decision mechanisms in firms,
Winter argues that to understand the behavior of adaptive organizations in rapidly
changing markets, we must study its internal structure, decision rules and the concrete
mechanisms of adaptation. In the fifth section of the paper, and employing the theory
of finite Markov chains, the author proposes a one-industry evolutionary model in
which heterogeneous boundedly-rational (satisficing) firms operating with rules,
displaying different growth rates (transition probabilities from t to t+1 towards
alternative states including growth, entry, exit), and facing a standard demand-side of
the market, engender a competitive process formalized as a Markov process on the set
of industry states. Then a strong formal result is proved on the possibility of coming up
with a realistic firm and industry dynamics theory capable of understanding firm
behavior and industrial change in non-equilibrium conditions. The theory of stochastic
processes used for firm transition probabilities, the incorporation of an original and
tractable evolutionary model embodying everything learnt on the representation of
techniques and organizations, the consideration of firm entry-exit, and a peculiar
characterization of demand, all led Sidney Winter to establish sufficient conditions
under which, the long-run equilibrium of the modeled industry, would be identical to a
(conveniently tuned) typical outcome of partial equilibrium neoclassical models
(although no firm in Winter model may be maximizing profits). Moreover, by removing
one or several of the sufficient conditions, we observe industrial dynamic paths in the
model leading to non-neoclassical configurations. It is a theorem that proves formally
the need to differentiate between the assumption that firms maximize profits, and
accepting the possibility of potential particular outcomes in which firms may end up
being (or not) profit maximizers in industry models. Besides all this, we may note that
the demand-side of Winter (1971) industry analysis, as characterized by his seventh
assumption, already anticipates certain shortcomings regarding demand that weaken
the first epoch of modern evolutionary economics. Basically, demand plays here the
role of closing the system, as it will be the case in Winter (1984), with no evolutionary
insights in this respect. This is a typical shortcoming of early neo-Schumpeterian
evolutionary economics (and of Schumpeter himself) that is being improved in recent
decades (Witt, 2001; Valente, 2012; Chai and Baum, 2019). It is, nevertheless,
interesting to note here that an insightful alternative manner of dealing with demand
from an evolutionary perspective had been tried earlier in Phelps and Winter (1970),
where Winter presents a customer-flow revision protocol in an evolutionary approach
to demand, but –in this case- combined with a neoclassical supply-side (a dynamic
optimization problem for price-setting firms). Recent advances in evolutionary
economics, such as Almudi et al. (2013), and Almudi et al. (2020) in Industrial and
Corporate Change, have combined the evolutionary supply-side in Winter (1971) with
the evolutionary demand-side in Phelps and Winter (1970). The combination produces
surprising results on coevolution in multisector settings and industrial policy.
In order to close the early research by Sid Winter, we note that in Winter (1982, 1986)
the author explores the notion of rationality, the nature of the firm, organizational
capabilities, and possible rigidities arising when organizations display adaptive
behavior, thus anticipating later collaborations with the neo-Institutional views, as in
Williamson and Winter (1991). Likewise, in relation with the problems of information
acquisition and large-scale social organization (that concerned our protagonist at least
since his studies on turnpike theorems and social planning), Winter warns us against
the price mechanism as being considered the unique and even the most effective
information transmission activator in complex economies. This theme also appears in
Arrow (1974), and in Winter takes the form of exploring the low elasticity of
substitution in firms, when facing changes in relative input prices (Winter, 1981).
During the eighties, we see in the author highly elaborated arguments on the nature of
knowledge, revealing how Winter was becoming influenced by his collaboration with
3. The problem of economic change in the early Richard Nelson
Richard Nelson always explains that the program in economics at Yale University and
elsewhere in the early 1950s (his training years), was much richer in contents related to
economic history and economic thought than it is today. This familiarity with historical
studies, with the history of thought (Smith, Ricardo, Marshall, Schumpeter), together
with the early involvement of Nelson in field studies related to technological progress
(one year of engineering at MIT, and collaborating with technologists at RAND),
conditioned his interest in economic change. Of course, the early Nelson was also
influenced by the prevailing theoretical approaches that we have seen in section one. It
is clear in Nelson (1956, 1964) that he was thinking (at least in part) from the
Keynesian-Neoclassical synthesis of James Tobin and colleagues, and he was doing
growth accounting with the new date series, drawing on aggregate neoclassical
production functions. But, even in these early works, Nelson dealt with inter-
disciplinary frontier issues that, with time, led him far from the mainstream coordinates.
For example, in his study on low-level equilibrium traps for low income economies,
Nelson (1956) already detects the role of the socio-cultural environment as a potential
engine of economic growth (under certain conditions), even if capital per capita was
not growing at the low-level specific trajectories. This analysis anticipates that Nelson
was going to perceive the processes of economic growth and development, as being
much more complex phenomena than the accumulation trajectories obtained in Solow
(1956, 1957), in the optimal-growth Ramsey-Cass-Koopmans models, or even in the
overlapping generations models being proposed at that time (Cass, 1965; Samuelson,
1958; Diamond, 1965). We claim that Nelson’s conception is more complex because it
considers a much wider array of non-market phenomena, notwithstanding the relative
advances in Ramsey-Cass-Koopmans (they consider intertemporal preferences
combined with investment and the productive structure, in order to characterize optimal
consumption, capital and income growth paths); or the advances from Samuelson’s
overlapping generations model with money, that later allowed Peter Diamond (1965)
and colleagues to study growth with a portfolio of assets. These aspects had already
been studied, but from a different angle, in the Keynesian Tobin-growth models with
On the other side, it is remarkable in Nelson that, even when he uses terse standard
models or growth accounting techniques (Nelson 1964, 1968; 1981, 1982 much later
Nelson and Pack, 1999), he always operates clearly influenced (in his tendency to
encompass many pragmatic details of corporate activity and policy-making) by a small
group of young economists and technologists of his generation (Zvi Griliches, Edwin
Mansfield), and by his partners at the US Council of Economic Advisors (James Tobin,
Arthur Okun, Kenneth Arrow) who, because of the nature of their tasks at that moment,
focused on practical implementation contexts. They considered the specificities of
distinct real sectors (agriculture, aeronautics), concrete historical episodes, and tried to
figure out the impact of their ideas on social organization. Of course this global and
mixed Nelsonian conception of economic practice is, somehow, at odds with the
prevalence of highly stylized models in the mainstream, and as early as in his paper on
technology diffusion (Nelson, 1968) or in his joint study with Winter on weather
forecasting and information (Nelson and Winter, 1964), he realized that removing key
assumptions of mainstream models could be essential for studying economic change.
Regarding other streams of thought framing early Nelson’s ideas, let us briefly bring
out two additional influences that followed from the interwar breakthroughs that we
mentioned in section one. Firstly, a very important circumstance was the contact of our
protagonist with Burton H Klein, a former student of Schumpeter, who in Klein (1977)
presents a fresh view on Schumpeterian competition, the generation of knowledge, and
the transformation of national capabilities, that had permeated young people (like
Nelson and colleagues) at RAND in the previous decade. The influence of Schumpeter,
and of Schumpeterian ideas were to become a permanent mark in Nelson thought, and
operated as co-activators of the evolutionary theory of capabilities that Nelson and
Winter developed in the 1970s and 1980s. Secondly, another influence following from
the interwar breakthroughs, that shaped Nelson thinking, was that of the organizational
theorists and institutional economists (all the way from Simon, 1947 to Alchian and
Demsetz 1972). This stream enriched the Nelsonian analysis of technological and
economic change with elements related to legal systems, property rights, the nature of
organizations, the notion of rationality, and aspects of social action in general.
The peculiar style of the young Richard Nelson, and his familiarity with real cases and
the history of economic thought, reached top levels of insight in two fundamental
works: Nelson (1959) on the economics of basic scientific research, and his role as
editor of the NBER volume (Nelson, 1962) in which –together with other classic
contributions, such as Arrow (1962)- he published his magisterial study on innovation,
the transistor and the Bell Labs. In both studies, Nelson is becoming increasingly aware
of the market failures surrounding innovation activities, the role of the public sector in
framing the rate and direction of technological advance, and the need to consider
markets as interrelated with professional associations and Universities. In another
classic paper of this time (Nelson and Phleps, 1966), the authors propose a formal
model to deal, precisely, with scientist training and its role in growth, a model that has
permeated contemporary endogenous growth theory [as one of the strategies to deal
with human capital, see Lucas (1988); Aghion and Howitt (1998)]. The Nelson-Phelps
(1966) function has also been integrated in models of coevolution and catch-up by
Almudi et al. (2012).
It is clear that the set of works that we have mentioned above, can also be framed in the
context of discussions on technology and alternative socio-economic systems during
the Cold War. Note that, although the expansion of macroeconomics in the 1950s,
1960s and 1970s, (the role of fiscal vs monetary policies, Central Banks, the inflation-
unemployment trade-offs) was the most popular topic in the profession (Friedman,
1968, 1970; Lucas, 1972; see also Blanchard and Fischer, 1989), it is undeniable that
the strategic role of technology and related institutions (Rosenberg 1976; Nelson 1980,
1981), the problems of calculation in centralized systems (Hayek 1988), and the
determinants of growth in both sides of the Cold War (Abramovitz, 1956; 1986) were
important for global leadership. These debates and analysis spilled-over the field of
growth theory and cross-fertilized with institutional and socio-political studies in public
choice (Buchanan and Tullock, 1962), administrative behaviour (Simon, 1957), the
theory of democracy (Dahl, 1956; see recently Hodgson 1999, 2015), and political
philosophy (Sen, 1970; Rawls, 1971; recently Acemoglu and Robinson, 2019).
Dick Nelson, incorporated his research advances to his teaching at Yale during the
1970s and early 1980s. Thus, on the one hand, he taught industrial organization and
public policy; on the other hand, he used to teach the economics of technical change,
while also playing a leading role at the Institute for Social and Policy Studies. From all
these activities and the new insights that he was finding, Nelson was figuring out in the
1960s, 1970s and early 1980s a view of capitalist societies as mixed, highly complex
and continuously changing systems. Even when he had to explore specific markets,
Nelson was gradually abandoning the idea of market failures since, as he usually
reminds us, all markets are essentially characterized by externalities, certain public
good aspects, asymmetric information, market power of some agents, incompleteness,
distortions and radical uncertainty. There are no real markets without these features.
His (increasingly) multidisciplinary and mixed approach to modern societies, led him
to detect that capitalist systems may undergo pathological trajectories of change.
Perhaps, it is his book The Moon and The Ghetto (1977) the piece in which Nelson
synthesizes, for the first time, his concerns on how the uneven evolution of human
know-how in distinct but equally-important realms of social activity (education,
literacy, health, income distribution policies) can create enormous problems of social
Clearly, the combination in Nelson of his interest in technological advance as a source
of growth, and his conception of capitalist change as arising from a complex network
of interactions across mixed realms, explains why he never felt fully satisfied with
Schumpeter’s entrepreneurial innovation theory. For Nelson, the distinctions between
invention, innovation, science and technology, practice and understanding are not so
neat; of course there are differences, but they are subtle, fuzzy, and must be carefully
studied. In his opinion, technology should never be characterized as being just a body
of practice, but also involving understanding (obtained in interaction with Universities,
public-private partnerships and R&D labs), and being an intrinsic part of organizational
change. It is a body of practice and understanding that develops through parallel but
highly heterogeneous paths, favoured or blocked by regulations, conditioned by ethical
considerations, showing context-dependency, and entailing complicated organizational
adaptations. This view on technology and innovation is more elaborated than
Schumpeter’s brilliant (but preliminary) insights during the first half of the 20th
Century. In fact, as we will see in the next section, the Nelson-Winter proposal includes
and often generalizes several Schumpeterian ideas. For instance, Schumpeter mark I
and Schumpeter mark II can be reconciled as being alternative outcomes from a
generalized Schumpeterian theory, depending on certain market and institutional
conditions, and on sectoral technological regimes. Likewise, the Nelsonian view on the
uneven paths of technological advance in distinct activities and sectors, puts forward a
warning regarding the potential of innovations. More precisely, Nelson highlights that
not all social problems are amenable to technological fixes (a crucial point very relevant
nowadays). We may be going to the moon whereas, at the same time, in the same
society, we may be ineffective in improving the way in which children learn to read or
to do math. Having criteria to distinguish (ex-ante) sectoral discrepancies in this respect
is essential, as we have recently shown, along the lines of Nelson (1977), in Almudi et
al (2016, 2021 and 2022) for the case of energy storage.
Finally, note that as Richard Nelson increasingly claimed during those years that
technologies develop at highly uneven rates, in context-dependent manners, entailing
organizational adaptations, and with variations depending on sectors, he was becoming
close to Sid Winter’s evolutionary conceptions. The combination of both critical views
was explosive. In fact, as we know today, the Nelson-Winter collaboration in the 1970s
and 1980s (Nelson and Winter 1973, 1974, 1977, 1978, 1982), the work along these
lines by some of their –then- students such as Malerba (1985), their interactions with
scholars at SPRU (Freeman 1982, 1987; Dosi 1982, 1984, 1988; Pavitt, 1984) and with
economic historians at Stanford (Rosenberg 1982), all this led to a disruptive departure
from mainstream economics. This departure established, with the passing of time, the
seeds and roots of the new school of evolutionary economics. As an example of these
disruptive advances, Nelson and Winter (1982) proposed a new methodology to do
economic science, one that cannot be easily reconciled with mainstream practices. They
distinguished between what they called appreciative, and formal theorizing, with the
former being close to empirical studies, focused on finding the key variables and
mechanisms that might be going on in reality, and the later (formalization) devoted to
check the consistency of the theories, sharpening the arguments and highlighting new
ways. This methodology is, probably, not fully shared as the unique heuristic by all
evolutionary economists, but it has been enormously influential and fruitful up to our
days (see the history-friendly models by Malerba et al (2016)). In the next section, after
having explored the context and early works of our protagonists, and once we have
arrived at the originating sources of evolutionary economics, we are going to analyse
the Nelson and Winter (1982) foundational book, An Evolutionary Theory of Economic
4. The foundational evolutionary traverse
As we have seen, the foundational evolutionary traverse of Nelson and Winter had
begun, at least, fifteen years before the publication of their 1982 book. But the content
of this book conveys and sharpens many of the individual and common insights that
our protagonists had devised during even more time. Considering the limits for this
chapter, we would like to put shortly that, regarding its contents, Nelson and Winter
(1982) deserves special recognition for at least three reasons (some of them fully
explicit in the text, while others being implicit but ready to inject an overhaul in
economics): first, there is a sharp critical attack on why economic change is deficiently
addressed by mainstream economics; second, they propose consistent parts of a new
confronting theoretical vision to study change; finally, Nelson and Winter suggest
avenues for further research to come up with an alternative paradigm in economic
science. In this ambitious program, the book is much in line with another classic, Dosi
et al. (1988), and with the Freeman project at SPRU (Freeman 1982, 1987, 1990), a
program that is developing today along the lines of Dosi (2000), Dosi and Nuvolari
(2020), Dosi (2023).
In setting the stage for their critique, remind from the previous sections that Nelson and
Winter had already come to see economic change in a broad manner. They had in mind
at that time, not only the conventionally accepted long-run transformations in modern
economies entailing income and consumption per capita growth, capital accumulation,
and productivity enhancing technical advances, but also (and primarily) the ongoing
organizational, multisectoral, techno-scientific and institutional dynamics that make
those quantitative trends possible. More precisely, Nelson and Winter (1982) state that
firm adaptations, and endogenous novelties in organizations and technologies, always
shape and, in turn, are re-shaped in real time, by scattered interactions with rivals and
institutions. These processes drive industrial dynamics and macroeconomic change. In
a neat Schumpeterian spirit, they point out to technological change, and the needed
institutional co-adaptations, as the crucial driving forces in all economic dimensions.
From this perspective, Nelson-Winter proceed to present their demolishing critique to
mainstream economics (GET, neo-Keynesian models, the successive neoclassical neo-
Keynesian synthesis). They show why these approaches cannot explain correctly the
sources of economic change and, therefore, most economic problems, since for Nelson
and Winter economic systems are always in motion. Their attack points to certain core
assumptions that standard theories were carrying on since the marginal subjectivist
revolution and the first quarter of the 20th century. Thus, they argue against supply-
demand equilibrium settings, with fully (or probabilistically) informed maximizing
agents facing financial and techno-static constraints, with the agents simply reacting to
prices (or expected prices) to devise their plans, and these plans being compatible (or
becoming compatible in transient paths) in stable (static or trendy) stationary states.
This is the core of standard theory that Nelson-Winter denounce as being incompatible
with a realistic analysis of economic problems. Let us briefly asses the scope of this
broadly anticipated critique, and then we will go to the details of the critical arguments
and their possible solutions.
In our opinion, since the Nelson-Winter critique goes against the fully-rational
(marginalist) characterization of agents in modern societies, with these societies being
primarily perceived as market systems in equilibrium (in different formal concretions),
it turns out that the Nelson and Winter critique is extensible to most of the interwar
developments that we have posed in section one, and their post WWII realizations, all
the way to the 1980s. This range of works would include: comparative static exercises
and standard dynamic system analysis in neoclassical models; the orthodox Keynesian
implementations; topological (algebraic or differential) GET-models and extensions;
many industrial organization studies based on classic Game Theory or in (old-style)
imperfect competition models; the successive vintages of dynamic general equilibrium
settings with intertemporal optimization (deterministic, or with rational expectations á
la Muth (1961), with monetary or real impulses, focusing on cycles or dealing with
growth). Hence, the critique attacks the stream of (micro and macro) orthodox advances
until the 1980s (Arrow and Hahn 1971; but also Debreu 1970, Dierker 1974, Mass-
Colell 1989; Lucas and Prescott 1971, Kydland and Prescott 1982, Lucas 1983 and
Sargent 1987; IO advances such as Dixit and Stiglitz 1977, Dasgupta and Stiglitz 1980,
or Tirole 1988; and Neo-Keynesian settings compiled in Blanchard and Fischer 1989).
These approaches, either static or dynamic, deterministic or stochastic, always involve
sufficient conditions for some sort of stationary state to exist (and often even to be
unique), and include compactification and convexification possibilities, with continuity
properties for functions and correspondences, in such a way that fixed point arguments
can be used in the proofs; they often incorporate random shocks with nice properties
(null mean, identically-independently distributed with low constant variance, low
autocorrelation orders and stationarity, even Gaussian shapes) for quick return to the
trend to be assured; and in the most sophisticated cases (in which measure theory and
contractions apply) they involve stochastic processes verifying sufficient conditions for
convergence (or almost convergence) in order to focus the analysis on some kind of
“state of rest” (attractive stochastic trends, or well-behaved limit-distributions). This is
the scope of the critique that, in our opinion, is explicit (or sometimes simply implied)
by the Nelson-Winter attack. Now let us explain the critical arguments in some detail.
In Nelson and Winter (1982), the critique is specially powerful regarding organization
theory and the standard theory of the firm. As Nelson and Winter argue, for mainstream
theory, firms are quasi-identical agents that present neat objectives (maximizing profits
drawing on consistently evaluated alternative production plans, or max-profits defined
over calculable alternative flows of accumulated expected returns), constrained by
traceable and accessible choice sets (closed, convex and “boundable” production sets,
identified with the state of technical knowledge), and subject to “visible” vectors of
market prices (or probabilistic sequences of expected prices). In case that changes in
those aspects were to occur, they would be either exogenous for firms, or (if firms had
market power) controllable by them with clear results. With these firms facing standard
demand-side settings, prices (or sequences of “rationally-expected” prices) would
allow for optimal action, and the whole system (industry or the economy as a whole)
will be (or will move without chronic problems) to a situation of mutual-compatibility
of plans; that is to say, sustained stationary states in general equilibrium. This
characterization of agents (with or without externalities, with the possibility of other
standard market failures or rigidities, transitory rationings, in fully-known strategic
settings in the case of Games) is what, essentially, allows firms to rationally calculate
and detect their optimal choices (given their objectives and constraints and those of
other agents) and behave accordingly, with instantaneous (or dynamically assured)
overall compatibility of actions.
As Nelson-Winter argue, it is this core framework what rules out the possibility for
standard models to deal with real economic transformations and, in turn, to cope with
the economic problems of systems in motion. As they say, in analyzing mainstream
models, one can simply check how equilibria (or equilibrium paths) are modified
depending on policy interventions, exogenous variables, parameters, or random shocks,
but always being sure that the system will recover some kind of stationary state. The
assumption of reversibility of choices is implicit in these settings, as firms can move
smoothly across the choice set in its search for optimal options. Scalability, perfect
replication, high elasticity of input substitution, free disposal of input-excesses, non-
costly ceases of activity, easy information acquisition, are all typical complementary
assumptions. The orthodoxy rules out irreversible mistakes, radical uncertainty,
discontinuities, non-convexities, disconnections in choice sets or discrete spaces. And,
if bad choices were made, market processes would always re-conduct the system
towards optimal (or tractable sub-optimal) states of rest, in a renewed appeal to
Friedman (1953) defensive argument.
By the 1980s, in this mainstream context, economic growth was explained (even in the
stochastic models) by defining dynamic general equilibrium conditions with exogenous
population growth, in which maximizing firms managed to expand their use of inputs
(capital, labor, financial assets), increasing capital intensity, and taking advantage of
exogenous technological changes that entailed smooth and traceable modifications in
the production possibility set; all these elements led to output growth, consumption
growth and increasing employment levels (and the corresponding variables per capita)
in the long run [from Solow (1956, 1957), and Ramsey-Koopmans-David Cass (1965),
to the overlapping generations models of Diamond (1965), and including the New
Classical Macroeconomics (Lucas 1983, Sargent 1987, Hall 1990) and the RBC-DSGE
models in Stokey, Lucas and Prescott (1989)].
It is noticeable that, the hypothesis that firms may choose among a wide range of
technological options (input-output combinations) including those never used before,
or those located far away from the previous technical state, is assumed by ruling-out
transition failures, knowledge gaps, organizational adaptations, and problems of path
dependency and lock-in (Dosi 1997, Hodgson 2001, Dopfer and Potts 2008, Dosi and
Grazzi 2010, Metcalfe 2010). This mainstream lacuna will instill interesting debates
between evolutionary and neo-Austrian scholars in the 1990s (Kirzner 1992, Loasby
1999, Potts 2000). Notwithstanding its value, we would like to mention that the Nelson-
Winter critique in the 1980s had shortcomings that were to be improved in the following
decades. For instance, they left aside consumer behavior, the critique did not go deep
in sophisticated financial and monetary aspects, and it was almost blind to Government
budget dynamics and aggregate demand. In any case, the diagnose in Nelson and
Winter (1982) is clear: orthodox theory is not suitable to explain how real firms
engender and react to changes in technology-driven market conditions, and how these
innovations affect industry structures and economic growth.
An alternative formulation from a Schumpeterian evolutionary perspective, should
consider that innovations (and their consequences) come from more realistic and
elaborated corporate and organizational models, combined with domain-specific
technical, institutional and non-market factors, precisely those factors that our
protagonists had been studying for years (sections 2 and 3 above). The inadequacy of
orthodoxy to deal with economic change leads Nelson and Winter to put forward some
consistent pieces for a new framework, an implicit overall challenge to mainstream
economics, and a rich research agenda for the following decades. We want to briefly
mention several elements.
Firstly, organizations are seen in Nelson and Winter (1982) as heterogeneous agents
(vs orthodox representative agents) endowed with different and limited operational
capabilities and organizational routines, pursuing idiosyncratic objectives (profits, sales,
market shares, growth rates, sharing dividends, permanence) in a boundedly-rational
way (Simon, 1983). Organizational reactions to environmental changes are local, and
based on specific, practical, often tacit and context-dependent previous knowledge that
constraints firm-specific action. These knowledge features are encapsulated –and
carried on by organizations- into collective operational routines. Routines are seen as
the key (internal) knowledge coordination and operational mechanisms that drive
organizational responses to the information received from outside, and from within.
Bounded-rationality of profit-seeking firms (vs fully-rational orthodox behavior
explained above) means that they try to do better (instead of looking for the best option),
and they adapt accordingly, along the lines of the satisficing behavior hypothesis
(maintaining routines, or patterns that have worked well, unless they observe
performance levels below specific thresholds). In this context, innovations are
responses to specific problems or environmental changes; the search for these responses
is costly, local and radically uncertain. R&D activities are carried out and oriented from
pre-existing operational routines/technologies (local search), and they are generally
focused on firm-specific goals, displaying discrete trajectories (involving topological
complications that do not appear in the mainstream) everything within self-organizing
firm populations.
Secondly, the degree of innovation success and how it affects firm relative presence in
markets, depends not only on inner efforts, but also on rival behaviors (incumbents or
new entrants), on the base of technological opportunities in the sector/industry, the
degree of cumulativeness in knowledge production, and the extent to which the new
discoveries can be privately appropriated by firms (patents, advantages of pioneers,
entry barriers). These sectoral parameters would allow the analyst to simulate
alternative technological regimes (Winter, 1984) and industrial trajectories, which may
resemble Schumpeter mark I or mark II depending on alternative simulation settings.
Considering all these aspects, major innovations (radical innovations) may happen but
with a much lower probability than minor ones (incremental innovations), and often
(not always) appear incorporated in new entrants. Apart from their inner innovations,
firms can opt for imitating the technical solutions of their competitors. But in Nelson
and Winter (1982), imitation (of techniques or routines) not always works, since cross-
firm replication through imitation is perceived as imperfect, involves the adoption of
operational routines that (often) only function within very specific contexts. Hence,
imitation is also uncertain, costly and not very different from pure innovation. This is a
highly original insight which breaks with the standard conception of technological
knowledge as a quasi-public good. More recently, replication dynamics and routines
have been largely explored in Winter (1995, 2005, 2006), Becker (2010), Hodgson and
Knudsen (2010), and the sectoral framing aspects have received attention in Dosi (1988,
1997), Winter et al (2003, 2007), Dosi et al (2005), Dosi and Nelson (2010), and
Almudi et al. (2013). Remarkably, the evolutionary vision presented above has been
clearly differentiated from the behavioral theories by Kahneman (2003), Richard Thaler
and colleagues, in that evolutionary economic theory does not focus on framing
psychological distortions, noise, or in paradoxical perception-decision phenomena, but
in bounded-rationality as defined in Simon (1983), (see Nelson (2018)).
Finally, in the models devised for industry studies or for growth theory, Nelson and
Winter propose studying populations of boundedly-rational diverse (profit-seeking)
firms, with market selection operating at the organizational level, so that, more
successful organizations (embodying better-fitted routines) gain presence (in terms of
profit-driven growth, market share), while others loose it. The frequency distributions
(related to firms and specific traits) change through market selection, entry-exit, and
the imperfect replication of successful traits. Since firms need to adapt to changing
contexts, they may try to imitate the routines of the most successful organizations
(which are always subjectively and imperfective perceived by imitators), or try to inner-
innovate to adapt. At any time, the search for new options at the firm level is always
subject to radical uncertainty, and organizations may or may not fail when pursuing
their objectives. As a result of this, the non-equilibrium competitive processes modeled
in evolutionary economics endogenously generate (parameter-dependent) highly
complex dynamics for market concentration, prices, R&D spending and sectoral
growth. These models often have an algorithmic implementation with the subsequent
computational exploration; the specific forms in Nelson and Winter (1982) are simply
concrete stylized prototypes to be developed.
In fact, the original models were very soon extended to study new phenomena in
industrial dynamics by Winter (1984), Rothblum and Winter (1985), Silverberg, Dosi
and Orsenigo (1988), Metcalfe (1994, 1998) and Dosi et al (1995). In the case of
evolutionary growth models, departing from the simple exemplar in Nelson and Winter
(1982), new models appeared soon, involving multiple sectors (interlinked through
vertical and horizontal interactions), with the whole economic system displyaing
structural change (changing relative importance of sectors in the aggregate), with the
possibility of new sectors entering, others declining, and the aggregate being depicted
as a restless system composed of co-determined subsystems. This was the picture that
Schumpeter (preliminary) envisioned, and that the evolutionary authors of the 1990s
and 2000s clearly established (Chiaromonte and Dosi, 1993; Dosi et al. 1994;
Silverberg and Verspagen 1994; Saviotti 1996; Saviotti and Pyka 2004; Metcalfe,
Foster, Ramlogan 2006; Fatas-Villafranca et al. 2008, 2009, 2012; Almudi et al. 2013).
In modeling these evolutionary processes, (and this includes the models in Nelson and
Winter (1982)), the mathematics of evolution that had been developed since the 1930s,
and the theory of stochastic processes (including the time-series econometrics of the
1980s and 1990s) were essential (see Andersen 1996; Valente and Andersen 2002; and
the wide comparative studies in Silverberg and Soete 1994, Dosi 2000, and Metcalfe,
Foster and Ramlogan 2006).
The technical tools used in evolutionary economics have been enriched since the 1980s
by using evolutionary models of population games, computational methods (ABMs)
and stochastic dynamic networks (Almudi and Fatas-Villafranca 2021). We will talk
about these developments later on. Of course, there are more themes in the 1982 book.
But, for brevity, and considering the scope of this book, in the next sections we will
follow the development of these ideas, since they delimit the core of contemporary
evolutionary economics.
5. The golden decades
The decades during the 1990s and 2000s saw an explosion of research in evolutionary
economics (Foster and Metcalfe 2001; Witt 2003; Dopfer 2005; Hanusch and Pyka
2007). This is the reason why we call this period, the golden decades. With the
advantage of hindsight, we can say that Nelson and Winter (1982), Dosi et al. (1988)
and from a slightly different perspective Anderson et al. (1988), all gave a critical
momentum to many developments that were advancing along similar lines (Arthur et
al. 1997; Weibull 1995; Dosi 2000; Dopfer and Potts 2008; Hodgson 2019). This is a
fascinating phase in which, with Nelson and Winter developing their views separately
but benefiting from their joint foundational traverse, and with cascades of controversies
around epistemological and historical bases, new tools, firm theory, the notion of
rationality, industrial dynamics, economic growth and social organization, technical
change and policy-making, the evolutionary economics paradigm took shape. In this
section, as in the whole chapter, we will focus on the role of Nelson and Winter, and
we will be brief because the other chapters in the handbook cover the specific
developments. Throughout his section we will delineate (just as an outline) what Winter
(2014) has called the consolidated and empirically well-supported “beachhead” in
evolutionary economics. That is, a strong body of theoretical, instrumental, and applied
evolutionary knowledge that was developed during the 1990s and 2000s and that stands
well up to empirical testing. As we will see in the next section (the final one) recent
historical traumatic events, and the accumulation of insights during the golden decades,
have produced a new explosion of innovative work in evolutionary economics in the
2010s and early 2020s. These advances have moved the consolidated frontier far
beyond Sid Winter’s (2014) beachhead. But before we move to the front, let us study
very briefly the golden decades.
After having served for some years at the US General Accounting Office as Chief
economist (Winter 1992), Sidney Winter moved to Wharton and developed his previous
contributions (in coming up with a new theory of the firm) in line with certain areas of
organization science and management studies. More precisely, as Teece et al. (1997)
had been proposing and studying in detail, the dynamic capabilities of specific firms
might be considered key factors in explaining the origins of competitive advantage and,
of course, the ultimate sources of innovation and growth (see the specific chapter in
this book). Although orthodox scholars in the field of strategy remained a bit skeptical
on the role of this conception, evolutionary economists (Dosi, Nelson and Winter
(2000) and Winter (2003)), participated decisively in the debates, and supported the
notion of “dynamic capabilities” by connecting it with the more basic concept of
organizational capability, all the way down to the original evolutionary notion of
organizational routine. They also provided industrial models in this regard (Zollo and
Winter (2002)). The evolutionary argument and, clearly, that of Sid Winter basically
states that a firm capability (in general) may be seen as a high level set of routines that,
jointly with the implied input flows, provided firm’s management with options to
decide how to produce specific outputs. He uses the notion of routine (as we have
already seen in previous sections) as denoting a pattern of collective behavior that has
been learned by operational repetition, has proved useful and operational, and that
involves (partly) pieces of tacit and non-articulable knowledge. Thus, a bundle of
interlinked and connected routines would provide the carrying organization with
idiosyncratic operational capabilities, and by adding the qualifier “dynamic”, one may
be pointing out to capabilities related to innovation and change. Then, dynamic
capabilities would be the specific type of capabilities that are essential for managing
deliberate organizational changes and innovative adaptations. As it is well known, there
is a whole field of research along these lines, that is further studied in other chapters,
and which can be seen in the contributions to Nelson (2018). It is straightforward that
these new insights regarding organizational innovations are related to the very ultimate
sources of economic growth. This was the theme in which Dick Nelson played a leading
role during this phase.
Richard Nelson moved to Columbia University and, with time, became director of the
Program on Science, Technology and Global Development at the Columbia Earth
Institute. One of the debates in which Nelson participated vividly during this period,
regarded the suitability of the new endogenous growth models to explain economic
change. More precisely, Nelson (1998) discussed these new models at the light of the
nascent evolutionary theory of economic growth. It was clear in the 1990s that for both,
the mainstream models and evolutionary theories, the proposition that technological
advance is the source of long-run productivity growth was firmly established. Although
the rates of technological progress may differ enormously among industries, highly
innovative sectors show high R&D intensity, large innovations in supplying industries,
or both. Regarding these basic statements there was agreement among both schools of
thought. But, whereas mainstream economists approached growth dynamics by coming
up with neoclassical endogenous growth settings (Lucas 1988, Romer 1990, Grossman
and Helpman 1991, Aghion and Howitt 1998, Acemoglu 2008, Benassy 2011, Romer
2012), evolutionary theorists characterized growth as an out-of-equilibrium process
necessarily involving structural change, displaying overlapping fluctuations of distinct
frequencies, being driven by the radically uncertain creation-destruction of firms and
sectors, and generating problems of income distribution and institutional co-adaptations
(Chiaromonte and Dosi 1993; Silverberg and Verspagen 1994, 2005; Silverberg and
Soete 1994; Nelson 1996, 2005; Saviotti and Pyka 2004, 2013; Metcalfe et al. 2006;
Winter 2008; Fatas-Villafranca et al. 2012; Valente et al. 2015). As Nelson (1998)
explained, the differences between both lines of analysis (endogenous growth theory,
and the evolutionary stream) are extremely significant. In the evolutionary literature,
nothing resembling the dynamic optimization plus general equilibrium approach (even
with imperfect competition and stochastic extensions) that we see in endogenous
growth models can be considered an acceptable basis to analyze economic growth.
Evolutionary economists also consider some degree of market power, endogenous firm-
R&D investments, human capital provision, and the emergence of increasing returns at
a macro-level as key drivers of growth. But, in contrast with the equilibrium settings
from which neoclassical authors deduce “quality ladder properties” or “stealing effects”
(Grossman and Helpman 1991, Aghion and Howitt 1998), the evolutionary scholars
argue that growth emerges from the scattered innovative action of bounded-rational
profit-seeking firms, which are highly diverse, compete in changing frames in which
multiple equilibria may exist, and non-linear dynamics (shocked by entry-exit of firms
and sectors) always produce complex dynamics. As a brief comment, it is obvious that
for evolutionary scholars, the so-called transversality conditions that accompany the
principle of maximum in optimal control (with the use of Hamiltonians), or the Euler
first-order marginalist-intertemporal equations that underlie the dynamics of control
variables, not to say the perfect knowledge of dynamic stock-flow state equations, or
the permanent market-clearing conditions that formally close dynamic optimization
models, all this conveys a distorting characterization of economic dynamics. Note that
the so-called transversality conditions rule out Ponzi games, and add in these models to
assure that fully-rational agents locate the (unique and null-measure) convergent path
towards the growth steady state; and they do it in saddle-path-type instability models,
something that even from a rough mathematical point of view is a bit intriguing. These
comments are enough to discard endogenous growth theory as a valid explanation of
change from an evolutionary perspective, when it is increasingly clear (from an
empirical viewpoint), that technology advances by transforming the whole context in
which firms operate, and entails the appearance of radical “unknowns”. Innovation (by
definition) places us within the realm of what have never been tried before, a realm that
is formed by objects, processes, pieces of information, institutional arrangements, and
potential human reactions of an unprecedented nature (Arrow, 1994; Witt, 2009, 2014).
Besides this, as Metcalfe (2001) and Nelson (2008) strongly emphasized during those
years, economic growth and technological advance cannot be understood without
considering the contribution of supporting institutions during the process. Nelson
(2018) have been insisting for decades in that the role of science and Universities in
economic change is more complex that the characterization they receive in endogenous
growth theory (compare Lucas 1988, with Almudi et al. 2012, 2021). In Nelson studies,
scientific research in fields like electrical or chemical engineering, computer science,
or pharmaceutical biotechnology coevolve with practical and profit-oriented corporate
developments in non-trivial ways. Likewise, the role of patents, multiple and highly
heterogeneous efforts going on at the technology frontier, driven by very specific
corporations in distinct sectors, all interlinked with concrete University systems,
regulatory agencies, legal frames and professional bodies, are key explanatory factors
of technological innovation and growth. These mechanisms are essentially distorted
(and often erased in their rich intricacies) in endogenous growth models (Nelson 2005,
Dosi and Nelson 2010).
Regarding these aspects, Nelson and Winter (2002) state that the study of sectoral
processes of Schumpeterian competition, the empirical study of specific innovative
sectors, and looking for the intersectoral connections to understand growth, is necessary
but not sufficient. Here we find (as the necessary complementary piece) one of the most
significant insights of the golden decades, one that had been already explored by Chris
Freeman and colleagues, but that becomes very much improved and generalized during
this period: we refer to the observed coevolution of institutions, firms, technologies and
market mechanisms, interlaced in complex multi-agent dynamic networks, that shape
the so-called national (and even sectoral) systems of innovation (Lundvall 1992, Nelson
1993, Malerba 2002). The concept of system of innovation has been playing a central
role since the 1990s in evolutionary economics, and it has proved useful to understand:
the sources of industrial leadership in high-tech sectors (Mowery and Nelson 1999,
Malerba 2002, Murmann 2003, Fatas-Villafranca et al. 2008, Almudi et al. 2012); the
global processes of economic development understood as global learning processes
(Verspagen 1991, Malerba and Nelson 2013, Almudi and Fatas-Villafranca 2018,
2021); the role of the State in evolutionary economic theory (Dosi 1995, Mazzucato
2013); and the evolutionary foundations of economic geography (Boschma and Martin
2010). There is nothing in mainstream microeconomics or macroeconomics that may
accommodate the analysis of these techno-institutional, corporate and market networks
[nothing, from recent developments in Game Theory as in Fudenberg and Tirole (2000),
or in advanced GET (Balasko 2016), to the recursive macroeconomic theory with
Bellman equations and stochastic dynamic programing in Ljungqvist and Sargent
(2018) or Miao (2022)]. Nevertheless, new tools have been devised regarding network
theory (Jackson, 2008), or in the modeling of learning processes in evolutionary frames
(Samuelson 1997; Sandholm 2010; Hart and Mas-Colell, 2013) that can be of technical
help for evolutionary economic theory.
Then, for brevity and given the limitations of space, we can sum up the results of this
section by saying that, with Nelson and Winter being highly active in the debates during
the 1990s and 2000s, a compact and well-grounded body of appreciative and formal
theoretical work was obtained regarding industrial dynamics and growth, together with
advances in organization theory, economic development, innovation systems,
evolutionary economic geography and policy studies. These results stood perfectly up
to empirical scrutiny (Dosi et al. 2017) and they constitute what Winter (2014) named
the “consolidated beachhead” in evolutionary economics. In the next section, we see
how drawing on these established foundations, and stimulated by a sequence of
traumatic events that have shocked the world during the last decade, evolutionary
economics have developed new insights during the 2010s up to our days. We will finish
the chapter by showing how contemporary evolutionary economics has moved well
beyond the consolidated beachhead.
6. Far beyond the consolidated beachhead
The turbulent decade (2008-2022) has seen a sequence of shocks and traumatic events
that have dismantled ideas and structures that had been taken for granted (perhaps for
too long) at a worldwide level. For the sake of brevity, we are going to simply mention
recent developments in evolutionary economics fostered by the Great Recession (2008-
2016), the COVID-19 Pandemic with the great lockdowns that almost paralyzed the
world (2020-2022), and the increasing geopolitical tensions that lead us towards a
multipolar dangerous world. It is remarkable how these apparently independent events
have uncovered hidden weaknesses; silent fractures that were stalking our dream of a
global liberal-democratic (capitalistic) order, a state of things that some had considered
as being approaching the end of history (Fukuyama, 1992). These events have been
extremely traumatic and, together with the strong bases on which evolutionary
economics had been left after the golden decades, they have inspired new frames,
developments and results that have expanded the frontier of evolutionary economics.
The Great Recession revealed the dark side of global financial and trade generalized
interconnections, a network of transnational interactions that was relying on the belief
that efficient market-allocations did not need tight regulations, and in which financial
innovations (audited by agencies “capable” of calculating increasing risks) allowed to
cover all sorts of funding needs (Caballero 2010; Eggertsson and Krugman 2012).
When investment banking went into bankruptcy -leading the global economy to its most
severe crisis since the 1930s- the world woke up from its market dream, and the fears
regarding secular stagnation, liquidity traps, increasingly unequal income distributions,
high unskilled unemployment in Western societies and socio-political revolts came to
stay. Many of the fatal conceits underlying the crisis, and the huge shortcomings of
mainstream NK-DSGE models in vogue at that time (Woodford, 2003) were denounced
by Sidney Winter (2010) in his testimony submitted to the US Congress. The reaction
of evolutionary economics to this situation involved important breakthroughs from the
consolidated beachhead in, at least, three directions: i) the most influential advance has
been the key “Schumpeter-meeting-Keynes” generation of evolutionary macro-models
put forward by Dosi, Fagiolo and Roventini (2010) and Dosi et al. (2013). These models
are complementary to the complexity approaches in Gallegati et al. (2017) and Wilson
and Kirman (2016). This overall new approach has been discussed and studied in detail
by Dosi and Roventini (2019); ii) there is a second essential body of evolutionary
macro-models that recover post-Keynesian ideas and institutionalist notions, and
incorporate them in evolutionary settings which display demand-driven structural
change. We find them in the Ciarli et al. (2019) or Valente et al. (2015) version, and/or
in replicator models with vertical integration and value chains in Cantner et al. (2019);
iii) there is also a body of stylized (formally tractable) evolutionary macro-models (see
Fatas-Villafranca et al. (2012)) that tackle, firstly, the dynamics of income distribution
and unemployment in relation with growth, technological change and overlapping
cycles of distinct frequencies. Secondly, in a variant presented in Almudi et al. (2020)
in Metroeconomica, these models include the role of the banking sector in innovative
economies with debt, in which inflationary paths lead to rising interest rates, and this
mechanism may slowdown innovation, deteriorate income distribution and engender
“big rips” in economic growth. The three lines of advance i), ii) and iii) have moved
evolutionary macroeconomics into unexplored territories which, apart from reacting to
the turbulent decade (2008-2022), have also tried to deal with concerns expressed by
evolutionary economists of previous generations (Winter 2017, Witt 2014). Somehow
related with this, there have been significant recent advances related to the evolutionary
theory of consumer behavior and demand. This is a shortcoming that we have already
mentioned in the chapter. Ulrich Witt (2001) began to face this issue two decades ago,
and perhaps stimulated by the ideas in Nelson (2013, 2018) this line is fructifying in
new models and studies by Chai and Baum (2019), Fatas-Villafranca et al. (2019, 2007),
Almudi et al. (2013) and Valente (2012). These new approaches to consumer behavior
have appeared, in parallel, with a more generalized interest in the cognitive and
intentional characterization of agents in evolutionary theories [a classic issue in Dopfer
(2005) that has benefited from insights in Nelson (2016) and Muñoz et al. (2011)].
Quite apart from this, the COVID-Pandemics and the great lockdowns with distribution
bottlenecks that followed, have shown that, when economic systems collapse (and this
is a very real possibility in complex systems), getting things in motion again is not a
trivial task. Thus, in two complementary works that have recently appeared, Jason Potts
and colleagues (Allen et al. 2020), and Almudi and Fatas-Villafranca (2021) have
analyzed co-evolving systems which display potential virtuous paths vs possible
collapsing trajectories, and have looked for alternative ways to re-invigorate the
systems in post-traumatic conditions. Very much in line with former ideas by Chris
Freeman (2019) and by Dick Nelson on interrelated selection processes (Dopfer 2005,
Dosi and Nuvolari 2020) the recent contributions on coevolution consider explicitly
(and in alternative formalizations) the mixed dynamic and co-determined nature of
modern economies. Drawing on alternative co-evolutionary models (that combine
replicator dynamics, ABMs and networks) Almudi and Fatas-Villafranca (2021) detect
catalyzing and blocking factors which may lead either to sustainable paths, or to
trajectories of collapse. This stream of works is also in line with Andreas Pyka (2017)
new concept of “dedicated innovation systems”, and with the overall characterization
of capitalist economies as mixed evolving systems in Nelson (2022).
Finally, the geopolitical tensions and socio-political turmoil that we see in most
societies after the turbulent decade, remind us that not all social problems are amenable
to technological, market and economic policy-driven fixes (the classic theme in Nelson,
1977; formalized in Almudi and Fatas-Villafranca, 2022). We need to reconsider
aspects of political economy from an evolutionary perspective (Fatas-Villafranca 2011;
Almudi et al. 2017). The rise of populism and increasing inequalities in the dangerous
multipolar world that comes, require that we deal with the dynamics of power (hard
political power in the classic sense), very much along the lines of Dosi (1995) and Dosi
et al. (2020). This would be a new step in recognizing, as Nelson (2022) does, that in
all human systems in history, non-market aspects are more deciding factors for social
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Acknowledgements: This research is from projects PID2019-106822RB-I00 & S40 20R.
Corresponding: ,
JEL-Code: B52, B41, C61, C73, E32, O31
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We propose a new co-evolutionary computational two-sector approach to the design of national innovation policy that recognizes the importance of intersectoral absorptive capacity constraints in innovation linkages between sectors in an economy. We show how the innovative capacity of an upstream producer sector can be constrained by the absorptive capacity of the downstream-user sector. This suggests that the low productivity performance of modern innovation policy might in part be understood as a consequence of sectorally unbalanced knowledge evolution, where the problem lies in underinvestment in innovative capabilities in the downstream sector. Our computational two-sector model suggests an important role for innovation policy to create a balanced, sectorally targeted approach.
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