Technological regimes and paradigms: a core concept of evolutionary economics

1. Technological regimes and paradigms: a core concept of evolutionary economics ESST Module 4: Unit 2 Andreas Reinstaller

2. Central questions: “How is economic activity coordinated?” “What explains prices?” “How is wealth created and redistributed?” Neoclassical approach: Coordination: Markets coordinate. Is a market in equilibrium all production and consumption plans correspond. There is perfect coordination Prices: Utility and profit maximization under full information leads that prices embody all information on intrinsic evaluation of goods by consumers and production costs Growth: Economy as a whole is in a continued but moving equilibrium which is brought about by the coordination mechanisms. Remember? The three central question in economics and how Neoclassical economics approaches them

3. Coordination: frequency adjustment on the population level. Firms that are not adapted to the social environment/market on which they act will leave the industry, while others may enter. Prices: reflect intensity of competition on the market, costs, accumulation levels and the growth of demand of the market Growth: Competition drives the innovation process, which in turn generates growth. Evolutionary Economics: Competition as an evolutionary process • Unit of Selection: Firm • Bounded rationality: firms and other economic agent may act rationally, but within limits. • Technologies are complex systems

4. The representation of technological and organizational learning: rational and bounded rational choices logical Incrementalism (evolutionary) cognitive representations (evolutionary) Off-line local experimentation (evolutionary) Evaluation rational (neo-classical) model On-line Location on the fitness landscape Local Distant Limited Set of technological alternatives Extensive From G. Gavetti and D.Levinthal (2000),in: ASQ, vol. 45, p. 116

5. Technology as a complex system: well behaved production sets vs. rugged technological landscapes A rugged (evolutionary) technology landscape Fitness Fitness A smooth (Neoclassical) technology landscape

6. Technological interdependence: Local search and lock-in Implication: Even if a firm would know all available routines and dispose over all possible skills, technological interdependence may lead to solutions that from a purely technical and economic standpoint are suboptimal. From: Reinstaller and Hölzl (2002), The Babbage Principle after Evolutionary Economics: On the complex roots of labour displacing technical change, submitted paper.

7. What is a paradigm? “A model and a pattern of solution of selected technological problems, based on selected principles derived from natural sciences and on selected material technologies”, Dosi (1982), p.152 Within a paradigm problem solving behaviour is developed: The selected principles generate routines, heuristics (more later). Together they constitute relevant knowledge. Technological regimes: Depending on the selection environment and the underlying technology industrial sectors will show specific patterns of development (more later) Technological trajectories. Once a paradigm is chosen, the technological artefacts developed within this paradigm are improved. This improvement pattern is a technological trajectory. Technological Paradigms: the core concept of evolutionary economics

8. Remember the variable “A” in previous lecture. Human capital models explain A, through previously accumulated human capital of a nation -> explains growth differentials between developed and less developed countries. R & D models: same as above, but instead of having fuzzy human capital we have quality ladder due to R & D: countries investing more in R & D have higher growth Learning by doing models: past levels of investment (accumulation) trigger a learning effect. Critique Human Capital: The notion of Human Capital alone does not take into account the complex dynamics of learning and knowledge creation. If we want to understand the process of growth we need to look at learning processes R & D: linear STI model (see later) Learning by doing: just a small extension to “Solow” model. But does not remarkably improve the empirical performance of the model. Generating new Knowledge. How did the economic mainstream try to overcome some of the shortcomings of its Growth theory? A recap of Endogenous Growth theory.

9. Generating new knowledge. What is knowledge? A definition. Knowledge is structured information on a system or a subset of its elements that allows to predict the behaviour of that system. This entails a process of structuring information during which elementary pieces of information on the system are put into causal relation with each other, and a hierarchy of causal relations is set up. From: A.Reinstaller (2002), “The use of Genetic Programming in Evolutionary Economics by Bernd Ebersberger and Andreas Pyka. A note.”, manuscript (referee report)

10. Aristotle’s knowledge taxonomy: Knowledge has been at thecentre of analytical interest from the very beginning of civilisation. Epistèmè: knowledge that is universal and theoretical: "know-why." Technè: knowledge that is instrumental, context-specific and practice-related: "know-how." Phronesis: Knowledge that is normative, experience-based, context-specific and related to commonsense: "practical wisdom." Knowledge has been divided into four categories (Lundvall and Johnson, 1994): Know-what: knowledge about “facts”. Know-why:knowledge about principles and laws of motion innature, in the human mind and in society. Know-how: skills – i.e. the ability to do something. Know-who: involvesinformation about who knows what and who knows what to do (network knowledge). Generating new knowledge. What is knowledge? Different types.

11. Embedded in individuals Embedded in organisationsand institutions(sharedcodes of communication, shared routines, shared methods for problem solving and searching) . Knowledge is tacit or codified Tacit knowledge cannot be easily transfered. -> No Blueprint character. Even codified knowledge cannot always be easily transfered -> absorptive capacities Person: Substantive and procedural Skills Formal knowledge Organizational routines and heuristics Combination of They are the “genes” of the evolutionary process On the location of knowledge

12. The characteristics of technological knowledge • Technological knowledge has characteristics of a public good, i.e. non-rivalry and non-excludability make it easily accessible to others • Uncertainty: it is difficult to assess further developments and market opportunities • Cumulativeness: it builds on previous knowledge • This has also an advantage: it generates externalities and spillovers (i.e. the social rate of return is higher than the private one) • The disadvantage is that it may lead to underinvestment, hence some protection is needed (attained by patent protection, industrial secrecy...)

13. Operationalising the concept of technological paradigms: technological regimes and trajectories, or what’s the effect on an industry? • A Technological Regime is a particular combination of: • opportunity conditions (scarce or pervasive) • appropriability conditions (high or low appropriability) • cumulativeness (dependence on previous technological achievements) • knowledge base (degree of taciteness and complexity, i.e. relieance one or several different sciences and knowledge bases) • These factors determine development path, the technologicaltrajectory, of each single technology in the regime. • This gives rise to specific development patterns of industries, as it has an influence on • Competition in that industry • The Market structure in that industry • Technical change in that industry • A technological regime is the manifestation of technological paradigms.

14. Technological regimes: The extreme cases: Schumpeter Mk. I, Schumpeter Mk II • There are roughly two distinct regimes that are distinguished: • Schumpeter Mark I: • high opportunity • low appropriability • low cumulativeness • example: machine tool or mechanical industries • Schumpeter Mark II: • high opportunity • high appropriability • high cumulativeness • example: chemicals, electronics

15. Assessing EE and Scot: Characteristics of evolutionary processes • Processes which generate variation in the pool of characteristics in a population • Processes which restrict and guide possible patterns of variation in behaviour • Processes which change the relative frequency of different entities within the population • Processes which determine the rate at which the above three processes change • Processes which determine the overall direction of evolutionary change Source: Metcalfe, J.S. (1998), Evolutionary Economics and Creative Destruction, London, p. 23

16. SCOT Unit of analysis: social actors (individual, company, institution, government…) grouped into relevant social groups for the development of a technology Inducement to engage into research: problems in society Generation of variety: different technological communities produce solutions, or “facts” that are channeled into the pool of possible solutions Selection mechanisms: value set of a society (e.g. religion) in filtering relevant problems, relevant social groups select the final design. Main conclusion: technologies are socially constructed EE Unit of analysis: business firm grouped into industries Inducement to engage into research: technological opportunity; “need is the mother of invention” view is partially rejected. Selection mechanism: market. Firms that are better adapted to social circumstances (embodied in characteristics of demand) survive. (genotype: routines, phenotype: firm) Main conclusion: economic development is a evolutionary process in which better adapted firms survive. What makes it better adapted is left open -> SCOT is here complementary Relating Evolutionary Economic Theory to SCOT, I

17. Relating Evolutionary Economic Theory to SCOT, II By Marc Dijk (2001), A generic process-model of science and technology development, ESST 2001, term paper, Maastricht.

18. General conclusion comparison SCOT - EE • The two approaches are complementary, as both are evolutionary! SCOT explains parts of the problem which are not explained by EE, i.e. it provides an accurate description of the “selection” environment in which business firms and industries act. EE explores how the evolutionary selection mechanism actually acts upon business firms. The focus of EE is narrower as it lies on the exploration of the dynamics of the creation of wealth, and is not interested in problems of wider concern.