Evolutionary Patterns in Industrial Evolution

Abstract

In this paper I try to show how an integrated evolutionary and mainstream economics could be developed using the fields of organization and technology. At this beginning stage I do not give more than tentative hints, but these in a hopefully comprehensive way.

The focus of interest in this essay is a pattern of development in industries’ history that seems to be related to the pattern of evolutionary development of species. In paleontology this pattern has been treated under the name of “punctuated equilibrium”. I suspect that the reasons for this structural similarity can be found in economics in four areas: technological, organizational, cultural development and competitive processes: the Alchian debate is related to the development of behavioral rules and norms as well as the competitive process. The theory of the firm complex is related to the organizational issues. Competitive market processes emerge as interaction of evolutionary processes in these areas. The technological area will lead to discussion of creative destruction and the concepts of technological paradigms and regimes. Industrial evolution patterns give hints about the processes governing industrial dynamics. Industrial dynamics are the key to the development of evolutionary economics. The industry plays a similar role as the species in biological theory. It is on the one hand a powerful concept that focuses a number of processes from other levels. On the other hand it breaks down in “peripheral” areas and hints at the possibilities for further scientific development.

The issues I deal with here are used as “toy problems” to show the power of an integrated evolutionary framework: briefly in the areas of methodology, theory of the firm and more extensively in industrial evolution. I have chosen these issues because they are symptomatic for the development of economics as it exists today. Their (non-)treatment over the course of the history of economic thought is related to the (non-)development of an integrated (evolutionary) framework. The power of an evolutionary foundation of economics is revealed by the number of questions that almost answer themselves when seen through an evolutionary lens.

The wealth of details that research in the tradition of the German Historical school had to consider and which seemed to hinder development of general analytical frameworks, becomes in the evolutionary view a supply of data on experiments performed under real conditions. Every real life system delivers constantly a rich set of data. This is as much a curse as a blessing. The curse is that it often leads to information “overkill”, the blessing shows once we have developed a framework to interprete events. Rich data sets then can be used to test or answer the questions we have come up with in the theoretical exercises. The presumption is that comprehensive data have been recorded in a way which is tolerant to switches in the theoretical framework.

The treatment of the firm as an abstraction which has more characteristics of an industry average than an entity is another of these examples: firm level heterogeneity is an allowed and necessary component of evolutionary competitive processes. Diversity is not a bugging theoretical problem, but a relevant variable in models. Future research might deal with the following questions: Why is there this observed level of heterogeneity in that industry? What are the benefits and disadvantages of heterogeneity in comparison to other conceivable situations? Not with the question why there are so many forms and such a large number of firms although theory tells something different. Diversity is not a nuisance but information.

The foundation of mainstream economic methodology in evolutionary processes as conceived by Alchian and Friedman is the third of these questions. The debate ensuing around their writings and the assumptions necessary to secure their results shows that evolutionary processes can only lead under very restrictive assumptions to neoclassical concepts. Thus their position is a useful result, but not for grounding mainstream concepts in economics, but for showing the limits of the neoclassical position.

The treatment of industrial development is related to the three issues above. Data developed in case studies serve to provide the background for a differentiation of industry histories in general patterns and peculiarities. The two “classes” of variables underlying patterns and peculiarities are again are the foundation for building models of industrial evolution. The treatment of economic behavior as revealed by the Alchian debate gives hints about behavior of agents in firms as well as the behavior of firms as agents . Furthermore it clarifies the conditions which are necessary for the evolutionary process to take place. The evolutionary based theory of the firm describes the individual actors on the industrial level.

After dealing with methodological issues in chapter 2, I will lay out the foundations for an evolutionary conception of the competitive or market process in chapter 3. Chapter 4 will deal with organizational and sociological perspectives on change. Chapter 5 will build on the perspectives developed in the first chapteprs to analyze industrial change patterns.

N.B.: paper written around 1997/1998, slightly revised 2001. Partial basis for later papers. Warning: contains idealistic statements of young researcher.

Keywords: industry dynamics, industry evolution, innovation, strategy, evolutionary economics, product life cycle, product evolutionary cycle, marketing, population ecology, industry evolution framework, resource dependence, technology, organization, competition