An Evolutionary Theory of Economic Change

Posted: 4 Nov 2009

See all articles by Sidney G. Winter

Sidney G. Winter

University of Pennsylvania - Management Department

Richard R. Nelson

Columbia University - School of International & Public Affairs (SIPA)

Date Written: 1982

Abstract

This study develops an evolutionary theory of the capabilities and behavior of business firms operating in a market environment. It includes both general discussion and the manipulation of specific simulation models consistent with that theory. The analysis outlines the differences between an evolutionary theory of organizational and industrial change and a neoclassical microeconomic theory. The antecedents to the former are studies by economists like Schumpeter (1934) and Alchian (1950). It is contrasted with the orthodox theory in the following aspects: while the evolutionary theory views firms as motivated by profit, their actions are not assumed to be profit maximizing, as in orthodox theory; the evolutionary theory stresses the tendency of most profitable firms to drive other firms out of business, but, in contrast to orthodox theory, does not concentrate on the state of industry equilibrium; and evolutionary theory is related to behavioral theory: it views firms, at any given time, as having certain capabilities and decision rules, as well as engaging in various ‘search' operations, which determines their behavior; while orthodox theory views firm behavior as relying on the use of the usual calculus maximization techniques. The theory is then made operational by the use of simulation methods. These models use Markov processes and analyze selection equilibrium, responses to changing factor prices, economic growth with endogenous technical change, Schumpeterian competition, and Schumpeterian tradeoff between static Pareto-efficiency and innovation. The study's discussion of search behavior complicates the evolutionary theory. With search, the decision making process in a firm relies as much on past experience as on innovative alternatives to past behavior. This view combines Darwinian and Lamarkian views on evolution; firms are seen as both passive with regard to their environment, and actively seeking alternatives that affect their environment. The simulation techniques used to model Schumpeterian competition reveal that there are usually winners and losers in industries, and that the high productivity and profitability of winners confer advantages that make further success more likely, while decline breeds further decline. This process creates a tendency for concentration to develop even in an industry initially composed of many equal-sized firms. However, the experiments conducted reveal that the growth of concentration is not inevitable; for example, it tends to be smaller when firms focus their searches on imitating rather than innovating. At the same time, industries with rapid technological change tend to grow more concentrated than those with slower progress. The abstract model of Schumpeterian competition presented in the study also allows to see more clearly the public policy issues concerning the relationship between technical progress and market structure. The analysis addresses the pervasive question of whether industry concentration, with its associated monopoly profits and reduced social welfare, is a necessary cost if societies are to obtain the benefits of technological innovation. (AT)

Keywords: Decision making, Market structures, Industry structures, Evolutionary economics, Organizational behavior, Organizational change, Microeconomics, Motivation, Profit motive, Equilibrium, Management decisionsMarket competition, Search strategies, Market consolidation, Evolution model

Suggested Citation

Winter, Sidney G. and Nelson, Richard R., An Evolutionary Theory of Economic Change (1982). University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship. Available at SSRN: https://ssrn.com/abstract=1496211

Sidney G. Winter (Contact Author)

University of Pennsylvania - Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States

Richard R. Nelson

Columbia University - School of International & Public Affairs (SIPA) ( email )

420 West 118th Street
New York, NY 10027
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
10,134
PlumX Metrics