Economics of the Firm: Analysis, Evolution and History (Routledge Studies in Global Competition)

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Already at the end of the nineteenth century Veblen in his article Why is economics not an evolutionary science? Veblen in this context was concerned with the uncovering of causal relations. He directly looked for dynamic economic theories for which he claimed that the past state of affairs influences the present one, and this occurs as a continuing sequence. Veblen did not only concentrate on the necessity of understanding economic systems as evolutionary systems but he was also critical to those economists who followed different lines.

Against an extension of pure, static economics i. Instead, for economics to become evolutionary, the so-called disturbing factors were themselves required to take centre stage. Veblen argued that if economics were to be evolutionary, there would be no room for controlling principles such as the concept of equilibrium, since these controlling principles restrict from taking on a dynamic perspective.

Apart from this critique and from their aim to clarify the dichotomy between statics and dynamics, both Veblen and Schumpeter also observed efforts made by their contemporaries and predecessors to push economics towards a dynamic, evolutionary theory. Schumpeter for example referred to John Stuart Mill's Principles of Political Economy , in which the first three books are concerned with statics, while the fourth book explicitly deals with dynamics:. All this, however, has only put us in possession of the economical laws of a stationary and unchanging society.

We have still to consider the economical condition of mankind as liable to change […] thereby adding a theory of motion to our theory of equilibrium — the Dynamics of political economy to the Statics. Mill's doctrines of production, distribution, and exchange, are a theory of certain economic processes and […] he deals in a consistent and effective fashion with the sequences of fact that make up his subject matter.

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Veblen , p. With contemporary works he discerned the same failure. Veblen , in this context referred to John Bates Clark's distinction between statics and dynamics, the latter advocating that. To influences that would act if society were in a stationary state, we must add those which act only as society is thrown into a condition of movement and disturbance.

This will give us a science of Social Economic Dynamics. Clark , p.

Evolutionary economics

Veblen rejected the alleged complementarity of static and dynamic theorising, since this blurred what dynamics and evolution were all about. Clark's avenue towards a dynamic theory he therefore considered as a dead end:. Clark nor any of his associates in this line of research have yet contributed anything at all appreciable to a theory of genesis, growth, sequence, change, process , or the like, in economic life. They have had something to say as to the bearing which given economic changes, accepted as premises, may have on valuation, and so on distribution; but as to the causes of change or the unfolding sequence of the phenomena of economic life they have had nothing to say hitherto; nor can they since their theory is not drawn in causal terms […].

Veblen , pp. In a similar vein, Schumpeter remarked on Clark's approach Schumpeter Schumpeter was not convinced by Clark's approach due to the predominance of static considerations in an allegedly dynamic economic theory. He identified this indeed with the distinction between statics and dynamics. But this did not greatly matter. He saw the essential points involved in constructing the model of a stationary state and he created, for the purpose of describing its properties, the concept of Synchronization.

Further evidence for a change of economic method towards an evolutionary perspective was found also in other parts of the history of political economy. These efforts — according to Veblen — were made by the Austrian School and by Marginalists. Hence, for Veblen too little attention was paid to human action.

Behavioural traits were just wrapped under a certain hedonistic stereotype. This behaviour suited some standard case but did not allow studying changing human behaviour in context to economic evolution. Thus, efforts existed to transform economics into an evolutionary science, which in the view of Schumpeter and Veblen were unsatisfactory. While Schumpeter and Veblen were in agreement concerning the evolutionary character of economic systems and in their general claim for a dynamic economic theorising, they had different explanations of why evolutionary economic theorising had not been successfully implemented yet.

Consequently they took different paths to formulate theories accounting for this dynamism. For Schumpeter pure static economic theorising represented the fundament on which some evolutionary theory could be built on, whereas Veblen regarded it as a cage, from which economics ought to break out. He partly relied upon their terminology and methodology. Schumpeter also had a more differentiated point of view concerning the relevance of anthropology and related disciplines for economics.

Schumpeter b[] , pp. It was thus considered important by Schumpeter to acknowledge the mutual dependence of economic and sociological research, resembling Max Weber's focus on social economics b[] , p. Veblen's claim for economics to deal more intensely with behavioural traits was reinforced in The Limitations of Marginal Utility :. In so far as modern science inquires into the phenomena of life, whether inanimate, brute or human, it is occupied about questions of genesis and cumulative change, and it converges upon a theoretical formulation in the shape of life-history drawn in causal terms.

In so far as it is a science in the current sense of the term, any science, such as economics, which has to do with human conduct, becomes a genetic inquiry into the human scheme of life; and where, as in economics, the subject of inquiry is the conduct of man in his dealings with the material means of life, the science is necessarily an inquiry into the life-history of material civilization, on a more or less extended or restricted plan. In The Instinct of Workmanship and the State of the Industrial Arts Veblen [] , henceforth Instinct Veblen substantiated his ideas on evolutionary economics and embedded the description of dynamic processes into a detailed treatise on human behaviour.

He considered the understanding of individual behavioural traits on the micro-level as pivotal to gain knowledge of evolutionary phenomena on a more aggregate level. Veblen also distinguished between stable and changing patterns of individual behaviour, which allowed him to leave behind the hedonistic stereotypes studied in taxonomic, pre-evolutionary sciences.

Schumpeter [] , p. Schumpeter considered the entrepreneur's behaviour as being the essential type of individual behaviour driving economic evolution.

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His motives are of a sociological and economic nature and manifest in his intention to create something new and to break with old traditions related to the functioning of the economic system in the circular flow. Yet, for Veblen these individual attributes did not take such a significant role for economic evolution as Schumpeter assigned to the entrepreneur.

In advancing towards an evolutionary theory, Schumpeter also considered the feedback of social conditions onto individual behaviour as an essential element. This idea was carried over to his later writings.

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In a comment on Marx he wrote:. The economic interpretation of history does not mean that men are […] wholly […] actuated by economic motives. On the contrary, the explanation of the role and mechanism of non-economic motives and the analysis of the way in which social reality mirrors itself in the individual psyches is an essential element of [Marx's] theory and one of its most significant contributions. Capitalism , p. A similar idea of Veblen can be found in Instinct. There he argued that cultural, institutional, and organisational conditions feed back on the individual level.

Max Planck Institute of Economics - The Evolutionary Economics Group - Discussion Papers

Individual behaviour was considered as being socially co-determined and guided by socio-economic conditions. Thus, evolution and consecutive change in the socio-economic environment were accentuated in Veblen's and Schumpeter's evolutionary perspectives. Additionally, economic evolution was considered to take place in the material environment, reflecting what Schumpeter in Theorie described as process and product innovations:. In a similar vein, Veblen argued:.

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The complex of technological ways and means grows by increments that come into the scheme by way of improvements, innovations, expedients designed to facilitate, abridge or enhance the work to be done. Any such innovation that fits workably into the technological scheme, and that in any appreciable degree accelerates the pace of that scheme at any point, will presently make its way into general and imperative use, regardless of whether its net ulterior effect is an increase or a diminution of material comfort or industrial efficiency. Instinct , p. Neither for Veblen nor for Schumpeter the evolution of technologies, institutions, and organisations on the level of society as a whole as well as changes in individual behaviour was considered independent from each other. Schumpeter substantiated his ideas of the consequences of technical and economic circumstances on human behaviour in Capitalism pp. Following their assessment of the interdependence between changes in the material and the socio-economic environment as well as the connection to individual behaviour, Veblen and Schumpeter devoted considerable parts of their scientific work on developing ideas of how meaningful evolutionary economic theorising ought to look like.

In this respect, they were inter alia concerned with the following interrelated but distinct questions: Which factors do characterise modern capitalist economies and how does the capitalist system behave over time? Are there processes leading to a transformation of the capitalist order over time? Hence, the study of capitalist economies in both Veblen and Schumpeter was not only limited to understand the system-inherent forces driving the evolution of capitalist societies Section 4.

For Schumpeter the pivotal point for understanding the complex processes driving capitalist systems from within was the observation that. The need to simultaneously account for changes in the socio-economic, material, and natural environment and therefore study economic evolution as dynamic process in which these environments co-evolve was emphasised by Veblen when he studied the evolution of capitalist economies inter alia in The Theory of Business Enterprise , henceforth Business Enterprise.

In concentrating on the evolution of western civilisations especially of the United States , Veblen discussed the transformation from the money economy of earlier times to the credit economy under the capitalist economic system. Regarding the business enterprise, Veblen subsumed the organisation of the machine process through business principles and other social institutions. One of the most fundamental business principles in capitalist societies, according to Veblen, was the institution of free ownership:. As the machine process conditions the growth and scope of industry, and as its discipline inculcates habits of thought suitable to the industrial technology, so the exigencies of ownership condition the growth and aims of business, and the discipline of ownership and its management inculcates views and principles habits of thought suitable to the work of business traffic.

Business Enterprise , p. Hence, upon him and his fortunes centres the abiding interest of civilized mankind. In Veblen's point of view, businessmen did not act in routines but were apt to change the direction of the enterprise. Yet, Schumpeter's entrepreneur behaved differently to Veblen's businessman in such a way as that the latter.

That is the work of the men who have in their hand the devising and oversight of mechanical processes.