Sum up of section 2
Controversies in Industrial Economics about the notion of
Comparative advantages:
 SCP-paradigm: Given factor endowments, rigid causality and
competition policy
 Infant Industry Protection: Importance of Economies of
Scale, subsidies to industries with potential for innovations
 Strategic Trade Theory: Institutional Comparative
Advantages
 MNEs and FDI: Intra-industrial trade, difficulties with
traditional trade theory
Industrial Policy Paradigms
 The traditional based on the following assumptions: 1) the
production process uses well-defined and well-known
inputs and 2) inputs are geographically relatively fixed
 The new based on the following assumptions: 1) new
economic knowledge a key input in the production function
and 2) labour the least mobile factor
EVOLUTIONARY ECONOMICS
 Is it appropriate to borrow concepts and methods from
biology?
 Does biological thinking lead to new perspectives on and
new solutions to problems considered in economics?
Aim: Make you acquainted with basic principles of Evolutionary
Economics
Main contributions
 Market competition (Schumpeterian competition)
 Economic growth
 Technological change
Nelson & Winter founders of the New Evolutionary Economics
Darwinian Natural Selection
Unlike the maximization metaphor, where actors have
the foresight to make deliberate choices, selection is
based on limited rationality (‘chance’, “choices are made
by the environment”)
IP-linkages to
Policies that try to influence technical advance and growth by
arrangements for the rewarding and the commercialization of
innovative efforts
Policy areas
 Policies on intellectual property and patents
 Public Technology Advisory Centres and EU policies for
European Standardization
 Policies on knowledge-assets that are external to firms
(supporting inter-firm technology exchange in clusters,
public sponsoring of research programmes)
 Policies on markets for technology (selling of patents and
licenses, technological joint-ventures)
Evolutionary processes: “Competitive selection” = “Natural
selection” transferred to Economics
Economic change
1. A firm = a repertoire of ‘modes of behaviour’ (mob)
2. mob = a rule (routine) for making decisions or for the
production of a product in a multi-product firm.
3. ‘Economic change’ = a firm substitutes one mob for another
No ‘average, profit-maximizing firm’. A population of firms with
various realized profits characterizes an evolutionary process at
time t. The probability for survival depends on realized profits.
Note the difference between ‘Darwinian change’ (natural selection
where the genes mutate by chance) and ‘Lamarckian change’,
where learning changes mobs
Do institutions such as European Standardization constrain or
enable the process of change?
 Diffusion of fixed technical specifications may hinder
innovations that do not exactly confirm with the
specifications
Haldane’s dilemma
1. If the probability for genetic change is small, then the cost of
genetic change (the ratio of ‘selective deaths’ to ‘survivors’)
has to be high.
2. But if the number of ‘selective deaths’ increases over a
certain limit, the whole population will be eliminated
3. Hence, the rate of genetic change has to be slow
Calculations to be made by a policy-maker
 Social costs due to loss of potential output during the
period while the unfit mobs are being eliminated (IP:
Procedures for rewarding industrial research that speed
up innovative activities)
 Social costs due to the fact that economic agents are
eliminated in the process of competitive selection (IP:
Offer training and education to unskilled workers)
 Economies of Scale? Infant Industry Protection?
A “map” for your orientation and for discussion
Forecasting
social
phenomena
Model of
rationality
Decision-rule
Inertia
Industrial
Economics
Yes!
Substantively
rational
behaviour:
Perfect
foresight
Profit
maximization
Capability for
learning and
adaptation
large
Survival based Optimisation
on
calculus by
individual units
Evolutionary
Economics
Difficult!
Chance is
crucial
Procedural
rationality:
Informationprocessing
capabilities
limited
Mob
(“routine”),
imitation
Competitive
(natural)
selection
Evolutionary
Economics +
NeoDarwininan
selection
(Lamarckian
change)
Existing firms
learn and adapt
Change
through
creation of new
firms:Change
in existing
firms rare
Realized profits Realized profits