Economic Evolution

Remarks, Notes and Slides from the Session

2008-07-06T10:15:43-06:00

Carliss Baldwin’s Introductory Remarks

Good evening. I am honored to be on this panel with Dick Nelson and Dick Langlois, and thank Peter Murmann for bringin us together.

I’m here it introduce you to a special variety of knowledge—designs.

My focus on designs is driven by concerns of financial modeling. Why? Because financial models rest on the fundamental idea of an asset. No assets, no finance, it’s as simple as that.

Designs are assets. They are the most basic of the assets involved in economic change. And new designs are options: they are “the right but not the obligation” to pursue a specific course of action.

Design Rules, the book I wrote with Kim Clark, is a confrontation between neoclassical finance theory and the phenomenon of innovation. The book is not Schumpeterian at all, if anything, it is Samuelsonian. It assumes perfect markets and rational expectation. You can think of it as Robert C. Merton (of rational option pricing) meets Herbert Simon.

No sooner was the book published in March 2000, than the Internet Bubble burst. At that point, I had to take seriously Nelson and Winter’s and other’s critiques of neoclassical economic assumptions. I was already an evolutionist—Design Rules presents a formal theory of the evolution of designs under neoclassical assumptions of foresight and capital asset pricing. But in the wake of the Bubble, I found I had to become an evolutionary economist and maybe a Schumpeterian. So here I am.

Now, as to why you should care about designs…

The structure of designs is the substrate of the economic structure and therefore economic evolution. All innovation involves a change in or the creation of a new design, however, finance demands that designs, not innovations, be the unit of analysis for theorizing. (Innovations are the “delta” of designs. The option involved in an innovation is the option to accept that “delta.”)

Institutions, including firms and transactions between firms (“markets”) are built on and must “mirror” the designs of the underlying processes for making goods and services. This is because the design of products, services and production processes specify the tasks that must be carried out by economic actors to obtain the goods and services. The designs also exhibit dependencies: if some element of the design changes (an innovation), what else must change? Through mirroring, the structure of product and process designs influences the institutional structure of the economy: what Winter and Jacobides have called the “institutional structure of production.”

Now I can report that the assumptions of neoclassical finance can give you evolution—the evolution of design assets as a process of variation-selection-retention. The theory predicts an open-ended, dynamic, complex adaptive system in the formal tradition of John Holland. You do not get all the way to evolutionary economics, but one can go a long way in that direction.

This theory of design is wrong. With Kim Clark, I built the theory, and I admit its wrong. But it’s wrongness is actually a strength, for it means the theory is falsifiable. In other words, the theory fails in interesting ways, which are susceptible to institutional analysis based on evolutionary economics.

In the rest of my short time, I’m going set forth some basic definitions. Then I will show you how differences in the structure of product and process designs can lead to different patterns of industry structure and evolution. I’ll then talk a bit about the process of designing and about what constitutes “success” for designs I’ll simply stop talking when time runs out.

Download Baldwin’s presentation slides below. Attention: it is a big file and takes some time to download

Richard Nelson’s Slides his Key Note Presentation Earlier in the Day (download below) (He spoke without slides at this event)

Richard Langlois’s Slides (download below) and a Related Paper Knowledge, Consumption, and Endogenous Growth

Sidney Winter spoke on a similar topic at a conference in 2002. You can also download his remarks below.

Post Questions and Comments before and after the Conference

2008-04-19T20:39:10-06:00

We want to give everyone the opportunity to influence the discussion that will take place during the workshop. Feel free to post comments and questions on the topic of the workshop here.

Overview of Symposium Sesssion at the July 2008 Schumpeter Conference in Rio

2008-04-19T20:01:56-06:00

This session at Schumpeter Conference in Rio explores the varieties of knowledge in the economy and articulates promising avenues for future research. Carliss Baldwin, Richard Langlois and Richard Nelson will make presentations followed by discussions and questions from audience members. The session is organized and facilitated by Johann Peter Murmann.

Abstract—Carliss Baldwin

Designs are the instructions based on knowledge that turn resources into things that people use and value. All goods and services have designs, and a new design lies behind every innovation. I argue that designs—sometimes called recipes (Nelson and Winter) or prescriptive knowledge (Mokyr)—are a special kind of knowledge deserving of focused attention by scholars of innovation. In the first place, designs have observable structures (architecture). Their structure can be mapped in terms of hierarchies of modules with coordinating interfaces. Design structure influences (but is also influenced by) the organization of firms and the economy, including the location and design of transactions. In the second place, the unit of change or innovation in a complex system is the module. Modules are “units of a larger system whose elements are powerfully connected among themselves and relatively weakly connected to elements in other units.” Thus it is relatively easy to substitute one module design for another without changing other parts of the system. As a result, modules carry option value, which in turn provides incentives for to invest resources in innovative effort. Investigating the modular structure of designs, the option value of modules, and how different institutions support or impede the evolution of complex designs is an exciting, open avenue of inquiry in the study of technological change and innovation.

Abstract—Richard Langlois

I will discuss knowledge and designs from the perspective of economic history and economic growth. One of the ongoing puzzles — and controversies — in the theory of economic growth is exactly what “knowledge” is and how it contributes to growth. I will argue that one important, and often neglected, mechanism involves the embodiment of knowledge in economic structures — in organizational and technological designs — in a way that generates increasing returns through knowledge reuse. In a fundamental respect, economic growth is about the evolution of design. “Spillovers” from explicit or propositional knowledge can augment this process, but such spillovers need not be the primary driver of growth.

Abstract—Richard Nelson

My discussion will be concerned with the co-evolution of practical know-how in a field, and the understanding that relates to that know-how and orients efforts to advance it. In some cases relative impressive bodies of know-how have been achieved almost exclusively through the vehicle of trial and error cumulative learning with little in the way of understanding behind that know-how. But there would appear to be limits to the advance that can be achieved this way. Over the last two hundred years at least virtually all bodies of know-how that have been advanced greatly have had associated with them relatively strong and progressive bodies of science or science-like understanding. I will argue that the positive correlation involves two way, not one way, causation.