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�Ķ
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.
