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Capitalism and evolution

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Abstract

In this paper I to ask an old fashioned question, “Why do capitalist economies evolve in the way that they do?” The answer will lie, in the nature of human curiosity and the corresponding growth of knowledge and in the particular instituted rules of the game that induce the self transformation of each particular economic order. The essential idea is this; the manner of self transforming is contingent on the manner of self-ordering, so that different instituting frames have different dynamic consequences. The notion of order provides the bridge to the systemic properties of the economy, the nature of its parts and the manner of their interconnection, while the notion of transformation provides the link with evolution and the open-ended, essentially unpredictable, development of capitalism. From my perspective capitalist economies are ignorance economies, in which highly specialised individuals and teams know a great deal about very little, so that the productive strength of the system, its collective knowing, depends on how the pools of specialised, narrow understandings are connected. Connectivity requires organisation and organisation depends on rules of the game and on belief and trust so that we can rely upon the testimony and actions of others. Failure of trust leads to failure of connectivity and a corresponding loss of system coherence. Order is central to the notion of economic evolution and, in practice, economic configurations demonstrate immense richness and subtlety but order is not equilibrium. Systems in equilibrium do not evolve. That the day to day structures of capitalism are the product of ordering processes in the epistemic as well as the material realm seems to me self evident and it is equally self evident that these structures are restless, that their development is open-ended and unpredictable.

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Notes

  1. See, for example, the authoritative treatment of Andersen (2011).

  2. I have attempted to connect the ideas of Hayek, Marshall and Schumpeter in relation to economic evolution in Metcalfe (2008).

  3. To state that part of the problem lies in inadequate labour mobility is not too helpful. The stickiness of social ties relative to the fluidity of economic ties is perhaps the more productive way to pose the problem. Of itself the mismatch provides ample justification for a welfare state to compensate for the loss of human capital that occurs when firms and industries are forced into absolute decline. For example, the growth of the Lancashire cotton industry stimulated the growth of numerous urban centres (the ones famously characterised on canvas by L.S.Lowry) but as the industry declined after 1920, and disappeared in the mid 1980s, those urban centres were left without their primary economic rationale. Manchester adjusted well, eventually, other towns did not.

  4. Even Schumpeter expressed the view that “a majority of would be entrepreneurs never get their projects under sail and that, of those that do, nine out of ten fail to make a success of them” (1939, p. 117).

  5. Foster (2005), Hodgson and Knudsen (2010).

  6. See Shackle (1966), p. 36 for an interpretation of Marshall on similar lines.

  7. See, for example, the discussion in Kirman (2011), chapter 4. We may note that the theory of the pricing of financial assets as developed by Keynes and Shackle rests exactly on a diversity of views as to how those prices will evolve in the future. I am grateful to a referee for drawing my attention to this point.

  8. See Landes (1969), Mokyr (1990, 2002), Hughes (1989), and Mathias (1979).

  9. A model study of its kind is Landes’ account of the evolution of the international clock and watch industry (1983).

  10. The story is a long one to tell, thanks to the work of Clark (1944), Kuznets (1971, 1954, 1977) and Maddison (1995) among many others. For an up to date example that distinguishes the changing importance of different kinds of service activity see Jorgenson and Timmer (2011).

  11. On this relation between aggregates and their components (a macro-meso story) and its importance for evolutionary growth theory see Dopfer and Potts (2008), Metcalfe and Foster (2010) and Metcalfe et al. (2006).

  12. The evolutionary nature of Smiths theory of knowing and connecting is detailed in Loasby (1999). In Smith’s theory of knowledge (first outlined in his Essay on Astronomy, published posthumously in 1795) knowledge is derived from the connection of disparate phenomena and is thus a product of human imagination and has no existence beyond human minds.

  13. The weaknesses have been admirably exposed by Mirowski (1989).

  14. Dopfer and Potts (2008) call this the bimodal axiom, that the same broad idea may admit many alternative instantiations in practice. Thus when we talk of the method of producing a particular class of commodity we are in effect talking about a population of alternative methods.

  15. See Loasby (1990) for further elaboration of this Marshallian theme. We should also note the relevance here of Edith Penrose’s theory of the firm, that it is an incompletely connected administrative structure premised on many specialised knowings and thus constrained in its development by the limitations on the rate at which new knowings can be generated and old understandings abandoned. Penrose (1959).

  16. See Potts (2000) for a very clear articulation of the view that the use of fields in economic theory is a means to avoid the significance of connection, to replace specific relations and interactions with the idea of complete and anonymous immersion in a field of forces acting equally on all.

  17. Quite remarkably, Marshall writes of this in Industry and Trade (1919), where he depicts a tripartite ecology of research organisations, an almost exact description of a modern innovation system. For, an excellent exemplar, see the penetrating account of the role of Stanford university in the development of semiconductor technology by Lecuyer (2007).

  18. A referee rightly drew my attention to Herbert Simon’s emphasis on the quasi-decomposability of evolving systems. The incompleteness o f connectivity, the mutability of connectivity are two essential aspects of organisation in capitalism and the immanent possibilities for creative destruction. See Simon (1969). The referee also pointed out that this is the reason why Marshall developed his reasoning in partial equilibrium terms; since he was writing about an evolving system it necessarily could not be completely and immutably connected. The impossibility of general equilibrium as an economic frame is, of course, premised on the incompleteness of market connectivity, which, in turn, is premised upon our ineluctable ignorance of the future. “Would someone please write me a contract to purchase an unspecified device to solve an unspecified problem at some indeterminate date beyond today” is not a request that is likely to elicit action.

  19. The reader puzzled by a claim that libraries and book stacks constitute technologies might care to read Petroski (1999).

  20. See Dopfer et al. (2004) for the evolutionary significance of this theme. These ideas are taken further in a thoroughgoing manifesto for evolutionary economic theory, Dopfer and Potts (2008).

  21. Shackle (1966) captures this with his usual élan, “To ask for a non-determinist history is to ask for a history which is not completely structured, a history, that is to say, in which we need not regard every situation or event as the inevitable, sole and necessary consequence of antecedent situations and events, a history in which, therefore, a situation or event can be essentially and inherently not fully explainable, not fully analysable, not fully assignable to conditions or causes which are sufficient to guarantee the occurrence of it and it alone” (p. 107, italics in original) The connection with age-old debates on the distinction between “free will” and “determinism” is drawn in Popper (1972).

  22. Richardson (1975) has provided a very cogent account of this non-equilibrium dimension to Smith’s economic dynamics.

  23. Just as scandals that arose with new medical products lead to strict regulation so the scandals that have arisen more recently about the conduct of financial organisations may instigate a raft of new rules and regulations as to “innovative” lending practices and the design of financial instruments.

  24. It is one of the canons of economic theory that decisions to produce and consume depend on relative prices not absolute prices. If an economy, a simple economy, trades one hundred goods or services this generates 4,950 relative prices, a considerable volume of information. The same information is contained in 99 money prices (one of the goods being taken as money or the accounting unit) from which any relative price can be deduced. The effect this has on the economy of information when keeping track of transactions and changes in the ownership of property will be obvious.

  25. The post 2008 financial crisis was a phenomena based on the breakdown of trust in financial markets, a breakdown that arose from an inability to access the true risk profile of an important class of financial assets (innovations in fact) held on the balance sheets of retail banks and other financial institutions. Lacking this information, no counter party could be confident in the solvency of those it lent to. I recall being told, some years ago, of a shop in Buenos Aires, at a time of very high inflation, being “closed for lack of prices”. It is the same point, when information breaks down so does trade and our ignorance is manifest.

  26. One might add that the rules which facilitate the establishment of new business entities are of central importance to a Schumpeterian view of economic evolution. The wider lessons in relation to inter society differences in development potential has been drawn by De Soto (2000).

  27. This is why the disclosure rules attached to patents are so important. The information placed in the public domain signifies the ideas which must be avoided if a patent is to be invented around. The wider point of relevance is the transience of the innovator’s profits, a central part of Schumpeter’s theory of economic development. “No industrial company of the type indicated gratifies its shareholders with a constant shower of gold; on the contrary it soon declines into a stage that has the most lamentable similarity with the drying up of a spring.” (Schumpeter 1912, p. 209).

  28. Note the importance of the recent rebirth of the economic sociology of markets. For very different contributions see Callon (1998), Harvey (2010) and Beckert (2009). That economists do not seem much bothered by the organisation of real markets is oft’ said (e.g., Richardson 1972) but see Kirman (2011) for an outstanding counterexample. There is a connection here to the debates on markets as evolving systems of computable rules. Consult Mirowski (2007) and the commentaries on this paper for further elucidation of the point. Richard Nelson has long emphasized the importance of rule sets as social technologies and their associated innovations. On this see Nelson and Sampat (2001).

  29. The “Vital Few” is the perceptive title of Jonathan Hughes’ (1966) instructive account of American enterprise.

  30. As explored in Georghiou et al. (1984).

  31. The intra ocular lens, an astounding development in the treatment of cataract, was first used in London in 1948. It took four decades for a sequence of problems to be identified and solved that turned the treatment from a surgeon’s craft into a quasi-industrial process, a procedure that is today the most frequently performed medical intervention in the world. A new branch of cataract surgery was instigated to train the practitioners and channel the growth of understanding, a new industry emerged to produce the devices and process equipment required, and, along the way, new rules for regulating practice were introduced. The pace at which these changes occurred differed between the USA and the UK as a result of their differentially instituted medical systems. See Metcalfe et al. (2005) for an account of this radical innovation. Here too one might also remember Marshall’s, dictum “constructive movements which had long been in preparation” (Marshall 1920, p. xiii).

  32. On the idea of adaptive experimental economic policy, see Metcalfe (1995), Hausmann and Rodrik (2003) and Rodrik (2004). Space precludes further exploration of the powerful case they make for active industrial policy in a world of evolving ignorance.

  33. For a complementary view see Nelson (2013).

  34. Simplified not least because of the neglect here of the role of labour and capital markets in the process of economic change.

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  1. Manchester Institute of Innovation Research, Manchester, UK

    Stan Metcalfe

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  1. Stan Metcalfe
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Correspondence to Stan Metcalfe.

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The financial support of the Autonomous Province of Trento, sponsor of the Openloc project, is gratefully acknowledged. The comments of the two referees are noted with particular gratitude, as are the response of the participants of the symposium organised by Geoff Hodgson at which the first draft of this paper was presented. Although it has not proved possible to incorporate all of their wide ranging comments, the argument in this final version is better connected thanks to their insights.

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Metcalfe, S. Capitalism and evolution. J Evol Econ 24, 11–34 (2014). https://doi.org/10.1007/s00191-013-0307-7

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