Abstract
A broad sketch of an evolutionary theory of long run economic development is presented in this article, considering the basic processes and structures involved. The problematic orientation of Neoclassical growth theory is discussed, pointing out its limited macroeconomic perspective, the weak consideration of technological change and of demand, the lack of attention to institutional settings. An explanation of economic development has to consider the key role of innovation and the process of creative destruction, in the context of Schumpeterian insights and evolutionary perspectives. I argue that economists need to consider three somewhat separate bodies of research on economic development. One is the evolutionary analysis that follows Schumpeter. A second is the research on technological advance as an evolutionary process. The third is focused on institutions and how they mold the development process, and how they themselves evolve. Moreover, the role of demand in shaping growth dynamics and business cycles—stressed by Keynes and post-Keynesian approaches—has to be integrated in such evolutionary perspectives in ways that are only now starting to emerge.
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Notes
This is the central focus of Adam Smith’s The Wealth of Nations. Recall that he begins his book with an example of progress in pin making.
An important exception to this generalization is Malthus and his argument that, because of land scarcity and the tendency of populations to grow when incomes are above subsistence levels, the economic future is bleak. The argument that the kind of economic development we are experiencing will lead to environmental disaster has a similar flavor.
In recent years there has been some argument within the research community in question about whether the appropriate measure is net rather than gross national product, domestic product rather than national product, and similar matters. All this is irrelevant to the argument presented here, which is that no aggregate measure of output can be used by itself to construct an adequate measure of economic progress.
That standard measures like GNP per capital or per capita income miss important aspects of the relevant changes is widely recognized, but the emphasis within the economics profession seems to be on improving those numbers, rather than accepting that economic progress simply cannot be described in a single number, or a small set of them.
And before Schumpeter there was Marx, and before Marx Adam Smith.
While there are important differences, my characterization of Schumpeter’s theory of economic development fits both how he articulated the theory in his Theory of Economic Development, and in his Capitalism, Socialism, and Democracy.
It can be argued that the institutional simplicity of Schumpeter’s formulation is a reflection of the fact that government, and in particular the institutions of modern science, played a smaller role in his days than in more recent years. But reflection on the rise of the dyestuffs industry in Germany in the late nineteenth century would reveal much of the involvement on non-market institutions in industrial innovation that one sees more widely today (see Murmann 2003).
Of course this also is true regarding neoclassical growth theory.
In most of the models technologies differ in the modes of production they define, but not in the nature of the products they produce. However, in some of the models product characteristics differ as well.
In the models that admit product differentiation customer preferences also count.
I note that since these models do not treat depressions, the time series they generate tend to be quite off the actual patterns that pertained during the great depression.
See Dosi and Nelson (2010), for a general review of this literature.
I note that this point of view appears to have been developed relatively independently by different groups of scholars studying technological advance empirically, including evolutionary economists and historians of technology.
For a review of the diverse strands of this literature see Nelsn and Sampat (2001).
Murmann (2003), reviews this story.
In his 1992 review article, Chandler brings together many of the themes he developed in his several books.
As I noted earlier, the argument that economic progress in an era is driven by a particular set of rapidly advancing technologies, and that these leading technologies change over time goes back to Schumpeter’s Business Cycles.
I do not want to be understood as proposing that these three aspects cover all that we should know about and recognize. Rather, I am proposing that today the research traditions oriented in these three ways all are strong, and each illuminates a different important feature of the development process.
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Nelson, R.R. Understanding long run economic development as an evolutionary process. Econ Polit 32, 11–29 (2015). https://doi.org/10.1007/s40888-015-0007-x
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DOI: https://doi.org/10.1007/s40888-015-0007-x