Abstract
During the early post WWII years Walrasian minded static equilibrium economists managed to disconnect a promising merge of Schumpeterian and Swedish School economics, and for decades more or less block the development of evolutionary dynamics. This paper is a fresh start of what should then have been done. I link my discussion to Loasby’s (1998) two forms of coordination failure of; (1) failure of economists to model the coordination of an economy “out of equilibrium” and (2) failure of economists of competing schools to understand and benefit from each other. I find that 2 may explain 1.
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Notes
I got the idea of this paper at a session at the Schumpeter conference in Aalborg in 2010, when Brian Loasby suggested that perhaps one should also look at the Stockholm School economists of the 1930s. Nobody picked up on Brian’s suggestion, which illustrates the point of his double meaning, and of my paper.
Erik Lindahl is reported to have been puzzled when told about the correspondence principle (Petersson 1987:22)
Wicksell (1898) does not use the term “expected”, which appears not to have been the standard terminology of the time, but states (p.104) that the “concept of subjective value” is that “ the probability that an entrepreneur will make a profit must always be somewhat greater than the probability that he will make a loss”. For otherwise his “moral expectation would be negative”.
Wicksell (1898:102ff) uses the term “entrepreneur”, even though he probably means a firm in general.
The rate of return to capital and the market rate of interest on loans
Reflecting Wicksell’s influence of Böhm-Bawerks’s theory of capital. See further Eliasson (2007)
In fact, in Wicksell (1917) the business cycle, and by implication economic growth, depends on some “ extraneous force”, that makes the economy move like a “ rocking-horse”.
Johan Åkerman (1953), the most pronounced Swedish Schumpeterian at the time, criticizes the macro orientation of the Stockholm School by pointing out that aggregation (the “summation problem”) raises the level of abstraction and distances analysis from the factual circumstances and their causal relations.
Allen (1956:187f) has almost nothing to say on non linear modeling
Then risk and uncertainty are not synonyms. The use of the terms as synonyms can be traced back to Marschak (1950) who wrongly interpreted uncertainty in Knight’s (1921) sense to be identical with incomplete information. Arrow (1951) carried on by distinguishing between three kinds of phenomena which are in some way associated with uncertainty. They are (1) calculable risks of the lottery type, (2) speculation in financial markets, and (3) business risks. The second kind, involving imperfect foresight, is dismissed by Arrow with the comment that “they would not arise in the absence of risk of type (1), and they indicate that the reaction of individuals to a given risk situation are not all the same”. Regarding the third kind of situations involving imperfect foresight, Arrow considers the analysis of them to be so incomplete that he does not regard them as “being immediately useful in discriminating among various theories of uncertainty”. He therefore makes no further mention of the second and third kinds of “risks”. So uncertainty and its special case, calculable risks, become synonymous, a terminology that has sunk so deeply into the minds of economists that it is currently taken for empirical fact.
The term was coined by Modigliani and Cohen (1961), who were not aware of what the Stockholm School economists had done, or at least did not bother to quote them.
During the period 1870 to 1920 Sweden enjoyed a “Silicon Valley” experience of extraordinary proportions when two thirds of the largest Swedish manufacturing companies in 1988 were founded (Eliasson 1993).
The interest rate is endogenously determined by demands and supplies of funds (Eliasson 1978:28ff) and partly moderated by foreign trade credit transactions geared to differences between the local domestic and an exogenous global interest rate.
The behavior of firms in the MM model has been modeled on the basis of more than one hundred interviews on firm planning practices (Eliasson 1976). Firms follow a Maintain or Improve Profits (MIP) profit targeting procedure (Eliasson 1976:236ff, 258f, 291f). The competitive climbing of all other firms of similar ex ante profit hills, however, makes the landscape of ex ante profit hills endogenous to the market process. Hence, business mistakes are constantly committed and firms that have used up their net worth exit endogenously. The evolutionary selection process therefore becomes both dependent on its initial state and irreversible. The endogeneity of those profit hills, that depend on the endogeneity of prices, prevents the model from collapsing into a traditional static general equilibrium model (Eliasson 1991, 2009).
An evolutionary model requires that the state space, or opportunities space, stays overwhelmingly complex, diverse and intractable, and decision makers fundamentally but differently ignorant for ever. This will be the case if learning by all micro actors from exploring the opportunities space makes the space expand at a rate that is faster than the rate of learning (The “Särimner Effect”. See Eliasson, 1990:46,1996:27f, 2009), thus keeping all actors fundamentally ignorant for ever, and preventing both the theory of the EOE, and the MM model, from collapsing into its special case, a general equilibrium or neo-Walrasian model. Also note that this information paradox, namely that economic progress makes you (read all actors in the economy) increasingly ignorant about what can be learned, is an in principle testable assumption.
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Eliasson, G. The incomplete Schumpeter Stockholm School connection. J Evol Econ 25, 45–56 (2015). https://doi.org/10.1007/s00191-014-0372-6
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DOI: https://doi.org/10.1007/s00191-014-0372-6
Keywords
- Economic coordination
- Economic mistakes
- Evolutionary economics
- Ex ante/Ex post
- Experimentally organized economy
- Ignorance
- Information economics
- Micro based macro modeling