Applied Evolutionary Economics and Complex Systems

Applied Evolutionary Economics and Complex Systems

Edited by John Foster and Werner Hölzl

This book takes up the challenge of developing an empirically based foundation for evolutionary economics built upon complex system theory. The authors argue that modern evolutionary economics is at a crossroads. At a theoretical level, modern evolutionary economics is moving away from the traditional focus of the operation of selection mechanisms and towards concepts of ‘complex adaptive systems’ and self-organisation. On an applied level, new and innovative methods of empirical research are being developed and considered. The contributors take up this challenge and examine aspects of complexity and evolution in applied contexts.

Chapter 6: Complementarity constraints and induced innovation: some evidence from the first IT regime

Andreas Reinstaller and Werner Hölzl

Subjects: economics and finance, evolutionary economics

Extract

6. Complementarity constraints and induced innovation: some evidence from the first IT regime Andreas Reinstaller and Werner Hölzl 1. INTRODUCTION Schumpeter (1939) distinguished three stages in the process of technical change: (i) invention, that is, the act of creation of a new technology, (ii) innovation, its commercial introduction, and (iii) diffusion, its gradual adoption. Evolutionary economists recognized the importance of Schumpeter’s trichotomy, but in the past their work has mostly focused on the last two stages of the process. The inducements and focusing devices leading entrepreneurs to produce new combinations are not analysed in an appropriate way. Technological search is often depicted as random. Neoclassical work on technical change has long studied John Hicks’s induced innovation hypothesis in the framework of aggregate production functions. The key insight is that ‘a change in the relative prices of the factors of production is itself a spur to invention, and to invention of a particular kind directed to economizing the use of a factor which has become relatively expensive’ (Hicks 1932, pp. 124–5). This literature studies the inducement mechanism relying on the principle that a rise in real wages will trigger labour-saving innovation. The problem arising from this type of work is that the aggregate production function framework seems not to be appropriate, as technological change is an inherently microeconomic phenomenon. Second, neoclassical production functions of the Cobb–Douglas, CES or translog type are strongly separable. Separability amounts to the claim that the marginal rate of substitution of any pair...

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