Heterogeneity, Innovation and Entrepreneurship
Science, Innovation, Technology and Entrepreneurship series
Edited by Elias G. Carayannis, Aris Kaloudis and Åge Mariussen
Chapter 3: Heterogeneity in Economic Thought: Foundations and Modern Methods
Mark Knell INTRODUCTION Behavioural heterogeneity and technological diversity have been central issues within economic thought since at least the time of Adam Smith. Heterogeneity among competitors, which is one of the most important features of the modern market economy, has also been one of the most controversial problems driving the development of the theory of competitive equilibrium.1 Modern neo-classical economists, including authors of virtually all textbooks, deﬁne competition as an end state that is synonymous with market structure. The assumption of perfect competition is necessary for the theory of competitive equilibrium, which requires that all goods and services are perfectly substitutable and that all economic actors have free and complete information. If this knowledge is not complete or product diﬀerentiation exists, then the market structure would be imperfectly competitive. By contrast, the classical economists, many of the early neoclassical economists, including the Austrian school, and evolutionary economists view competition as a process where competitive rivalry necessitates the need to be diﬀerent and hence heterogeneous. Numerous episodes in the history of economic thought emphasize the importance of behavioural heterogeneity and technological diversity among ﬁrms and agents. In most instances, they were associated with the economists’ view of competition and the role of the ﬁrm within the economic theory. Our story begins with Adam Smith and the beginning of his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, ﬁrst published in 1776. In the ﬁrst three chapters of the ﬁrst book, Smith explains...
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