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* Markus C. Becker and Thorbjørn Knudsen 19.1 INTRODUCTION In this chapter, we consider Richard R. Nelson and Sidney G. Winter’s work within the context of dynamic approaches to the firm. We first review how Nelson and Winter provided the foundation of evolutionary economics and the evolutionary theory of the firm. Then we identify how their work was developed further and finally, point to some avenues for research that emerge on the basis of their work. 19.2 FOUNDATIONS There is a long history of conceiving of economic change as a selection process (Veblen,  1970; Schumpeter,  1934; Alchian, 1950),1 but the full treatment of the evolutionary argument that makes it a serious contender to standard theory first came with Nelson and Winter’s (1982) foundational work. Winter’s (1964) critique of Milton Friedman’s (1953) natural selection argument decisively paved the way for modern evolutionary economics. Friedman (ibid.) argued that it does not matter whether the behavior of economic actors is determined by utility maximization or follows other rules. If the firm does not exhibit behavior that in effect is like that of utility maximizers, the firm will perform less well than its competitors. Because of this, it will sooner or later go out of business. Managers would therefore seem to act as if they played out the predictions of textbook economics. For Friedman, this constitutes a process of ‘natural selection’: only those firms that act as if they maximize utility will survive. For a couple of reasons this is not...
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