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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.
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Chapter 2: Econometrics and evolutionary economics

John Foster


John Foster* 1. INTRODUCTION In the 1980s, my interest in evolutionary economics was stimulated by dissatisfaction with the econometric methodologies available to undertake applied work using time-series data. Many of these dissatisfactions were raised in Evolutionary Macroeconomics (Foster 1987). Although this led to an interest in evolutionary economics in its own right, my original research programme, dedicated to the development of an econometric methodology that could encompass both conventional and evolutionary modelling, remained intact. Over the years, it has been noticeable that many of the difficulties encountered in econometric modelling have stemmed more from the economic theory used by modellers than the statistical techniques that are applied. It gradually became apparent that, if the relationship between econometrics and economic theory could be respecified in a new way, this might lead to a shift away from the dominant neoclassical theoretical paradigm in economics towards theoretical perspectives embodied in neoSchumpeterian evolutionary economics. By 1987, conventional econometric methodology had split into three strands (see Pagan 1987). Two of these strands – VAR modelling, pioneered by Christopher Sims, and error (or equilibrium) correction modelling (ECM), popularized by David Hendry – were combined into a unified VECM approach in the 1990s (see Pagan 1994). Over the same period, my own ‘evolutionary’ approach to econometric modelling was developed, beginning with Foster (1991) and (1992) and ending with Foster and Wild (1999a, 1999b). These papers were greeted not with criticism, but with an uneasy silence amongst conventional econometric modellers. Conversations with such modellers have revealed that...

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