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The Evolutionary Complexity of Endogenous Innovation

The Engines of the Creative Response

Cristiano Antonelli

The notion of endogenous innovation as the outcome of the creative response of firms to out-of-equilibrium conditions is the cornerstone of the new evolutionary complexity. This book elaborates and applies the theoretical framework established in the author’s previous work Endogenous Innovation: The Economics of an Emergent System Property. This volume carefully explores the role of the reactivity of firms to out-of-equilibrium conditions. It also examines the quality of knowledge governance mechanisms in assessing the levels of externalities that define the likelihood of creative responses, as an alternative to adaptive responses.
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Chapter 3: The microfoundations of evolutionary complexity: from the Marshallian search for equilibrium to Schumpeterian dynamics

Cristiano Antonelli and Gianluigi Ferraris

Extract

Analysis of the Marshallian and Schumpeterian microfoundations of endogenous innovation enables us to draw a line between the new emerging evolutionary complexity from biological evolutionary analysis and to overcome its limits. This chapter integrates the Marshallian process of imitation and selection with the Schumpeterian creative response. In Marshall initial variety is given and exogenous, the dynamics of the process is driven by the selective diffusion of best practice and long-term equilibrium stops the generation of externalities; firms are not expected to try to react to unexpected mismatches between planned and actual product and factor market conditions. In Schumpeter firms are allowed to try to react, and the quality of knowledge externalities supports their creative response and may keep the system in a self-sustained process of growth. The Schumpeterian creative response can be regarded as a special case of the Marshallian dynamics that takes place when externalities – available to all firms, including best-performing ones – enable the introduction of innovations that account for the reproduction of superior performance and variety. The levels of reactivity of agents and of quality of knowledge externalities, provided by the system, account for output and productivity growth. This hypothesis is tested by means of an agent-based simulation model that shows how these microfoundations of endogenous innovation are able to generate aggregate dynamics based upon the interaction between individual decision-making and system properties.

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