Dopfer, Kurt
Potts, Jason
2008
The General Theory of Economic Evolution

xii
“That is our general theory, namely that the analysis of rules is the explanatory basis of the nature and the causes of wealth in consequence of the coordination of rules, and that economic evolution in rules is the explanatory basis of how this wealth changes.”

xiii
“both behaviors and technologies co-evolve and mutually adapt to each other, a process that invariably results in both micro and macro structural change.”
Definition: “Our general theory of economic evolution is therefore intended as an integrated generic framework to define the rules of an economic system, how they are coordinated, and the causes and consequences of their change.”

xv
“Knowledge builds knowledge, and the consequence is economic evolution, both as an extent structure of knowledge and as a historical trajectory of knowledge.”
” We require micro analysis to study how individual carriers originate, adopt and retain novel rules, and to analyze the change in micro structure that results. We require meso analysis to study how populations of rules change and the transformations in industries, markets and institutions that result. We require macro analysis to study how meso units themselves are coordinated into a macro whole and the historical logic of growth and development as sequences of macro trajectories.”

1
Definition “economics”:
“evolutionary economics is best defined by what it is not – i.e. it is not a mechanistic analysis of economic coordination and change. It is not the study of the consequence of things already known, nor of their exogenous disturbance.”

2
Definition “economy”:
An economy can be defined “as a complex open system, or more specifically, as a non-linear, quasi-entropic, differentially replicative, partially stochastic, non-integral, non-computable, non-equilibrium, boundedly rational, learning focussed, behaviourally conditioned, self-organizational, strategically interactive, path-dependant, environmentally composed, institutionally structured, co-evolutionary, discovery-based, enterprise driven, technology and resource dependant, topologically complex adaptive ongoing process of variation, selection and replication in the growth of knowledge.”

3
“The complete axiomatics of evolutionary realism can be summarized as follows:

Axiom 1: All existences are matter-energy actualizations of ideas
Axiom 2: All existences associate
Axiom 3: All existences are processes”

4
“Evolutionary reality is composed of populations [axiom 1] and structures [axiom 2] of idea-actualizations (i.e. process-structures) that change with time [axiom 3].”
“Economic evolution is therefore not ‘just a metaphor’ from biological evolution. Rather both economic and biological evolution, along with all other evolutionary subject domains, share common properties represented by the three axioms of evolutionary realism.

5
Definition “evolution”, “economic evolution”, “subject”, and “object”:
“Evolution is the process of the adoption and embodiment of ideas into new carriers and in economic evolution that carrier is primarily the human mind.”
Subjects are “processes that centre about the human mind”.
Objects are “processes that relate to the external environment of things”.

“Subjects are not objects because objects have no mind, and, therefore, play only a secondary role in the process of economic evolution.” Capital is way less important than humans/knowledge.

6
“The human mind is [...] the seat of economic evolution.”

8

“Economic evolution is the co-evolution of subject and object rules. [...] Economic evolution is therefore a complex generic process at the nexus of subjects and objects. This makes an obvious difference between, for example: (a) engineering, which is the pure study of technological rules; (b) sociology, which is the pure study of social rules; (c) ethology, anthropology or behavioural psychology, which is the study of behavioural rules; and (d) cognitive psychology or neuroscience, which is the study of cognitive rules. Economics is the study of subject and object rule co-evolution, and therefore involves (at least) all of these.”

9

10

11
“All rules have carriers in the same way that all existences are composed of an idea and a matter-energy actualization of that idea. Carriers and operations are the material reality of a rule.”
“Schumpeterian economists ever since [Schumpeter] have centred their analysis about trajectories, and in particular technological trajectories.” Very good references!

12
“a rule process in three distinct phases:

Phase 1: Origination of a novel rule
Phase 2: Adoption of that rule into a population of carriers
Phase 3: Retention of that rule in a population of carriers”

“A trajectory is the process by which a novel rule is originated, adopted and retained in a carrier population, such that it eventually becomes coordinated in the economic system resulting in a new economic order.”
“The population sum of micro trajectories for a single rule through time is a meso trajectory, and a meso trajectory is the basic dynamical unit (i.e. process) of economic evolution.”

13
“[Evolutionary economics] shares with biology the fundamental ontological premise that it is ideas (or rules in analytic language) that evolve. But in economic evolution, these rules are generic in that they are created by the human mind, and neither the product of genetics or any other exogenous factor. For this reason, evolutionary economists emphasise that the locus of the wealth of nations is the human mind and its propensity to originate, adopt and retain new ideas.”
‘Idea’ in analytic language: ‘rule’.
‘Actualization’ in analytic language: ‘carrier’.

14
“economic evolution is both a self-organizing and creative-destructive process of a novel rule trajectory.”

16
“The fundamental questions in economics are not, in this view, the problems of choice in markets or efficiency in firms, but rather the coordination of the whole economy and how this changes.”
“So although we maintain that evolutionary economics is ultimately for macro analysis, we allow that the definition of macro may be scalable to ‘macro units’ smaller than the whole economy.
We call this partial evolutionary economic analysis [...].”

21-24
Meso must be at the centre of evolutionary economics.
There is no direct relationship between micro and macro.
There is a relationship between micro and meso, and meso and macro. (see p26)
Therfore evolutionary economics needs a double methodology: methodological individualism for micro-meso, and methodological pluralism for meso-macro.

24
“Indeed, the global macroeconomy is quite possibly the most complex system in the known universe, and certainly at least as complex as the human brain or the global ecosystem. Yet although no neuroscientist would describe the mind as a simple neuron- to-behaviour aggregation, and no ecologist would describe the ecosystem as a simple gene-to-ecosystem aggregation, the current mainstream paradigm of economic analysis is analogously that, namely the supposition that micro operations sum to aggregate economy.”

25
“The reason these otherwise naturally meso concepts have remained static and exogenous − even when it is observationally unambiguous that markets change, that industries change, and that technologies change, and moreover that the most immediate and pressing economic problems that agents face is in dealing with such change − is that the aggregate logic of the micro-macro framework cannot have it otherwise. It is the theory not the reality that is wrong.”
“As every entrepreneur and World Bank economist knows, it is ultimately the analysis of the problems of change that reveal the qualities of a good framework. The micro meso macro framework is, we argue, geared precisely toward the analysis of such change.”
“Evolutionary micro analysis, then, is the study of individual rules, carriers or systems that compose a meso unit. And evolutionary macro analysis is the study of coordination and change in the structure of all meso units as a whole.”

26
There are two foci of evolutionary economics: “a micro–meso focus about agent carriers and rules; and a meso–macro focus about rule populations.”

29
Definition “Homo Sapiens Oeconomicus”:
“Homo Sapiens Oeconomicus is generic man. It differs from the classical notion of Homo Oeconomicus in the sense that it explicitly recognises the element of Homo Sapiens, namely the ‘wise man’, and not just as a tool-making and tool- using animal, but as a rule-making and rule-using animal that experiences generic change. Homo Sapiens is capable of knowledge, and Homo Oeconomicus is capable of economic operations. Homo Sapiens Oeconomicus is capable of new knowledge for new operations and, therefore, is the carrier of economic evolution.”

30
“The uniqueness of Homo Sapiens Oeconomicus lies in these higher order abilities as manifest in the creation of 2nd order rules for changing and developing 1st order rules. The creation and transmission of these “generic rules” is the basis of what we call culture, a point that resonates across the social sciences, but it is also the foundation of economic analysis from the evolutionary perspective.”

31
“We now effortlessly live in cold climates, hunt fish, and fly at night, and that has nothing to do with biological evolution of the human organism, but rather is a consequence of economic evolution in our ability to originate, adopt and retain knowledge. Economic man is a generic animal.”
“The ideology of evolutionary economics, then, is neither the perfectibility of man or society imbued in the concepts of “rational man” or “socialist man”, but closer to the spirit of “renaissance” man with respect to the optimistic prospects of new knowledge and to the goodness and naturalness of both an open society and an open mind.”
Definition “agency”:
“The generic ability to use and adopt knowledge is not limited to agents however, but also extends to firms, organizations, households, networks, and other socially organized systems of agents, which we shall call agencies.”

32
“Technical change moves the economy, but so too does change in the rules that organize people. Evolution in social rules, including agencies, is also essential to economic evolution.” Sandberg was talking about the same when he said that technology changes faster than the consumers’ understanding of them.

33
“Agencies organize agents into structures of knowledge that otherwise do not exist through
any aggregation of those agents, but rather through the emergence of specific connections that yield generic value.”

36
“Economic evolution originates in a micro trajectory, as the process by which a micro unit acquires a new generic rule and thus changes its knowledge base.”

37
“In most cases, what is originated, adopted and retained is not a rule but a rule complex of subject and object rules.”
Definition “micro trajectory”:
“We define this process by which a micro unit becomes generically different as a three-phase structure – origination, adoption, retention – over two types of carriers – agents and agencies – in terms of three orders of rules – 0th, 1st, 2nd – and over four types of rules – CBST. This generic micro 3×2×3×4 space is analytically appropriate, we suggest, for the representation of any rule in any micro unit at any point in space and time in order to provide a useful micro foundation for meso and macro analysis of economic evolution.”

38
Definition “global/local generic novelty”:
“Global generic novelty is the first carrier of a novel generic rule. Local novelty is the first carrier of that in each new environment.”

41
“Learning is adaptation to a world, whereas adoption is a generically marginal process that changes the world. Learning is a process of adaptation, but adoption is a marginal process of differentiation and progress. Learning stabilizes known advances, but adoption drives them. Adoption, not learning, is therefore the core mechanism of microeconomic evolution via generic change in micro units.”

42
“Rule adoption into an agent or agency is also conditional upon the ability of the carrier to cope with the uncertainty of the event, to manage the process of change and to finance the resource cost involved.”
“To adopt a new rule is to become generically different. And generic difference is the driver of economic evolution.”

47
There are four aspects of creative destruction:

1. “A rule that cannot be generically communicated (i.e. encoded and decoded) is just a person with an idea; it is not entrepreneurship and it is not innovation.”
2. “This will often mean that the entrepreneur makes two contributions: (1) the ‘discovery of the opportunity’, often in the form of a new technical rule or a new use of existing technical rule; and (2) the creation and organization of the necessary accompanying rules for thinking, behaviour and social organization to render the novel rule viable. This may involve campaigns of persuasion that endeavour to change other agents’ thinking and behaviour, the provision of organizational and financial structures to make these changes possible, and the creation of new market structures to facilitate these changes.”
3. Natural (good) monopoly: “the entrepreneur [is] creating or opening up a new market about a new generic rule and then being the first to occupy it.”
4. “meso 1 proceeds in a fog of uncertainty with the expectation of profit. [...] Expected profit is not a necessary incentive to undertake this endeavour, but it is often sufficient.”

49
“Meso 2 therefore begins with high uncertainty, but toward the end of the adoption process the cumulative effect of experience and experiment will have greatly reduced that uncertainty and knowledge of the rule will settle into understandings.”
Meso 2 / competitive enterprise “is a competitive process in the literal sense of a race in which no one knows who wins until the end, although with the twist that there is no end to the race, only participant or player exit. Meso 2 is the exhilarating phase of market capitalism at its best and at its worst, both creative and destructive and ordered and chaotic all at once, creating new solutions for some, and new problems for others. This is the normal run of generic competition and the cutting edge of economic evolution as ideas are tried and tested. Competitive enterprise is competition to innovate and therefore the powerhouse of economic evolution.”

50
“By meso 3, the rule has formed into an institution, such that the carrier population replicates and the structures it requires are maintained.”
“By meso 3, uncertainty has been transformed into risk and generic profits have been extracted. The size of the market is revealed and good strategies have been learnt. Prices will become stochastic as the information conveyed by them is fully expropriated.11 Stable patterns of activity will predominate and transactions costs will fall as risk premiums vanish and efficiencies of scale and scope are produced. Maintenance and service niches will open up, and expertise will be well-defined. Expectations about the rule will converge, and any environmental, cultural or political implications will become pronounced. The rule will become embedded in material artefacts and human behaviours. Cognitive and behavioural rules will normalize into habits and routines, and social and technical rules will become dominant and standard. Meso 3, as such, will begin to look a lot like the world that neoclassical economics describes. Yet the difference is that this world is explained in generic analysis whereas in neoclassical analysis it is simply assumed.”

55
“The meso unit in a market can be usefully further characterized by its generic scale and velocity. Some ideas are bigger than others, and some ideas happen faster than others.”

56
“while technical rules may be fast and easy to adopt, new behavioural rules may take much longer, effectively slowing the entire process. A novel generic rule is adopted at the velocity of its slowest component, and so the complexity of a rule over the rule taxonomy will matter.”

59
“Entrepreneurship is most valuable in meso 1 and 2, but management is most valuable in meso 3.”
“Venture finance drives meso 1 and 2, but standard savings and investment drive meso 3.”

63
“Finance is an evolutionary enterprise that can only exist in the context of novel generic rules, and therefore in the face of uncertainty. Savings and investment are both generic and operational notions; but finance is a purely generic property, such that it has no role outside of an evolving economy and, in turn, no meso trajectory can happen without finance of some kind or other.”

67

68
“At the deep level, macro 1 involves the de-coordination of the extant logic of rule associations due to the new rule upsetting existing structures of what was known to be feasible, true or reasonable. The conventional response is at first to deny or attack it, then to adapt to it through awkward adjustments of position, then finally to assert that that was what was believed all along.” That’s what Hollywood has always been doing, see VHS and the Boston Strangler for example.

69
“Macro 2 changes things: it changes what people think and do, and also the systems they form.”

70
“The state of macro 3 is the state of macro order, a process that is both ever-embedding knowledge and ever-regenerating those rules so as to retain and maintain the coordination of the once-novel generic rule within a new macro order. By macro 3, the meso rule is embedded into the macro order at all levels and it is at this stage that the broader implications of the rule play out.”

76
“Phase 3 of a cluster is the ongoing retention and stabilisation of the operations of the cluster. The two extreme states of this are, first, that the entire cluster will be absorbed into a very large firm in order to internalise all the connections between the constituent rules and hence to more efficiently control or exploit them. And second, that the entire cluster may become controlled by government through regulation, planning, sponsorship, or direct ownership. This may then further be tied to policies relating to regional development, innovation, education, infrastructure and trade. Actual outcomes will invariably fall somewhere between these states, with some mix of private and public provision of connections.”

77
“We defined a macro trajectory as the effect of a meso trajectory on the system of all other rules. This was then analytically represented as a three phase process of decoordination, recoordination and ongoing macro coordination of both the deep generic order and the surface generic equilibrium. We examined the ways in which coordination failure can occur at each of these phases as a failure of rules or populations to connect. And we then further developed this to consider the co-evolution of systems of meso rules explicitly in terms of emergent clusters of meso units and trajectories. Overall, we sought to unpack the complexity of generic coordination in an open evolving economic system in consequence of a meso-macro trajectory.
We have argued in this chapter that economic evolution is a process of change and recoordination. A meso trajectory is the driving process of change, but a macro trajectory is the process of decoordination and recoordination that results. This process consists of a reconfiguration of the associations between rules (deep structure) and of the populations of carriers (surface structure).”

78
“The coordination of economic systems is a consequence of human cooperation and the imagination that sustains it. But the evolution of economic systems is a consequence of human imagination and the cooperation that sustains it. The macroeconomy can, therefore, only be understood as a co-evolutionary process.”

80
“Regime: Rule + Carrier population + Trajectory”

85
“Our theory of rules is as follows:

• Rules are originated by human minds
• There are two major classes of rule – subject and object
• There are four minor classes of rule – cognitive, behavioural, social and technical
• There are three orders of rules – 0th , 1st, 2nd
• There are three phases to a rule trajectory – 1 2 3
• Each rule can have many carriers – this is the rule population
• There are two types of rule carrier – agents and agencies”

85f
“So far, then, we have built up a theory of economic evolution that begins with a novel idea in a single agent that then develops into a theory of the meso unit as the rule is adopted and retained by a population of carriers. Such a meso trajectory disturbs (i.e. decoordinates) the macro order and engenders a process of recoordination that over a macro trajectory results in a new macro order. This process occurs in parallel, as multiple meso trajectories unfold at once, and in series, as one meso trajectory leads to the next. These meso-macro processes are defined respectfully as the coevolution of many meso and the process of regime transitions from one trajectory to the next. And that, in abstract, is our theory of economic evolution.”

86
“The statement that there is currently no general theory of coordination will surely annoy just about everyone [...].”

93
“Homo Sapiens Oeconomicus does not just inhabit an environment and then adapt to it, as did Robinson Crusoe, but actively seeks to change that environment in order to
explore both its generic capabilities and its generic potential. Economic man has knowledge. But it is not the case that he will never be satisfied with that knowledge, but rather that he never can be, because other agents will create new ideas and those will, eventually, compete with everything he has. The solution therefore is to continually develop new knowledge.
The study of economic evolution is the study of this process, which we think can be analysed as a micro meso macro process.”
“economic systems evolve when a new idea creates a new environment that opens a path to create further new ideas.” (summary about Hayek)

94
“all policy is intervention into the economic order to promote welfare.”

95
“We may therefore distinguish three levels of generic policy as based about the three orders of rules: 0th order constitutional rules; 1st order operational rules; and 2nd order mechanism rules (see 1.4.2 above). Policy that seeks to effect coordination and change in constitutional rules is 0th order generic policy. Policy that seeks to effect coordination and change in operational rules is 1st order generic policy. And policy that seeks to effect coordination and change in mechanism rules is 2nd order generic policy.”

98
“Difference is the elemental driver of economic evolution, and societies that are tolerant of different ideas and rules carried by micro agents possess a necessary condition for economic evolution.”

99
“Open societies drive economic evolution through the creation of space for novelty and the possibility of micro units becoming generically different. Freedom is not therefore just a moral, civic or political quality, but also a fundamental economic quality in the possibility of opening the future to new generic potential. The value of freedom is the possibility of novelty, and the power of novel generic ideas is that they are what endogenous growth theorists call ‘nonrival’, i.e. they can be adopted and used by other agents without operational cost to their originator. But generic ideas are operationally costly to originate, adopt and retain. New knowledge is neither free nor given, but requires generic investment in rules resulting in the de-coordination and re-coordination of the economic order, an ongoing and natural evolutionary process that Schumpeter called ‘creative destruction’, but which we have defined and given further analytical precision with the concept of a ‘meso trajectory’.”
“It is the possibility of novelty that is the origin of all wealth, and it is the market system – along with other institutional mechanisms of generic freedom, including rules for origination, adoption and retention – that constitutes the process of ongoing generic construction. This is the basis of all freedom, the origin of all wealth, and the central unit of evolutionary economic analysis.“