Evolutionary model of industrial dynamics
The
model stems from two streams of my research, namely:
Computer simulation of evolutionary processes (initiated in 1970s)
Joseph A. Schumpeter and evolutionary economics (since the end of 1980s).
For the first time the model was published in 1992
(Kwasnicki and Kwasnicka, 1992) and since that time the model (with minor modifications)
and its simulation results have been presented in different journals and books. The list
of relevant publications is presented beside.
The model draws heavily from our earlier model of
biological evolution, developed in 1970s and 1980s by Halina Kwasnicka, Witold Kwasnicki
and Roman Galar.
There is close interrelationship between the model of
industrial evolution and the general model of knowledge development presented in the first
part of my book on Knowledge, Innovation and Economy. In fact most ideas presented in the first part of
this book are adjusted to the specific circumstances of industrial development and are
expressed in the more formal, mathematical way.
General structure of the model and transformation of routines into products characteristics are presented in figures below.
Once I have been asked to state the main differences between my model and
the well known Nelson and Winter model (e.g. An Evolutionary Theory of Economic Change,
Belknap Press, Cambridge, Mass. and London), here is my short answer to that question:
· diversity of innovation
types - in the NW model firms are able to improve only the productivity of
capital (A), in my model, beside that type of
innovation, firms are able to improve product performance (i.e., products' technical
characteristics, (z), technical competitiveness, q(z)), and also to reduce unit cost of production
(V).
· different price setting
procedures - the NW model set uniform price for all products of different firms via
global demand function, in my model each firm sets the price individually, taking into
consideration such features as current production costs and current products'
characteristics as well as current market structure (the firms' specific price setting
procedures cause diversity of price at the industry level).
· in my model routines' and products'
characteristics spaces (analogous to genotype and phenotype spaces in biology) cause different modes of search for innovation. In the NW model economic
characteristics (namely, capital productivity) are modified directly. In my model basic
inventions and innovations stems from firms' routines modifications and next through
relevant transformations of routines values productivity of capital (A),
unit costs of production (V), and products
characteristics (z) are evaluated.
· decision making
procedure in the NW model has a form of rather simple mathematical formula, in my
model the decision making procedure include such important
elements as investment constraints, possibility of credit taking, current structure of the
market, diversified firms objectives, subjective evaluation of each firm concerning future
behaviour of its competitors, etc.
I think that it is very easy to generate
numerous models (especially computer simulation ones) to describe different phenomena
within a defined sphere of reality. Probably I represent minority of researchers,
but in my opinion our general aim should be to develop a single, relatively
general model of industrial dynamics allowing for description and explanation of different
phenomena and also enabling identification of emerging properties of industrial
development. Another important aim to build such general model is to use it as an
educational tool in microeconomics' courses of university curriculum (what I do presenting
evolutionary economics in my university teaching). Therefore at the industry level
(sometime called mesoeconomic) I propose a general model which can be applied (through
relevantly planned experiments) to describe phenomena observed in real industrial
processes. Following this proposition, in the previous publications I have used this model
to describe important 'stylised facts', namely:
for a given market, the margin of price and firms' profit increase with the concentration of industry (for example, from perfect competition, through oligopoly, duopoly, and ending with monopoly) (Kwasnicki, 1996, chapter 6);
there is a specific relationship between economies of scale and an industry concentration, namely the larger the economies of scale the greater industry concentration (Kwasnicki, 1996, Ch. 6, Kwasnicki, 2000);
'the capital/labour ratio is rising more or less in proportion to productivity, and it is highest amongst the richest nations and lowest among the poorest, the capital/output ratio is much the same as between poor and rich countries – it is no higher in America ... than it is in India'(Kaldor, 1985, p. 67). Kaldor calls it 'one of the best established “stylised facts” of capitalist development' (Kwasnicki, 1996, Ch. 7);
in the presence of innovation, there is no uniform price for all products sold on the market but the great diversity of price is observed (Kwasnicki, 1996, Ch. 7, Kwasnicki, Kwasnicka, 1996a);
emergence of innovation leads to temporal monopoly of the pioneer firm; at the first phase after innovation introduction the monopoly firm gains extra profit that disappears in time, when competitors imitate the innovation (Kwasnicki, 1996, Ch. 7);
skewed distributions of business firms' size and their long-term stability is the well established 'stylised facts' of industrial demography; size distributions of firms of real industries are very similar ('look like') to Pareto, Yule, or log normal distributions (conditions required for the skewed distributions emergence are presented in Kwasnicki, 1998);
in multi-technological substitution processes of industrial development the diffusion of a single technology has a form of the bell-shaped curve (which consists of four phases: an initial, introductory phase when the diffusion rate is not very high, followed by a phase of relatively quick diffusion; the third phase may be called the matured one in which the market share of the technology reaches maximum value; in the fourth phase, the market share of that technology declines, what is caused by emergence of new, better technology). That pattern is natural phenomena observed in simulations experiments. In (Kwasnicki, Kwasnicka, 1996) we have applied simplified version of that model to forecasting diffusion-substitution processes;
industrial development is a unique historical process in which path-dependence and cumulative causation play an important role (Kwasnicki, 1996, Ch. 8).
cycles and fluctuations are natural phenomenon observed in industry development (Kwasnicki, Kwasnicka, 1994, Kwasnicki, 1996, chapters 6 and 7);
patterns of firms' entry, exit, and industrial demography observed in the model are similar to records of industrial dynamics collected by David B. Audretsch, Steven Klepper and Kenneth L. Simons, Glenn R. Carrol and Michael T. Hannan, and many others (current work)
"On the basis of the presented results one may draw the conclusion that it is possible to imagine situations (industry regimes) in which highly concentrated industries behave as industry with large number of firms being in a state of pure competition (namely, for very small values of the cost ratio AV) and also industry regimes in which numerous competitors behave as oligopolist (or even as a monopolist), namely, for high values of the cost ratio AV. These findings are purely theoretical and ought to be verified using real data on industrial development. The open question is if in real industrial processes we observe such small and large values of the cost ratio?
As a hypothesis, it may be stated that
in real industrial processes, because of introducing innovation reducing unit cost of
production, the cost factor is reduced in successive stages of an industry development.
Therefore, for matured innovative industries we can expect higher competitive conditions
of industrial development."
(Kwasnicki, 2000)
Kwasnicki
W., Kwasnicka H. (1992), Market, Innovation,
Competition. An Evolutionary Model of Industrial Dynamics, Journal of Economic Behavior and Organization, vol.
19, 343-68.
Kwasnicki
W., Kwasnicka H. (1994) Bounded Rationality and Fluctuations in Industry Development –
an Evolutionary Model, in Robert Delorme and
Kurt Dopfer (eds), The Political Economy of
Diversity: Evolutionary Perspectives on Economic Order and Disorder, Cheltenham, UK,
Brookfield, US: Edward Elgar Publishing Limited.
Kwasnicki
Witold, Kwasnicka Halina (1996), 'Long-Term
Diffusion Factors of Technological Development: An Evolutionary Model and Case Study',
Technological Forecasting and Social Change 52,
31-57.
Kwasnicki
Witold, Kwasnicka Halina (1996a), 'Innovation regimes,
entry and market structure', Journal of
Evolutionary Economics, 6, 375-409.
Kwasnicki
Witold (1996), Knowledge,
Innovation, and Economy. An Evolutionary Exploration., Edward Elgar Publishing Limited; Cheltenham, UK,
Brookfield, first published in 1994 by Oficyna Wydawnicza Politechniki Wroclawskiej.
Kwasnicki
Witold (1998), 'Skew distributions of firms' sizes – an
evolutionary perspective', Structural Change and
Economic Dynamics, (1).
Kwasnicki
Witold (1999),'Leaping across the mountains,
bounding over the hills'punctualism and gradualism in
economic development"
paper presented at European Meeting on Applied Evolutionary Economics (EMAEE), 7-9
June, 1999, Grenoble, France
Kwasnicki
Witold (2000), 'Monopoly and perfect competition – there are two sides
to every coin', in Saviotti
Paolo, Bart Nooteboom (eds), Technology and knowledge: from the firm to innovation
systems, London: Edward Elgar Publishing.
Kwasnicki
Witold, (2001), 'Firms Decision Making Process in An Evolutionary Model of
Industrial Dynamics', Advances in Complex
Systems, Vol. 4, No. 1 101-125,
Jena lecture (2002) on: Chreods, path-dependence and evolution: chance and necessity in economic development (simulation study)
'Evolutionary
modeling and industrial structure emergence' (with Halina Kwasnicka), 2005, a chapter
prepared for publication in Handbook of Research on Nature Inspired Computing for
Economy and Management (Jean-Philippe Rennard
General structure of the evolutionary industrial model
Basic mechanisms
of generation of new sets of routines (inventions):
transition
From routines to competitiveness, productivity of capital and unit cost of production
