An evolutionary theory of economic change

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Citation: Richard R. Nelson, Sidney G. Winter (1982) An evolutionary theory of economic change.



Tagged: Economics (RSS) Business (RSS), Organization Theory (RSS)


Summary:

Nelson and Winter argue that an evolutionary theory of organization is a superior description of firm behavior than orthodox views around optimization and that routines act as the genes of the firms in their model.

After a brief introduction making the case for the need for the need of an evolutionary theory, Nelson and Winter introduce what they argument is the contemporary economic orthodoxy which they use to contrast to their evolutionary theory.

The books fourth chapter is a detailed description of skills. The authors describe skills as, "a capability for a smooth sequence of coordinated behavior that is ordinarily effective relative to its objectives, given the context in which it normally occurs." The authors use the example of driving a car as a major touching point in their exploration of skills. They probe the way that skills can involve tacit knowledge, how skills can (and can struggle to be) communicated between people, and the way they are learned, internalized, and put into action.

The books fifth chapter gives a full description of the books theoretical contribution which is the authors evolutionary theory of change. The authors build on the conception of skills in the previous chapter to highlight routines as both the analog to skills in an organizational context as as the central concept with which one can understand firms and their interactions with each other and their environment and in their own operation.

The authors offer a theory of organizational memory build on routines, which of course, ultimately reside in the knowledge of individuals within firms The authors argue that codifications of knowledge may exist through the action of individuals within firms and that firms "remember by doing" in their practice of routines. The section has become a key citation in the subsequent literature on organizational learning (e.g., Levitt and March 1988). In the next section, the authors describe routines as truces as a way of describing the way that political tensions are dealt with through the creation and practice of routines within firms and that these routines essentially keep the peace within organizations.

The third section focuses on the behaviors of firms by describing how routines are used as (or play a role as) a form of organizational control, discuss how firms replicate and destroy routines, and discuss briefly how firms can "learn" new routines through imitations of other routines.

After a discussion of explicit comparison to skills and a discussion of the difference between the concepts of routine-based firm evolution with orthodox views which assume that firms will adopt optimal and are optimizing. Nelson and Winter counter that their theory is much more behavioral in that it provides a way of describing what firms do (even if attempts to optimize are one of the routines that are adopted) that can better explain a variety of firm behaviors.

In the final section, the authors describe how innovation through the combination of new routines, through reactions to changing or changed environments or to failure, and as a set of heuristics that can result in strategies as routines.

Theoretical and practical relevance:

Nelson and Winter's book is a classic of organization theory in particular and is well known more broadly in the literatures on innovation, organizational leaning, and economics. It has been cited more than 16,000 times and figured prominently in many other extremely highly cited works.