Sunday, January 6, 2013

Evolutionary Economics-Is your organization innovating?

Is your organization changing to the times? It is important for organizations to consider the market conditions when loosing revenue or attempting to creating sustainable growth. Market factors can cause some organizations to be successful while others are forced out of business. This is a process that fits within the evolutionary economic model that sees innovation, change, and development as a result of adjusting developmental patterns.

Evolutionary economics counters neoclassical models by focusing on the fluid development of economic systems throughout history. Where evolutionary economics sees adjustment in a more unpredictable adaptive context, the neoclassical model sees the economy at rest with well anticipated changes. The evolutionary model is fluid by nature and tries to explain how innovation and adaptation emerges from chaotic economic trials.

In evolutionary economics the rationality of the system is bounded (Simon, 1955). This means that people make decisions as institutions, organizations, government, and other entities to adjust to the market. Typically, these elements follow patterns of change and adaptation that worked well in the past. They have the power to innovate and develop from the challenges they face. This change becomes even more possible when the factors see an opportunity for resources or become aware that their existing patterns are not working.

This is different from other theories that assume that the actors have enough knowledge, time, and energy to make logical adjustments to the environment. However, such actors don't work within a vacuum and have imperfect information with imperfect conditions. This forces them to use patterns based upon previous behavioral styles and then adjust these patterns due to market pressures.

Evolutionary economics fosters the belief that adjustments within the systems are a learning process (Lall, 2000). In essence, unlike the neoclassical model where an optimum level of performance is desired the evolutionary style sees no optimal level of performance. It only sees the amount of adjustment and change in relation to economic factors presented. Growth is seen by how much change actually has occurred over a given time period.

Innovation within the economic system can cause levels of uncertainty (Schumpeter, 1950). As uncertainty increases so does the opportunities for innovation. Innovation coming from multiple sources within the economy and can also cause "creative destruction" which leads to winners and losers in economic development. It is this uncertainty that forces the factors to continually adapt to find market advantages.

Innovation in the market can come from the natural cooperation of entities within the system as well as through the institutionalized developers such as universities and governmental agencies (Nelson, 2008). Organizations and corporations often seek to develop products and services for specific market capitalization. Universities and public research focus on larger social platforms of market development that may take longer if relying on private interests alone. Thus, private and public research has an important change producing function in society.

The question business owners should ask themselves are 1.) "Is my organization changing to market needs?"; and 2.) "Are the patterns my management team developed through its policies & procedures adequate for this market change?".  If the answer is no then the organization needs to make a stronger environmental analysis and adjust its patterns in order to be one of the winners in this "creative destruction" process.

Lall, S. (2000) Technological change and industrialization in the Asian newly industrializing economies,
in: L. Kim & R. Nelson (Eds) Technology, Learning, and Innovation (Cambridge: Cambridge University

Nelson, R. (2008). Economic development from the perspective of evolutionary economic theory. Oxford Development Studies, 36 (1). 

Simon, H. (1955) A behavioral model of rational choice, Quarterly Journal of Economics, 69, pp. 99–118.

Schumpeter, J. (1950) Capitalism, Socialism, and Democracy (New York: Harper).

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