Diffusion processes in economic systems

FWF-Project P 24915-G11

Funding: EUR 330.435,00

2012-2016

Technical change takes place in several different ways. Joseph A. Schumpeter identified five of them, namely (1) introducing a new product, (2) introducing a new process, (3) the opening up of a new market, (4) the utilisation of new resources or subassemblies, and finally (5) the introduction of new forms of organisation. The presented project studies the dynamic properties of the economy in case of exogenous technological shocks, characterised by new processes. In the presence of technical progress, the question arises what characteristics the transition path of an economy from the old steady state to the new one exhibits. Utilizing Leontief production functions, producers face a binary (or plural) choice-of-technique problem between two (or more) distinct processes. The resulting transition path connecting two different long-period positions are constructed by combining evolutionary economics and classical economic thinking (Kurz 2008). First attempts to explicitly combine these two strands of research are implemented by Steedman and Metcalfe (2011).

It is the goal of this FWF-project to advance research in this direction. Four separate but interrelated tasks aim at facilitating the understanding of dynamic properties of economic systems in the presence of technical change. Task 1 provides a literature survey of existing ideas concerning the dynamics of economic systems. A special focus is put on Schumpeter and his theory of innovations (Schumpeter 1912, 1961, 2005) and on institutional thinking as inspired by Thorstein Veblen (1898, 1924). Combining these strands of economic literature with the empirical and theoretical findings of diffusion research (Rogers 2003), task 1 supports the modelling and simulation of economic diffusion processes. Tasks 2 and 3 formally merge classical and evolutionary economics. In detail, task 2 is concerned with one-sector model economies, whereas task 3 incorporates inter-sectoral feedback effects by analysing multi-sector models. An extensive theoretical framework is provided, which can be applied to practical purposes of political economics. As surveyed and outlined in Rogers (2003), both formal and informal institutions (in the sense of North 1990) play a crucial role in shaping the diffusion process of new technologies. As technical change has a major impact on social issues (Rogers 2003, ch. 11, and Kalmbach and Kurz 1992), it is of interest for policy makers not only to promote technical progress (as a means to economic growth) but also to understand and to shape the diffusion process itself by properly developed institutions. Hence, the role of institutions in the respective model economies will be studied extensively. Both formal institutions, such as different legal frameworks, and informal institutions, as for example historically determined norms, will be incorporated.

Finally, task 4 includes the mathematical tools necessary to accomplish tasks 2 and 3. As mathematical structure of the models developed in the course of task 1 and 2, systems of ordinary differential equations related to the time-continuous logistic differential equation come up. Especially the theory of Lie-symmetry analysis (Bluman and Kumei 1989) will be adapted to economic models.

Bibliography

Bluman, G.W.; Kumei, S. (1989): Symmetries and Differential Equations. New York: Springer.

Kalmbach, P.; Kurz, H.D. (1992): Chips und Jobs. Zu den Beschäftigungswirkungen des Einsatzes programmgesteuerter Arbeitsmittel. Marburg: Metropolis-Verlag.

Kurz, H.D. (2008): Innovations and profits: Schumpeter and the classical heritage. Journal of Economic Behavior & Organization, 67 (1), 263–278.

North, D.C. (1990): Institutions, institutional change, and economic performance. Cambridge and New York: Cambridge University Press.

Rogers, E.M. (2003): Diffusion of innovations. 5th ed. New York: Free Press.

Schumpeter, J.A. (1912): Theorie der wirtschaftlichen Entwicklung. Berlin: Duncker & Humblot.

Schumpeter, J.A. (1961): Konjunkturzyklen. Eine theoretische, historische und statistische Analyse des kapitalistischen Prozesses. Göttingen: Vandenhoeck & Ruprecht.

Schumpeter, J.A. (2005): Capitalism, socialism and democracy. 5th ed. London: Routledge.

Steedman, I.; Metcalfe, S. (2011): Herr Schumpeter and the Classics. Papers on Economics and Evolution. Jena: Max Planck Institute of Economics, Evolutionary Economics Group.

Veblen T. (1898): “Why is economics not an evolutionary science?”. The Quarterly Journal of Economics, 12 (4), 373–397.

Veblen T. (1924): The Theory of the Leisure Class, New York: B.W. Huebsch.