Learning, Innovation and Economic Growth: A Long-run Model of Industrial Dynamics

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Abstract
The theory of the firm has been dominated by a neoclassical apparatus that abstracts from most real–life features familiar to managers. Yet the economy can often be characterized by certain regularities of behavior, both over time and cross-sectionally. Rejection of fully optimizing behavior as an explanation of economic activity does not single out any precise alternative as a theory of boundedly rational behavior. This paper develops an evolutionary model describing the relation between endogenous technological change and economic growth along the lines of an ‘artificial world’ modeling philosophy. In this model firms must determine what proportion of their investment budget will be devoted to R&D as an operating routine. In contrast to themore neoclassical approaches the paper investigates this decision problem in the context of bounded rationality where agents can have only vague ideas about the relationship between their actions and outcomes. The model is constructed around three basic blocks. The first block describes how the artificial economy evolves with a given set of technologies and firms, with selection taking place at both levels. This block consists of equations for the rate of capital accumulation, the diffusion of new technologies in the total capital stock of the firms and the real wage rate. The second block describes a set of rules that is used to introduce new technologies and firms into the economy. This block takes the innovative behavior of firms as given and then describes the probability that individual firms will make an innovation as well as how this innovation is introduced. The third block describes how innovative behavior changes under the influence of the evolution of the economy and firm learning. This block describes feedback from performance to innovative behavior and thus a form of collective learning. The paper concludes that an evolutionary approach appears to offer an attractive alternative explanation of how an economy can ‘bootstrap’ itself in histrical time through a succession of growth phases and market structures. The model also demonstrates that a bounded rationality approach to the theory of the firm, coupled with an evolutionary framework for analyzing market selection and collective behavior, does yield dividends both in terms of explaining how identifiable patterns of behavior emerge from profit-seeking rather than completely rational profit-maximizing assumptions and how market structures and growth regimes may be endogenized simultaneously.

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