An Evolutionary Theory of Economic Change

An Evolutionary Theory of Economic Change - RICHARD R....

Info iconThis preview shows pages 1–14. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 6
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 8
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 10
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 12
Background image of page 13

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 14
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: RICHARD R. NELSON AND SIDNEY G. WINTER AN EV©LUTH©NARY THE®RY (DE EC©N©MHC @HAN@E THE BELKNAP PRESS OF HARVARD UNIVERSITY PRESS CAMBRIDGE, MASSACHUSETTS, AND LONDON, ENGLAND 1982 much the possible improvements might mean to my enjoyment of life or to my life expectancy? The world seen by evolutionary theory differs from an orthodox world not only in that things always are changing in ways that could not have been fully predicted, and that adjustments always are having to be made to accommodate to or exploit those changes. It differs, as well, in that those adjustments and accommodations, whether private or public, in general do not lead to tightly predict- able outcomes. For better or for worse, economic life is an-adventure. 1@ The Evolution of Public Policies and the Role of Analysis PUBLIC LAWS, policies, and organizations are an important part of the environment that shapes the evolution of private sector activi- ties. Laws and policies regarding what is patentable and what is not, and about acceptable or required licensing agreements, influence the relative advantages of innovating and imitating. Antitrust law and its administrative and judicial interpretation define acceptable com- petitive behavior. Regulatory regimes constrain and mandate certain private actions. Public school systems and educational support pro- grams influence the flow of trained personnel into research and development activity. Government R&D support programs have, since World War 11, provided approximately half of the total funding for research and development. More generally, a significant portion of economic activity is conducted by public rather than private orga- nizations. The evolution of economic capabilities and behavior must be understood as occurring in a mixed economy. Although for some purposes it is useful to think of public laws, policies, and organizations as being part of the landscape, these, like private sector activities, undergo continuing evolution. Over the long run the cumulative result of private and public actions and reac- tions is a gradual modification of the basic structure of society. Karl Marx, of course, was concerned above all with the patterns, and po- tential discontinuities, of such long-run changes. Much of Schum— peter’s Capitalism, Socialism, and Democracy was an elaborate prog- nostication that the natural dynamics of capitalistic competition would lead to the political enactment of some form of socialism. 372 ECONOMIC WELFARE AND POLICY Our focus in this chapter is less broad, and shorter-range. We con- sider the evolution of particular public policies, or policies address- ing particular phenomena. We shall, first, develop a general View of the processes by which public policies come into being, are modi- fied, and (sometimes) fade away. Then we will turn to a particular as- pect of those processes—conscious attempts to marshal knowledge to guide policy. As with our evolutionary theory of capabilities and behavior of business firms, in our analysis of the determinants Of government policies we recognize that people and institutions often try to be rational about decision making, but also that human under- standing is incapable Of what Lindblom has called effective “syn- optic” analysis, and hence that even very thoughtful behavior has major elements of “muddling through” (Lindblom, 1972). We also recognize, with Keynes, that human attempts to analyze problems are powerfully influenced by the theoretical perspective from which the problems are viewed. Indeed, we have stressed at several places in the book that the ability of a theory to illuminate policy issues ought to be a principal criterion by which to judge its merit. We conclude this chapter, therefore, by considering how our evolutionary theory of technical change—a topic we have considered at some length—illuminates the question of the fruitful, and unfruitful, roles for government to play in industrial innovation. 1. MECHANISMS AND ACTORS Public policies evolve partly in response to changes in perceived de- mands and opportunities, changes that may result from the evolu- tion of private technologies and market structures or from other identifiable shifts in objective conditions. Public policies may reflect not changes in objective conditions but shifts in values, or under— standing. Change over time in the relative power of different inter- ests and groups within society likely will pull changes in policy in their wake. The particular institutions and procedures for arriving at and modifying policies determine the way in which the various forces mentioned above are translated into new policy departures. Sometimes the institutional machinery for making policy seems to take on a life of its own. The evolution of air quality regulation in the United States dis- plays the workings of all these forces and mechanisms. Air quality in the United States generally declined during the 19505 and 19605. Although in some communities, like Pittsburgh, air quality was im— proved as a result of local initiatives to roll back the emission of pol— lutants (in this case, prohibitions on the burning of soft coal), in 13%“ my. 4., (.1 t. r « L as. 4, mm. a??ka THE EVOLUTION OF PUBLIC POLICIES 373 communities like Los Angeles a combination of significantly in- creased automobile traffic and petroleum refining led to noticeable deterioration. The sources of the deterioration were not obvious a priori. Assessment of the effects of various pollutants on health has been, and still is, constrained by the state of biological knowledge and by limits on measurement techniques. Thus, until recently con- cern about the emissions from coal-burning electrical generating plants was focused largely on sulfur dioxide, whereas recent studies suggest that sulfates may be a more serious problem. Published studies played a central role in the consciousness- raising regarding air quality. Some of the studies were narrowly fo- cused; for example, during the 19505 scientists at the California Insti— tute of Technology implicated auto exhaust as a source of the smog besetting Los Angeles. Some were quite sweeping. Rachael Carson’s Silent Spring (1962) sounded the alarm regarding industrial pollutants in general. During the 19605 the trickle of studies became a flood. The Club of Rome forecasted impending disaster (see Meadows et al., 1972). More focused and cautious studies—for example, that by Ridker (1967)—provided some of the first estimates of the economic costs of air pollution. The policy response developed hesitantly. Several states enacted laws to protect air quality; California’s auto emission control stan- dards of the early 19605 is a prominent example. Federal action was piecemeal. In 1965 Congress authorized the setting of auto emission control standards. Generally, however, at the start the federal legisla- tion shied away from imposing particular standards, and a consider- able amount of responsibility and freedom of initiative was vested with the states. The 1970 amendments to the Clean Air Act located significantly more power in a federal bureau—the Environmental Protection Agency (EPA)—and wrote into the legislation more detail about how regulation was to proceed. The 1970 amendments took the form they did in part because of the political aspirations and strate— gies of some of the key legislators involved. Iacoby and Steinbruner (1973) note that Edmund Muskie was chairman of the key Senate committee and, at the time of the hearings, was considering a run for the presidency. He and other legislators believed (and they seemed to think that a good share of the American electorate agreed) that the states had not been acting forcefully enough—that the private com- panies who were creating the pollution, or designing the automo— biles that polluted, were culpable and ought to be brought to account. There also was a belief that if particular technological re- quirements were imposed, the companies would have the incentive and the ability to achieve these and the costs involved would not be unduly burdensome. The particular form of the new legislation, the way the legislation 374 ECONOMIC WELFARE AND POLICY was interpreted by EPA, and the subsequent experience of adminis- trative and legislative amendment, was somewhat different in the several areas of application. However, the stories told by Iacoby and Steinbruner (1973), Sonda (1977), and White (1981) about automo- bile emissions control, by Lurie (1981) about emissions from copper refineries, and by Ackerman and Hassler (1981) about the regulation of coal-burning electrical generating plants have many elements in common. While the 1970 legislation fenced in the range of action open to the EPA, in the nature of things Congress could not specify all the details, and the constraints were roomy enough so that the EPA still retained considerable discretion. Partly because Congress had so mandated and partly because of the way in which the EPA in- terpreted the legislative mandate, EPA regulations took the form of particular required standards, often tied to assessments of what would be safe for humans, sometimes keyed to judgments about what the best technologies would be capable of achieving. Environ- mental protection groups and the industries being regulated both tried to pressure or persuade Congress and the EPA to modify the regulations. A portion of this pressure was exerted through litigation and the courts. To set and justify the standards and to protect those in litigation, the EPA undertook many studies, attempting to assess the scientific evidence about health effects and the evolving state of the tech- nological arts. These studies generally did not concern themselves with the broader questions of the benefits and costs involved in various strategies of environmental protection, or even with ex— ploring the range of possible instruments; rather, they were focused on a particular regulation to be formulated or one that was under at- tack, and attempted to justify a particular proposed or extant stand- ard or to examine certain specific changes in that standard. Recogni— tion of a wider range of values at stake in environmental protection legislation was forced upon Congress and the EPA by the pressure and litigation of various interest groups. The automobile companies claimed impossibly high costs and lost jobs as a consequence of pre- vailing regulation, as did the Eastern coal companies and the coal unions. EPA studies in general did not anticipate these complaints and did not attempt to come to grips seriously with the tradeoffs they implied. Similarly, EPA studies seldom explored seriously different regulatory instruments, such as the use of effluent fees instead of the setting of requirements. In contrast, at universities and at such research centers as the Brookings Institution these broader questions of values, tradeoffs, and strategies were being explored. Studies such as the one by Kneese and Schultze (1975) were intended for a nonacademic audi- ence, and by the mid 19705 the political climate had changed notice- THE EVOLUTION OF PUBLIC POLICIES 375 ably. Some of the change surely reflected a new understanding of the tradeoffs involved and of the range of possible regulatory instru— ments. By the late 19705, under the Carter administration, regulatory re- form became a byword. Under Charles Schultze’s leadership, various checks on the EPA (and other regulatory agencies) were established within the administrationwchecks that surely forced the EPA to pay more attention to tradeoffs and alternative instruments, which in turn strengthened the hand within the EPA of civil servants who be- lieved in regulatory reform. Despite some move in the direction of balancing benefits and costs, by 1980 the public mood had swung even farther. The presidential candidates of both major parties ran partly on deregulation planks. This has been a terse account of the history, from 1967 to 1980, of clean air regulation, but enough has been said to suggest the broad outlines. While in some ways very particular to the case, in many ways the pattern is typical. For example, the study by Crain and colleagues (1969) of the spread and then the halt of fluoridation of public water supplies re- veals many similarities with the air pollution case. Initiation of a public program was triggered by perception of a need that could be met by public—sector activity—the desirability and the possibility of reducing tooth decay in children through fluoridation of public water supplies. The workings of public institutions and mechanisms strongly influenced how fluoridation proceeded and how that policy was effectively stopped. In the early stages local administrative agencies—~health departments and water supply departments— treated the fluoridation question as within their province and as out- side the arena of democratic politics. Eventually, voices were raised questioning the safety of fluoridation and even the legitimacy of gov- ernmental decisions to add substances like fluoride to public drinking water regardless of the possible benefits to children. It was proposed that children could drink fluoridated milk. The question of whether or not to add fluoride to the public water supplies became one on which political candidates often had to take sides. In some cases specific referendums were held on the subject. Again, while there are important elements specific to the case, the history of public policies regarding fluoridation has a pattern that fits the evolution of many other policies. There are many threads in common with the story told by Steiner (1971) about the evolution of welfare policy in the United States, and with Heclo’s account (1974) of the evolution of welfare policies in Britain and Sweden. Similar elements are apparent in the analyses by Art (1964) of the TFX deci- sion and by Nelson (1977) of policy toward the supersonic transport. All of these studies suggest certain similarities in the evolution of 376 ECONOMIC WELFARE AND POLICY public- and private-sector activities. At any time, public policies, like private technologies and policies, are implemented by organiza- tions largely as a matter of “organizational routine." Changes from existing routine usually are local, although there may be an occa- sional major change. Those changes may survive and take hold, or they may be turned back. Because a good share of the changes pro— posed are local and because the selection environment is compara- tively constant, public policies tend to follow certain trajectories. Thus, a policy change today might fruitfully be understood as evolving from a policy base that was itself the outcome of a sequence of earlier changes, and, in turn, as setting the stage for future evolu- tionary developments. The case studies also point to important differences between pri- vate and public policy making. The key ones are, first, the multiparty nature of public decision making and, second, the complex machin- ery that it involves. In orthodox economic theory (if not necessarily in actuality) the goals of a private business firm are treated as those of a single person. Although much political discussion proceeds in terms of a search for the “public interest,” political scientists as well as economists understand that such a “public” is more a figure of speech than a concrete entity with identifiable goals. The actual “public” that is interested in policy choices and outcomes has a di- verse, divergent makeup and interests that are at least in partial con- flict. Further, there are several different ways by which interested parties can influence policy making. The case studies discussed above indicate that in many instances several different types of actors and a variety of mechanisms are involved.1 In a democratic society, citizens and citizen interest groups ulti- mately are sovereign. Occasionally, as was the case with fluorida- tion, sovereign power may be expressed in a specific referendum on the issue. In other cases there may be no specific referendum, but candidates for electoral office may take particular stands on the issue and the outcome of the election may be interpreted as that of a refer- endum. More commonly, a particular policy is not advertised as part of electoral politics, but elected officials and interest groups have worked out their own understood accommodation. 1. Although the multiplicity of kinds of actors is apparent in most case studies, many theoretical treatments of political decision making focus on one, or maybe two, different actors. Thus, for example, Downs (1957) deals with the electorate and politi- cians running for office, and Niskanen (1971) with departmental bureaucrats and executive-level budget officers. In both the clean air and fluoridation cases, at one time or another the electorate, officials running for office, civil servants, and the courts all played important roles. .waaa tame... ,m . smegmamaw .«L t; THE EVOLUTION or PUBLIC POLICIES 377 As suggested, specific referenda are rare. Because of this, elected officials—both executives and members of legislatures—generally have considerable freedom of action. The air pollution and fluorida- tion cases both demonstrate the importance of the values and percep- tions of elected officials. Just as voter sentiment generally provides only loose constraints on the actions of elected officials, so the decisions of elected officials generally leave a considerable amount of discretion for the civil ser- vants and others who carry out a program or policy. Prior to the 19605 the role of “administration” was seen in the political science litera- ture as simply technical, consisting of working out the best way to achieve an objective or to carry out a policy defined by elected offi- cials and mandated by the electorate. Since that time, it has become better recognized that the shape of a policy is to a considerable extent determined by how it is implemented. . In addition‘to voters, elected officials, and bureaucrats, the courts often play a significant role in determining policy. Many activities are controlled by regulatory authorities. In a federal system there may be several layers of involved governments. Policy making and reVISing is a complex multiactor game. The relative importance of the different actors and the way in which they play their roles certainly differ among the various arenas of public-sector activity. Dahl (1961) stressed this diversity in his dis- cussion of pluralistic democracy. The politics and administration of defense clearly differ from those of education, which in turn differ from those of welfare. And, as the cases of air quality regulation and fluoridation both show, the roles of the different political actors can change over time. These differences and changes are in part determined by and re- flected in the particular design of the political machinery. The machinery determines and defines how the various parties interact and how, out of that interaction, policies emerge and change. Stu- dents of voting theory long have known that, for given preferences and alternatives, the particular voting rules and the way in which the alternatives are presented strongly influence the outcomes. Wil- davsky’s (1964) study of the federal budgeting process alerted schol- ars to the key role played by the administrative machinery of budget— ing. It also seems inadequate to view the political and administrative machinery merely as a way that the weights of different interests are determined. The machinery plays a powerful role in its own right. Thus, in the case of air quality regulation it was important that the Senate hearings not only were part of the machinery for determining what to do in that instance but also were a stage for politicians inter- ested in reelection or in other future posts. 378 ECONOMIC WELFARE AND POLICY Throughout this book, and especially in Chapter 5, we have stressed that knowledge of how decisions are arrived at in business firms may tell us something about what decisions will be reached. To focus exclusively on the benefits and costs that a firm derives from actions and to ignore how it gathers, processes, and evaluates infor- mation and options is to be blind to useful predictive information. This is even more strikingly true regarding governmental decision making. Political machinery involves actors in posturing, as well as arm- wrestling, bargaining, debating, and deliberating. For a student of political process, or more specifically of the evolution of public poli— cies, all aspects are interesting. However, for a social scientist the deliberative aspects have a spe- cial standing. After all, if our researches are to influence policy, they are most likely to do so by affecting the way in which policy contexts are interpreted. Many public policy issues are complex, the nature of the problems and the options not well understood, and the values at stake far from transparent. Beliefs about the nature of the problem play an important role at several stages: first, in diagnosing a situa- tion and defining it as a particular kind of policy problem in the first place; second, in interpreting experience with a policy and estab- lishing the context within which minor modifications of the initial program are proposed and debated; and, third, in influencing the broader evaluation of whether the program is basically on track, needs to be changed drastically, or should be killed. Much of the interpretative framework is broadly oriented by a society’s cultural heritage, by deep—seated beliefs and ideological predilections which define legitimate and illegitimate roles of gov- ernment, worthy and unworthy causes, what is attended and not attended about a situation. Within this broad context, particular tech- nical interpretations are lent by the general state of scientific under— standing of various topics. Interpretation is influenced only margin— ally by studies or analyses aimed specifically at the particular policy issue in question and these studies, too, are strongly conditioned by ideology and scientific understanding rather than providing inde- pendent interpretations. But such studies do play a role. The history of the Clean Air Act clearly shows that specific policy analyses played a nontrivial role in influencing beliefs at each of the stages men- tioned above. In the 1950s and early 19605 policy analysis was recog- nized as an important part of the administration of programs and policies. But, as with administration more generally, it is more apparent that analysis plays a much broader role in modern govern- ment than merely guiding effective choice among known alternatives THE EVOLUTION OF PUBLIC POLICIES 379 given prespecified ends. Some commentators, such as Wildavsky (1966), have argued that the role played by analysis has become too large and should be confined. In any case, it seems important to understand that role better. 2. THE ROLE OF ANALYSIS IN POLICY MAKING we use the term “analysis” here to mean the inquiry of professionals trained in social science or in other disciplines into the policy alter- natives, the values at stake, the likely consequences of adopting dif- ferent policies, and the articulation of the findings of such inquiry with the express aim of illuminating and influencing policy choices It Is useful to examine the ways in which different schools of eco; nomic thought view the role of policy analysis. If one takes seriously the assumption made in some “rational ex- pectations" models—that all individuals know all the public policy options and the consequences (perhaps state—contingent) of the chOIce of any one—it is hard to discern any role for policy analysis. The presence of public goods and other reasons for collective action call for collective—decision-making machinery, but there is no such thing as a "public interest” to be served, only a collection of individ- ual Interests. In arriving at collective decisions, conflicts of interest need to be resolved. But, from this perspective, no one interest is “better” than any other. And since everybody knows the structure of the economic (and political) problem as well as anyone else, there are no “experts” and there is no need for “analysis.” The policy-making problem is simply one of arriving at a Pareto-optimal agreement. This, -of course, may be no simple task, given actual collective-choice machinery. Many simple voting schemes do not achieve it. One pos- srble role of policy analysis, within a rational expectations frame- work, might be to constrain the set over which voting or bargaining proceeds to alternatives that are “efficient” or at least for which benefits exceed costs.” But such “analysis” would simply define the constraints on the choice set, and would not provide any new “information.” ’ In contrast, economists who during the early 19605 expressed a strong faith in “policy analysis” adopted a position that stresses the lImItations of existing knowledge and the importance of particular studies to marshal knowledge. Analysis is needed to illuminate the current policy problem, and to educate elected officials, bureaucrats and the electorate about the right way to look at it. From this point of VIew, lack of knowledge is highlighted and conflict of interest played 380 ECONOMIC WELFARE AND POLICY down. There is a “public interest” to be found and analysis can help . . 2 to lltnghlduld be apparent that actual policy making involves both wrestling and bargaining among different interests and an attempt to identify a public interest. There is some truth in the DownSian View of politics in which elected officials, interested only in reelectitc‘m, cater to equally self-interested voters, but there is more to it t an that.3 As a special case, relevant to analySis of the Clean Air we concede the limited power but reject the completeness of reVisionis; theories of regulation.‘ A striking feature of both the clean air. an fluoridation cases is that for many parties there was no strong private interest. Yet they were interested in the policy issue, felt it impor— tant, and took stands. It is reasonable to say that they were at- tempting to identify a public interest, and to support it. D ‘ ' We think it useful to View the role of analysis in public dei'ISIOJI making as part of the process by which a public interest gets de inte- . By that we do not mean that studies identify a true public intsres 11; any strictly objective sense. We mean that studies help tof ej‘in:1 public interest. This is not just a quibble over the meaning 0 wor s. We, as do other scholars, have trouble with the concept of an objec- tive public interest. We observe, however, that political actors o ten behave as if they were searching for one. In recent years stifidies szem to play a large role in that search. And we donot deny t at. stu lets can be and often are put forth to further a particular private interest.1 Rather, our point is that, unlike the testing of strength an — bargaining that also are part of the political process, studiestkarf er):e pected to present arguments that rationally persuade peop e'c1 a1 0 C— policy is better than another, in terms of values that are W1 e yhale cepted and that are viewed as applying to the society as a w 0 an to a articular roup. . ratgedrtgosition Illere is singular to that taken by some phlloiophatifs regarding science. It may be doubted that an objective trut re y exists or, if one does, that science can find it. Nonetheless, sc1enfcei can be perceived as a quest for truth, tsin-d tigelat quest may be fruit 11 ' h ultimate ob'ective is not a aina e. ' evilfhil: Leispective certlainly is consistent with portions of the artictu— lated faith of the policy analysts, particularly the more recent sta e— 2. A classic early statement is by Hitch and McKean (1960). contemporary the: retical exploration of the role of policy analysis is contained in Mishan (1971.)1 anto Stokey and Zeckhauser (1978). See Lindblom and Cohen (1979) for a View Simi ar ours in many ways. 3. See Downs (1957). I A . 4. See Stigler (1971) and Peltzman (1976). For a critique, see Levme (1981). THE EVOLUTION or PUBLIC POLICIES 381 ments. Thus, Schultze (1968) stresses the role of policy analysis, in an interactive process, as that of holding forth an “efficiency goal.” Effi— ciency may not be the only public interest, but it certainly is widely regarded as one general characteristic of good policy. We diverge from modern policy analysts, however, in treating the public interest as something that is created in political dialogue rather than as being something objective, as something around which widespread politi- cal support clusters, given a particular interpretation of the problem, rather than an objective that reflects definitive understanding of the problem and the values at stake, and durable agreement on goals. We likewise have trouble with the idea that analysis helps to iden- tify a “best” policy, and with the style of analysis associated with this view. According to this view, the right way to do analysis is to construct a model of the situation and find the best policy within this model. The model may be rich and complex, or it may involve simply a listing of a finite set of alternatives and the calculation of benefits and costs for each. In either case, there is an implicit belief that the choice that is best within the model is an optimum, or at least a goodr policy within the real context, or that in any event going through the optimizing exercise is the most useful way to focus intellectual attention. There is a large leap of faith here. In his presidential address to the Operations Research Society, Hitch (1955) recognized this leap expli- citly. He stressed that models are highly simplified and often mis- leading characterizations of the real context, but proposed nonethe- less that going through the exercise of building a model and searching for an optimum within that model is a useful heuristic for finding or designing good policies for the actual context. Perhaps so, but this is far from obvious. The work of Newell and Simon (1972) on human problem solving in a context as "simple" as a game of chess suggests that there are better heuristics than building a simple model of chess and optimizing within that model. These better heuristics involve the recognition of patterns, the use of pattern recognition to focus quickly on one or a small number of alternatives, exploring only these in any depth, and the consideration of the merits of various moves in terms of their positioning advantages and dis- advantages. The values, of course, of different positions are “proximate.” Given limits on computational power, they cannot be calculated by dynamic programming. They have to be formed and re- formed on the basis of experience and general understanding of the game. Proximate values are an important part of problem-solving heuristics. Posing the task as the identification of (Pareto) optimum policies serves to distance analysis from the tug-of—war of competing goals 382 ECONOMIC WELFARE AND POLICY and values in ways that sometimes reduce the ability of analysis to contribute to the political dialogue. Economists, of course, differ in the extent to which they take seriously the warning of Arrow's impossibility theorem against the posing Of policy problems as if there were a technically correct way to brush aside differences in interests among individuals and groups. Those who have learned the lesson have a greater tendency to recognize that social decision mechanisms, beyond analysis, are needed to decide what is to be done. But in most cases they still view good analysis as laying out the alternatives and tracing their consequences, while remaining neutral regarding which or Whose values should be weighted most heavily. However, from the perspective being developed here, even this po- sition is simplistic. One little-recognized consequence of our bounded rationality is that we lack the capability tO sharply separate our values from our knowledge. Indeed our (proximate) values form a large part of our knowledge. Analysis of proximate values is an im- portant part of good policy analysis. We are not endorsing here a Panglossian View that what appear at first thought to be conflicting interests can be discerned, after more careful analysis, to be truly not conflicting, or that analysis can always identify the more salient interest. In some cases study and persuasion can result in the emergence of a recognized public inter- est; in other cases it may be impossible to gain any agreement upon this among informed interested parties. Even when it is so possible, the process by which a recognized public interest is defined in a pluralistic democracy involves a complex interchange of views, and often bargaining, among different interests. Studies should be seen as handmaiden to that political process, not as having political legiti- macy in themselves. In some cases studies may play a dominant role, and in others a minor role. Were that not so, democracies could dis- pense with all the complicated and expensive apparatus we have for making political decisions, and simply establish an analytic office that would decide things for us. Some writers who puff the role of analysis seem disturbed that we do not do just that. Is it possible to draw some guidelines for good policy analysis, recognizing explicitly that our rationality is bounded, and that in most instances there really are conflicting values and interests and that a public interest, if one be defined, is a matter of (perhaps tem- porary) social agreement rather than an objective fact? We think it is. First, the role of analysis is to enhance understanding of the problem. The objective is not to find an optimum. The tactical Objec— tive is to identify reasonable next moves in the chess game of policy development. Articulation of the higher-order objectives (winning) may provide some guidance as to what not to do next, but often is THE EVOLUTION OF PUBLIC POLICIES 383 not very helpful in discriminating among plausible (not clearly losmg) next moves. In order to make that evaluation, it is necessary to have a good strategic understanding of the sort of chess game being played. And it is here, we believe, that policy analysis can and does have its greatest impact. Analysis helps people think about the problem—what they see as a reasonable range of options, the conse- quences of choosing one or another, the proximate values at stake Like tactical analysis, strategic analysis should not be thought of in Optimlzmg terms. People simply cannot know the best way to get from here to some unfamiliar and distant place, and cannot even know exactly what it will be like when they get there. However a good road map, and somé thoughtful consideration of the purpose’of the trip, certainly can help. As the air quality regulation story and many others signal too clearly, a real danger is that policy making can get so bogged down in argumentation about which turn to take next that the purpose of the trip and the map are forgotten. Second, analysis should be understood as influencing the dis- course and bargaining of democratic politics. Analysis cannot make a “public interest" out of a set of divergent private interests. But it can unmask proposals, put forth as equitable, that in fact sharply benefit one interest at the expense of others. It can help to identify policies that. have promise of achieving a broad public purpose (such as re- ducmg hazardous air pollution at reasonable cost) where that pur- pose has been obscured or lost in a tangle of specific piecemeal poli- c1es and narrow vested interests. Discussion of the objective and the trip plan does influence the bargaining about which turn to take next. Often discussions of policy analysis implicitly assume that the most important studies are produced in government itself or by hired consultants. Analyses done in or close to government clearly are important. However, as indicated by the clean air case and others, it is often the scholar outside government who calls attention to the problem, who provides the most illuminating and scathin cr1t1c15m of existing policies, who opens thinking to new onesg Perhaps it is characteristic of democratic politics that governments irl power are incapable of fresh strategic thinking, or even of keeping the ex1st1ng strategy in mind when making tactical decisions unless forced by outside criticism or new blood to back off and tl'iink In such a context, analysis (done outside government) is an important component of the system by which society keeps its government under control and tolerably alert. Third, the flexibility of an action today in terms of the range of ch01ce kept open for tomorrow, and the information about alterna- tive future paths that action will create, are important desiderata. At 384 ECONOMIC WELFARE AND POLICY best, strategic road maps are grossly drawn. While they provide direction and broad guidance, they imay not tell you that a certain road is in an unexpectedly bad state of repair. They are sure to omit certain newly built roads which become visible when one comes to a branch point and looks about with open eyes. Policy making is a continuing evolutionary process. Analysis should not proceed as if pragmatic social learning could take an easy short cut. Fourth, if one views policy making as a continuing process, the organizational and institutional structures involved become critical. Public policies and programs, like private activities, are embedded in and carried out by organizations. And, in a basic sense, it is the organizations that learn, and adapt. The design of a good policy is, to a considerable extent, the design of an organizational structure ca- pable of learning and of adjusting behavior in response to what is learned. The legislative mandate should provide broad guidance to the values to be pursued, but should not tie the hands of the admin- istrating agency regarding choice-Of means. If the value tradeoffs or the nature of the most appropriate instruments is uncertain, explora— tion ought to be an explicit part of the legislative mandate and of the administrative strategy. These propositions are, of course, old saws in the field of public administration, but their intellectual basis there is almost exclusively experiential. Economists instinctively find them attractive, and seem to think that they are deducible from standard microeconomic theory. But they are not, unless perhaps one introduces to that theory considerable ex ante uncertainty, and costs of information transmis- sion as well as acquisition. These factors, of course, are central to our evolutionary perspective. In a recent article Majone and Wildavsky (1978) took a point of view similar to that sketched above. Their article is titled, interest- ingly, “Implementation as Evolution.” They, too, see policies as institutionally embedded. Policies are articulated often at a relatively high level of government, but are carried out by lower levels of gov— ernment in interaction with private parties. The way in which a broadly articulated policy is implemented depends on the adminis- trative structure. The implementation of a policy both generates new information about what works and doesn’t work, and involves the working out of conflicts of interest among the potential benefiters and losers. As a result of experience, the way a broadly articulated policy actually proceeds is modified: The articulation may change as well. Fifth, just as many analyses of the workings of the market economy tend to abstract the private economy from public policies, programs, and institutions, too many analyses Of public policies and programs do not recognize adequately that their effects will be deter- v THE EVOLUTION or PUBLIC POLICIES 385 :itioiresti,lflod:e;on51d:rable degree, by private and not governmental fl . . . a w1 e range of public policies can be viewed as de- ining a mix of market and nonmarket activity ‘ or a mode f govemrnent-private interaction, in a particular area, The roble cif regulating air pollution certainly can be regarded in thisl3 way nTliJe fluoridation polic ' ’ i . y dialogues turned increasin l o ' limits on governmental action. g y n the appropnate certainly. there are some issues in which the choice of rivate— public mix is not central. The question of which defense 5 I:tem t procure is to only a very limited extent an issue about publicind ’0 vate responsibility. In recent years the discussion about olic Fril- primary and secondary education may have excessively cerigtered, Oiri the question of the private-public mix (vouchers, tax deductibility of tuition payments, and so forth). But there is certainly an interesting area of policy discussion where the mix and fit questions are crucial Serious policy analysis of any such arena requires detailed unde I standing of the institutions, mechanisms, interests and valu s rt stake. lFor all the reasons discussed in the preceding chapter siren la (and .SImple-minded) arguments about the optimality of private En‘f terririse, or simple pointing to market failures, does not carry the iana ySislvery far. Serious analysis of a particular policy problem neVItab y means immersmn in a set of relatively unique attributes of that context. It is beyond the scope of this book, which is about theory, to actually engage in such a detailed analysis of a oli problem. Nonetheless, we have stressed the importance of a thgo cty ical perspective in the interpretation of particular phenomena :ieid Siiuaiions. In view of our argument that a principal criterion by w 1c a theory ought to be judged is its ability to illuminate policy issues, it is Incumbent upon us to indicate at least roughl how evolutionary theory frames certain policy questions y our Much of this book has been concerned with develo in th about technological change in industry. It seems appropfiatg chZIe}: fore, to con51der how our evolutionary theoretical ideas illuinin t policy issues relating to that topic. Earlier we have considered ia e piecemeal manner, some of the policy implications for exam lei c: a undrums regarding antitrust policy. We conclude this chaiter considering more systematicall ' . y the uestion of a ' - ment policy toward industrial R&D.q ppropnate govern 3. GOVERNMENT POLICY TOWARD INDUSTRIAL R&D From the perspective sketched above, a wide range of policy analyses afi 1potentially relevant to a particular policy discussion. At one end 0 e spectrum, there are studies focused on the particular policy op— 386 ECONOMIC WELFARE AND POLICY tions under immediate consideration and on plausible alternatives to these. These kinds of studies are very dependent on the particular context and are designed to explore the qeustion: What should be the next move? At the other end of the spectrum are studies that broadly survey the terrain. They aim to help improve strategic planning. Be- cause the narrower studies are so particularized, unless they involve a methodological breakthrough they seldom are of durable interest. The focus of discussion here, therefore, is not on a particular present policy issue, such as whether the federal government should now aid the aircraft industry in developing the next generation of commercial aircraft or whether it should join with the American automobile in- dustry in the support of automotive R&D. Rather we offer here a background analysis of the general issue of the appropriate and fruitful roles that active governmental support of industrial R&D can play. Any particular policy study, after all, assumes such an analysis. Such an analysis depends, of course, on assumptions made about industrial R&D. Here we will make basic assumptions about R&D that are reminiscent of the discussion in Chapter 11, but somewhat different from those employed in the more stylized models. R&D is an activity separate from production. It is a highly uncertain activity, and reasonable people will disagree on the rankings of R&D projects. The outcome of an R&D project may include a technology ready for implementation, or nothing may be found or invented. In either case, the outcome of a project also includes revised knowledge about technological alternatives. In particular, a successful R&D project re- veals that similar but not identical R&D projects may yield similar but not identical technologies. An unsuccessful project provides gen- eral information about the location of “dry holes.” As a consequence, if the topography of innovation is sufficiently regular, technical ad- vance will be cumulative in the following sense. The outcome of one round of research and development projects (which includes some successes and some failures) defines a set of “neighborhoods” where it is a good bet that further R&D will locate technologies similar to and better than the technologies developed previously. These neigh- borhoods may not be in close proximity to each other; rather, the promising lines of search branch into an exploration of distin- guishable subclasses of technology. Research and development pro- jects within one class provide knowledge relevant to the next round of research and development projects within that same class. How- ever, they do not contribute much understanding that is relevant to research and development activity aimed at another class of tech- nology. It also is important to be explicit about where the information rele- THE EVOLUTION or PUBLIC POLICIES 387 vant to industrial R&D decision making resides. In general it resides With the organizations that are engaged in producing and inarketin the product. These are the organizations that know about thg strengths and weaknesses of prevailing technologies and of the targets and opportunities for improvement. They know how custom- ers react to different product designs. At best it is time-consumin and costly to relay ’the bulk of this information to an R&D organiz: tion that stands significantly apart from the producing and market- ing organizations. And without the cooperation of the firms in ques- tion, it is impossible. Thus, in an economy that relies basically on profit-seeking private enterprise to provide goods and services Virtually inevitable that much R&D decision making will be de tralized to private business firms, with returns to R&D internal through secrecy, patent protection, or market domination. The questions under consideration are these. First what will be the strengths and weaknesses of leaving industrial R&l,3 totally in the private domain? Second, what are the opportunities and limitations for governmental involvement in industrial R&D? We will argue that both the anatomy of market failure and the opportunities and con- straints on governmental action depend on the character of market structure and competition in the industry, tional variables as the strength and scope 0 industrial secrecy.5 . ConSIder an industry consisting of a large number of competin firms, each doing its own R&D. There are several different kinds ogf market failure” that need to be recognized. First, if firms have less than perfect ability to exclude other firms from using their technol- ' ogy, there is the well-known "template extemality ” which stems from the chances that a technology that is found (created) by one firm Will be imitated by others. If patents prevent direct mimicking but there is a “neighborhood” illuminated by the innovation that is not foreclosed to other firms by patents, the extemality problem remains though in modified form. Second, and more recently emphasized iri the literature, there are problems akin to those of multiple inde end- ent tappers of an oil pool or of fishermen working the same fiihin ground. Incentives to be the first to invent, to get the patent ma ing duce many firms to try to invent early. Barzel (1968) and others have pomted out that, under certain assumptions, in such a competitive race too many resources are applied too early. Given a set of estab- lished patents and imperfect license markets, individual com anies can make money from projects that would not be worthwhile had it is cen- ized as well as on such institu— f patents and the extent of 5. The analysis that follows is drawn from Nelson (1981). 388 ECONOMIC WELFARE AND POLICY they access to the best technologies developed by othersf-rptrOjeti: that yield little social value. The stronger the patent :gt 5, late greater the importance Of the oil pool problem relative tot e ecilnp to problem. The template problem tends to hold total R&D spen 111158: D a level below a social optimum. The oil pool effect may 'spur Ian spending, but toward an allocation of effort that is soc1 y lneéiilfeEnOther allocational problem emerges if technological ad- vance is cumulative. In the competitive situation- there would appsadr to be a problem regarding R&D that is similar to the one descrit:a by Hotelling in the case of location dec1510ns. Where the rteturn:l n01— firm from a technical advance must be assessed against the tic in ogy it currently is using rather than against the best tec~lnglogZCh— the industry, and where the rough location of the best avai a ' e nd nology is known and the neighborhood looks both prom;smg a _ unprotected by patents, there are incentives in the system or evpry_ body to cluster around the same broad opportunity, In the deve op ment of technology over an extended period, too much attentictlm I: focused on particular parts of the technological landscape an 1 noS enough real diversification of effort is achieved. If a‘firm expl DEE-t new terrain, it is less likely to come up uptht smiliztll‘ggg. An 1 i ' ws that other firms will soon c us er a . I dozsoiisildle‘: now a monopolized industry, noting first the differences in its incentive structure relative to that of the competitive case. In al monopolized industry, neither template externality nor the 01 fpoo externality exists. And the knowledge externalities that come rorln successful exploration of uncharted regions of the set are ilpteana f ized. There may be cost—side advantages as well. For many. infs o R&D there are economies of scale, at least up to a'pOII'It, arising rortn several different sources. Certain kinds of R&D inputs and ouctlptu s are lumpy: a significant quantity of R&D effort must be diIZZICItDe flora: project if there is to be any hope of success. A small-scale ‘11 :21. 0 may not be able to achieve success at all, and, if it does, wi hac ietve it significantly later than an effort that is funded at a hig erhra ec.l There also are diversification advantages of a large-scale researc a: development effort. Multiple attacks on particular objectives cand : mounted. A large and diversified range of prOjects can hell:1 guar e11 company from the economic disadvantages of a long ry f between R&D successes. And to the extent that the rate of grcliw 0— capital or sales of a firm is limited, there is an economy of sca e ass;- ciated with the fact that a big firm can quickly apply a new1 tehc n nological development to a larger quantity of output and capita a caIWhZTgi ftlllirjdebits of monopoly to be charged against these cred- THE EVOLUTION or PUBLIC Poucnss 389 its? Traditional theory would argue that the size of output in the in- dustry would be lower. This causes the traditional triangle loss. It also feeds back to R&D incentives by reducing the size of the output to which R&D applies. It is hard to say whether there would be more or less R&D undertaken in the monopolized case than in the compet- itive case. The greater degree of internalization and the smaller scale of output pull in different directions. In the monopolized case there will be less incentive to do the kind of R&D that is profitable in a competitive case only because someone else has a patent. While this is another factor that acts to lower the R&D level in the monopolized case relative to the competitive case, it suggests that the most impor- tant difference in the two regimes is the efficiency of R&D allocation. If the monopolist can be assumed to be a profit maximizer and if the consequences of choosing any particular R&D project are more or less obvious, there are strong arguments that monopoly would gen- erate a better portfolio of R&D projects than would a regime of com- petition. However, this tentative conclusion looks less compelling if we note that different people see alternatives in different ways and that organizations have tendencies to adopt parochial viewpoints and simplified decision-making styles. Then a centralized regime looks less attractive in terms of the portfolio of projects it would be likely to carry, and a competitive regime looks more attractive. The argument here against monopoly and for competition is not the standard one of textbook economic theory. It does not derive from the logic of maxi- mizing choice or from arguments akin to the proposition that it is so- cially desirable to set the level of output at the point where marginal cost equals price. Rather, the argument is in part that differences in perception as to what are the best bets will in a competitive regime have a greater chance to surface and be expressed in a diversified portfolio Of R&D projects than they would in a monopolized regime. The argument also is that large, sheltered organizations tend to be stodgy and uncreative or narrowly messianic in the R&D they do, rather than ingeniously and flexibly creative. It is- not just that monopoly limits the sources of new ideas, but that an industry domi- nated by a large, secure firm is not a setting that spurs the generating and sensitive screening of good ideas. Any regime of competitive R&D is bound to involve some waste and duplication. The costs and dangers of monopoly are principally those of reliance on a single mind~unlikely to be an agile one—for the exploration of tech- nological alternatives. One is tempted to look to a regime of oligopoly—involving neither the R&D incentive problems of a multitude of small produc- ers, nor the pricing and single-source reliance problem of a true 390 ECONOMIC WELFARE AND POLICY monopoly—as the most desirable institutional structure. Many prominent economists, from Schumpeter to Galbraith, are associated with this position. And, interestingly, oligopoly tends to be the market structure that naturally seems to evolve in industries where the funding or inventing of new technologies has proceeded rela- tively rapidly. An oligopolistic structure has the potential of com- bining the best aspects of competition and pluralism and of R&D benefit internalization. But such a structure also has the potential for combining the worst features of monopoly and competition. In many oligopolistic indus- tries, a considerable amount of R&D done by firms seems to be “de— fensive” and aims to assure that a firm has available a product similar to that developed by a competitor, rather than aiming to come up with something significantly different. Small numbers may yield considerable duplicative R&D without any real R&D diversity. And economists who tout oligopoly as progressive should be more alert to the possibility that, where oligopolistic rivalry in R&D does involve firms exploring significantly different parts Of the range of technological alternatives, oligopoly may be unstable. A monopo- lized structure may gradually evolve. A central feature of Schumpe- terian competition is that the profits that are the reward of successful innovation provide both motivation and the funds for firm growth. And there are social economic advantages of having the firm with a better technology (the lower cost or the better product) supply a growing share of the market. However, to the extent that firm re- search and development expenditures are keyed to size and to the ex- tent that there are advantages of scale of any Of the sorts discussed above, a successful innovator may reduce its rivals to a point where they can be effective competitors no longer. Where oligopolistic Schumpeterian competition has the merits that some observers as- sign to it, our simulation studies suggest that the structure may tend to self-destruct. The “failures” of market-induced R&D may well be serious, at least if performance is judged against the standards of an ideal plan— ning model. There is indeed a fundamental dilemma in using profit—seeking firms and competitive markets as the organizational device for stimulating and guiding R&D. If the problem were simply “externality,” as some economists seem to believe, it could be re— solved through tightening patents or providing simple R&D sub- sidies. But the problem is much more complex than that, involving overspending on certain types of R&D as well as underspending on others, the warping of R&D strategies, and constraints on the use of what is essentially a public good: knowledge. Market failure re ardin R&D is not neatl resolved b ivin a small adjusting S g Y Y 8 8 a THE EVOLUTION OF PUBLIC POLICIES 391 :IeSSt‘to conventional policy Instruments or by introducing a few new Of course, it is possible to take R&D or some component of R&D largely. out of the market system. This is what has hap ened regarding basic research, which is conducted mostly at univefsities rather than at profit-seeking firms and is funded largely by the ov-‘ ernment. This strategy has been relatively successful for two reagons (if the analysis above is accepted). First, the information needed to guide basic research decision making is not located in the o eratin parts of organizations that produce goods and services but father irgi the minds and experience of basic research scientists. lielatedly, the I opportunities and problems guiding allocation are signaled by the logic and values associated with advancing scientific understandin rather than by the profit objectives of enterprises. Indeed these dig: tinctions form a basis for defining basic research. Secbnd basic research decision making has been largely decentralized and I lural- :stic; the proposals come mostly from research scientists and igstitu— 1:25 and are subject to a peer review system or something equiva- .Soc1e'ty in effect has a choice regarding what arenas of research it Will define as basic research, to be funded publicly and guided b th tenets of a scientific discipline, and what arenas it will regard aZa :2 plied and to be guided (if not necessarily funded) by criteria close 1:0 the values of the organizations using particular technolo 'es The lesson of history is that the former approach has large long-in. rac- tical payoffs, when a field thus defined as a science can advancep ro- gressrvely and when the scientific understanding illuminates tIEJCh- nological options and their connections with economic values It should be recognized that many of the same kind of inefficiencies Of market decentralized R&D—allocating mechanisms reside in this d - centralized “Republic of Science," which allocates basic researceh resources}? No hidden-hand theorems obtain for either system But so long as it pays to have some bodies of research guided by the lo ic Inherent in the natural unfolding of certain bodies of understandiE it is viable to have scientific criteria (as contrasted with profitabiligl criteria) guide R&D allocation in those areas. 50 long as good decti}: Slon making needs detailed access to the particulars of ongoin re- ;earch Cand so long as there are dangers of a single central mind any- pgfihedeggpttgzlization seems far preferable to a more centrally But for the bulk of R&D that bears on advancing industrial tech- nology, much of the relevant information is located in the production 6. The idea Of a Republic of Science originated with Polanyi (1967). 392 ECONOMIC WELFARE AND POLICY enterprises, and good R&D decision making involves attending directly to economic benefits and costs. The Republic of Science IS not an appropriate system for governing the problem-oriented R&D work aimed at advancing production technology. Let us ignore here the cases in which government itself is a heavy purchaser of the prod- uct in question or is its provider (where special considerations ob- tain) and focus on private industry selling products largely to other private parties. In these circumstances, government is severely con- strained in terms of what it can do to guide and support R&D. There are, first, informational constraints; second, constraints imposed by the requirement for "fairness"; and, third, constraints arising from bureaucratic politics. The first two constraints turn out to be closely connected. Where the suppliers of goods and services are not rivalrous, the govern- mental information access problem can be resolved. Agriculture and medical practice are good examples. In these cases governmental in- formation gathering and R&D support are not viewed as helping one part of the industry at the expense of another, but as helping the whole industry. (Whether this conception is justified or not is an- other matter.) Not only governmental R&D support but public insti— tutions to allocate these funds, and even public R&D undertakings, generally are welcomed in these arenas. . The difficult problem of information access arises, along w1th real problems of “fairness,” where private suppliers are rivalrous. This is the situation that characterizes much of American industry. In such a regime, the kind of information that enables good R&D decisions to be made is the kind of information that gives one firm a competitive advantage over another. Since R&D often is an important instrument of competitive policy, firms are not likely to be cooperative when governmental programs are proposed that might upset the competi- tive balance. Governmental or other outside interests may conjecture that the risks and limited capturability of certain technological ven— tures are deterring private investment, but they are likely to have great difficulty in finding out exactly how much private firms are spending on these endeavors. Proposals that companies _share their technological knowledge are likely to unify the companies and the antitrust division in resistance. It is hard for public policy to fill in the holes in the portfolio when there is no solid information as to what that portfolio actually is. Governmental policies not only are limited by information access corstraints, but are limited to those actions that industry considers as generally supportive, neutral, and unthreatening to the status quo. Thus, industry has long advocated even—handed tax credlts. Support of cooperative research institutions run by industry and i THE EVOLUTION or PUBLIC POLICIES 393 guided to keep out of fields of proprietary interest has been em- ployed widely in Europe, less widely in the United States. Not sur- prisingly, cooperative R&D tends to concentrate on techniques of common interest not likely to give any firm a competitive advantage. Support of industry-specific basic research and pilot development of certain technologies at universities, nonprofit institutions, and governmental laboratories has been used occasionally by the United States. This seems to be viable politically, so long as governmental funds go into projects far enough away from actual practice so that there are no obvious likely gainers and losers among private compa- nies. Support of atomic energy and civil aircraft technology are good examples. The experience in these fields has been quite mixed. A good part of the difficulty certainly has been that, unless the govern— ment completely takes over industry research on the frontiers of tech- nology, the informational and fairness constraints in a sense force the government to explore alternatives that no private firms think are worthwhile funding themselves. In some cases, there may be a real "market failure" problem that governmental funding is resolving. But all too often, what industry was not funding was not worthwhile funding (even by broad social criteria), at least not at that particular time. The aircraft and atomic energy cases also signal the “bureaucratic politics” problem. While governmental support of R&D activities in these fields initially was justified in terms of the “public knowledge” nature of frontier-probing R&D, over time there developed within government a constituency for particular technological options and R&D projects. As suggested above, this does not seem inevitable regarding governmental R&D programs, but avoidance seems to re- quire building in pluralism either through geographic and political decentralization (agriculture) or the use Of outside peer reviews (Na- tional Institutes of Health, National Science Foundation). This is dif- ficult to do if the relevant long-run criteria are commercial, if much relevant knowledge is industrial rather than open and scientific, and if the relevant industries are rivalrous. So, although the “market failure” may be serious if the basis of comparison is R&D allocation under an idealized optimized plan, surely this is the wrong basis for comparison.7 In economies where the production of goods and services is largely conducted through profit—seeking business firms selling their goods and services on rea- sonably competitive markets, it is inevitable that these organizations be the locus of the bulk of R&D activity. Certain kinds of R&D can be established in other institutional regimes guided by other informa- 7. Again, we return to the proposition espoused by Coase (1960). 394 ECONOMIC WELFARE AND POLICY tion and incentive systems. Perhaps the regime of academic basic re- search is the best example. But a good share of industrial R&D must be guided by information available in and criteria relevant to the firms who eventually use the technology. Government is quite lim- ited in the extent to which it can effectively supplant the market. And government—business cooperation is severely constrained by busi- ness rivalry. The point of view on market failure, and limits on government ac- tion, in industrial R&D lent by evolutionary theory is not totally di- vergent from that which would be lent by positive orthodox theory. But the emphasis is different. In the first place, the current state of uncertainty regarding the range of things that can be done, and the consequences of doing various things, is stressed. Second, no at- tempt is made to define an optimum policy; rather, the style of analy— sis is to try to identify policies that should be avoided and others that appear more promising, and to focus attention on the latter. In part this represents carrying over to the arena of policy analysis our explicit recognition of bounded rationality. In part it represents a more general acknowledgment that notions like “market failure” cannot carry policy analysis very far, because market failure is ubi- quitious. Finally, it involves an explicit recognition that govern— ments are quite limited in the things they can do well, and that there- fore policy analysis should be concerned with these constraints as well as with the inefficiencies of private action. Third, flexibility, experimentation, and ability to change direction as a result of what is learned are placed high on the list of desiderata for proposed institu- tional regimes. Frankly, we do not know of any "orthodox" economic analysis of the fruitful and unfruitful roles of government in industrial R&D to contrast with our own. This is largely because those economists who are seriously interested in the question, while they often use ortho- dox language and concepts, tend to adopt a point of view that is im- plicitly, if not explicitly, evolutionary. See, for example, Marschak, Glennan, and Summers (1967) or Noll (1975). Our point is that analy- sis of the problem is hindered, not advanced, by the assumption that firms literally maximize profit and industries are in equilibrium, and is advanced when bounded rationality and slow—moving selection are recognized explicitly. As scholars who have drawn so much from Schumpeter, we find it interesting that our policy perspective on industrial innovation ap- parently differs significantly from his in at least one important respect. As part of his prognostication of socialism arising out of capitalism, he spoke Of the pending routinization of innovation and the decline of the entrepreneur. He seemed to argue that these devel— THE EVOLUTION OF PUBLIC POLICIES 395 opments would tame technological advance, or the economic adjust- ments required by it, but not hobble or badly distort innovation Our analysis, perhaps influenced by our knowledge of the fate of such efforts to plan and optimize technological advance as the super- sonic transport and the breeder reactor, leads us to a different posi- tion. The attempt to optimize and accordingly to control tech- nological advance will, according to the evolutionarv theory we espouse, lead not to efficiency but to inefficiency. J ...
View Full Document

This note was uploaded on 03/16/2010 for the course CRP 3210 at Cornell University (Engineering School).

Page1 / 14

An Evolutionary Theory of Economic Change - RICHARD R....

This preview shows document pages 1 - 14. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online