An evolutionary theory of economic change

Abstract

Economic change proceeds through a process of organizational evolution driven by the interaction of routines, search, and selection. Conventional neoclassical models of static equilibrium and maximizing behavior are replaced by a behavioral framework where the primary unit of analysis is the organizational routine. These routines embody a firm’s capabilities and are largely characterized by tacit knowledge, making them persistent and difficult to replicate perfectly. Innovation occurs through stochastic search processes—analogous to genetic mutation—whereby firms seek to modify or replace existing routines in response to environmental pressures or suboptimal performance. The market functions as a selection mechanism, where the differential profitability of these routines dictates the relative growth or contraction of firms over time. This dynamic process leads to path-dependent trajectories of technological change and economic growth, accounting for phenomena such as the persistence of productivity differences and the evolution of industrial concentration. By incorporating bounded rationality and satisficing behavior, this framework reconciles microeconomic decision-making with macroeconomic patterns of development, characterizing the industrial economy as an inherently disequilibrium system driven by a continuous cycle of innovation and competitive elimination. – AI-generated abstract.