ECONOMIC THEORY & TECHNOLOGICAL & INSTITUTIONAL INNOVATION

WHY DID THE MARKET REFORMS OF THE 1980’S REFLECT AN ECONOMIC THEORY AND PRACTICAL POLICY CONSENSUS?

The market reforms of the 1980's involved deregulation and the withdrawal of state intervention in market systems. The overthrow of the established policy consensus was often mistakenly attributed to the strong leadership of Margaret Thatcher in the UK and Ronald Reagan in the USA. However the policy changes were global and underpinned by economic theory not political personalities.

The significant global market reforms included 1978 Deng Xiaoping in China who started to break Mao socialism with private farms & Shenzen, 1979 Margaret Thatcher, 1980 Ronald Reagan, 1985 European Competitive Market, 1989 Collapse of the Berlin Wall, 1991 Rao in India started to break Ghandi socialism &1992 Subsidiarity in the Treaty of Maastricht ...

1 Theory and Policy

The words of John Maynard Keynes suggest that economic theory maybe an important determinant of practical policy -

'The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else' [1].

The idea that theory determines policy is an important theme in social science studies; McGrew describes the concept as reflexivity and quotes the influential Anthony Giddens -

'reflexivity acknowledges theory as an integral part of the real world, we all live some aspect of theory every day, theories are not merely handy devices to understand behaviour, they actively constitute what behaviour is' [2].

Three examples demonstrate the power of theoretical ideas to shape behaviour.

Marx developed an extensive theory of class conspiracy and capital exploitation. In many countries of the world these ideas influenced policy for over a century from the publication of the Communist Manifesto in 1848 to the demise of the socialist experiment in Eastern Europe in 1989.

Alternative theories were also influential, particularly the ideas Madison and Jefferson enshrined in the 1787 constitution of the USA. The democratic ideals associated with 'we the people …', 'the pursuit of happiness …' and the 'American dream' of private capital accumulation, suggested a very different way of protecting people from conspiracies and exploitation.

Keynes' macro economic ideas influenced Western Governments over generations following the publication of his General Theory in 1936 and -

'the notion of an unstable economy whose performance could be improved through the manipulation of public budgets …' [3].

A notion which provided a theoretical justification for active intervention in the economy.

Slowly the ancient wisdom of balanced budgets gave way to the emotional hopefulness of compassionate spending ... and someone else will pay.  

It was 40 years later in 1976 that James Callaghan abandoned neo-Keynesian policies in the UK -

'we used to think we could spend our way out of recession, increase employment by cutting taxes and boosting Government expenditure. I tell you in all candour that that option no longer exists' [4].

Was Callaghan's policy choice being influenced by alternative opposing theories? Hayek was less influential than Keynes but was consistent in his exposure of the inflationary consequences of budget deficits and 'the fatal conceit' in assuming superior knowledge for public investment [5].

A final example germane to a theoretical understanding of practical policy is Darwin's process of evolution which constructs the unimaginable complexity of the universe. Since first promulgated in 1859, evolution has become an unassailable theory and one which continues to gain favour as the only alternative of creation by design becomes increasingly incredible -

'acting like a universal acid, evolution is powerful enough to have done all the design work that is manifest in the world … how can the products of our own real minds be exempt from an evolutionary explanation?' [6].

Any analysis of theory and policy, at the very least, should be consistent with Darwin's insight.

It appears theories always have contrary competing alternatives and policy choice is seldom straightforward.

If theory does underpin policy, it is obvious that such theory should be critically assessed because, for example -

'if you believe that privatisation has improved the performance of previously nationalised industries, you may also favour the development of internal markets in the provision of health care' [7].

What could be at risk is as fundamental and important as the National Health Service!

An important tool in market reforms of the 1980's was privatisation or de-nationalisation, which has become a dominant economic policy for governments all over the world. Typically the World Bank is unequivocal in its recommendations -

'privatisation programs have been a major activity of the World Bank for the past decade and a half. The Bank’s position is derived from long experience with failed attempts at reforming public enterprises. For years, the Bank supported efforts of governments to improve public enterprise performance but with little success. The efforts either did not bring the desired results or the improvements were not sustained. Few governments have been able to introduce, and keep in place, the large number of complex and demanding measures needed for effective public enterprise reforms.

The costs have been high. Inefficient but privileged public enterprises drained budgets, diverted resources from health and education, damaged the health of the banking sector, and created obstacles for the private sector. Observing the immense difficulties of reforming public enterprises without changing ownership, the Bank emphasises divestiture as a means of locking in the gains from reforms' [8].

Is this emphatic and seemingly authoritative case for deregulation just a passing fashion? Or is policy based on substantial theory?

Martin Ricketts suggests supporting evidence for deregulation maybe elusive -

'disentangling influences has not yet been satisfactorily overcome and results are extremely mixed …' [9].

Nevertheless there are competing economic theories which merit evaluation against objective criteria.

2 Criteria for Evaluation – David Ricardo and Robert Solow

The criteria for evaluation of any economic theory must include issues of both -

equity and the welfare of consumers and the

allocative and productive efficiency of firms - 'the themes of equity and efficiency underlie the examination of all policy issues … and they can be connected' [10].

The 'connection' caveat is important and critical assessment of theory should start with the dependence of consumer welfare and firm efficiency on the process of trade and technological innovation.

The welfare benefits of trade were well understood by the classical economists but were counter intuitive and proved difficult to grasp.

David Ricardo developed his theory of comparative advantage in the 1870's -

'the principles of comparative advantage and gains from trade are the most important results in the whole of economics. They apply at national, and also individual level. It maybe that a doctor is better than a farmer both at practising medicine and growing potatoes. It does not follow that the doctor should do both. If each specialises in the activity in which they have comparative advantage and engage in trade they are both better off than if each tries to be self sufficient' [11].

The concept of comparative advantage is counterintuitive as Nobel laureate Paul Samuelson was aware -

'thousands of important and intelligent men have never been able to grasp it or believe it even after it was explained to them' [12].

The crucial dependence of consumer welfare and the efficiency of firms on technological innovation is a relatively recent contribution to theory but it is also proving difficult to grasp because of the counter intuitive implications for the role of capital and natural resources.

Robert Solow developed his theory of growth and Total Factor Productivity in the 1950's -

'the role of technological change in economic growth is overwhelmingly important relative to capital formation and has, perhaps, only been fully realised with the studies of Solow' [13].

After Solow's work on growth accounting in 1957 -

'suddenly it became clear to economists that a theory which neglected the causes of technological change would have problems of credibility' [9].

It is clear that trade and technological innovation or their absence have made dramatic impacts on the course of history.

Around 1750, in North Western Europe, trade and technological innovation spurred the Industrial Revolution and self sustaining economic growth -

'at the heart of the Industrial Revolution was an interrelated succession of technological changes' [14].

In 1989, in Eastern Europe, centrally planned economies collapsed as directed capital did not nurture technological innovation -

'the failure to experiment was responsible for the failure of Eastern Europe to generate new technology' [15].

The strengths and weaknesses of any theory explaining and justifying the market reform and privatisation band wagon must analyse the linkage with trade and technological innovation.

3 Neo-classical Theory

Neo-classical theory has been and still continues to be dominant in Western economic thought, it should be the start point for analysis.

Superficially the neo-classical ideas of Pareto efficiency and competitive market equilibrium appear to provide an appropriate justification for deregulation and the return of nationalised firms to market disciplines.

Pareto defined an optimal where further resource reallocation cannot increase any individual welfare without adversely affecting others, it is a characteristic of competitive markets, where participants are price takers.

Pareto developed his idea of efficiency because he was unhappy with Bentham's utilitarian concept that 'the greatest happiness' results as individual utilities are 'added up' to a total happiness of society. Utilitarianism involves difficulties of measurement and aggregation, and problems of conflict between winners and losers whenever collective decisions are made to augment 'the total happiness of society'. Pareto confronted these difficulties by suggesting that optimal resource allocation avoids harm to others.

Walras developed a general equilibrium theory of competitive markets which boosted Pareto's concept by demonstrating how optimal resource allocation can be secured. However, Walras's model involves restrictive assumptions; multiple maximising buyers and sellers, homogeneous products, perfect information, mobile resources and exogenous technology.

The theory found in all economic text books has three important steps -

 households demand goods and services which maximise their utility

 profit maximising firms produce what is demanded at minimum costs

 general competitive market equilibrium outcomes are Pareto efficient [16].

Consumers adjust the quantities of goods and services they purchase in response to given market prices to maximise their marginal utility.

In the 1930's John Hicks developed a Theory of Choice based on indifference curve analysis to derive the demand curve. Indifference curves represent the quantities of alternative goods which give equal satisfaction and budget lines constrain the options available. The analysis led to downward sloping demand curves as the price of goods reduced. Market demand is derived from the individual demand curves.

In competitive markets although all consumers are different each, each and every one of them pays the price which matches the value to them at the margin, otherwise they would buy alternatives. The availability of competitive alternatives is a key assumption.

Firms also adjust the quantities of goods and services they supply in response to given market prices to maximise their profits.

Choice of production technique and production scale is determined by relative factor prices and the shape of the firm's isoquants, curves representing different combinations of capital and labour producing the same output. Production quantity is maximised within cost constraints in an analogous way to the consumer maximising utility within a budget constraint.

The derived total costs curves tend to increase rapidly with initial investment and then scale economies follow from increased output before diseconomies creep in as the system becomes stretched.

In neo-classical theory of the firm with perfect competition the final twist introduces selling price and the idea that investment flows into or out of the industry until a long term equilibrium is reached where price equals minimum average costs as competition eliminates excess profits.

Thus, individual firm supply curves are their marginal cost curves and market supply is derived individual supply curves in an analogous way to demand.

Pareto efficiency involves the general equilibrium of the whole economy, bringing together demand derived from household utility maximisation and supply derived from profit maximising firms. Walras's mathematics demonstrated that a set of equilibrium prices can exist which simultaneously renders all excess demands equal to zero and all markets can clear.

Thus, prices determined by supply and demand in competitive markets reflect marginal utility, otherwise consumers and households would purchase alternatives, and prices also reflect opportunity costs, otherwise firms would produce alternatives. No further gains are possible without somebody being adversely affected. This result, the first welfare theorem, states that competitive markets are Pareto efficient.

Furthermore the reverse is also true, the second welfare theorem states that every Pareto efficient outcome can be achieved as a competitive equilibrium.

This is a relevant conclusion for practical policy as it demonstrates how Pareto efficiency can be achieved by deregulation of competitive markets. Walras and Pareto provided a neat powerful explanatory model which not only -

'co-ordinates complex economies giving consumers what they want in the quantities they want …'

but also does it -

'by least cost methods of production with outcomes that are allocatively efficient' [10].

Pareto efficiency is particularly appealing to policy makers because change does not result in winners and losers conflict.

However, deregulation is a reversal of long held market regulation policies which are inspired by the neo-classical theory of market failure. Market failure describes the circumstances when the underpinning assumptions of Pareto efficiency and general equilibrium do not apply.

There are five main criticisms of neo-classical theory -

the key idea that self interest delivers the equity of Pareto's optimum and the efficiency of general equilibrium is paradoxical and counter intuitive, Adam Smith was misunderstood -

'it is not from the benevolence of the butcher than we expect our dinner but from his regard to his own self interest …' [16],

economics is not laissez faire choices are guided by 'moral sentiments'. Smith wrote 'Theory of Moral Sentiments' in 1759 years before his misunderstood 'Wealth of Nations' in 1776.

the assumptions are unrealistic; multiple maximising buyers and sellers, homogeneous products, perfect information, mobile resources and exogenous technology.

other important variables are exogenous; this is at the heart of the Institutionalist's critique which suggests behaviour influencing variables should not be excluded from the analysis because in reality individuals, households and firms don't calculate in isolation they respond to social norms, they 'satisfice', and develop 'game strategies' and above all universal moral sentiments are involved.

the conundrum, of how equilibrium prices determined. General equilibrium requires that prices adjust in all markets simultaneously reducing all excess demands to zero. But if all agents are price takers, how do prices actually change in real markets? The Walrasian auctioneer and the idea of 'tatonnement', or groping by trial and error does not coherently explain how market prices are actually determined,

'the process by which prices are determined remains something of a conundrum' [16].

a consequence of the model is inequality which inspires political conflict, the issues of unequal initial endowments and wealth distribution of are not confronted. Inequality becomes particularly problematic when market competition is absent and the Pareto efficient general equilibrium model cannot apply.
Unfortunately regulating inequality is a political misunderstanding of the role of diversity in evolution and a calamitous failure to distinguish between successful positive sum wealth creation and zero sum theft & cheating. Thomas Jefferson - 'all men are created equal with certain inalienable rights; life, liberty & the pursuit of happiness' -  was not a plea for clones but a plea not to discriminate against individuals because they belong to an identifiable group.

It is these weaknesses that justify policy action to 'correct' market failure. It is particularly the abuse of market power by monopoly firms which underpins the neo-classical theoretical counter to deregulation policy.

There is a problem of market power when firms are not price takers and can influence price. Price reduction is the only option monopolists have to increase sales, so marginal revenue is always less than average revenue or demand. Profit maximisation results in the price charged being higher than marginal costs, and the 'excess' profits destroy Pareto efficiency.

Thus when monopoly power exists and the corrective action of competitive investment flow does not apply, Government action is justified. The particular case of natural monopolies resulting from increasing returns to scale is particularly relevant for policy as in this case competitive investment can always be squeezed out.

It is clear that neo-classical theory provides supporting evidence for both deregulation and regulation depending on the circumstances.

It is far from satisfactory that the dominant economic theory fails to provide any clear cut justification for deregulation policies, Martin Rickets is honest -

'given the methodological difficulties, it is still hard to establish the impact of privatisation on firms' efficiency and consumers' welfare' [9].

However, amongst others Nathan Rosenberg has produced a pertinent critique of neo-classical theory. It is not a criticism of substance but of omission. Rosenberg addresses the 'omission' of a theory of technological innovation.

Technological innovation is an exogenous variable in neo-classical theory. The production function and factor costs establish the most profitable position on the firm's isoquant curve and efficiency gains from will simply shift the curve. However nothing is said about the process of technical change, it is an unexplored black box.

Rosenberg's purpose is specific -

'to break open and to examine the contents of the 'exogenous black box' into which technological change has been consigned by economists. Technological change is perhaps the major impulse in generating long term economic growth yet such awareness has not yet rubbed off on the dominant academic traditions of western economics' [15].

His analytical context is a real world of immense complexity, diversity and uncertainty -

'technological change is an extraordinarily complex subject and economics is befuddled by the immense diversity of the contents of the black box and the inability to see the consequences of innovations' [15].

In a world where knowledge is incomplete, tacit and dispersed, it becomes expensive and often impossible to obtain -

'knowledge cannot be deduced from some merely theoretical framework, it is acquired from experience and experimentation, new information is expensive. Errors arising from the absence of facts are far more numerous than those resulting from unsound reasoning' [15].

These characteristics of knowledge strike at the heart of neo-classical theory where -

'models assume very rich information environments where firms are aware of the options available to them leading to well defined production functions. Traditional analysis sharply distinguishes between factor substitution and technical change, yet firms are not aware of the details of processes using factor mixes technologically distant from current processes. Furthermore the linear model of science / technology / production assumes firms also possess complete information on economic value' [15].

Rosenberg's thesis is that knowledge is often unavailable and expensive to obtain, the consequences of its use uncertain, it is necessarily path dependent on history with future knowledge dependent on innovation where 'rational decision making has no direct application' and it is intimately embroiled in a complex interconnection with it's physical and institutional environment -

'technological change is not a straightforward matter it is an extraordinarily complex subject' [15].

Rosenberg's critique is essentially focused on the 'paucity of information' on which to base maximising calculations.

It is the complexity of reality which undermines the explanatory power of neo-classical theory but it is exactly such complexity that prompts an examination of evolution as an alternative theory.

4 Evolutionary Economic Theory

The theory of evolution is a complete explanation of dynamic complex reality -

'at every stage of the tumultuous controversies that have accompanied the evolution of Darwin's dangerous idea the picture has become clearer and clearer', there is no credible alternative [6].

It was Schumpeter who first suggested -

'the essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process' [15].

Metcalfe is clear that the evolutionary process is 'independent of its application to any particular set of phenomena', his application is not biology but economic behaviour and technological change [17].

The process involves four concepts -

heredity – inherited successes are subject to

variation – where random changes compete for scarce resources in a

selection process – resulting in differential survival which drives

population structures – in an environment which then determines the rate and direction of change

'competitive selection acting on individual differences to produce changes in population structures' [17].

Evolution is easy to define but difficult to assimilate, as Darwin himself said -

'most people just don't get it … I must be a very poor explainer' [6].

From these insights Metcalfe, amongst others, has explored the process of technological change as 'a knowledge base for translating input into output'.

Variety. 'Innovation is my starting point' because it is innovation which creates the difference and diversity on which the selection process acts. 'Rationality of behaviour is not the important issue, the variety of behaviour is'. ' Variety is not a nuisance which hides the underlying reality, rather it is the distribution of variety which is reality, and which is the prerequisite for evolutionary change'.

The key is that it is differentially surviving innovation which adds to the knowledge base.

Innovation, by definition, recognises hitherto unconnected connections. Winning ideas cannot be identified in advance regardless of their source as codified scientific knowledge or tacit creative inspiration, the process requires variety.

Heredity. However, 'behaviour is not infinitely adaptable'. 'Variation acts on existing ideas otherwise there would be no continuity over time in form and behaviour'. 'Stability of operating routines is a necessary condition for an organisation to exist at all'. 'Technologies do not emerge fully fledged into the world, they develop painfully in a trial and error fashion'.

The process is one of continuous improvement of the knowledge base, path dependent, there can be no random jump to a new ideal.

Selection. Differential survival requires a sorting mechanism, the market acts as a 'sieve'. 'Markets can be seen as institutions to facilitate adaptation to better conceived activities through creative destruction leading to the growth or decline of firms or knowledge bases'.

There are two key points -

markets do not select on the basis of any preconceived knowledge but on the basis of decisions based on incomplete, tacit knowledge widely dispersed in the population.

'truly innovative solutions must come from diverse individuals because 'experts' have a preconceived view' [16].

'it is not for others to judge whether consumers purchase for merit or fashion, all that matters is that they themselves glean pleasure' [19].

 secondly knowledge bases are selected in markets, not on a winner takes all basis but as increasing or decreasing population frequencies - winning behaviour and ideas simply become more prevalent, they are discovered, they emerge and crucially they are not calculated in advance.

Environment. 'The rate and direction of change is driven by market evaluation in an environment'. 'Fitness is not an intrinsic feature of the knowledge base but rather the consequence of the market co-ordination of rivals'. 'The most significant feature of all this is that evolutionary arguments are concerned with patterns of change not only in the entities themselves which could be treated as entirely fixed in nature, but in terms of the relative importance of these entities in the population'.

The environment is critically important. Diversity and competition will generate change but the speed and direction will be governed by the environment.

Metcalfe suggests technological change is the result of evolution driven by 'being different and being competitive' but dependence on the environment has obvious implications for privatisation policy. It is clear the World Bank's privatisation policy recommendations are likely to have different results in different environments. Nobel laureate Douglass North has noted -

'anyone who watches Russia has observed that privatisation without the fundamental structure of the rule of law does not produce anything worth a hoot' [20].

Evolutionary theory suggests deregulation is an appropriate policy only in as far as it nurtures technological change through diversifying ownership to create variety and encouraging competition in markets to ensure differential survival.

It complements neo-classical theory -

'I see no fundamental contradiction or incompatibility between the evolutionist mode of thought and the neo-classical' [17].

In avoiding the difficult restrictive assumptions, evolution enriches neo-classical theory, particularly by providing an explanation for the discovery process of price determination and technological innovation. Evolution solves the conundrum of price determination in markets which has troubled neo-classical economists -

'the core of the argument revolves round the 'gravitation' of market prices to prices of production and correspondingly, the 'gravitation' of actual profit to 'normal' profit' [17].

As a complement to neo-classical theory it meets the same welfare and efficiency criteria developed by Pareto and Walrus in competitive markets.

Furthermore there is an important added bonus.

The traumatic issue of wealth distribution now becomes an essential part of the process, it is not a unwanted 'result'. There are no initial endowments only changing frequencies of technological know how in the population.

Technological know how is incomplete, tacit and dispersed and not an artefact to be owned or endowed, monopoly ceases to be a problem because -

'no monopoly position is safe as long as there is scope for innovation to undermine it' [9].

All rival concepts of welfare and efficiency depend on incredible knowledge assumptions.

Nevertheless there are two weaknesses in the evolutionary explanation of technological change -

 the process is counter intuitive and implausible, Darwin himself described evolution as,

'it is an awful stretcher to believe that a peacock's tail was thus formed, but …' [6].

 furthermore it is not a predictive policy tool as Heinz Kurz noted,

'useful economic theory cannot possibly be based on a full description of the individual agents and their differential behaviours. An answer to the question of the dynamics of the system would involve the intertwined histories of all the different agents in the different sectors – clearly a task that is beyond the capacity of economists' [17].

However, Kurz is being disingenuous. Theories which accurately reflect reality cannot be dismissed because they are not predictive, particularly when they 'predict' the unpredictability of reality!

Evolutionary theories can and do provide insights for policy -

'the appeal of evolutionary theorising about economic change is that it does seem better to correspond to actual processes' [9].

Evolutionary theories appear to support neo-classical theory by providing an evolutionary explanation for the invisible hand, the Walrasian auctioneer and technological change.

The contribution of evolutionary theory rests on the issue of 'know how'.

The knowledge required to establish consumer welfare and efficient best practice by regulation does not exist -

'government cannot predict which are the likely innovations or the promising markets; its proper role is to build an infrastructure to support firms and let innovations follow from the market process' [9].

Thus it is deregulation policies which help technological innovation to emerge from a diversity of competing firms responding to welfare and efficiency signals from market prices.

5 Technological Innovation

In the real world of uncertainty and incomplete, tacit and dispersed knowledge, evolution is the only process which explains technological change and provides guidance for appropriate practical policy -

'evolutionary theorists argue that processes and routines which allow a firm to cope with uncertainty are more appropriate as a basis for modeling' [16].

The technological innovation model involves a complex control loop and is not a facile process. It is an inseparable combination of ownership diversity and market competition that is required -

Choices are made by Herbert Simon's process of individual 'satisficing' -

 building on proven inherited success, imitate success, there is no better place to start!

 freely choosing between options available at the time and the place, unhindered by 'rent seeking' Bishops, Princes, Generals or bureaucratic majorities

experimenting to generate diversity and increase the chances of discovering new tricks ... a continuous process of experimentation & iteration ... James Watt added his condenser to a dinosaur and discovered a world beater by try and try again until something works ... (the immune system evolved in exactly the same way) ...  

cooperating with others to discover better tricks from synergies which are not available to individuals

retaliating against the inevitable parasites and predators to defend and accumulate benefits

learning from the successful outcomes of differential survival and starting again

Individual choices are co-ordinated in markets 'as if' a control loop - 

information as 'know how' is incomplete, tacit and dispersed making maximising calculations impossible but knowledge is reflected in prices from millions of economic exchange bargains from all over the world

The information signal.

 innovative alternatives from ownership diversity reflecting the different ideas of different people at different times in different circumstances are presented as alternative choices with associated prices in markets

The comparative set point.

 choice in competitive markets enables consumers to continuously value change by selecting goods and services which maximise utility

The control algorithm.

 responses are co-ordinated in the decisions of firms as 'creative destruction' forces new innovations and experiments in an attempt to discover the high value and low costs which will maximise profits.

The response actuator.

Technological change is a battle of ideas. Ideas don't win but in this way successful ideas become more prevalent in the population.

The control loop is handling information; technological and institutional 'know how'.

The vindication of this position came in 1990s when the mainstream economic tradition embraced 'endogenous growth theory'. A golden thread of economic understanding from Adam Smith's 'pin factory' through the industrial revolution and the spread of democracy to Paul Romer's increasing returns from monopolistic competition.

6 Conclusions

Progress in both the welfare of the consumers and the efficiency of the firm follows inexorably from technological innovation.

Learning and innovation must be carefully distinguished. If technological change simply involved learning from the past, it could be planned and designed. Reality is more complex, change involves learning from the past and innovating into the future, a counterintuitive evolutionary process -

'blind variation provides the only mechanism available to breakout from the bounds of what is already known' [ 21].

Technological innovation requires a system of complex interactive individual activities co-ordinated in markets 'as if' a control system. The crucial elements are diverse ownership and competitive markets resulting in the discovery of welfare benefits and efficiency by differential survival.

Evolution provides the theoretical underpinning for deregulation policy only when it orchestrates the necessary diversity and competition.

Evolution also provides a critique of the alternative of regulation by planned design which, by definition, exploits learning from the past at the expense of the diversity and competition necessary for future innovation. Furthermore any interpretation of equity based on equality of outcome destroys the diversity and competition essential for the evolutionary process.

As an explanation of dynamic economic processes it complements neo-classical theory and answers a core economic question -

'how is industrial innovation understood within different theoretical perspectives?' [9].

Echoing Darwin himself and his 'awful stretcher ..', Vivienne Brown is succinct -

'the paradoxical nature of the idea that economic outcomes which are unplanned at an economy wide level maybe better than planned ones seems to fly in the face of common sense. The invisible hand becomes even more extraordinary when this beneficial outcome is seen as the result of the pursuit of self interest on the part of individual economic agents' [16].

It is easy to believe that Walras' 'auctioneer' does not exist but more difficult to accept that the blind process of evolution provides a robust explanation of the 'invisible hand' with its inexorable tendencies to optimise both equity and efficiency in imperfect markets. 

In 2008 a financial crisis rocked world trade and the old Washington Consensus was turned into a political football. However, the Washington Concensus was developed by John Williamson an English economist, and contained 10 specific economic policy recommendations.

The crisis emphatically endorsed the economics - but repolarised the petty party politics - and forced a new label 'Structural Reforms' -

fiscal discipline, balance the books

enabling investment, compound interest

low marginal tax rates, economic growth

markets for interest rates

markets for exchange rates

markets for free & fair exchange trade

privatisation, susidiarity, modularisation, diversity

foreign direct investment, no 'protective' barriers

deregulation, innovation

patents, intellectual property rights, the law of the land

The Washington Consensus was rubbished and rebranded as 'structural reforms'?

But always remember to paraphrase Winston -

'Market exchange is the worst form of social interaction for discovering & accumulating synergies of specialisation & scale ... apart from all the alternatives which have been tried from time to time' 

In 2014 the trend was clear if hesitant but the population of the world was getting on board - 'Getting India back on Track' by Ashley J Tellis -

'A slow roll back of socialist policies has been underway since 1991. But unlike China since 1978 this shift in India has been hesitant, conflicted & furtive'.

Sources and further reading –

[1] Maynard Keynes (1936) – 'The General Theory of Employment, Interest & Money', Macmillan London.

[2] Anthony McGrew (1997) – 'The Transformation of Democracy', Open University.

Anthony Giddens (1990) – 'The Consequences of Modernity', Polity Press.

[3] James Buchanan (1978) – 'The Consequences of Mr. Keynes', IEA.

[4] James Callaghan (Sept. 28th.1976) – 'Labour Party Conference'.

[5] Fredrick Hayek (1988) – 'The Fatal Conceit',Routledge.

[6] Daniel Dennett (1995) – 'Darwin's Dangerous Idea', Touchstone.

[7] D319 (1998) – 'Course guide', Open University.

[8] World Bank (1999) – 'Privatisation', http://www.worldbank.org.

[9] D319 (1998) – 'Firms', Open University.

[10] D345 (1997) – 'Course Guide, Theory & Arguments', Open University.

[11] Maureen Mackintosh et al (1996) – 'Economics and Changing Economies', Open University.

[12] Paul Samuelson (1969) – 'International Economic Relations', Macmillan.

[13] Kenneth Arrow (1962) – 'The Economic Implications of Learning by Doing', Review of Economic Studies, Vol.29.

[14] David Landes (1969) – 'Unbound Prometheus', Cambridge University Press.

[15] Nathan Rosenberg (1994) – 'Exploring the Black Box', Cambridge University Press.

[16] D319 (1998) – 'Markets', Open University.

[17] Stanley Metcalfe (1998)– 'Evolutionary Economics & Creative Destruction' Routledge.

[18] D319 (1998) – 'Study guide 3', Open University.

[19] D319 (1998) – 'Households', Open University.

[20] Douglass North (1999) – 'Understanding the Process of Economic Change', IEA.

[21] John Ziman (2000) – 'Technological Innovation as an Evolutionary Process', Cambridge University Press.

Sources and further reading – bibliography ...

The evidence mounts. New sources continue to be published confirming, supporting and expanding on the universal relevance of Darwinism and Evolutionary Economics.

john p birchall

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