Dosi recommends that we focus on the idea of the economy being a complex and ever-changing system by first understanding the drivers of change before then looking to understand the (imperfect) co-ordinating properties of the economic system
Dosi’s perspective does this by studying how different kinds of people and businesses interact in a dynamic and unpredictable way.
Dosi explores the generation and ‘carrying’ of knowledge and how firms often have their own unique way of learning (which isn’t influenced by market competition) and then, looks at how markets actually work and the dynamics which influence them.
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Introduction
The purpose of reading this chapter is to start understanding the production and use of knowledge (innovation) as an economic concept and grasp the ability to deconstruct the idea that innovation means progress.
Brief economic history
Adam Smith (Wealth of nations, 1776) believed that technological advancement was a key driver for economic growth; i.e. innovation as progress with the use of machines to increase productivity. He coined the term ‘the invisible hand’ to describe how free markets can incentivise individuals, acting in their own self-interest, to produce what is societally necessary.
Marx builds on this relationship between the theory of production and labour relations*—centred around the theory of value, capital accumulation, and technological progress.* He believed that the mode of production was a form of expressing ones life, what they are, coincides with their production. (Workers are intrinsically connected to what they produce).
The arrow-debreu-McKenzie General Equilibrium (GE) model
Using the Arrow–Debreu–McKenzie General Equilibrium (GE) model as an example, Dosi demonstrates that it’s difficult to go from saying that a balance exists to explaining how the economy actually gets there or stays there. Essentially, just because you can prove that a balance exists, doesn't mean we know how it looks or how it behaves in the real world. The model cannot explain human behaviour > to paraphrase: we can’t use this model to explain why a butcher sells meat at a certain price day after day, even though they're trying to make a profit.
This model's assumptions (and many others) are too strict to match the messy reality of the economy.
The current economic paradigm (and how we should interpret the economy)
The current dominant economic theory is the analytical opposite to Smith, Marx, and Keynes. It builds on the separation between ‘coordination’ and ‘dynamics’, starting from the former and assuming away the latter in a first approximation.
Dosi recommends we look at the economy in a different way. (Inspired by Adam Smith)
In this approach, we focus on the idea that economies are always changing and not always in a smooth way. Businesses will try news ways of making things or creating new products, they often make mistakes, but sometimes they stumble upon big successes.
This also applies to how companies are organised and how they compete with each other. We're interested in how companies constantly search for better ways to do things, like using new technologies or changing their structure, to get ahead of their rivals. This process of competition and change is what drives the growth and sometimes even the disappearance of companies (creative destruction - schumpeter).