WP – An Appreciative Theory of Economic Change and Development

(Last updated 28.6.11)

Abstract – a work-in-progress, open for comment.

This development framework adapts to constraints in emerging markets and works via the interactive co-evolution between institutions and innovation systems.

The innovation systems come up with products and processes with appropriate technology from the diffusion end of the technological S-curve.  A complementing co-evolution of institutions, both economic and political, supports the innovation systems among firms and sectors of the local ecosystem to capture the expected higher value-adding potential.

This framework involves using modern industrial policy to institutionalize a discovery process to find and fine tune economic locomotives with high value-adding potential for the wider economy.

Cases of this policy in successful emerging markets and small, developed nations have varying governance structures that incentivize, extract and enforce performance. Winners in the private sector are led by entrepreneurs while, in the public sphere, change leaders work as policy-based reformers. Both must be proven innovators in the mold of Schumpeter.

The  framework loops for continuous interaction and positive feedback between technology and institutions to sustainably deliver on its high value-adding potential for distribution.

Working on an Appreciative Theory of economic change and development

Here’s a story of passion and hard work(-in-progress) that I have committed to be my life work!

 

I hopped unto the appreciative theory by serendipity while reading and writing for SYNTHESiST from the starting point of firm-level innovation within ASEAN.

This Page summarizes the status, as rolling work-in-progress, of an appreciative theory of economic change and development for emerging markets.

It was a process of discovery that was fueled by passion that got deeper and broader until it reached its natural border.

In the course of my research, I found this 1982 book by working back from many citations that seem to always end up to it [as with another seminal but later (1988) book fondly called IFIAS6 (1988), for short].

What is appreciative theory?

The concept of appreciative theory was first presented in detail by Richard Nelson and Sidney Winter in their epochal book, An Evolutionary Theory of Economic Change (1982, Harvard). Please click image above for Amazon link.

Compared to formal theorizing, Nelson and Winter contend that appreciative theory is useful:

… when economists are undertaking applied work … to an audience interested in that question per se … theoretical ideas tend to be used less formally and more as a means of organizing analysis.

To me, appreciative theory can be likened to the rich hypothesis that is the starting point of the Kathleen Eisenhardt (1989) suggested method for drawing out grounded theory from case studies that is very useful in the social sciences.

This is not a simple point because, from the economics history that I linked below, the disagreement between the mainstream and many other early branches of economics through almost two centuries had revolved around methodology and logic, deductive or inductive.

Thus, a resolution in methodology could very well lead to a grand unified theory. A Holy Grail, indeed!

Nelson and Winter (1982) were the first neo-Schumpeterians.

As the authors themselves confirmed the influence of Schumpeter, their book is epochal and influential, to me, for four reasons:

• the write-up on methodology and the suggestion of appreciative theory as opposed but related to formal theory,
• the extensive positioning with and critique of mainstream neoclassical economics,
• the updating of classic Schumpeter disequilibrium led by entrepreneurs as the normal dynamic state of economy with new inputs and techniques from selected economic areas – the example of bounded rationality was given – and thus the prefix in neo- in neo-Schumpeterianism, and
• within the purview of classic Schumpeter itself, the proposition in formal theory, long since accepted, of ‘path-dependence’ as the main pathway (via Markov process) of technical progress.

To me, from The Theory of Economic Development, the most important concept coming from Joseph Schumpeter is not ‘creative destruction’ from Capitalism, Socialism, Democracy, though arguably the phrase is the most popular.

The more important concept is his thesis that dynamic disequilibrium driven by innovating entrepreneurs is the norm in an economy.

By implication, as I linked in a brief history of economics below, Schumpeter said that mainstream theoretical economists modeled with equilibrium – with profit as objective function and not the true object of any economic enterprise – just for ease in mathematics (though the math has actually become more complex as the tools became available for formal models in a chase to match real world complexity).

Unfortunately, the richness of the real world according to this description cannot be captured by formal models of mainstream economics without massive simplification.

Still, as an innovator, appreciative theory that works is good enough with new cases gathered, in the spirit of Eisenhardt, bringing the knowhow closer and closer to ‘truth.’

Appropriate technology from Innovation Systems.

Being an industrial engineer and MBA, I had been involved in designing and implementing innovations, from product to process to systems and business models, my whole professional life.

As in my early post of March 13, 2009 (18 days after going online) and updated on December 30, I described Bengt Ake Lundvall’s National Innovation Systems (NIS).

The key elements of this evolutionary economics (GLOBELICS) concept are two types of learning from (a) the science and technology infrastructure and from (b) learning by doing (K Arrow), using (N Rosenberg) and interacting (BA Lundvall).

Beyond managing transactions in the mercantilist tradition, proper management of learning and interactions yields increasing returns beyond value-adding from transactions.

In the model, the appropriate technology choices can be determined and prepared for using the NIS as framework of analysis.

Co-evolution of Institutions as goal of complementing social innovation.

Taking off from the concept of Richard Nelson in his paper, Co-evolution of Technology, Industrial Structure and Supporting Institutions from the book Technology, Organization and Competitiveness, 1998, Oxford, I put together the post Social Innovation Digs Deeply Into Markets and Hierarchies to link the work of the New Institutional Economics school within the appreciative theory.

In this paper, Richard Nelson made reference to an earlier book, Institutions of Capitalism (1985, ) by Oliver Williamson who developed the model of institutions below.

A year later on December 31, 2010, I found the best framework for social innovation in the work of the New Institutional Economics (NIE) school under their Dean, Douglass North, who wrote a great update on the school in his book Understanding the Process of Economic Change (Princeton, 2005).

I started to get acquainted with the group with 2009 Nobel winner Elinor Ostrom though I was not then able to establish the connection with Ronald Coase, the 1937 Nobel winner, and his book, Theory of the Firm.

Oliver Williamson, co-winner of the 2009 Nobel Prize, developed a four-level model of institutions in his paper, The New Institutional Economics: Taking Stock, Looking Ahead, (Journal of Economic Literature, September 2000).

I show my diagram version of his table at right. I call the four levels as:

• Core economics or payoff table,
• Governance as play of the game,
• Institutional environment as formal rules of the game, and
• Embeddedness to include the informal institutions like customs, traditions and norms.

The Williamson model further suggests a typical time frame for change.

With definitions at each level giving hints on how to achieve transparency, as well as incentive and penalty prescriptions, the Williamson institutional framework provides the possibility of change becoming a policy problem to be resolved than the more difficult attitude or values-based context for conversion.

Need for co-evolution of political institutions beyond that for economic institutions

Update on June 30, 2011 – After reading Francis Fukuyama’s latest, The Origins of Political Order, I became convinced that more than economic institutions are needed to implement change into nations.

This is not in conflict with the Williamson framework given above. It just happens that the NIEs are more focused at the shorter-term institutions closer to transactions that is their main tool while the political scientists are looking more into social institutions in the longer-term historical context.

I have posted on change in political institutions on Fukuyama, and his inspiration Samuel Huntington, on the subject of Social Innovation in Campaign Finance to Boost the Art of Associating.

Discovering economic locomotives via modern Industrial Policy (Section created 25.3.11)

While asserted by Professor Dani Rodrik as from the neoclassical school, I have decided to use his modern industrial policy as main tool for discovering the economic locomotives in the framework for appreciative theory for emerging markets.

I accept the good Professor’s approach for two key reasons.

Firstly, Professor Rodrik’s framework is not inconsistent with co-evolution and the new institutional framework whose Nelson and North he actually refers to in his book.

Second, it works from the ground up from the firm (micro-) and industry (meso-) levels and is focused more on policy that works than on theory. As such, the possibility for aggregation to macroeconomics is left open.

Being neoclassical-based, modern industrial policy by Professor Rodrik as a formal model is internally consistent in mainly providing a frame for development, albeit powerful. As can be expected, it misses on two critical aspects of development in emerging markets – the techno-paradigm trajectory and entrepreneurial leadership – that are important on the ground.

Fortunately, the SYNTHESiST appreciative theory for emerging markets allows for that in its learning-focused innovation systems and its entrepreneurs-change leaders components.

The appropriate macroeconomic environment including the public finance and monetary economics components are still empty placeholders in this appreciative theory.

An Appreciative Theory of economic change and development (Section last updated 25.3.11)

I have synthesized the three components – innovation system for appropriate technology, co-evolution for institutional change, and modern industrial policy as locomotive discovery tool – with its neo-Schumpeterian context into one framework.

Coincidentally, both books by the neo-Schumpeterians, Nelson & Winter, and the NIE on Institutions, by Douglass North, describe their work as economic change while Dani Rodrik subtitles his work as economic growth.

In contrast to the mainstream, this implies that each of their perspective economics – even Rodrik’s neoclassical tool – is dynamic-across-time and not a static resource allocating device.

In the model that I posted on February 5, 2011 in SYNTHESiST Working on an Appreciative Theory of Development , the dynamism is provided internally by entrepreneurs and change leaders, taking Schumpeter’s definition, who create the technical. social, or blended innovation to constantly put the system in disequilibrium.

Externally, as designated by the thunderbolt, impulses and imbalances also contribute to the disequilibrium from the following sources:

• demographic changes,
• scientific discoveries (as opposed to practical technology innovations),
• institutional lags especially from the embeddedness end, and
• resource constraints from climate and supply issues, force-majeure from disasters, wars and the like.

The best economic change an development managers are those who are best able to navigate through this Schumpeterian disequilibrium without upsetting their applecart.

A model-analog that applies at the firm and sector levels.

A similarly shaped framework seems to apply at the firm level as well as I described in Business Model Innovation Triggers Growth and Locks Value.

A co-evolution between technical and social sphere inside the firm leading or responded to external stimuli also seems workable from my experience in this field.

A brief history of economics from the evolutionary context.

As a useful context, I wrote a brief history of economics in Economics and Crises – an Epic History of Self-Healing as a sort of reference post.

Mainly, it shows how economic schools are branching out from the neoclassical in response to (a) criticisms of its rigidity from formal modelling assuming and methodological issues and (b) loss of explanatory and predictive powers from major crisis through the years.

I venture that the branching seems like the prelude to a scientific revolution as described by Thomas Kuhn that may precede the arrival of a unified theory and paradigm shift.

A continuous work-in-progress

The appreciative theory is a work-in-progress that I am trying to validate with cases. And more documented cases.

My goal is not to come up with grounded theory – a la Eisenhardt, thought it would be great if conditions change and I can focus o that work – that is way beyond the effort I am able to put into the work.

As an engineer and management practitioner, I will be content with results that work on Earth – in Newton’s physical world while in the era of Einstein’s quantum mechanics – and that can continuously improved with more cases and experience.

After all, that is how Dick Nelson describes the purpose of an appreciative theory to be.

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