The Disequilibrium Paradigm

In contrast, the disequilibrium (quasi-evolutionary) approach characterizes the economy at the macro-level as an open multi-sector materials/ energy processing system. The system is characterized by a sequence of value-added stages, beginning with extraction of crude resources and ending with consumption and disposal of material and energy wastes, which can do harm if not eliminated. Referring again to Figure 1.1, if the system is open, then the causal link between materials and energy consumption and economic growth implied by this mechanism must be mutual. In other words, it must be bi-directional, not uni-directional.

This means, ceteris paribus, that a two-factor production function involving only labor and capital services as inputs cannot reflect this mechanism. A third factor representing resource flows (in some way) is minimally necessary to reflect the feedback between increasing resource consumption and declining production costs. This is needed, for example, to explain the long-term decline of resource prices (Barnett and Morse 1963; Barnett 1979; Potter and Christy 1968).

However, the simple positive feedback mechanism sketched in Section 1.2 allows for only one type of technological change; namely, the combined effects of scale economies and experience or learning-by-doing at the societal level. However these forces do not distinguish between sectors. Hence they cannot explain structural change. But, in reality, there is not one single aggregate technology of production for a single composite universal product, nor even a single technology for each product as assumed by activity analysis. The real world exhibits multiple competing technologies for each product and in each sector.10

The qualitative evolutionary change mechanism at the firm level (assuming abstract products) has been described by Nelson and Winter (1974, 1982). It applies in a multi-product, multi-sector system. As the rate of improvement of the existing dominant technology for one product slows down, the incentives to search for, and find, a new technology (or a new material or even a new product) grow in parallel. If the demand for continued improvement is sufficiently powerful, there will be enough R&D investment to achieve a 'breakthrough' enabling some radically new innovations capable of displacing the older techniques (Ayres 1988a). Schumpeter's evocative word for this process was 'creative destruction' (Schumpeter 1934).

Spillovers from radical innovations since the industrial revolution, especially in the field of energy conversion technology, have probably been the most potent driver of past economic growth. However, in contrast to some evolutionary models, we insist that breakthroughs and radical innovations do not occur at random, and do not necessarily affect productivity in other sectors or stimulate the creation of new products and industries. Finally, we note that there is a natural order of major discoveries in the material domain, depending on the physical properties of materials and the physical capabilities of tools. For this reason, technological progress is extremely uneven and its effects are inhomogeneous.

Nelson and Winter are not the only economists who have developed evolutionary models with self-organizing features. Since the early 1980s there has been an explosion of interest in evolutionary models, mainly focusing on non-linear dynamics and innovation.11 It must be said, however, that most of these contributions are purely theoretical. Empirical studies in this area are scarce.

The disequilibrium evolutionary resource-conversion perspective elaborated in this book depends less upon theory than on empirical data. We cite relevant theory only where and when necessary. Our work implies that long-term growth, and progress towards sustainability, will require more than the gradual efficiency gains resulting from economies of scale and social learning. Radical Schumpeterian innovations (resulting in new products and services and structural change) are also necessary, and - as it happens - not as easy to explain as Schumpeter originally suggested (1934, 1912). We touch on this point later in this chapter.

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