In this chapter we focus on those approaches to stability analysis that emphasize structural change without considering the role of equilibrium as an organizing concept.
An important part of this group is made up of approaches based on the evolutionary paradigm. In particular, we shall consider the so-called neo- Schumpeterian views that underlie several approaches to stability issues, including the ‘reasoned history approach’
and the related ‘Techno-Economic Paradigm’ (TEP) approach.
A theory of reasoned history
One way to deal with stability is to focus on the structural change occurring in actual historical processes. One of the theories attempting to do so is the so-called ‘reasoned history approach’ which figures strongly in the contributions of several neo- Schumpeterian authors, such as Freeman, Perez, Dosi, Soete, Louça and Verspagen. This approach has several distinct features. First of all, it rests on the organic and evolutionary metaphor, according to which
in real economic series non stationarity and time dependence do matter, economic variable do evolve (and)…do not stabilize around some imaginary permanent level or constant rate of growth…evolution is nothing more than the creation of variety and novelty and a fortiori no fixed attractor or strictly unchangeable mechanism can represent the process. Irregular waves do exist, and they cannot be studied under the diktat of the ceteris paribus conditions: time is turbulence.
(Freeman and Louça 2001:118) Second, it suggests that the concept of ‘coordination’ is more suitable for the analysis of evolution than that of ‘equilibrium’:
Coordination, as a social process subjected to complex interactions—and not equilibrium, which is a state—explains the existence of attractors in growth patterns, the weight of social institutions, and the relation between the economic system and other parts of society.
(ibid.: 120) In particular, ‘social and economic coordination…the economic behaviour dubbed as
‘equilibrium’, i.e. the dynamic local stability of the system…’ (ibid.: 127) is granted by key social, institutional and political factors. As noted by Freeman and Louça, the fact that coordination exists ‘does not imply that there is harmony or equilibrium, either in the ideological sense of a general feature of capitalist economies or in the precise sense of a permanent dynamic property prevailing in the markets’ (ibid.: 122).
Third, the reasoned history approach involves an interdisciplinary vision emphasizing
‘the complexity of the interactions between the various subsystems of society’ (ibid.:
135). Strictly speaking, this vision is not altogether new. For example, it underlies the theories of Marx and of other social thinkers (e.g. van Gelderen) who study ‘capitalism as a whole’. Within the theory of fluctuations, it was postulated by Kondratieff (e.g.
Freeman and Louça 2001:79). Indeed a large part of neo-Schumpeterian literature seeks to provide a modern reformulation of Kondratieff’s long-cycle or wave hypothesis. But a similar interdisciplinary approach has also been suggested more recently by Kuznets:
If we are to deal adequately with processes of economic growth, processes of long term change in which the very technological, demographic, and social frameworks are also changing—and in ways that decidedly affect the operation of forces proper—it is inevitable that we venture into fields beyond… economics proper…it is imperative that we become familiar with findings in those related social disciplines that can help us understand population growth patterns, the nature and forces in technological changes, the factors that determine the characteristic and trends in political institutions.
(Kuznets 1955:28, quoted in Freeman and Louça 2001:118) Unlike previous formulations, however, the reasoned history approach is more sensitive to the methodological and epistemological implications of the interdisciplinary approach.
As Freeman and Louça make clear, traditional analytic methods are unsuitable for the study of the relevant interactions. Hence, their approach ‘denies the extreme assumption about self-contained models and methods, and looks for integrated theories that will be incomplete and not definitive, explanatory and not predictive, historical rather than simply economicist, and evolutionary rather than mechanistic’ (Freeman and Louça 2001:117).
Like Kondratieff, these authors emphasize a holistic and organic view, according to which all cycles are part of the same process and there is no strict separability of irreversible and reversible movements. Moreover, they endorse arguments against detrending, namely that the trend (the growth of the economy) and the cycles (the acceleration and deceleration of growth) are quite simply one and the same phenomenon (ibid.: 83). On these grounds, they are led to emphasize the effects of cycles on trend.
Thus, for example, structural factors that are expected to influence the longer-term evolution of productive forces may be defined as merely endogenous consequences of the cycle itself.
However, Freeman and Louça depart from Kondratieff on several important points. In particular, they are sceptical as to whether it is possible to determine general internal laws as advocated by Kondratieff, according to whom, for example, ‘the explanation of the long cycles and in particular those of prices must be looked for in the character of the mechanism and the internal laws of the general process of socio-economic development’
(quoted in Freeman and Louça 2001:109). Indeed Freeman and Louça criticize the theoretical requirement of universality in Kondratieff’s tradition, stating that it
amounts to (1) that only ‘endogenous models’ are valid and (2) that all relevant factors of all kinds must therefore be modelled as endogenous variables. As a consequence, the scope of the model is defined in such a way that it must include all social, economic, political and institutional realities.
(Freeman and Louça 2001:109) In their view, this ideal of an all-comprehensive endogenous model capable of generating the cycles cannot be achieved, and ‘amounts to the search for the Holy Grail’ (ibid.: 111).
Thus, the search for a single best research strategy to account for complex dynamics continues. On the one hand are the standard models, which are generally limited to a small number of variables and are ‘by this sole fact forced to ignore most of the relevant factors which are finally condensed under the form of some exogenous residual random term’ (ibid.: 109). On the other are broader theoretical frameworks which define capitalism as a concrete historical process. These do not admit a clear-cut distinction between exogenous and endogenous variables, embracing the view that ‘the boundaries of the economic sphere are not objectively defined and it is not possible to endogenise artificially such factors as state intervention, social institutions or cultural features’ (ibid.:
110). While it is possible to capture the contradictions of capitalism by ‘the concrete economic analysis of production and distribution…others remain outside the scope of each model’ (ibid.: 110). In particular, the reasoned history approach makes a distinction between five subsystems of history which are relevant to the study of economic growth:
the history of science and of technology, economic history, political history and cultural history. The point of this distinction is that ‘the economic subsystem is partially and conceptually autonomous from the other social and political spheres, where independent processes may develop.’ The theory must therefore address both ‘their relative autonomy and their interconnections’ (ibid.: 110).
Techno-Economic Paradigms
In principle, the ‘reasoned history approach’ is a rather general research programme. It seeks to provide the grounds for a new synthesis between the various contributions on the historical evolution of economies, such as those by the neo-Schumpeterians, Boyer and the Regulation school, Gordon and Maddison (ibid.: 95). In order to provide a modern reformulation of the long-cycle or wave hypothesis, the neo-Schumpeterian authors (particularly Freeman and Perez) developed a more specific type of ‘reasoned history’
referred to as the TEP approach, in which the NE is regarded as a new TEP (for a comprehensive assessment see Preston 2001:38–41; for analysis of the NE along these lines, see also Verspagen 2000, 2002).
In line with Schumpeter, they insist that an understanding of booms and depression requires more than focusing on short inventory or investment cycles, as standard macroeconomists do. One should focus instead on ‘long-wave’ cycles (typically lasting approximately fifty years and divided into sub-periods of ‘boom and bust’), concerning phenomena, such as the rise and decline of entire industries, major infrastructural investment, changes in the international location of industry and technological leadership
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and other related structural changes, such as those in the skills and composition of the labour force.
Critique of aggregates
One of the key features of this approach is the implication that an understanding of stability in the long-term context calls for more than a focus on a few aggregates.
Moreover, in contrast with the early literature on long cycles, the neo-Schumpeterian authors are sceptical about the existence of quantitative macroeconomic regularities.
Perez (2002), for example, argues that such regularities fail to emerge, as a result of the difficulties incurred in constructing constant money series or indexes and in comparing money values at different points in time. Furthermore, long-run aggregate series are meaningless, mostly because technological change brings about quantum jumps in productivity growth and radical changes in the relative price structure. On the other hand, the sort of disaggregated statistics that are related to the inner workings of the economy behind aggregates and that would be appropriate for testing the long-wave hypothesis are rarely available, and Perez is aware of this. She therefore shifts the focus of attention from measurement to qualitative understanding of the complex tensions and forces triggered by technological revolutions. This stance does not imply, however, that the search for simplification and regularities concerning business cycles is an impossible task. Theorists can still attempt to single out regularities of a qualitative kind.
Analysis of interactions and complementarities
One element of regularity is the paradigm itself. The neo-Schumpeterian authors divide the history of capitalism into five paradigms corresponding to major technical and organizational innovations, such as water-powered mechanization, steam-powered mechanization, electrification, motorization and computerization of the entire economy.
Another regularity is that the TEP concept places the emphasis on the set of complementary social, institutional and economic factors associated to technological revolutions in a given historically contingent context. Indeed, each TEP is characterized by a collection of economic factors, such as a certain type of raw material, labour force structure, consumption pattern, business organization, industrial and financial structure (see e.g. Freeman and Perez 1988:59). Thus, for example, ICT constitutes a new TEP, for it is a general-purpose technology giving rise to a new range of products, services and industries and affecting almost every other branch of the economy by changing the input cost structure and conditions of production and distribution throughout the system.
Moreover, according to the TEP concept, an understanding of major transformations such as the NE requires more than a focus on the economy. ‘Long-wave’ phenomena should be understood as society-wide processes. In order to explain the long-run sequence of ‘good and bad times’, and chaos and the return to prosperity, one must consider wider-ranging social and institutional factors and not just the working of markets. This means that the new technologies in each TEP are tightly associated to a set of complementary institutions. Thus, for example, while regarded as crucial for the
previous paradigm based on mass production and Fordism, consumer credit, oligopoly, trade unions, the welfare state and Keynesian policies are no longer considered viable or of such great significance in the current paradigm based on ICT (see e.g. Freeman and Perez 1988:56–7).
It is clear that by stressing this element, the TEP approach overcomes the tendency towards empty generalization typical of standard economic theory and represents a clear advance over Schumpeter and the earlier literature on long cycles. While the latter attempted to confine the analysis of long waves within narrowly defined economic systems and to search for endogenous causes of business cycles, these neo- Schumpeterian authors instead deem a purely economic explanation legitimate only for the shorter inventory or investment cycles. In particular, while many neo-Schumpeterians and the previous literature on long waves or Kondratieff cycles narrowly focused on technological change alone, the TEP concept implies a broader perspective based on the consideration of two types of interaction.
First, it justifies a systemic view of technological change, according to which, on the one hand, the innovation process is at least partly explained by context and, on the other, technological change shapes society. As for the first influence, the TEP has strong ties to the ‘National System of Innovation’ (see e.g. Freeman 1988; Nelson 1993), which stresses the role of institutions, such as universities and public R&D, among the determinants of innovations. Therefore, these appear not as sudden breaks in the routine, but as phenomena occurring under special conditions that must be created and continuously reproduced. As for the second influence, Perez stresses that institutional change is necessary for the accommodation of technological revolutions: the establishment of a network of services (infrastructure), cultural adaptation, institutional enablers involving rules and regulations, education and financial innovation (e.g.
consumer credit was important for the development of mass production) (2002:41–2).
Second, the TEP stresses the interaction between financial capital and the upsurge of new technologies. This point has been of particular interest to Perez, who notes for example: ‘Though technology takes pride of place in the explanation, it is as much determined by social and institutional factors and by the economy and finance as it, in turn, influences them’ (2002:160). The crucial role of finance appears quite clearly in the third element of qualitative regularity in long-wave phenomena captured by the TEP. As Perez points out, this consists in the sequence of events (hidden under many layers of unique factors, events and circumstances) that characterizes all industrial revolutions and recurs about every half century: irruption of the new technology, the frenzy phase based on the predominance of finance and the formation of structural tensions such as the stock market bubble, the mismatch between aggregate demand and supply and political unrest, the turning point usually in the recession that follows the collapse of the financial bubble and the synergy phase when all conditions are favourable to the full flourishing of the new paradigm (see Perez 2002).
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Instability
In general terms, the ‘reasoned history approach’ provides an insightful analysis of instability. Following in the tradition of Marx and other social thinkers like van Gelderen subscribing to the organic and evolutionary metaphor, it regards the coordination process of ‘capitalism as a whole’ as the outcome of tendencies and counter tendencies, that is, of conflict. As Freeman and Louça mention, the evolutionary metaphor requires the incorporation of the concept of ‘morphogenesis’, or the study of structural crises in economic history:
Morphogenesis implies two essential features: changes and control, or rupture and continuity. Both coexist and are interdependent and inseparable: the one-sidedness of the analysis of a single term of the social process is indeed responsible for most of the relativist trends in economics, the extreme examples of theories of continuity being those defined by an assumption of perfect rationality and the general equilibrium paradigm.
(Freeman and Louça 2001:119) At the same time, the ‘reasoned history approach’ also tries to account for the fact that the instability in real-world economies is not extreme. The concept of coordination, for example, explains why ‘disequilibrium processes exist but are constrained…why structural instability persists but does not drive the system towards explosion’ (ibid.:
118).
In general terms, according to this approach, instability is due to processes of change, and crises are conceptualized in terms of a gap between the potential for growth and realized growth (ibid.: 127). This gap may arise essentially because the five social subsystems generate a large number of irregular fluctuations, that is, cyclical and wave- like movements with different periodicities. These fluctuations can be caused either ‘by specific subsystem cycles (political business cycles, technological trajectories, cultural movements, life-cycle of products and industries) or by the lags and feedback in the inter- subsystem connections’ (ibid.: 121), that is to say, because of the lack of synchronicity and harmony between the key social, institutional and political factors.
This general view is elaborated upon in the TEP approach, which sees instability arising because ‘there is a basic mismatch between the technoeconomic possibilities and the existing social structures’ (Louça 2003:770). According to these neo-Schumpeterian authors, it is the mismatch between technological innovation and the (old, slowly adjusting) institutional infrastructure which is responsible for the tensions leading to economic cycles (see also Perez 2002:25). More specifically, what underlies the deeper crises and long-term cyclical behaviour is the need for reforms and the inevitable social resistance to them. Indeed there is ‘a sort of inertia and time lag involved in the changing embedded socio-cultural practices and norms across a wide range of institutions’ (Preston 2001:40). From this standpoint, the recent NE with the advent of ICT does not represent a
unique event in the history of capitalism; a similar pattern of events and mismatch have been generated in the past by other technological innovations.
In addition to these considerations, the TEP has also made a significant contribution to the understanding of structural imbalances within the economic sphere that render the economy unsustainable and eventually lead to recession. Among these one can distinguish between those occurring at the macroeconomic level—such as the mismatch between the profile of demand and that of potential supply, the rift between paper values and real values generating a gigantic process of income redistribution and the tension between the socially excluded and those reaping the benefits of the bubble (see e.g. Perez 2002:43)—and those due to market forms. As for the latter, one can note that in this neo- Schumpeterian literature,
the crisis on the fourth long wave is often addressed in terms of the dampening effect of oligopolistic competition in the face of maturing technologies and consequent upward pressure in wages and prices and the inefficiencies of large corporations which tended to exhaust the scope for productivity gains.
(Preston 2001:40)
Limitations: the dangers of technological determinism
The account of the evolution of actual historical processes based on the TEP concept, despite its obvious utility, does not seem to be sufficient alone to single out new indicators of instability or to provide the basis for policy recommendations. A few major limitations can be noted here. The first is that the TEP concept fails to overcome all the dangers of technological determinism. As noted, for example, by Boyer (1988:67), this turns out to be a salient feature in the present revival of neo-Schumpeterian ideas (see also Elam 1994; for an account of the debate on this issue, see Preston 2001:40). Despite being an improvement over the old Kondratieff cycle approach and being much more flexible than other approaches,1 the TEP approach still places technological change at the centre of the NE. In particular, although it also emphasizes other economic and social factors, such as institutions, finance, globalization and policy, it still regards them as being causally related to technology. This is made clear by Perez in the description of her informal model based on the sequence of events characterizing the evolution of various paradigms, from their rise to their decay. She argues that this sequence ‘has been stripped of all those events not causally related to the absorption of technologies, which leads inevitably to streamlined simplifications that hardly ever occur as such’ (Perez 2002:49).
In dealing with the financial system, Perez places the emphasis on the financial instruments that enable innovation, and on the financial bubble which derives from it.
A few problems can be noted with this approach. In the first place, it fails to consider that the key factors mentioned in the sequence are also, at least partially, autonomous.
For example, major financial crises and economic recessions may develop because of the influence of other factors quite unrelated to innovation. Similar remarks apply to other important relations, such as that between technology and globalization. Second, while acknowledging in principle the relative autonomy of the socio-institutional sphere with
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