Routines which modify decisions in class (1) over time.

T h e first c la ss o f ro u tin e s are th e day to d ay “ o p eratin g ch aracteristics” o f th e firm . T h e sec o n d g ro u p p r o v id e s the stochastic ele m e n ts in the m odel, sin ce in v e s tm e n t is lin k ed to p ro fita b ility . P ro fitab le firm s w ill there fo re expan d, a t th e e x p e n s e o f u np rofitab le firm s. T h e th ird ca teg ory o f ro u tin e N e lso n an d W in ter c a ll “ s e a rc h e s ” . T h ese are c h a ra c te ris e d b y a “ ro u tin e-guid e d , routin e-chan gin g p ro c e s s ” . T h e ch a n g in g o f ro u tin e s e n a b le s firm s to ‘m u ta te ’, to use a bio log ical a n a lo g y . T h e au th o rs believ e th a t th is m o d el o f d ec ision -m aking is sufficient to e x p la in the d y n am ic ev o lu tio n a ry o u tc o m e o f a c o m p e titiv e m ark et. A s th ey e x p la in it, the c u rre n t o p eratin g c h a ra c te ris tic s determ ine fa cto r in p u ts and outputs. T h ese d e c isio n s d ete rm in e fa c to r a n d p r o d u c t p rice s on the (giv en ) m arket, w hich th erefore d e te rm in e p ro fitability , w h ic h in tu r n a ffe c t in v e s tm e n t A n e w s e t o f input an d o u tp u t le v e ls are th ere b y g e n e ra te d fr o m th e n ew level o f c a p ita l sto ck . A ll the w hile th e o p e ra tin g c h a rac teristics a r e b e in g s lo w ly changed b y th e firm s’ search ro u tin es [p p .1 4 -1 9 ].

T h e o rg a n is a tio n a l ro u tin e s are sim ilar to in d iv id u a l skills, ac co rd in g to N e ls o n a n d W inter. T h e y b e lie v e th a t m u ch o f th is sk ill is perso nal an d t a c i t a n d is n o t transfera b le, a n d c a n n o t b e w idesp read [p .7 6 ff). I t is f o r this reason th a t firm s ’ re ac­ tio n s to a d y n a m ic a lly c h a n g in g en v iro nm en t d iffer.

Critique

While much o f N elson and Winter’s book is concerned with specific descriptions o f the development o f these routines, these need not detain us here. Our criticism o f the evolutionary methodology will be at a more fundamental level. We can see how even Nelson and Winter — who are closest to the orthodox views o f rationality — are relying upon p o st hoc explanation. There is no attempt* at explanation o f which rou­ tines are likely to be profitable, but merely something o f an assumption that these exist. Similarly, in gam e theory there is no mention o f just how organic institutions emerge through supergames, but only that such a process would be socially

o p tim a l.14 E xactly what a b ilitie s are to be f o u n d in the lead ers o f h iera rc h ie s is not d is c u s s e d by W illiam so n. T h e n ew in s titu tio n a lis t attem pt a t post hoc exp lanatio n is a c tu a lly a post hoc ergo propter hoc fa lla c y , a n d b y offerin g such a fallacy as a cau se for ev e n ts, they ten d to o ffe r undue ju s tif ic a tio n fo r the status quo.

In fact, the n ew in stitutio nal e c o n o m is ts use a very p artic u la r form o f causal e x p la n a tio n . Th ey e x p la in n o t so m uch th e h is to r ic a l em e rg en c e o f in stitution s as the

'raison d'etre' fo r th ese in stitutions to e x is t [L a n g lo is 1986 p.2 1 ]. T h e y o ffe r a fu n c­ tional exp lan atio n o f in stitutional d e v e lo p m e n t — W illiam son , in fact, often ‘re­ in te rp r e ts ’ histo rical in stitu tio n s in logical t e r m s [D ugger 1983 p .10 2]. B u t functional e x p la n a tio n s have to be co u c h ed in term s o f s o cial benefit. T h e p ro b lem faced here — a s w ith the p o sitiv ism o f the o rth o d o x e c o n o m is ts — is to show ho w this social o p tim u m can be d eriv ed th rough m e th o d o lo g ic a l individualism . E ith e r the historical in s titu tio n s m u st b e sh o w n to be irre lev an t f o r p re sen t cho ices, o r th e fu nctio nal insti­ tu tio n s m u st be traced fro m som e sort o f p re -in s titu tio n a l ‘state o f n a tu re ' [R utherford 1989 p .3 0 2 ], a s S ch o tter sets o u t to d o .15

U nfo rtu n ately th e p re su m e d ‘state o f n a t u r e ’ is no m o re natu ral th an th e post- in stitu tio n al w orld, w h ich w e can see v e r y cle a rly w hen e x a m in in g gam e theory. R e c a ll th at S ch o tter’s n eo -A u strian fo r m u la tio n w as that th e rules th em selv es w ere not re g a rd e d a s in stitu tio nal; the in s titu tio n s em erg ed as th e so lu tio n to the gam e p ro b le m . N onetheless, g am e theory d o es t a k e so m e rules o r in stitu tio ns a s given. The n o tio n o f the su perg am e, fo r ex am ple, i t s e l f p resum es th at the g am e is capable o f re p e titio n [op.cit p .3 0 5 ]. T he sup erg am e c o n c e p t is inoperab le i f a non-optim al re s p o n s e is ca tastro p h ic [p.308]. F u rth e rm o re the en tire structu re is not so m uch a b s tra c t as artificial:

Gam e theorists sometimes become so enamoured o f th e mechanics o f the theory and the single-minded determ ination of their players to w in that they lose sig h t o f w hat any game-theoretic problem presup­ poses; the arena in which the players are to com pete o r cooperate ... although one can investigate with

14 See below on ‘learning’.

game theory the dilem m as possibly faced by tw o prisoners, one should not expect from such a theory an explanation for why escape or insurrection is not p a n o f the strategic space ... the arena o f any interactive game is partly determined by resources and technologies, but the social norms that pervade the atmosphere are an e qually important characteristic o f that arena | Field 1984 p.703).

F u rtherm o re, th e s u p erg am e m ust p o sit a co n stan c y a m o n g th e ec o n o m ic a c to rs [M iro w sk i 1986 p .2 5 2 ]. Indeed, the 'r u l e s ’ o f the g a m e , a s w e n oted, p o sit very strin g en t re stric tio n s o n the inform ation the p lay e rs are p re s u m e d to o btain.

Players are assumed to 'le a rn ' from past players o f the game but this learning is constrained to a very small sub-set o f experience: they are allowed neither threat strategies n o r to be different from other players and cannot rem em ber past the last immediate play o f the gam e (op.cit. p .2 5 1 ]

In fact, n o real 'le a r n in g ' is e v e r d one. " S c h o tte r, like m a n y o th e r latter-day A u s tri­ a n s, shies aw ay fro m ex p licitly d iscu ssin g learning, a s o p p o s e d to the tran sm issio n o f a d iscre te and see m in g ly p re p ackaged com m o d ity c a lle d knowledge, because the fo rm e r su g g ests a s o cial p rocess, w h ereas th e la tte r c o n ju re s u p th e g ro c e r’s d airy c a s e ” [M irow ski 1 9 8 6 p.2 52. cf. F ield 1984] G a m e th e o ry a b s tra c ts from the en tire s o cial an d cu ltu ral ele m e n ts o f in d iv iduals, c o m p lete w ith c u sto m s, languag e an d

rules [F ield 1984 p .6 8 8 an d passim ]. In fact, if gam e th e o ry is to be co nsisten t, these ele m e n ts should a ls o b e ex p la in e d in term s o f efficien c y . T h e s e ‘b a s ic ’ ru les m u st be en d o g e n ise d in to th e m odel. T h is it d o es n o t d o [F ield 1 9 8 4 pp.6 9 5 -9 6 ]. In fact, the in d iv idu als in th e g a m e th eory m o d els are j u s t a s a b s tra c t as the o rthod o x homo oeconomicus.

In effect. Schotter delines the problem ’ to be so straight forward and unambiguous that only one choice can be made: it is not so m uch learning as it is m echanism ... It is difficult to maintain that this model transcends the passive cooperation o f the zombies found in conventional neo-classical general equilibrium |M irow ski 1986 p.232].

S o in fact th e e c o n o m ic actors n eve r ch a n g e th ro u g h o u t th e sup erg am e. In ad d itio n the ob jec tiv e s an d th e en v iro n m e n t are a ls o g iv en in the ru le s , an d h eld to be c o n ­ stan t. A ctu ally n o e c o n o m ic gam e is p lay e d a t all an d n o p ro b lem solved: the rules.

166

a s fo r the o rth o d o x th eo ry , d ete rm in e th e o u tcom e in adv an ce.

G iven the fixed actors with their fixed o bjectives and fixed rules, the analyst (an d n o t t h e a c to r s) pre­ reconciles the various sets, insists the pre-reconciled outcom e is the one that w ill actually obtain and calls this a solution ... The process in w hich the actors take part is irrelevant, because the deck has been stacked in a teleological manner, [o p .cit p.253 original emphasis]

A n d w h a t is m o re , sin ce th e m o d els a s s u m e th is co n s ta n c y , th e y c a n n o t co n s id e r h is­ to rica l ch an ge [M iro w sk i 1986 p .2 5 5 ], w hich is p re cisely to s a y th a t th e y a re unable to s h o w the e v o lu tio n a ry ad a ptation t o a chang ing e n v iro n m e n t w h ic h S c h o tte r began b y cla im in g is a n ecessary re q u isite o f ec o n o m ic s. In fa ct, th e n e w in stitu tio n alist sch o o l relies u p o n esse n tia lly th e s a m e fu n d a m e n tals a s the o rth o d o x y it h o p ed to su p p lem en t [H o d g so n 1989 p .24 9]. I t still holds th e sam e h e d o n is tic a p p ro a c h , using a self-seek in g a n d ab stra ct in d iv id u a l, and m ay b e n o m o re d y n a m ic th a n general eq u ilib riu m a n a ly sis . W e have ju s t s e e n how g a m e th eo ry , lik e g e n e ra l eq u ilib riu m , m o d els an u n ch a n g in g w o rld . S im ila rly , W illia m s o n a c tu a lly h a s a n otio n o f ra tio n a lity n o t to o d issim ilar fro m t h a t o f th e o rth o d o x y , p a rtic u la rly b ec au se he m isu n d e rstan d s S im o n ’s co n cept o f t h e b o u nd ed ra tio n a lity [H o d g so n 1 9 8 9 p.254]. S im o n ’s p o in t w a s th a t because h u m a n com p u tatio n al ab ility is lim ite d , a g e n ts cannot m ax im ise , a n d th ere fo re strive fo r a c c e p ta b le m in im a . T h e p ro b le m f o r S im o n is not sca rcity o f in fo rm a tio n b u t o f the c o m p le x ity a n d q u a n tity o f in fo rm a tio n [H odgson 19 88 p .8 1 ]. T h e p ro b lem o f in fo rm a tio n is not th e re fo re sim ply th a t o f its c o s t

... ‘satisficing' does n o t amount to cost-m inim ising behaviour. C learty, the latter i s ju s t th e dual o f the standard assumptions o f maximisation; if ‘satisficing’ w as essentially a m atter o f m inim ising costs th a t it w ould amount to m aximising behaviour o f th e orthodox type.