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evolutionary economics, organizational routines, and equilibrium

Nelson and Winter’s classic An Evolutionary Theory of Economic Change is a disequilibrium theory of economic production — for an excellent overview, see this (pdf) Nelson and Winter (2002) review piece from the Journal of Economic Perspectives. The evolutionary perspective in economics indeed is a reaction to neoclassical economic models which operate on the basis of, and with a focus on, equilibrium. Evolutionary economics has become a powerful, in part interdisciplinary, project which offers interesting insights about the dynamics of markets and industry structure.

If there is one place where evolutionary economics has been the most influential (as the citation patterns to the classic 1982 book reveal), it’s in the fields of organization theory and strategic management — literatures which relate to the theory of the firm, efforts to understand organizational advantage, organizational heterogeneity and organizational change. However, I’ve wondered about the applicability of evolutionary economics vis-a-vis organizations, particularly intra-organizational dynamics. That is, the central construct that has emerged from evolutionary economics has been the concept of routines, but the routines concept essentially presumes an equilibrium of sorts (routines are defined, inter alia, as ordered and stable patterns — see Markus Becker’s excellent ICC review of organizational routines).  Routines presume an equilibrium rather than problematicizing and explaining how that equilibrium might emerge in the first place.  Thus, evolutionary theory in economics is focused on disequilibria at the population and industry levels but then presumes certain equilibria (i.e. routines) vis-a-vis organizations themselves. Should routines, then, be the central construct of organization theory and/or strategy?  (Ok, ok — we’re painting with a broad brush here.)  If we focus on routines, what falls out of our purview?    If organizations are presumed to have extant ways of doing things, patterned behaviors, etc — undoubtedly so — then its hard to explain how the equilibrium or order emerges in the first place. James Coleman’s “meta-theory” chapter (from Foundations of Social Theory) brilliantly highlights this point: if we start with the premise of various collective constructs — say: norms, routines, culture, whatever — then its difficult to explain their origin, the emergence of order, nor meaningfully address organizational change.

I suppose we might also take a more pragmatic approach.  Routines are central in some situations and not so central in others: sometimes an organization indeed is in equilibrium and other times not. I’m not completely sure how to reconcile the equilibrium and disequilibrium issue — I suppose for purposes of analysis one has to anchor on some kind of equilibrium (or there’s an infinite regress problem), at some level.  I just think that for organizational analysis the routines construct makes too much of stability and order without explaining it.  Depending on our level of focus — individual, social, organizational, etc —  some kind of initial condition and equilibrium necessarily lurks in the model (generally at the level just below the one being studied) or else the effort becomes intractable.  I don’t think that “multi-level” models will necessarily resolves these problems, theories at different levels are often in direct conflict with each other.  If nothing else, I think its healthy to think through one’s assumptions related to what one takes as a given and not when theorizing and studying organizations. Obvious, perhaps.

Written by teppo

June 25, 2009 at 8:57 pm

Posted in economics, strategy

15 Responses

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  1. Seriously y’all. I have to read for my comps, all these great posts are killing my study time.

    First revolutions, now orgtheory/evolutionary econ! Maybe you can do an overview of how VOC fits into and doesn’t fit into Sociological New Institutionalism?

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    R. Pointer

    June 25, 2009 at 10:20 pm

  2. Maybe you can do an overview of how VOC fits into and doesn’t fit into Sociological New Institutionalism?

    I’m on it.

    Not really (tho I do think that is a good comps question).

    But now that Ed McMahon, Farrah Fawcett and Michael Jackson have all died within 36 hours, I am going to go into mourning for the 1980s for a bit before posting anything else (or before commenting more seriously on this very interesting post).

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    Sean Safford

    June 25, 2009 at 10:30 pm

  3. Timely post, Teppo. The workshop on routines and capabilities at The University of Lund just broke up (save a few folks still at the post-prandial drink-off). The routines construct took a beating today. Markus Becker fought valiantly against the combined onslaught of Nicolai Foss, who argued that the overuse of the term had rendered it meaningless; and J C Spender, who went further than that! My take is that Nelson and Winter chose routines as a convenient analogue to genes in attempting to adopt the evolutionary metaphor from biology. If so, routines have some tenuous meaning at the population level of firms, but not at the firm-level. In the population case, routines are about common practices in the industry that, perhaps, define the industry and represent a limiting, inertial resistance to innovation. As applied to the firm, they represent codes for process replication over time. I cannot see how the construct is useful at either level of aggregation as a measurable construct for superior performance/ competitive advantage. Markus disagrees, but we parted on good terms after a stupendous Swedish dinner.

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    REW

    June 25, 2009 at 10:35 pm

  4. I spent quite a bit of time with Nelson and Winter. There are great nuggets to be found in this treatise, but on the whole it came off as rather pompous and repetitive. As far as I’m concerned, the authors hit an awkdward level of generality between case-based analysis and mathematical overgeneralization. I had difficulty drawing any instrumental hypothesis from their work beyond the generalized notion of how the variation and competitive pressrue on routines matter to how commerical culture evolves. This is not a trivial contribution. But neither is it surprising that the economics field did not run out to embrace it as an alterantive to neoclassical models.

    Evolutionary economics needs to produce neoclassical theory in some limit. Maybe they touched on this in their treatise and I missed it, but the relevant limits are ergodicity (i.e., no variation from one time-window to the next) and uniformity (i.e., no variation from one region to the next).

    Had the treatise been more concise, precise, or both, I think there might have been a quicker movement away from neoclassical theory. On the other hand, the data simply wasn’t there to demonstrate erogidicity and non-uniformity until more recently.

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    Michael F. Martin

    June 25, 2009 at 10:41 pm

  5. More seriously, I have a hard time distinguishing routines from culture. And when it comes to culture and the origin of norms, I have always turned first to Ed Schein’s classic “The Role of the Founder in Organizational Culture“. He argues routines emerge out of the settlement of early battles fought over unforeseen crises. These battles, in turn, are influenced by founders’ prior experiences. It seems reasonable to me — particularly in the context of organizations, rather than of broader social processes — since organizations more clearly have a “beginning”. They move from a state of utter disequilibrium to equilibrium as more routines build up over time.

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    Sean Safford

    June 25, 2009 at 10:48 pm

  6. R.Pointer: If routines and equilibrium come up in your comps, then you’ll just be that much more prepared (or, more confused).

    REW: Sounds like some of the same folks, and themes, emerged there in Sweden as at the Erasmus conference a few weeks ago.

    Michael: Right, its interesting that evolutionary theory is a reaction to neoclassical economics, but most ‘disciples’ are in a different discipline (orgs/strategy) and focus on a different level of analysis (which creates the equilibrium/disequilibrium tension I discuss above). The evolutionary VSR framework is interesting descriptively, but there’s opportunity to theoretically clean up some of the constructs and frankly the packing in of time (in the extreme: evolutionary psych does the same thing — rather deterministic explanation going back hundreds of years) does not lend itself to meaningfully explicating matters related to interests, preferences, intra-org and micro/meso dynamics, conflict, heterogeneity, purpose, etc — though the approach at a high level gives us some important intuition about macro evolution.

    Sean: Yes, I agree that the most fruitful place to start is with some sort of “initial condition” —- Sid two weeks ago referenced this by noting the need to “punctuate” analysis. If the time horizons are too long then theoretical explanation becomes an infinite regress and not very potent, founding is a good place to look (with props to Huber for making this point in 1991, others before of course as well, as well as recent work by Baron et al, Beckman, Johnson in AJS etc). In terms of your second point, and related to what REW mentions above, yes, there are lots of overlaps between routines and numerous constructs: culture, norms, truces, etc, etc. In fact, the Becker article referenced above notes all the definitions of routines that have been used — conceptually and semantically things are sort of a mess on that front. Yes, the routines concept is far too all-encompassing. But, the bigger problem, IMHO, is the taken-for-grantedness and associated fuzziness (sorry Fabio!!) of the collective construct, and the need for some more precision and careful, bottom-up analytical development.

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    tf

    June 26, 2009 at 1:05 am

  7. Sean, do you find Schein’s founder to be more important that the set of forces for imprinting described by Stinchcombe (1965): “”Social structures and organizations”, in James G. March (ed.), Handbook of Organizations?

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    REW

    June 26, 2009 at 1:08 am

  8. REW: Howard Aldrich’s Organizations Evolving (in particular, see newest edition with Martin Ruef) touches on that issue, though I’m not sure that there’s a take on “effect size” between micro versus macro factors (though the VSR framework certainly privileges the latter). In particular, see their ‘age, period, cohort’ discussion (Howard has emphasized that in the last couple presentations I’ve seen).

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    tf

    June 26, 2009 at 1:27 am

  9. […] et équilibre évolutionnaire Très intéressant billet de Teppo Felin sur Orgtheory.net qui pose une question pertinente au sujet du concept de routine en […]

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  10. I don’t see the problem with the dis/equilibrium: Routines don’t “presume” an equilibrium, they describe it. They describe that part of organizational activity that is (mostly) stable, and this is regardless of whether we’re looking intra-organizational or at the population level of firms.
    Regarding the emergence of routines, I would agree that there is little research about it so far, but that doesn’t make the routines concept useless. One approach that maybe could be useful here is Karl Weick’s theory of organizing.
    I also want to point at Martha Feldman and Brian Pentland’s work, who address the issue of how routines can change (e.g., their 2003 ASQ paper), and have worked out quite an amount of details of their idea, effectively resolving the determinism problem.
    Furthermore I think they offer a pretty workable definition: They see routines as “repetitive, recognizable patterns of interdependent actions, carried out by multiple actors.”

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    Johann Weichbrodt

    June 26, 2009 at 8:47 am

  11. Great post !

    As I argue on my blog (http://rationalitelimitee.wordpress.com/2009/06/26/routines-et-equilibre-evolutionnaire/), the distinction between replicators and interactors could be of some help here (see the Defense of Generalized Darwinism paper by Aldrich and al. in an 2008 issue of the Journal of Evolutionary Economics).

    There is two or things I wish to suggest for. First, not knowing how routines emerge and evolve don’t prohib any evolutionary analysis. In 1859, Darwin didn’t know anything about genetics and how genes replicate themselves but it didn’t prevent him to develop his evolutionary “theory”. Second, if routines are replicators, we have some ideas about their generic caracteristics (information transfer, causality and similarity in the replication) which make them similar to other replicators (norms, habits). And, this is my last point, because we have some knowledge about how norms and habits emerge and develop, we could in the future attain the same knowledge about routines.

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    C.H.

    June 26, 2009 at 11:26 am

  12. The simplest thing that occurs to me is that at first, the nucleus of a routine emerges from random chance. It persists and spreads because of its perceived usefulness (the perception may even initially be rooted in superstition, i.e., happening to co-occur with some pleasant outcome purely by chance, or perhaps due to circumstances of limited applicability). Then further practices agglomerate onto it, until it accumulates the force of a tradition, no one can remember the initial reasons (if any) for it, and it carries on by sheer momentum. Can anyone give a positive reason why this scenario does *not* suffice to explain the emergence of routines? This mechanism is not particularly satisfying, but personal satisfaction is not a good reason to discount it, any more than it would be a good reason to focus only on equilibrium in economic explanations.

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    Ruchira

    June 27, 2009 at 10:23 pm

  13. Dean Simonton’s _Origins of Genius: Darwinian Perspectives on Creativity_ http://books.google.com/books?id=LcB2kOXT-68C, about creativity at the individual level, is apropos.

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    Ruchira

    June 27, 2009 at 10:36 pm

  14. C.H.: Thanks for the link.

    Ruchira: Your intuition (about emergence related to random chance) is in line with the general VSR (variation, selection, retention) framework where initially variance/heterogeneity is introduced in potential practices, decisions (or whatever — with obvious links to genetic thinking) and then some are seen as effective and selected/retained. The literature on “institutionalization” also fits, where practices (decoupled from reasoning) over time take on a life of their own (independent of their potential effectiveness, though institutions perhaps now confer legitimacy).

    In my mind the “initial conditions” of all of this have not meaningfully been worked out — part of it having to do with the taken-for-grantedness of these constructs. (Well, and the rather all-emcompassing nature of constructs as routines and institutions — these issues have of late been discussed even by proponents — e.g., see the Becker ICC piece referenced above.) So, stable collective constructs presume an equilibrium that might be fruitfully revisited (though perhaps for other purposes the equilbrium assumption works).

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    tf

    June 28, 2009 at 1:56 am


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