Lecture Notes in Economics and Mathematical Systems Managing Editors: M. Beckmann and W. Krelle 293 D. Batten J. Casti B. Johansson (Eds.) Economic Evolution and Structural Adjustment Proceedings, Berkeley, California, USA, 1985 • SpringerNer1ag Lecture Notes in Economics and Mathematical Systems Managing Editors: M. Beckmann and W. Krelle 293 D. Batten J. Casti B. Johansson (Eds.) Economic Evolution and Structural Adjustment Proceedings of Invited Sessions on Economic Evolution and Structural Change Held at the 5th International Conference on Mathematical Modelling at the University of California, Berkeley, California, USA July 29-31, 1985 Springer-Verlag Berlin Heidelberg NewYork London Paris Tokyo EditorialBoard H.Albach M.Beckmann (Managing Editor) P.Dhrymes G.Fandel G.Feichtinger J.Green W.Hildenbrand W.Krelle (Managing Editor) H.P.Kunzi K.Ritter R.Sato U.Schittko P.Schonfeld R.Selten ManagingEditors Prof. Dr. M. Beckmann Brown University Providence, RI 02912, USA Prof. Dr. W. Krelle InstitutfOr Gesellschafts- und Wirtschaftswissenschaften derUniversitiitBonn Adenauerallee 24-42, 0-5300 Bonn, FRG Editors Prof. Dr. David Batten DepartmentofEconomics, UniversityofUmea S-901 87 Umea, Sweden Prof. John L. Casti Institutefor Econometrics&Operations Research, Techn. Univ. ofVienna ArgentinierstraBe 8, A-1040Vienna, Austria Prof. Dr. BorjeJohansson CERUM (CentreforRegionalScienceResearch) and Departmentof Economics, UniversityofUmea S-90187 Umea, Sweden ISBN 3-540-18183-0Springer-Verlag Berlin Heidelberg NewYork ISBN 0-387-18183-0Springer-Verlag NewYorkBerlin Heidelberg Thisworkissubjecttocopyright.Allrightsarereserved,whetherthewholeorpartofthematerial isconcerned, specificallytherightsoftranslation.reprinting, re-useofillustrations,recitation, broadcasting,reproductiononmicrofilmsorinotherways,andstorageindatabanks.Duplication ofthispublicationorpartsthereofisonlypermittedundertheprovisionsoftheGermanCopyright LawofSeptember9. 1965,initsversionofJune24, 1985,andacopyrightfeemustalwaysbe paid.ViolationsfallundertheprosecutionactoftheGermanCopyrightLaw. ©Springer-VerlagBerlinHeidelberg 1987 PrintedinGermany I Printingandbinding: DruckhausBeltz,Hemsbach/Bergstr. I 2142/3140-543210 I I I II II Preface Since the beginning of the fifties, the ruling paradigm in the discipline of economics has been that of a competitive general equilibrium. Associated dynamic analyses have therefore been preoccupied with the stability of this equilibrium state, corresponding simply to studies of comparative statics. The need to permeate the boundaries of this paradigm in order to open up new pathways for genuine dynamic analysis is now pressing. The contributions contained in this volume spring from this very ambition. A growing circle of economists have recently been inspired by two distinct but complementary sources: (i) the pathbreaking work of Joseph Schumpeter, and (ii) recent contributions to physics, chemistry and theoretical biology. It turns out that problems which are firmly rooted in the economic discipline, such as innovation, technological change, business cycles and economic development, contain many clear parallels with phenomena from the natural sciences such as the slaving principle, adiabatic elimination and self-organization. In such dynamic worlds, adjustment processes and adaptive behaviour are modelled with the aid of the mathematical theory of nonlinear dynamical systems. The dynamics is defined for a much wider set of conditions or states than simply a set of competitive equilibria. A common objective is to study and classify ways in which the qualitative properties of each system change as the parameters describing the system vary. The ongms of the present volume may be traced to comparative studies of spatial and economic dynamics which were initiated at the International Institute for Applied Systems Analysis (IIASA) in 1982. Among other tasks, the international reference group for these studies provided insights into the theoretical development of models and methods suited for the dynamic analyses of economic change processes. Many of the contributions contained herein have come from members of this reference group who have been undertaking basic research into dynamic processes such as competi tion, economic development and spatial adjustments. Most of the papers were presented during four special sessions held at the 5th International Conference on Mathematical Modelling, on the campus of the University of California in Berkeley, California from July 29-31, 1985. Three additional chapters have been prepared by those authors who were invited to IV contribute to these sessions but could not attend. Thus the volume is as complete and unified as possible. The editorial work has been undertaken by the Centre for Regional Science Research (CERUM) at the University of UmeA.* The work has been supported in other ways by the Department of Economics at the same university as well as by llASA and the University of Karlstad. In particular, Jenny Wundersitz (CERUM) coordinated all editorial tasks and Ingrid Lindqvist (University of Karlstad) prepared and revised the manuscript. For their perseverence and perceptive attention to detail, the editors are sincerely grateful. UmeA, February 1987 David Batten John Casti BOrje Johansson • TheworkonthisvolumehasbeendonewithinaprojectsupportedbyRiksbankens Jubileumsfond,grant84/266:1. Table ofContents Chapter1 EconomicDynamics.EvolutionandStructuralAdjustment 1 B.Johansson,D.Batten,J. Casti PARTA: DYNAMICCOMPETITIONANDECONOMICEVOLUTION 25 Chapter2 CreativityandEconomicDynamicsModelling 27 A.E. Andersson Chapter3 TheGeneralTheoryofDisequilibriumEconomicsandofEconomicEvolution 46 R.H.Day Chapter4 TheBalancedPathofEconomicDevelopment:AFableforGrowthMerchants 64 D.EBatten Chapter5 CompetitiveGrowthofFirmsinanIndustry 86 E. Akin Chapter6 TechnicalProgress.CapitalAccumulation,andEffectiveDemand: ASelf-OrganizationModel" 116 G.Silverberg Chapter7 TechnologicalVintagesandSubstitutionProcesses 145 B.Johansson Chapter8 Log-LinearRelativeDynamics:UnificationofTheories 166 M.Sonis PARTB: PERIODICCYCLESANDSTRUCTURALADJUSTMENT 185 Chapter9 TheSchumpeterClock 187 G.Haag,W.WeidlichandG. Mensch Chapter10 ComplexDynamicsinContinuousModelsoftheBusinessCycle 227 T.Puu VI Chapter11 GeneralizationsofGoodwin'sGrowthCycleModel 260 J. GlombowskiandM. Kruger Chapter12 AMultisectorModeloftheTradeCycle 291 A. Medio Chapter13 (M,R)-SystemsasaFrameworkforModelingStructuralChangeina GlobalIndustry 313 J. Casti PARTC: LOCATION AND SPATIALDYNAMICS 335 Chapter14 ContinuousModelsofSpatialDynamics 337 M.J. Beckmann Chapter 15 TheOnsetofTurbulenceinDiscreteRelativeMultipleSpatialDynamics 349 D.S.DendrinosandM.Sonis Chapter16 AdoptionandDiffusionofInnovationsandEvolutionofSpatialSystems 368 H.BlommesteinandP.Nijkamp ListofContributors 381 Chapter 1 Economic Dynamics, Evolution and Structural Adjustment B.JOHANSSON, D. BATIEN andJ.CASTI From perspectives represented in this volume, contemporary economics may be regarded as a mature discipline. It has brought the state of the art close to the boundaries of the predominant paradigm. Breaking through these boundaries implies a search for alternatives or at least some alterations to this paradigm. Many of the contributions contained herein spring from such ambitions. The different chapters consist of various attempts to permeate the boundaries or to open up new pathways within the existing paradigm, and in several cases to break with the established tradition. On occasions, economic theory and modelling has adopted concepts and research strategies from the natural sciences, in particular from classical physics. A growing circle of economic theorists have recently been inspired by some other developments within the natural sciences. In this volume one can certainly identify influences of this kind. Approaches and concepts introduced in the models are inspired by recent contributions to physics, chemistry and theoretical biology. Moreover, techniques for rendering the analysis of dynamical systems more tractable have been imported and adapted from the natural and engineering sciences. However, the problems so addressed are firmly rooted in the economic discipline with a special focus on technological change, business cycles, economic development and growth. The pathbreaking work of Schumpeter is a mutual source of inspiration for many of the authors. In this spirit the whole collection is concerned with the dynamic analysis of market economies and competition in the marketplace. 2 1. MODELSOFECONOMICDYNAMICS The two chapters on dynamics to be found in Samuelson's "Foundations of Economic Analysis" (1946) reveal that the evolution of most theoretical ideas and principles generally undergoes long incubation periods. Samuelson's explanations and interpretations of comparative statics, stability of equilibria, cycles and parametriza tion of dynamic processes contain many parallels with phenomena such as the slaving principle, adiabatic elimination, and self-organization (Haken, 1978; 1983). However, his discussion concentrates primarily on two aspects of economic dynamics, namely the stability of equilibria and business cycles. As such, Samuelson's contribution has little to say about economic growth. which has basically been a post war field of interest. Walrasian equilibrium models - in the guise of general competitive analysis - gained some momentum in the beginning of the 1950s. In retrospect one may recall a comprehensive research programme focussed on the existence of competitive equilibria, safeguarded by equilibrium prices. The associated dynamic analysis was therefore preoccupied with the stability of such equilibria. A great deal of theoretical effort was spent on the study of "artificial" price adjustment processes using the method of Lyapunov (see, e.g., Arrow and Hahn, 1971). The term "artificial" is justified here by the fact that the studies were not principally concerned with adjustment processes themselves, but rather with the stability of the essentially static notion of a competitive equilibrium. Indeed, the extent of any dynamic analysis was generally constrained by the equilibrium notion of the research programme. It may also be characterized as an underpinning for the static equilibrium analysis. As emphasized in the early work of Samuelson (1946), a static market equilibrium is of general interest only if it is stable. One might add that a competitive equilibrium will have little importance if it is not structurally stable or generic. Metaphorically speaking, if we repeat the market experiment under approximately the same conditions we would like to obtain approximately the same results (compare Hirsch and Smale, 1974). Growth theory comprises the process of capital accumulation intertwined with increases in production and consumption. The reconstruction of the world economy after the Second World War provided stimuli for analyzing growth problems. Von Neumann's German version of the influential "A Model of General Economic