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Title: Innovation, Organization and Economic Dynamics: Selected Essays by Giovanni Dosi ISBN: 1-85898-592-7 Publisher: Edward Elgar Pub Pub. Date: 01 September, 2001 Format: Paperback List Price(USD): $55.00

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Summary: An antidote for neo-classical economic ideology
Comment: As is pointed out by Paul Ormerod [1] in ‚The Death of Economics', neo-clasical economic theory self-destructed in 1968 when Roy Radner proved that infinite computational capacity would be required of rational expectations agents in General Equilibrium Theory [2]. In spite of that the truck keeps running without wheels, gaining in influence in law schools and in US court cases. Why this is so, how a theory without data (and, in eonometrics, data without theory) can survive and even prosper is a historico-sociological question, no easier to answer than are analogous questions about the persistence beyond the middle ages of Aristotelian theory, or the emergence of the Taliban in our own time. However, as the following quote (on microfoundations) suggests, Professor Dosi brings his criticism and ideas to us with exceptional wit and humor:

„...I mean the construction of the dynamics of micro constituents of a system (be they molecules, ..., firms, cells,..)which yield the dynamics of some aggregate variables of the system.....the issue of microfoundations is in principle separate from that of ‚microintentionality', although obvioulsy in social sciences the relationship between the two is a tricky problem. However, contrary to the prevalent opinion amongst economists, I think it is healthy to keep the two matters separate. ... no physicist in a right mind would claim that molecules tend in probability to some energy state because they ‚maximize their utility', so some partial decoupling might also help investigators..."

The theme of microfoundations of aggregate phenomena is taken up in chapters 12 ans 23. As Paul Ormerod [3] has taught us, neo-classical individual demand curves do not apply to aggregate phenomena other than maybe cornflakes (indeed, Osborne [4] has taught us that they do not even apply to individuals!). Furthermore, the neo-calassicists themselves proven that, given a textbook individual demand curve, the aggregate demand curves can be anything at all [3].

The reader in search of recent work on modern topics will find much food for though in the 23 chapters of reprints by Dosi and collaborators. Among the topics covered are evolutionary models, many chapters on path dependence, some on computability of models, and ‚stylized facts' (a phrase that I am still not comfortable with).

Nearly nothing is known about aggregates, making modelling there all the more difficult. The neo-clasical answers, Dosi correctly informs us, are too close to pre-Galilean reasoning (a theme that has been developed elsewhere, for good measure [4]). Also with foresight, Professor Dosi argues in several chapters that ‚knowledge' is not equivalent to sheer information, which leads us into the topic of this era, the economics of information (here, he mentions the work of Arrow, Aoki, Ackerlof,, Stiglizz, Radner, Hurwicz and others).

In Substantive and Proceedural Uncertainty (by Dosi and Egidi) a distinction is made between information incompleteness and knowledge incompleteness. Also interesting is that the authors recognize and emphasize the difference between the nature of probability in ordinary gambling and in economics. In the former cases the number and nature of bets placed cannot change the outcome: preferences, states of nature, actions and consequences are easily separable. In this case there is an information gap (we don't know in advance wihich face of a die will show when tossed) but not a competence gap. In economics and finance, in contrast, the ‚events' are not ‚states of nature' but are an inseparable part of the decision process, are not independent of agenmts' actions. We read further that ‚innovation implies nonstationarity..' and that ‚rational procedures' may quickly run against the computational constraints of individual agents. E.g., Nash equilibria may ‚exist' mathematically but may not be recursively realizeable (may not be algorthmically computable-for algorithmic computability in nonlinear dynamics, see [5,6]). On rational choice, they write that empirical evidence on individual behaviors is messy and subject to perturbations. Especially under uncertainty people may make mistakes anticipating expected probabilites and may not maximize. Even in 2-person games winning strategies exist mathematically but may require uncountably-much knowledge in the form of the infinite binary game-tree...

For historic background that is helpful in understanding Dosi's choice of approach to economic theory, see Mirowski's 'Machine Dreams'.