Toward an Evolutionary Theory of Production

Since the time of Adam Smith, Francois Quesnay and David Ricardo, economists have sought to ground their theoretical analyses of economic organization in an appreciation of the nature of real production activity. Any such an effort must balance two competing concerns. On the one hand, the obviously fundamental role of productive activity in economic life seems to demand a highly accurate appraisal, presumably based on detailed scrutiny. On the other hand, the objectives of economic science often seem best served by a broad-brush characterization done from a considerable distance. Those scientific objectives are, after all, quite different from those of engineering or operations management. In mainstream neoclassical theory, the second of these considerations seems clearly dominant. Production theory as it has developed in that tradition is strong on abstract generality and treats production in a way that is convenient for the neoclassical analyst. Mainstream production theory is partly for answering questions about production and its place in economic organization, but it is at least equally concerned with sealing off questions that are not considered fruitful for economists. It places a boundary marker that serves to identify the limits of the specifically economic concern with production, beyond which lie areas of concern to engineers, managers and technologists. It should be obvious that evolutionary economics needs to strike quite a different balance. Evolutionary thinking sees questions of production as tightly and reciprocally connected with questions of coordination, organization and incentives. Also, production activity is embedded – now more than ever – in a variety of processes of knowledge creation; theory needs to make room for those links. A major deficiency of the mainstream theory is 2 its isolation from the realities of organizational knowledge. Above all, the evolutionary economist needs theory to address questions of economic change, not the principles of resource allocation in a hypothetical static world. As is discussed below, a review of the historical development of production theory shows conclusively the shaping role of the analytical objectives held at each stage by the economists who made the contributions. On the contemporary scene, production function formulations now dominate because they provide a convenient basis for applied econometrics, and because the sorts of questions that require more general apparatus are no longer as salient for the discipline as they were a few decades back. The dominance of the production function apparatus in contemporary mainstream treatments of technological change is also a …