Richard R. Nelson

Sidney G. Winter

English

Research Papers in Economics

 
Mario CIMOLI*
Giovanni DOSI**
Richard R. Nelson *
Sidney G. Winter **
* Columbia University, New York, USA 
** The Warthon School, University of Pennsylvania, Philadelphia, USA 
2007/04 January 2007
LEM LEM
Laboratory of Economics and Management
Sant’Anna School of Advanced Studies
Piazza Martiri della Libertà, 33 - 56127 PISA (Italy)
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Working Paper Series
Preface to the Japanese Translation of An 
Evolutionary Theory of Economic ChangeRichard R. Nelson 
George Blumenthal Professor of International and Public Affairs, Business, and Law, 
Emeritus, Columbia University 
rrn2@columbia.edu 
 
 
Sidney G. Winter 
Deloitte and Touche Professor of Management 
The Wharton School, University of Pennsylvania 
winter@wharton.upenn.edu 
 
 
Preface to the Japanese Translation 
 of 
An evolutionary theory of economic change 
 
When many years ago we turned our minds to creating An Evolutionary Theory of 
Economic Change, and arguing its merits, we had several reasons. Perhaps the prime one was our 
belief that many economic phenomena of major interest involved economic conditions, behaviors, 
and structures that were almost always changing rather than constant. This is prominently so in the 
field of industrial economics, where both of us were doing research and teaching.  In many 
industries innovation was, and is, a principal vehicle of competition, and firms struggle to survive 
under conditions of continuing change.  Similarly, the context within which international trade 
proceeds, labor markets operate, and economic activity more generally goes on, is also 
characterized by continuing change of a kind that is not tightly predictable, to which economic 
agents somehow must adapt. We argued that economic behavior under this kind of economic 
change could not be adequately framed and analyzed with the kind of economic theory that was 
the standard then – based as it was, and is, on the assumptions that economic agents can somehow 
choose the optimal course of action, and that the system as a whole is in equilibrium.   2
A second reason derived from the observation that while, in many cases, prevailing theory 
seemed to generate predictions that were broadly consistent with the data, the theory itself was 
widely regarded as highly “unrealistic.”  We judged, contrary to much prevailing opinion, that this 
lack of realism was not a trivial matter – though we would concede that the proper standard for  
realism is ultimately a deep question.  More importantly, we believed that a more “realistic” 
theory could do the job just as well or better.  Here we had in mind, particularly, the prevailing 
standard theory of the firm, which assumed that firms chose actions that maximized profits, but 
was mute about how they actually did that.  If interpreted as a predictive theory about decision 
processes in firms, this theory was clearly inconsistent with what was known about the actual 
processes. A number of then-recent studies by organization theorists and empirically oriented 
economists had shown quite persuasively that firm behavior at any time was largely driven by a 
set of routines, decision rules, heuristics and practices that strongly molded what they did under 
various circumstances. 
 
A related concern we had was that prevailing economic theory was the source of a major 
communications barrier between economists who adhered to that theory and scholars in 
neighboring disciplines, like psychology, political science and  sociology (particularly 
organization theory), as well as business and technological history.  These scholars were studying 
and writing about subjects that certainly seemed to be of central importance to economics -- how 
people actually behaved in the face of uncertainty, how firms actually made decisions, and how 
business organization and technologies had changed over time. Since the findings in these studies 
were not couched in the language of prevailing economic theory, economists tended not to pay 
attention to them, or tried to force them into the format provided by that theory, or  argued the 
empirical facts when the forcing proved to be a problem. Actually, the same divide existed within 
economics between the theoretical believers and the many empirically oriented economists who 
did their research and writing in a way that did not adhere to the standard theoretical canons. 
These three sources of our concerns were not by any means independent, and as our work 
progressed the interdependencies seemed increasingly central to the overall case.  Particularly 
important is the fact that, in a world of continuing change, the opportunity sets of economic actors 
are among the things that are on the move.   When opportunity sets are on the move, the distortion   3
produced by unrealistic assessments of actor competence -- assessments sustained largely by 
disciplinary parochialism -- is greatly magnified.  As Schumpeter memorably said, “Carrying out a 
new plan and acting according to a customary one are things as different as building a road and 
walking along it”  (Theory of Economic Development, p. 85). 
Based on these and related concerns and beliefs we built a broad economic theory that 
treated economic change as an evolutionary process, with the behaviors of economic agents at any 
time represented as guided by a set of routines that molded what they did under different 
circumstances, but also subject to change through learning and innovation. We very much hoped 
that the change in theoretical viewpoint we proposed would be appealing both to empirically 
oriented economists working in the fields that were the center of our concerns, and to other social 
scientists who would find our theoretical perspective congenial to and consistent with their own 
beliefs, and thus would enable much more cross-disciplinary interaction. 
In the last paragraph of our book we concluded: “In summary, the analytic vantage point of 
an evolutionary theory reveals things from a different angle. After one gets used to that viewpoint, 
it turns out that much of what is seen is familiar. However, previously unnoticed features of the 
familiar objects become apparent, and some objects once visible from the orthodox angle have 
mysteriously vanished. Were they real or only an illusion? Things hitherto overlooked come into 
view – not merely different facets of familiar objects, but also entirely new objects. In all, the view 
seems clearer, as if the different angle had provided relief from distorting shadows. One hopes that 
others will come to appreciate the view.” 
We have been highly gratified that others have. The large interdisciplinary community 
studying technological change now is virtually unanimous that the process needs to be understood 
as evolutionary. While we were not the only scholars making that argument, it is clear that our 
writing has had a very great impact on the field, particularly among social scientists working in it. 
We had hoped that our evolutionary perspective on technological advance would serve to pull 
together the orientations of economists and other social scientists working in this field, and the 
work of historians, and it clearly has.     
The theory of firm capabilities and behavior that we espoused provided the basis and frame 
for a wide range of scholarship on firm management and strategy. In particular, the emphasis we 
placed on organizational routines has spawned a significant body of research and writing on that   4
subject. In this area our own contribution drew extensively on the work of others, in particular the 
organization theorists at (the then) Carnegie Tech.   Our emphasis on organizational routines as the 
basis of organizational capabilities, and on the augmentation of capabilities as generally involving 
the re-combination of old routines and the mastery of new ones, clearly has influenced the 
development of research in this field. 
Our own interest in developing an evolutionary theory was, as suggested above, strongly 
influenced by our perception that Schumpeter’s characterization of the nature of competition, 
which stressed innovation, uncertainty, and disequilibrium, was clearly the way that competition 
and the determinants of industrial structure should be understood in many key industries.  The 
standard mode of economic theorizing seemed totally inadequate for analysis of this kind of 
competition.  Since we wrote, there has developed an extensive body of empirical and theoretical 
work by economists, based on our evolutionary theory, concerned with Schumpeterian 
competition and the industrial dynamics in industries where competition is largely through 
innovation. 
Over the quarter century since the original publication of our book, we have been greatly 
encouraged by the way new research has complemented and supported its program – not merely in 
the specific areas just discussed, but on a much broader front.   Some of this work has been 
deliberately crafted in relation to our proposals, but most of it has appeared unexpectedly from 
across those disciplinary barricades that we sought to lower, or has been contributed by 
economists working from their own perspectives on topics close to our major agenda.  To be clear, 
we make no claim to have stimulated all of this valuable work – we simply say, there it is, and a 
great deal of it seems to support the program.  Given the range and volume of this research, we 
cannot possibly provide citations here.  We limit ourselves to identifying in this text a number of 
topic areas and key words, and beyond that we provide also a short list of references at the end of 
this preface.  The listed works offer some perspectives on the evolutionary program, its origins 
and progress, as well as an abundance of further references on specific points of fact and theory.     
Our account of individual and organizational behavior included an emphasis on tacit 
knowledge and what is now called procedural memory.  This broad account has since been 
complemented and supported by a great deal of research in psychology (procedural memory, 
situated cognition, distributed cognition), including research that probes these phenomena to the   5
physiological level  -- true micro-foundations for an economic theory, if ever such existed.  In our 
book’s introductory critique of orthodoxy, we asked a question about the theory of the firm, 
“Where does the knowledge reside?” and subsequently went on to propose our own answer to that.  
In the ensuing years, there was an enormous boom of interest in the general subject of 
organizational knowledge, both in academe and in the world of practice (quality management, 
knowledge management, organizational learning).  Further, our image of organizational 
knowledge based in the command of routines received such abundant support from studies in 
knowledge transfer and process improvement that our originally subtle question now seems almost 
elementary:  Of course, organizational knowledge resides mostly in the routines (also known as 
“practices” or sometimes as “systems”).    
We noted, following Schumpeter, that innovation itself can often be routinized in 
significant respects.  In the management literature, this notion has been extensively and fruitfully 
explored under the rubric “dynamic capabilities.”  We argued for a richer view of the connections 
between firm-level innovative activities and the broader knowledge context, noting that the latter 
is shaped both by information flows among firms and by a variety of institutional arrangements 
and policies.  This theme too has been extensively explored, with an emphasis on mapping the 
ways in which the institutions supporting technical change differ from country to country, or, 
simply, from place to place.  A substantial body of research and writing has developed on national 
innovation systems and innovation systems at the sectoral level.  
 Among the institutions the matter are those that affect the ability of firms to appropriate 
returns from their innovations, and those that link the innovative efforts of firms to the scientific 
fields on which they rest.  On these fronts we have collaborated with others to generate a 
substantial amount of new empirical information, illuminating in particular the areas where our 
theory suggested that such information was badly needed.  
In our modeling efforts, using both analytical techniques and simulation methods, we 
explored models involving populations of firms that are different in key respects.  We said “Firms 
are different!” and put forward the models to explore the implications – at a time when theoretical 
economics remained strongly addicted to the “representative firm” abstraction, and/or reflected a 
view that the knowledge underlying firm capabilities was typically public knowledge (or would be 
public in the absence of intellectual property protection).   In the ensuing years, it has been   6
overwhelmingly well documented that firms are remarkably and persistently different, even when 
their business is broadly the same and legal protection is not a major factor.   This has been shown 
in different ways in different literatures.  We mention in particular the body of research exploiting 
the large data sets derived from public sector census efforts in various countries, such as the work 
organized at the Center for Economic Studies of the U.S. Census Bureau.  Yet, mysteriously, 
many economists still seem to react with surprise with confronted with the latest evidence that 
firms are very different. 
We also argued the importance of understanding industry structure in dynamic terms, i.e., 
as one “outcome” of a continuing evolutionary process.  One part of that territory relates to the 
explanation of the size distribution of business firms – a question which, at the time, was barely 
respectable within the field of industrial organization economics, perhaps because, once again, the 
facts are so strikingly at odds with the picture offered by the economics textbook.  This was 
identified early on as promising territory, where simple evolutionary models easily come close to 
getting the picture right.  Much work has been done in this area, both in modeling and empirics, 
and the question became more respectable.  But the territory still ranks as “promising;” there is 
much that is important and not well understood. 
Our book was largely silent in two related areas that are actually quite central to the 
proposal that it put forward.  First, we did not say much about where the routines and capabilities 
of business firms come from originally; we spent our effort on discussing what they are like.  
Second, in our modeling of industrial dynamics, we did not attempt to address the facts of the 
typical development patterns of industries, across the various historical episodes.  Instead, we 
spent our effort on elucidating some key mechanisms.  
 Fortunately, the scholarship of the ensuing years did not follow our example of neglecting 
these topics, far from it.  Thanks to a body of research of several different kinds, much more is 
now known about these key aspects of the evolutionary process – and much more is recognized 
(by ourselves, among others) about their importance.  We know a good deal about how routines 
and capabilities emerge from learning efforts in new firms and industries, and how this process 
itself is evolutionary, often including an obvious element of borrowing from the past. We 
understand also that the best and most vivid examples of the process of economic evolution, where   7
the market is mostly clearly acting as a selection environment for the diverse proposals of diverse 
firms, tend to be seen in the early decades of a new industry. 
A number of distinguished Japanese scholars have been among those who have employed 
and advanced the concepts and techniques we put forward in our efforts to develop An 
Evolutionary Theory of Economic Change.  Now Akira Goto, Atsushi Sunami, and Tatsuo Tanaka 
have put in the major effort needed to translate our book into Japanese, so that more Japanese 
readers will be able to draw upon, and build upon, our work. We are deeply grateful and honored 
to have such knowledgeable scholars make this significant commitment to the further progress of 
evolutionary thinking.  
     R i c h a r d   R .   N e l s o n        
     S i d n e y   G .   W i n t e r  
     (January  2007) 
.  
   8
 
Some Perspectives 
Dosi, G. and F. Malerba (2002). "Interpreting industrial dynamics twenty years after 
Nelson and Winter's Evolutionary Theory of Economic Change: a preface." Industrial 
and Corporate Change 11: 619-622. 
Dosi, G., F. Malerba and D.J. Teece, (2003). "Twenty years after Nelson and Winter's An 
Evolutionary Theory of Economic Change: a preface on knowledge, the nature of 
organizations, and organizational changes." Industrial and Corporate Change 12: 147-
148. 
Freeman, C. and K. Pavitt (2002). "Editorial: Special Issue "Nelson + Winter + 20"." 
Research Policy 31: 1221-1226. 
Levin, R. C., A. Klevorick, R.R. Nelson and S.G. Winter (1987). "Appropriating the 
returns from industrial  research and development." Brookings Papers on Economic 
Activity No. 3: 783-820. 
Nelson, R. R., Ed. (1993). National Innovation Systems: A Comparative Analysis. New 
York, Oxford University Press. 
Nelson, R. R. (2006). "Commentary on Sidney Winter's "Toward a Neo-Schumpeterian 
Theory of the Firm"." Industrial and Corporate Change 15: 145-149. 
Nelson, R. R. and S. G. Winter (2002). "Evolutionary theorizing in economics." Journal 
of Economic Perspectives 16: 23-46. 
Winter, S. G. (2005). "Developing evolutionary theory for economics and management." 
In Great Minds in Management: The Process of Theory Development. M. A. Hitt and   
K. G. Smith. Oxford, Oxford University Press: 510-547. 
 
   
 

Preface to the Japanese Translation of An Evolutionary Theory of Economic Change

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Preface to the Japanese Translation of An Evolutionary Theory of Economic Change

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