Abstract
In this chapter we adopt and extend in a precise direction Mayhew’s critical arguments against the evolutionary theory of the firm as elaborated by Nelson and Winter (Mayhew 2000). Focusing on the distinction between ‘fixed and open systems of analysis’, Mayhew emphasizes the sharp difference between Veblen’s theory of business enterprise and the ‘truncating’ view of Nelson and Winter (ibid.: 57). There are, of course, a number of problems connected with this broad theoretical issue. We may, just passing through, call attention to the clear inconsistency between Mayhew’s position and Hodgson’s well-known interpretation, according to which Nelson and Winter’s work is largely compatible with Veblenian institutionalism. Nelson’s receipt of the Veblen-Commons award in 2007, Hodgson has pointed out, ‘is in recognition for his great and hugely inspiring contribution to a modern evolutionary and institutional economics’ (Hodgson 2007). Such assumed theoretical convergence is further confirmed by the fact that Nelson himself ‘has fully acknowledged his affinity with the original institutionalism’ (ibid.). Indeed, Nelson deliberately accepts both Veblen’s concept of institutions and Veblen’s focus on how things are done (Nelson 2007: 314; Nelson 2008: 2). We clarify a well-specified aspect of this neglected compatibility issue. In particular, we address the theoretical relationship between the theories of social costs of business enterprise of the ‘old’ institutionalists – Veblen and Kapp – and the most up-to-date version of the evolutionary theory of the firm elaborated by Richard R. Nelson. Starting from Nelson and Winter’s treatment of production routines in their seminal book, An Evolutionary Theory of Economic Change (1982), we discuss Nelson’s recent work on the concept of ‘social technologies’ in the context of the Veblenian-Kappian critique of business enterprise and the competitive mechanism. We show that Nelson’s evolutionary approach to the firm sharply differs from the Veblenian-Kappian approach. Although pertinently focusing on firms’ ‘knowing how to do’ (and ‘to choose’) (Nelson and Winter 1982: 52), Nelson’s competence-based theory completely disregards the fundamental distinction between making things and making money or, put another way, the ‘controlling dichotomy’ of business and industry (Tsuru 1997: 61). This neglect explains two sanitizing elements underlying Nelson’s and Winter’s evolutionary theory of the firm and Nelson’s more recent work on the coevolution between ‘physical’ and ‘social’ technologies: the equation between technological innovation under business and market guidance, and technological advance or progress; the assimilation of economic growth to economic progress. We start by briefly reconstructing the evolutionary theory of the firm elaborated by Nelson and Winter. We then turn to Nelson’s recent effort to integrate a useful concept of institutions (dominant social technologies) in their original theoretical framework. The next step will be to illustrate the core arguments of Veblen and Kapp concerning how the business management of industry tends to favor the institutionalization of various forms of disservices. This was Veblen’s and Kapp’s central thesis. After recalling the former’s path-breaking position we sketch out Kapp’s theory of social costs of business enterprise. For their relevance to the present discussion, we illustrate Kapp’s treatment of planned obsolescence and his critique of GDP as an indicator of economic performance. Selected recent theoretical and empirical research concerning the deliberate shortening of the lifespan of products and the limits of GDP as an indicator of progress in terms of human welfare shows the enduring relevance of these early institutional arguments. We contextually discuss the well-settled and today highly sophisticated organizational routine among big businesses, which goes under the name of ‘scientific misunderstanding’. Albeit apparently unforeseen by Veblen and Kapp, this type of misbehavior adds to the argument that business principles and practices might entail criminal elements and be extremely wasteful from a social point of view. Doubtlessly, Nelson provides some useful insights in business decisionmaking analysis that are compatible with the old institutional legacy. Indeed, the very emphasis he puts on ‘how things are done’ both in terms of physical and social technologies (see the section on Nelson’s recent work, below) is, in our view, typically institutionalist. However, his complete disregard of the Veblenian distinction between business and industry has a far-reaching negative implication: In accordance with his previous work with Winter, Nelson’s more recent analysis of physical and social technologies and his definition of the very goals of economic science continue to be based upon a sanitized and unrealistic conception of the firm and economic calculus. Thus, if one accepts Nelson’s view of the capitalist firm then he must necessarily acknowledge that the converging analyses of social costs of business enterprise of Veblen and Kapp are outdated and irrelevant for fruitful economic theorizing. Contemporary discussions on the building blocks of old institutionalism and the theory of the firm tell the story of a silent removal of the theory of social costs among present-day original institutionalists.