Diffusion Processes in Economic Systems

In the presence of technical progress, the question arises what characteristics the transition path of an economy from the old steady state to the new one exhibits. Utilizing a Leontief production function, the non-differentiability of the production function implies the following situation for producers: they are not able to continually adopt both their production method and quantities of input factors until the new equilibrium is attained (as is the case for neoclassical productions functions). Hence, the choice-of-technique problem between two (or more) quite distinct processes affects the transition paths connecting two different long period positions, for which evolutionary arguments in combination with Classical economic thinking as outlined by Kurz (2008) is necessary. First attempts to explicitly combine these two strands of research, are implemented by Steedman and Metcalfe (2011). To advance research in this direction is the goal of the four tasks of the proposed research project. Task 1 provides a survey of existing ideas concerning the dynamics of economic systems. By merging these theories with the Classics in the tradition of both Adam Smith and David Ricardo, Task 1 supports the economic modelling and simulation of technical diffusion as underlying process in an economic system in the presence of technical progress. In Tasks 2 and 3, two different theoretical economic frameworks are outlined merging classical and evolutionary economics. Task 2 is concerned with one-sector model economies, whereas Task 3 incorporates inter- sectoral feedback effects by analysing multi-sector models. Task 4 provides the mathematical tools necessary to accomplish Tasks 2 and 3. Especially the theory and application of Delay-Differential equations and the application of Lie-symmetry analysis to economic models is of interest in the presented context. Task 2 and Task 3 provide an extensive theoretical framework, which can be applied to practical purposes of political economics. As surveyed and outlined in Rogers (2003), both formal and informal institutions (in the sense of North, 1990) play a crucial role in shaping the diffusion process of new technologies. As technical change has a major impact on social issues (see Rogers, 2003, Ch. 11, and Kalmbach and Kurz, 1992), it is of interest for policy makers not only to promote technical progress (as a means to economic growth) but also to understand and to shape the diffusion process itself by properly developed institutions. In the course of both mentioned tasks, the role of institutions in the respective model economies will be studied. Both formal institutions such as different legal frameworks as well as informal institutions as for example historically determined norms as stressed by North (1990) and in the present context by Rogers (2003) will be implemented into the developed models and simulations will be conducted.

In the course of this project, significant contributions have been made to the research of technological progress and other types of economic change in the field of evolutionary economics. A key focus is thereby the observation that the diffusion of new technologies and other innovation types, such as institutional and organizational innovations, the introduction of new products and the creation of new markets or the discovery of new resources, has ever been the driving force behind the development and growth of economies. Depending on the characteristics of innovations, but also of the economic system from which they emerge, their diffusion bears the potential to trigger profound transformation processes and structural change, which can be accompanied by fundamental socioeconomic effects. The aim of this project was to raise awareness about the dynamic characteristics of economic systems triggered by the diffusion of new technologies, and to answer related questions in terms of structural change, growth and transformation.In order to meet the complexity of this subject, numerous investigations were carried out, and the resulting findings enhance the state of the art in (1) the history of economic thought, (2) economic theory and (3) empirics and empirical methods in economics. By developing a multi-sectoral model and analysing different scenarios of the diffusion of innovations, the transformation of economies and associated adaptation processes could be described in a completely novel way. This model has also been applied to empirical data and has shown the impact of radical technological change, on the example of the diffusion of ICT and its effects inter alia on labour productivity and income distribution. In addition, empirical case studies investigated innovation activities and patterns that are crucial for generating innovations, thus embracing an even broader thematic spectrum. Moreover, empirical evidence has been collected regarding restructuring processes due to technological change at the meso level that eventually lead to structural change on the macro level.The portfolio of results which has been achieved in the course of this project represents an important starting point for further studies in this field of research, and is important not least for the design of growth and innovation policy measures.