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for estimating costs and calculating optimal proi t. Technology is exogenous, but also
endogenous for new neoclassicals, i rms being assumed to have comparable techno-
logical competences (Romer, 1990). Firms' other important characteristics are similar,
remaining so during their life cycle. In a world without uncertainty, contracts can be
complete and fully dei nable. For the neoclassicals, competition is pure and perfect, no
barriers exist to market entry, and i rms have equal access to resources, knowledge and
information that are freely available, and optimal labour and capital input coordination
is af ordable.
In essence, the neoclassical model is one in which the i rm's decisions and activities are
driven by the price mechanism in a world of pure and perfect competition. Fundamental
questions, which neoclassical theory provides no answer to, concern growth and devel-
opment, coordination and knowledge. In the neoclassical tradition, i rm growth is a sign
of imperfect competition, one of the many paradoxes arising from a prejudice in favour
of equilibrium as the natural economic state. Neoclassical theory also fails to explain
mechanisms observed in the real world such as partnership, networking, or oligopoly
because it assumes the uncertainty that these practices denote is non-existent. Similarly,
heterodox proposals regarding the normality of i rm and individual choice as satisi cing
rather than optimal decision-making cannot satisfactorily be allowed without relax-
ing the absence of uncertainty principle, as the new neoclassicals in fact commonly do
(Simon, 1962). Nor can the impact of phenomena such as history, routines, location of
research and production centres or advantage of technological and individual skills supe-
riority be modelled. Despite recognition that much technological advance is endogenous
(Romer, 1990), the 'new' neoclassical models are still 'mechanical': uncertainty, conl icts
among experts, unexpected results that mark the innovation process are not integrated
(Nelson, 1995). Moreover the endogenous outcome remains the technological artefact,
and classical form of 'congealed capital' rather than the more embedded and embodied
form of innovation.
As suggested in the introduction to this chapter, evolutionary economics has a dif-
ferent way of conceiving economic actors, i rms and markets. It places a pronounced
emphasis on history, routines, and interactions and inl uences of environment and insti-
tutions. Firms are conceived of as specii c actors, or preferably, agents (Pavitt, 1984).
Moreover, following Simon's (1972) observation of the impossibility of any single agent
having omniscience with regard to information appropriate to optimal decision-making,
given the complexity of their environment and conl icts of interest that disallow proi t
maximisation, agents are not assumed to be able to compute optimal solutions and
even less to predict other agents' behaviours because of uncertainty (Alchian, 1950;
Heiner, 1983; Knight, 1921). Hence, bounded rationality (Simon, 1962, 1972), satisi cing
behaviour and dif ering expectations (Hahn, 1952 [1984]; Rosenberg, 1982) are taken
to be normally expected practice. In evolutionary economics, i rms are not uniform but
distinctive, and utilise dif erentiated capabilities, one of which is knowledge, another is
administration and management. As Penrose (1959 [1995]) saw, both knowledge and
organisation play signii cant roles. Increasingly, even compared with the era of Penrose
(1959 [1995]), knowledge and externalised knowledge networks were seen to have risen in
importance because of the increase in innovation as a factor of the i rm's self-constructed
competitive advantage. The organisation of a i rm as an ei cient and ef ective form of
administration managed to optimise this, and its other resource capabilities had never
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