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activity, such deviant i rm behaviour should be regarded as the fundamental driving
force underlying economic development. In such instances divergence from industrial
trajectories could be seen as more 'desirable' than path dependence and convergence.
The combination of the importance attached to markets and the notion that there
is some objectively 'best' set of equilibrium conditions to which perfectly competitive
markets drive individual i rms also leads to inadequate policy assumptions. The most
important of these is the idea of 'market failure'. This is based on the assumption that
there is a set of optimum equilibrium conditions in abstract market systems that can be
divined for i rms and industries. As a result of following this assumption, much govern-
ment economic policy-making in the UK has focused on devising institutional structures
to deal with so-called 'market failures' while at the same time assuming that the rest of
the national economy is functioning more or less in line with market demands. Such
assumptions do not carry policy analysis very far because market failure is ubiquitous
(Nelson and Winter, 1982, p. 394).
Evolutionary theory suggests that instead of concentrating on market failure, eco-
nomic policy analysis should be much more concerned with the problems associated
with adjusting to continual change. This would include adapting not only to the 'gales
of creative destruction' caused by the periodic major shifts in technological paradigms
but also to the changing trajectories encompassed within these long waves of economic
change. In practical terms this would shift the focus away from market failure towards
identifying market opportunities within these changing conditions.
A third important dif erence between neoclassical and evolutionary economic theory
is the signii cance attached to bounded rationality (Simon, 1955). Where neoclassical
economics deals with technical change at all it has repressed the bounded rationality
problem (Nelson and Winter, 1982, p. 40). It is clearly incorrect to assume that, par-
ticularly in the case of technical change, there is a complete set of information available
somewhere to any i rm willing to devote the ef ort to tracking it down. It is more real-
istic to assume that all i rms have to operate as best they can with partial knowledge.
Technical change is then driven by what i rms can know at any particular time. There is
therefore no reason to suppose that the resulting innovations and trajectory of change
will necessarily be optimum. We should generally expect satisi cing rather than optimis-
ing behaviours from i rms in the face of the impossibility of knowing everything about
any given set of supply and demand conditions.
As a result of this discussion it is argued here that there are at least three important
reasons for adopting an evolutionary perspective rather than the traditional neoclassical
stance. These are that the former of ers a better approach to understanding both gales
of creative destruction and incremental, particularly technological, change, better than
market analysis. Second it raises the signii cance of understanding the causes of disequi-
librium rather than abstract equilibrium conditions. Finally it starts with the assumption
of bounded rationality. This is much more akin to the circumstances that most i rms i nd
themselves in as compared with assumptions of optimality.
3. Basic concepts in evolutionary microeconomic theory
Nelson and Winter (1982) developed three basic concepts of i rm behaviour as the basis
of their evolutionary theory of economic change. These were routine, search and selec-
tion. They start from the assumption that organisations have a tendency to prefer to do
