Complexity and the Economy
Page 25
ACKNOWLEDGMENTS
This work was mainly carried out at and supported by Fuji Xerox Palo Alto
Laboratory. We also thank the members of the Santa Fe Institute Workshop
on Innovation in Natural, Experimental, and Applied Evolution (February
[ 132 ] Complexity and the Economy
2004), for comments on an early version of these ideas. This workshop was supported by the Packard Foundation and the Thaw Charitable Trust. W.B.A.
thanks Stuart Kauffman and John Holland for many discussions dating back
to August 1987 on the notion of technologies creating technologies by combi-
nation. Both authors thank Eleanor Rieffel for helpful discussions in the early phases of this article, and Rob Carlson, Rich Lenski, and Peter Schuster for
detailed comments.
REFERENCES
1. Schumpeter, J. A. The Theory of Economic Development; Transaction
Publishers: New Brunswick, NJ, 1911/1934/1996.
2. Lenski, R. E.; Ofria, C.; Pennock, R. T.; Adami C. The evolutionary origin of complex features. Nature 2003, 423, 139–143.
3. Beck-Sickinger, A.; Weber, P. Combinatorial Strategies in Biology and Chemistry; Wiley: Chichester, England, 2001.
4. Kauffman, S. A. Investigations; Oxford University Press: New York, 2002.
5. Bak, P.; Wiesenfeld, K. Self-organized criticality: An explanation for 1/f noise.
Phys Rev A 1988, 38, 364.
6. Bryant, R. E. Graph-based algorithms for Boolean function manipulation. IEEE
Trans Comput 1988, 35(8), 677–691.
7. Bryant, R. E. Symbolic Boolean manipulation with ordered binary-decision
diagrams. ACM Comput Surv 1992, 24(3), 293–318.
8. Ogburn, W. F. Social Change; 1922 (Dell: New York, 1966).
9. Kaempffert, W. Invention and Society. Reading with a Purpose Series, 56, American Library Association: Chicago, 1930.
10. Arthur, W. B. The Nature of Technology: What It Is and How It Evolves; in prepara-tion. (Appeared in 2009, The Free Press: New York.)
11. Maturana H.; Varela F. Autopoiesis and cognition: The realization of the living.
Boston Studies in the Philosophy of Science 42; Cohen, R. S; Wartofsky, M. W., Eds.; D. Reidel Publishing: Dordrecht, 1973.
12. Arthur, W. B. The Logic of Invention. Santa Fe Institute Working Paper 2005-12-045; Santa Fe Institute: Santa Fe, NM, 2005.
13. Gehring, W. J. The genetic control of eye development and its implications for the evolution of the various eye-types. Int J Dev Biol 2002, 46, 65–73.
t He evolu t ion of t ecHnology [ 133 ]
CHAPTER 8
The Economy Evolving as Its
Technologies Evolve
W. BRIAN ARTHUR
New technologies entering an economy cause it not only to grow and become more productive; if significant, they cause it to change in structure—to change in how it is organized. How does such structural change happen? How does an economy evolve as its technologies evolve?
This chapter argues that the appearance of a novel technology triggers a cascade of further events. The new technology becomes available as a possible building-block for further new technologies, and it creates opportunity niches in the form of needs for supporting technologies, for novel forms of organization to accommodate it, and for novel institutions. It may also bring social and economic challenges, which call for further technologies to resolve these. A new technology therefore brings a train of further technologies, and the economy thereby continually changes its character or internal structure. The chapter is a slightly rewritten version of chapter 10, “The Economy Evolving as its Technologies Evolve,” from my book The Nature of Technology: What It Is and How It Evolves (The Free Press, New York, 2009).
We have been looking very directly at the evolution of technology in the
previous chapter [of my book, The Nature of Technology: What It Is and
How It Evolves (2009)].1 There is an alternative way to perceive this evolution, and that is through the eyes of the economy. An economy mirrors the changes
in its technologies, the additions and replacements I have been talking about.
And it does this not merely by smoothly readjusting its patterns of production 1. The Free Press, New York. This is chapter 10 of that book.
and consumption or by creating fresh combinations, as we saw in chapter 8. It alters its structure—alters the way it is arranged—as its technologies evolve, and does this at all times and at all levels.
So I want to go back to the steps in the evolution of technology and look at
how they play out from the viewpoint of the economy. What we will see is a
natural process of structural change in the economy driven by the evolution-
ary processes we have just delved into. To explore this we will first need to
think of the economy in a way that differs from the standard one.
THE ECONOMY AS AN EXPRESSION OF ITS TECHNOLOGIES
The standard way to define the economy—whether in dictionaries or econom-
ics textbooks—is as a “system of production and distribution and consump-
tion” of goods and services.2 And we picture this system, “the economy,” as
something that exists in itself as a backdrop to the events and adjustments
that occur within it. Seen this way, the economy becomes something like a
gigantic container for its technologies, a huge machine with many modules or
parts that are its technologies—its means of production. When a new tech-
nology (the railroad for transportation, say) comes along it offers a new mod-
ule, a new upgrade, for a particular industry: the old specialized module it
replaces (canals) is taken out and the new upgrade module is slid in. The rest of the machine automatically rebalances and its tensions and flows (prices and goods produced and consumed) readjust accordingly.
This view is not quite wrong. Certainly it is the way I was taught to think
about the economy in graduate school, and it is very much the way economic
textbooks picture the economy today. But it is not quite right either. To
explore structural change, I want to look at the economy in a different way.
I will define the economy as the set of arrangements and activities by which a society satisfies its needs. (This makes economics the study of this.) Just what are these arrangements? Well, we could start with the Victorians economists’
“means of production,” the industrial production processes at the core of the
economy. Indeed, my definition would not have surprised Karl Marx. Marx
saw the economy as issuing from its “instruments of production,” which would
have included the large mills and textile machinery of his day.
But I want to go beyond Marx’s mills and machinery. The set of arrange-
ments that form the economy include all the myriad devices and methods and
all the purposed systems we call technologies. These include hospitals and
surgical procedures. And markets and pricing systems. And trading arrange-
ments, distribution systems, organizations, and businesses. And financial
2. The definition is from Dictionary.com. WordNet® 3.0. Princeton University, 2008.
t He economy evolving [ 135 ]
systems, banks, regulatory systems and legal systems. All these are arrangements by which we fulfill our needs, all are means to fulfill human purposes.
Now, earlier in the book [Arthur, 2009] I defined technologies as means to
human purposes, so all these are “technologies,” or purposed systems. So if
we allow that the New York Stock Exchange and the specialized provisions
of contract law are as much means to human purposes as are steel mills and
textile machinery, we can say that they too are in a wide sense
technologies.
If we include all these “arrangements” in the collective of technology, we
begin to see the economy not as a container for its technologies, but as some-
thing constructed from its technologies. The economy is a set of activities
and behaviors and flows of goods and services, mediated by—draped over—
its technologies. It follows that the methods, processes, and organizational
forms I have been talking about form the economy.
The economy is an expression of its technologies.
I am not saying that an economy is identical to its technologies. There is
more to an economy than this. Strategizing in business, investing, bidding,
and trading—these are all activities and not purposed systems. What I am
saying is that the structure of the economy is formed by its technologies, that technologies if you like form the economy’s skeletal structure. The rest of the economy—the activities of commerce, the strategies and decisions of the various players in the game, the flows of goods and services and investments that
result from these—form the muscle and neural structure and blood of the
body-economic. But these parts surround and are shaped by the set of tech-
nologies, the purposed systems, that form the structure of the economy.
The shift in thinking I am putting forward here is not large; it is subtle. It is like seeing the mind not as a container for its concepts and habitual thought
processes but as something that emerges from these. Or seeing an ecology not
as containing a collection of biological species, but as forming from its collection of species. So it is with the economy. The economy forms an ecology for
its technologies, it forms out of them, and this means it does not exist sepa-
rately. And as with an ecology, it forms opportunity niches for novel technologies and fills these as novel technologies arise.
This way of thinking carries consequences. It means that the economy
emerges—wells up—from its technologies. It means that the economy does
more than readjust as its technologies change, it continually forms and
re-forms as its technologies change. And it means that the character of the
economy—its form and structure—change as its technologies change.
In sum, we can say this: As the collective of technology builds, it cre-
ates a structure within which decisions and activities and flows of goods
and services take place. It creates something we call “the economy.” The
economy in this way emerges from its technologies. It constantly cre-
ates itself out of its technologies and decides which new technologies will
enter it. Notice the circular causality at work here. Technology creates the
[ 136 ] Complexity and the Economy
structure of the economy, and the economy mediates the creation of novel technology (and therefore its own creation). Normally we do not see this
technology-creating-the-economy-creating-technology. In the short term of
a year or so the economy appears given and fixed; it appears to be a container for its activities. Only when we observe over decades do we see the arrangements and processes that form the economy coming into being, interacting,
and collapsing back again. Only in the longer reaches of time do we see this
continual creation and re-creation of the economy.
STRUCTURAL CHANGE
What happens to this system that forms from its technologies as new technol-
ogies enter? We would still see the same adjustments and fresh combinations
I spoke about in chapter 8 of course; they are perfectly valid. But we would see something more: the addition of new technologies setting in motion a train of
changes to the structure of the economy, to the set of arrangements around
which the economy forms.
We are coming into territory here—that of structural change—that eco-
nomic theory does not usually enter. But this is not empty territory. It is
inhabited by historians, in our case by economic historians. Historians see the introduction of new technologies not simply as causing readjustments and
growth, but as causing changes in the composition of the economy itself—in
its structure. But they proceed for the most part on an ad-hoc, case-by-case
basis. Our way of thinking about the economy and technology by contrast
gives us a means to think abstractly about structural change.
In practice a new technology may call forth new industries; it may require
that new organizational arrangements be set up; it may cause new technical
and social problems and hence create new opportunity niches; and all these
themselves may call forth further compositional changes. We can capture this
sequence of changes if we borrow the steps in the evolution of technology
from the previous chapter, but now see them through the eyes of the econ-
omy. So let us do this.
We can start by supposing that a candidate novel technology appears. It
has been made possible by a combination of previous technologies and has
bested its rivals for entry into the economy. Six events or steps then follow.
We can think of these as the legitimate moves that can be made in the tech-
nology buildout game. I will state them abstractly, but the reader might find
it helpful to have an example technology in mind: the railroad, say, or the
automobile, or the transistor.
1. The novel technology enters the active collection as a novel element. It
becomes a new element in the active collection.
t He economy evolving [ 137 ]
2. The novel element becomes available to replace existing technologies and components in existing technologies.
3. The novel element sets up further “needs” or opportunity niches for sup-
porting technologies and organizational arrangements. In particular such
needs may arise from the new technology causing novel technical, eco-
nomic, or social problems. And so, the new technology sets up needs for
further technologies to resolve these.
4. If old displaced technologies fade from the collective, their ancillary needs are dropped. The opportunity niches they provide disappear with them,
and the elements that in turn fill these may become inactive.
5. The novel element becomes available as a potential component in further
technologies—further elements. In doing so it acts to call forth other
technologies that use and accommodate it. In particular it may give rise to
novel organizations that contain it.
6. The economy—the pattern of goods and services produced and con-
sumed—readjusts to these steps. Costs and prices (and therefore incen-
tives for novel technologies) change accordingly.
I have really just stated in economic terms the steps described in the previ-
ous chapter that form the mechanism by which the collective of technology
evolves. But I am interpreting these steps to describe how a new structure
for the economy forms. When a novel technology enters the economy, it calls
forth novel arrangements—novel technologies and organizational forms. The
new technology or new arrangements in turn may cause new problems. These
are answered by further novel arrangements (or by existing technologies
modified for the purpose), which in their turn may open needs for yet more
novel technologies. The whole moves forward in a sequence of problem and
solution—of challenge and response—and it is this sequence w
e call struc-
tural change. In this way the economy forms and re-forms itself in spates of
change, as novelty, new arrangements to accommodate this, and the opening
of resulting opportunity niches follow from each other.
Let me make this concrete with a particular example. When workable textile
machinery began to arrive around the 1760s in Britain, it offered a substi-
tute for the cottage-based methods of the time, where wool and cotton were
spun and woven at home by hand in the putting-out system.3 But the new
machinery at first was only partly successful; it called for a larger scale of organization than did cottage hand-work. And so it presented an opportunity
for—and became a component in—a higher level organizational arrangement,
the textile factory or mill. The factory itself as a means of organization—a
3. For accounts of the industrial revolution, see Landes (1969), Mokyr (1990), and Ashton (1968).
[ 138 ] Complexity and the Economy
technology—in turn required a means to complement its machinery: it called for factory labor. Labor of course already existed in the economy, but it did not exist in sufficient numbers to supply the new factory system. The necessary
numbers were largely drawn from agriculture, and this in turn required accom-
modation near the mills. Worker dormitories and worker housing were there-
fore provided, and from the combination of mills, workers, and their housing,
industrial cities began to grow. A new set of societal means of organization
had appeared—a new set of arrangements—and with these the structure of
the Victorian industrial economy began to emerge. In this way the character
of an era—a set of arrangements compatible with the superior technology of
industrial machinery—fell into place.
But an era is never finished. Manufacturing laborers, many of them chil-