An important virtue of orthodox theory is that it offers a relatively definite idea of what it is that firms do: they maximize profits, sub-ject to constraints. In practice, of course, the great diversity of the problems that can be cast into this framework, as well as the con flicting predictions that the resulting models yield about the same observables, largely undercuts any claim that orthodox theory has specific empirical content regarding firm behavior. Nevertheless, orthodox theory does impose a definite discipline on the character of formal models. It may well be impossible for a real firm to behave in ways that cannot be represented by some suitably elaborated ortho dox model, but it is certainly possible for a paper submitted to a journal to be judged unsound by orthodox referees because it does not model fi rm behavior “properly.” And this modeling discipline is a valuable one, at least in the sense that it perpetuates the intellectual routines of the orthodox theoretical enterprise.
In evolutionary theory, the ultimate discipline on the representation of firm behavior is considered to be empirical. Notions that firms pursue profits, that they satisfice, that they follow relatively simple rules, that they expand when p rofitable, and so on are all appropriate grist for the evolutionary theorist’s mill, but only be cause (and to the extent that) they are plausible as empirical general izations. This viewpoint gives the study of firm behavior per se a very different status in evolutionary theory from the one that it has in orthodoxy. The more we can learn about the way in which firms actually behave, the more we will be able to understand the laws of evolutionary development governing larger systems that involve many interacting firms in particular selection environments.
In particular, the routines actually employed by business firms present a broad fi eld of inqui ry from which, ideally, evolutionary theorizing would draw the needed empirical discipline. The issues involved are as diverse as our use of the term “routine” is flexible, and the viable approaches to the topic are correspondingly nu merous. The markup pricing study of Cyert, March, and Moore (Cyert and March, 1963 , Ch. 7) is a classic of one sort of work: the detailed examination and simulation by a computer program of a par ticular decision rule in a particular firm. Pricing behavior has been examined with a v ariety of other methodologies; in fact, research on pricing accounts for a major segment of the e mpirical critique of the o rthodox representation of firm behavior.6 Unfortunately, the ab sence of an appropriate theoretical structure to guide the research and build upon its results has limited its usefulness. Evolutionary theory provides the needed structure, and the earlier work on pricing deserves reexamination and extension.
One area of firm behavior that plainly is governed by a highly structured set of routines is accounting. Like other routines of real organizations, accounting procedures have the important character istic that they can be applied on the basis of information actually available in real situations. For orthodoxy, accounting procedures (along with all other aspects of actual decision processes) are a veil over the true phenomena of firm decision making, which are always rationally oriented to the data of the unknowable future. Thanks to orthodoxy’S almost unqualified disdain for what it views as the epi phenomena of accounting practice, it may well be possible in this area to make great advances in the theoretical representation of firm behavior without any direct empirical research at all- all one needs is an elementary accounting book. There are, however, some very interesting and important empirical questions concerning the extent to which accounting conventions systematically “distort” real deci sions, whether by promoting what economists would regard as fun damental misunderstanding of decision problems, or for reasons having to do with cosmetic concerns about measured performance. We expect that such effects will be found to be commonplace and in many cases quite important; this view is a facet of our general belief that there is no unobservable process that somehow overrides the decision mechanisms that appear to be operative in real firms and re places their results with the conclusions of orthodox theory. Ortho doxy’s indifference to accounting presumably is premised on the op posite view of the matter. This is one arena in which the clash between the two theoretical perspectives seems to be quite direct, and in which, therefore, some significant empirical tests might be possible.
The “routine as target” discussion in Chapter 5 constitutes a guide to other areas of empirical research relevant to evolutionary theory. Organizations that operate many very similar establishments-for example, retailing and fast-food chains-provide a natural labora tory for studying the problems of control and replication. There have been a multitude of studies of the diffusion of new technologies and considerable work on the problems of technology transfer. In these areas, as in that of pricing behavior, we believe that the interpretive framework of evolutionary theory would provide useful structure and guidance for future work.
For a final example of a class of empirical issues relevant to the theory, we chose one that is well suited for examination with the sorts of econometric techniques that dominate empirical work in the discipline today. It is remarkable that there is a large empirical litera ture on investment and a significant empirical literature on firm growth, but that the two literatures are virtually diSjoint. One would think that the investment and growth of an individual firm would be intimately related; certainly they are so in our models. But for a vari-ety of reasons having mostly to do wi th the relations of available data sets to differing foci of theoretical concern, this relationship is not apparent in the econometric literature. In the simplest evolutionary models, profit- seeking firms invest because they can cheaply repli cate their distinctive routinized ways of doing things and because the prevailing market signals indicate that it is profitable to do so; in vestment produces growth in capacity if not in sales revenue, and growth differences among firms are a mechanism of adaptive change in the mix of routi nes displayed in the industry. Of course, this pic ture is oversimplified, and conceptual and data availability problems would in any case stand in the way of estimating the relations in volved . For example, capacity is not sharply defined in many indus tries, particularly those in which firms are multiproduct, and there may be complex and variable lags linking profitability to investment decisions to capacity growth. Nevertheless, it seems clear that a con cern with the quantitative appraisal of the selection mechanism has not been a major factor in guiding empirical research in this general area in the past, and that there are many feasible and theoretically significant proj ects waiting to be done.
Source: Nelson Richard R., Winter Sidney G. (1985), An Evolutionary Theory of Economic Change, Belknap Press: An Imprint of Harvard University Press.