Innovation, uncertainty, entrepreneurship: Modelling the dynamic process of the economy – discussion and formalization
Introduction This chapter discusses some misunderstandings that afflict economic thought, in an attempt to contribute to their clarification. They concern three important aspects of the economy tightly linked with each other: innovation, uncertainty and entrepreneurship. Their interaction will be represented here through the notion of dynamic competition. This feature of the economy is inconsistent with the analytical apparatus of mainstream economics that, as a consequence, has yielded completely delusive results despite the use of sophisticated techniques and procedures. The situation is made worse by the fact that the various branches of heterodox economics, even if animated by an acute and growing dissatisfaction toward mainstream economics, have not offered a satisfactory treatment of the three aspects. A study of the matter must meet a complex and encroaching intellectual apparatus that has been built over time on methodological bases that, although fashionable, are substantially misleading. This will oblige us to start from some treatment on method additional to that in Chapter 1 and limited to what is absolutely indispensable. The chapter is articulated as follows. Section 5.1 starts with some considerations on method, mainly addressed to economics. Then it presents a simple and concise representation of the productive process based on the notion of dynamic competition as expressing the interaction between uncertainty, entrepreneurship and innovation. It follows an analysis of uncertainty, innovation and a description of the dynamic and cyclical motion of the economy; these developments also allow the explanation of entrepreneurship, this being inconceivable in the absence of uncertainty. The section ends up with a treatment of fixed capital, which is a protagonist of dynamic motion and is deeply concerned with innovation and uncertainty. These analyses will provide the foundations of the subsequent development. Section 5.2 expounds a critical review, starting with some main omissions and equivocations of general economics. Afterwards, we discuss two enlighten-
ing approaches that provide the premises for a satisfactory treatment of dynamic competition; this allows showing a missing ring, represented by the postulate of non-measurability of radical uncertainty and the impossibility of its explanation, a postulate that strongly opposes the necessary clarification on the matter. We then suggest that the current insistence on bounded rationality, polemically with the neoclassical theory of perfect knowledge, has accentuated the difficulty of formalizing dynamic competition and caused various equivocations on decision making. Some consideration on institutions, with reference to the theory of the firm, will follow. Finally, Section 5.3, after having indicated various ways of measuring radical (i.e. non-probabilistic) uncertainty, presents a formal model of the dynamic process of the economy, and carries out some simulations with the specified model. The hope of these analyses is to stimulate some implementation of economic research along lines that have been insufficiently deepened until now.