The Evolution of an Industrial Sector with a Varying Degree of Roundaboutness of Production

Abstract

The evolutionary model presented in this paper depicts an industrial sector with a varying degree of economic roundaboutness, i.e., vertical division of labor between producers and users of different types of intermediate products that are ultimately used for the production of a single final product. To include this vertical aspect of industrial dynamics, the model adds the concept of production trees to the evolutionary models of Schumpeterian competition. The specification of this concept suggests the use of the notions of graph theory and the related algorithms of computer science in the treatment of industrial novelty, including structural innovations. Although the model is developed within the Nelson and Winter tradition, the introduction of the Austrian issue of roundaboutness implies a major extension of the research agenda, including production-structure innovations, the emergence and functioning of markets for intermediate products, ways of coping with the instability of upstream markets, the spread of the effects of an upstream innovation, and the measurement of the degree of roundaboutness and of overall productivity. The model reflects a Schumpeterian version of the Boehm-Bawerkian vision of the emergence of increased long-term roundaboutness of production. The Schumpeterian approach implies an innovation- and entrepreneur-driven process of vertical disintegration and reintegration.