There are two main premises which underpin evolutionary economics.6 First, the primary focus of the analysis should be on the mechanisms that produce growth and change, rather than a series of static equilibria. This is foremost a consequence of the emphasis which evolutionary economics places on innovation as a source of economic growth. Innovation, here, is broadly defined to include not only technological innovation, but also organisational and institutional innovation. Second, the analysis should pay careful attention to the burden which uncertainty places on the informational resources of individuals and organisations. The evolutionary approach sees agents as constrained not only by financial and physical constraints, but also by limits on information processing capabilities.
To overcome the constraints posed by imperfect information, evolutionary economics posits that individuals (through interaction) and organisations (via repetition) develop routines to interpret and process the flow of information The organisation, constrained by the existing stock of information, continually operates within a narrowly defined set of "neighbourhood routines” (Murrell 1992b p. 39) until some event occurs which frees them from this process. Murrell (1992b p. 39) identifies three such “mechanisms" in capitalist economies. These are: (1) The process of entry - the creation of a variety of new organisations, some of which will find an effective organisational structure. (2) Takeovers, mergers and bankruptcy, each of which remove inefficient organisations and (3) The resource allocation function of the market, via which resources are reallocated from inefficient organisations to efficient organisations.
The evolutionary approach emphasises that the existing stock of organisations and informational flows is a product of the old (socialist) environment. The market might be more efficient in the long run, but in the short run routines and expectations are still best suited to the bureaucratic environment of central planning. The shift from central planning to the market also requires radical institutional change which is costly in the transformation phase. This cost is magnified when the change in environment produces a ratchet effect that removes the possibility of ever returning to past behaviour. The costs are particularly evident when long-stable co-operative agreements are no longer viable and have to be replaced with what are, at least in the short run, less attractive alternatives (Nelson & Winter 1982, Murrell 1992b pp.40-42).
The evolutionary paradigm has been used to justify both big bang and gradualist approaches to reform. Murrell's (1992a, 1993) prescription for reform is typical of gradualist reasoning. He argues that enterprises are generally only able to develop new routines, without a significant loss in efficiency, when exposed to small amounts of institutional change. Murrell’s view is that “the institutional matrix at the heart of any successful system [must be] produced slowly in an idiosyncratic, contingent process" (Murrell 1993, p. 120). The concept of routines in daily decision making has also been used to support radical approaches to reform. The alternative view to the gradualist perspective, put forward in support of big bang, is that a radical departure from past practices is required to provide the state with the credibility necessary to pursue further reforms. The argument is that there needs to be a “minimum big bang” ie. a complete break from past routines or a critical mass of changes is required. The rationale for this is that the reform process will initially be painful. Therefore, if there is not a complete break with the past, then rather than
make the necessary adjustments, enterprises will subvert the reform process in an attempt to return to the routines of the past with which they feel more comfortable. The term “necessary adjustments" in this context means adjustment to a market economy with private property rights (see Lipton & Sachs 1990). If the economy does not achieve a critical mass of private ownership, rapidly, to induce firms to respond to market signals, the danger is the reform process will be compromised (Roland 1994)7 The arguments for and against both big bang and piecemeal reforms are not clear-cut. Most proponents of gradualism {eg McMillan & Naughton 1992 and Murrell 1992 1993) point to the success of the Chinese reforms to support their claim that gradualism works. At the same time they refer to the poor performance of East Europe to argue that radical reform does not work. In contrast, the advocates of big bang {eg Lipton & Sachs 1990 and Sachs & Woo 1994) put forward a disparate range of arguments disputing the premise of gradualist success and/or supporting the basis of big bang reform. Some controversial points deserve particular mention:8
(i) Most scholars treat the Chinese reforms as piecemeal. Naughton (1995), for example, likens the reform experience to "growing out of the plan”. However, some commentators {eg Johnson 1994 and Walder 1995) suggest that the agricultural reforms involved a big bang. While agricultural growth has slowed considerably since 1984, in the initial reform period the agricultural reforms were arguably the most successful.
(ii) The gradualist approach to reform is most evident in the state-owned sector. The performance of the state-owned enterprises (S.O.Es) in China is particularly controversial (see section 2.3 below). The issues are further blurred when enterprises are categorised by size - large, medium and small - rather than ownership type - state and non-state - (see Lo
1997 chap. 4). Most, though, accept that the state-owned sector is, relative to agriculture and collective owned enterprises (C.O.Es) the least satisfactory performing sector (see Putterman 1995). This view is shared by commentators critical of state enterprise reform {eg Woo 1994 pp.284- 288, Lee 1994 pp. 191-195) and commentators who are supportive of the broad thrust of state enterprise reform {eg Jefferson & Rawski 1994).9
(iii) While debatable, some commentators have suggested that Eastern Europe did not undertake shock therapy as its first option for reform. Sachs & Woo (1994), for example, argue that the big bang approach was only adopted after the repeated failure of piecemeal reforms. Sachs & Woo (1994) further argue that when Russia did implement rapid price liberalisation in 1992 and rapid mass privatisation in 1993, it failed to open the trading system or undertake macroeconomic stabilisation. Hence Sachs’ (1992a) position is “the problem is not the reform....the problem is the failure to carry through the reform". This is a controversial statement, and there are many who would disagree with Sachs. Nevertheless, the failure to implement complementary policies rather than the effects of shock therapy per se arguably explains, or at least contributed to, the poor performance of the big bang reforms in Russia.
(iv) Poland, which was the most pure example of shock therapy was the first East European economy to show signs of recovery in 1992-1993. The critics of big bang point out that Poland’s economy is the "best of the worst" (Murrell 1992a and Gowans 1995). While this is true, the other economies (such as Russia) which started from worse positions may follow. Related to this is the fact that although the economic situation in China looks much better now than it did in 1978, this is only after an
eighteen year period - up to 1996 - whereas the big bang in Poland occurred much later. Therefore there is a good case that there needs to be a further period of adjustment in Eastern Europe before the success, or otherwise, of the radical reforms there can be fairly compared to China.
(v) The advocates of shock therapy refer to the reform experience in Vietnam which, they argue, stands in contrast to China. Woo (1994 p.305) argues that when Vietnam initially undertook Chinese style partial reforms from 1985 to 1988 they were not successful. However, when the authorities adopted a more radical strategy (including rapid price liberalisation and the decollectivisation of agriculture) the growth rate improved significantly. This view of the reform process has some support in Dollar’s (1994) article on Vietnam, but it has been questioned in other research - see for example Fforde (1994) and Probert & Young (1995). While each of these points are debatable, neither gradualist nor big bang perspectives are totally satisfactory. The problem with the big bang approach is that it advocates transition to the market, rather than
transformation, which is open-ended, without (i) providing sufficient
reasons why transition need be preferable or (ii) demonstrating that it is possible to create a system which is consistent with individual property rights which will work in practice. The two points are related. Where there is a pre-existing set of policies there is an a priori requirement to justify further reform. This involves showing that an alternative set of policies would work better than those that are already in place. The emphasis which advocates of shock therapy place on post-socialist transition per se leaves them open to the criticism that they are too focused on (even ideologically driven to - see Gowans 1995) a specific version of capitalism based on the Anglo-Saxon model. The result is that the big bang approach overlooks the potential value of a range of other
models; capitalist models - such as the "Japanese model” and the "German model”10 - and market socialism which might be better suited, in some circumstances, to building institutions in the transformation period. The evolutionary approach, in contrast to big bang comes close to advocating an open-ended transformation where different forms of capitalism or market socialism are foreseeable. Moreover, the gradualist argument, unlike big bang, stresses the pitfalls in immediate transition to private property and market regulation. It is, therefore, quite consistent with the emergence of a variation on existing models where new and distinct combinations of organisational forms are possible. The gradualist argument, however, suffers from the same flaws as the big bang approach in one important respect. "[Gradualist] writings have not attempted... to unravel the interplay between the three aspects of their focus: institutions, innovations and economic development. They simply leave the end state to be determined by the market, assuming that the most efficient institutions would thereby emerge ... Their break with big bang [therefore is] far less complete than it appears to be" (Lo 1997 p.20).