A Model of the Innovation-Adaptation Mechanism Driving Economic Dynamics : A Micro Representation

The study investigates the endogenous mechanism of innovation using a model based on neo-Austrian and Schumpeterian economics.The model, which consists of adaptive and technological features, is simulated over an interval of 16 to 64 periods supposing the existence of 18 firms. The first eight firms practiced innovation and adaptation, while the remaining ten firms practiced only adaptation. Results of the model simulation suggest that innovation and adaptation, collectively, make up the foundation for development and growth. For example, uncertainty associated with a lack of entrepreneurial skill was found to later hinder adaptation and further innovations. On the other hand, a rise in productivity was found to be a consequence of a reduction in uncertainty and an increase in excess of entrepreneurial skill. Furthermore, the adaptive search for profitaffects labor productivity, which then causes a reduction in profit rates and an increase in the excess of entrepreneurship. Simultaneously, the reduction in the variance of profit rates will stimulate applied and basic innovation, which in turn will cause a reduction in the excess of entrepreneurship. This cycle of adaptive and innovative influences helps portray why economic systems grow with disequilibrating-equilibrating development. However, exogenous uncertainty also plays a role in this innovative-adaptive mechanism.(NEE)