Market failure vs. system failure as a rationale for economic policy? A critique from an evolutionary perspective

Abstract

This paper reconsiders the explanation of economic policy from an evolutionary economics perspective. It contrasts the neoclassical equilibrium notions of market and government failure with the dominant evolutionary neo-Schumpeterian and Austrian-Hayekian perceptions. Based on this comparison, the paper criticizes the fact that neoclassical reasoning still prevails in non-equilibrium evolutionary economics when economic policy issues are examined. This is more than surprising, since proponents of evolutionary economics usually view their approach as incompatible with its neoclassical counterpart. In addition, it is shown that this “fallacy of failure thinking” even finds its continuation in the alternative concept of “system failure” with which some evolutionary economists try to explain and legitimate policy interventions in local, regional or national innovation systems. The paper argues that in order to prevent the otherwise fruitful and more realistic evolutionary approach from undermining its own criticism of neoclassical economics and to create a consistent as well as objective evolutionary policy framework, it is necessary to eliminate the equilibrium spirit. Finally, the paper delivers an alternative evolutionary explanation of economic policy which is able to overcome the theory-immanent contradiction of the hitherto evolutionary view on this subject.