Ulrich Witt
Encyclopedia
Ulrich Witt is a German economist and Director of the Evolutionary Economics Group at the Max Planck Institute of Economics in Jena (Germany). He also holds an honorary professorship at the Friedrich Schiller University. His areas of research include evolutionary economics
, long-term trends in economic development, as well as transformations that economic institutions, production, and consumption activities undergo over time.
Witt studied economics at the University of Goettingen and received his Ph.D. in 1979. After completing the Habilitation at the University of Mannheim in 1985 he served as a professor of economics at the University of Mannheim, the University of Southern California (Los Angeles), the Saarland University (Saarbrücken), and the University of Freiburg before he joined the Max Planck Institute of Economics in 1995.
Ulrich Witt is a member of several scientific advisory boards/bodies. He was awarded the K. William Kapp Prize from the European Association for Evolutionary Political Economy in 1992 and received an honorary doctorate from the University Witten-Herdecke in 2003. Furthermore, he is an honorary member of the Japanese Association for Evolutionary Economics. Ulrich Witt has published over 100 scholarly articles, as well as 12 books.
Central to his work is the idea of a naturalistic approach to evolutionary economics. His research connects insights from different disciplines such as biology and psychology and economics with the aim to enrich economic thinking. He applied this approach both to consumer theory and the theory of the firm
.
as a general approach to the study of emergent novelty and dynamic change in economic behavior. In contrast to the Neo-Schumpeterian approach pioneered by Nelson and Winter (1982), which focused on industrial economics and drew its primary inspiration from the Carnegie School of organizational theory, Witt (1987) was strongly influenced by behaviorist
and cognitive psychology
, sociobiology
, and also Austrian economics. Witt provided a multi-faceted account of individual economic agency based on inherited traits as well as a variety of learning processes. The 1987 book - which was derived from Witt’s Habilitation thesis - thus contains the nucleus of what Witt subsequently termed the “Continuity Hypothesis”.
theories insofar as it stresses the importance of cognitive and social dispositions acquired by early humans during natural, biological evolution
. Innate dispositions of this kind are seen as substantially influencing human behavior in an economic context. However, CH places emphasis on the fact that evolutionary processes driving the economy rely on mechanisms different from those underlying biological evolution. The form of evolution relevant for economics is cultural evolution, which, in Witt’s view, is Non-Darwinian and cannot be explained by abstract “Darwinian principles”. Cultural evolution is based on humans’ cognitive apparatus as an outcome of biological evolution, but is governed by distinct and idiosyncratic mechanisms. Therefore, Witt is skeptical about the use of biological analogies in explaining the evolution of the economy. Important Non-Darwinian mechanisms include individual and social learning, the diffusion of knowledge, and the creation of variance through human creativity and imagination. These are the driving forces of socio-economic dynamics that manifest themselves in a process of self-organization. In Witt’s opinion, the role of natural selection in cultural evolution becomes negligible due to the immense increase in pace of evolutionary change and the huge reproductive success of the human species - supported by the evolution of cultural institutions. Thus, the “connection between natural and man-made evolution resolves into an ... indirect one” (Witt 2003, p. 17). In the light of CH, long term economic change is no longer mainly an optimization problem of economizing on scarce resources. Rather, economic evolution today is driven by cumulative knowledge generation and problem solving, guided by learning, insight and intentionality as well as the successive emergence of new problems. In this respect, Witt sees his CH in the tradition of Thorstein Veblen
, while it is “somewhat different from, but not incompatible with, the neo-Schumpeterian approach” (Witt 2003, p. 18).
, and its assumption of consumer insatiability (Deaton & Muellbauer, 1980), LTC suggests that need deprivation and satiation are key motivational factors, and thus useful to explain consumer behavior. States of deprivation (e.g. hunger) induce unpleasant emotions, (i.e. pain), thus motivating individual action. Ending the deprivation (=need satisfaction) is an inherently rewarding experience, encouraging and reinforcing said behavior, and facilitating its future repetition. When two or more needs are simultaneously deprived, LTC posits that the relative strength of a given need, or its salience, compared to all other needs is based on the average rewards that individuals have obtained from past need satisfaction. Consequently, individuals undertake consumption decisions proportional to these average rewards. In this manner, LTC posits that individual consumer behavior follows Richard Herrnstein’s (1997) matching law
.
Based on this business conception and its implied division of labor, employment contracts do not specify a predetermined performance as in ordinary market transactions, but rather contract a “commitment to perform, on a reasonable level of effort, whatever turns out to be necessary when time comes” (Witt, 2007, p. 1127). This contractual framing allows for a high degree of flexibility to deal with unpredictable challenges and difficulties in the organization’s future. But the lower degree of specificity, in turn, requires the entrepreneur to coordinate and motivate the employees to adhere to the business conception. Such a coordination mode implies that the employees use the entrepreneur’s business conception as their own cognitive framework for their firm-related actions to interpret and assess incoming information (Witt, 1998, 1999, 2000, 2007). If the business conception is conveyed convincingly, the entrepreneur can rely on the governance regime of cognitive leadership as opposed to monitoring her employees. Consequently, the cognitive coherence among firm members opens up the possibility of a high level of creative, self-determined problem-solving initiatives from the employees which are nonetheless coordinated by the business conception and are intrinsically motivated (Witt, 2007). This governance regime of cognitive leadership is challenged over time when the firm grows (Witt, 2000). Coordination and communication of the business conception becomes more difficult as direct face-to-face interactions between the entrepreneur and employees become less frequent and rivaling social models might emerge based on informal communication processes among the employees. Therefore, the leader has to provide a convincing, appealing and sound business conception that can shape the informal communication beyond his personal interactions. One way to counteract the risk of rivaling behavior to become dominant is to implement a structure of subdivided entrepreneurship, in which division managers act as cognitive leaders themselves to ensure the cognitive coherence (Witt, 2000). Distinct developmental pattern of firm growth emerge as a result of specific transformative paths from the initial entrepreneurial firm to a larger company with several managerial layers.
Evolutionary economics
Evolutionary economics is part of mainstream economics as well as heterodox school of economic thought that is inspired by evolutionary biology...
, long-term trends in economic development, as well as transformations that economic institutions, production, and consumption activities undergo over time.
Witt studied economics at the University of Goettingen and received his Ph.D. in 1979. After completing the Habilitation at the University of Mannheim in 1985 he served as a professor of economics at the University of Mannheim, the University of Southern California (Los Angeles), the Saarland University (Saarbrücken), and the University of Freiburg before he joined the Max Planck Institute of Economics in 1995.
Ulrich Witt is a member of several scientific advisory boards/bodies. He was awarded the K. William Kapp Prize from the European Association for Evolutionary Political Economy in 1992 and received an honorary doctorate from the University Witten-Herdecke in 2003. Furthermore, he is an honorary member of the Japanese Association for Evolutionary Economics. Ulrich Witt has published over 100 scholarly articles, as well as 12 books.
Central to his work is the idea of a naturalistic approach to evolutionary economics. His research connects insights from different disciplines such as biology and psychology and economics with the aim to enrich economic thinking. He applied this approach both to consumer theory and the theory of the firm
Theory of the firm
The theory of the firm consists of a number of economic theories that describe the nature of the firm, company, or corporation, including its existence, behavior, structure, and relationship to the market.-Overview:...
.
Individualistic foundations of evolutionary economics
Witt’s 1987 German-language book "Individualistische Grundlagen der evolutorischen Ökonomik" is the starting point of an independent line of evolutionary economic thought. The book developed an ambitious vision of evolutionary economicsEvolutionary economics
Evolutionary economics is part of mainstream economics as well as heterodox school of economic thought that is inspired by evolutionary biology...
as a general approach to the study of emergent novelty and dynamic change in economic behavior. In contrast to the Neo-Schumpeterian approach pioneered by Nelson and Winter (1982), which focused on industrial economics and drew its primary inspiration from the Carnegie School of organizational theory, Witt (1987) was strongly influenced by behaviorist
Behaviorism
Behaviorism , also called the learning perspective , is a philosophy of psychology based on the proposition that all things that organisms do—including acting, thinking, and feeling—can and should be regarded as behaviors, and that psychological disorders are best treated by altering behavior...
and cognitive psychology
Cognitive psychology
Cognitive psychology is a subdiscipline of psychology exploring internal mental processes.It is the study of how people perceive, remember, think, speak, and solve problems.Cognitive psychology differs from previous psychological approaches in two key ways....
, sociobiology
Sociobiology
Sociobiology is a field of scientific study which is based on the assumption that social behavior has resulted from evolution and attempts to explain and examine social behavior within that context. Often considered a branch of biology and sociology, it also draws from ethology, anthropology,...
, and also Austrian economics. Witt provided a multi-faceted account of individual economic agency based on inherited traits as well as a variety of learning processes. The 1987 book - which was derived from Witt’s Habilitation thesis - thus contains the nucleus of what Witt subsequently termed the “Continuity Hypothesis”.
Understanding of evolution in economics and hypothesis of ontological continuity
The "Continuity Hypothesis" (CH) provides an ontological basis for evolutionary economics. Witt’s concept is influenced by DarwinianDarwinism
Darwinism is a set of movements and concepts related to ideas of transmutation of species or of evolution, including some ideas with no connection to the work of Charles Darwin....
theories insofar as it stresses the importance of cognitive and social dispositions acquired by early humans during natural, biological evolution
Evolution
Evolution is any change across successive generations in the heritable characteristics of biological populations. Evolutionary processes give rise to diversity at every level of biological organisation, including species, individual organisms and molecules such as DNA and proteins.Life on Earth...
. Innate dispositions of this kind are seen as substantially influencing human behavior in an economic context. However, CH places emphasis on the fact that evolutionary processes driving the economy rely on mechanisms different from those underlying biological evolution. The form of evolution relevant for economics is cultural evolution, which, in Witt’s view, is Non-Darwinian and cannot be explained by abstract “Darwinian principles”. Cultural evolution is based on humans’ cognitive apparatus as an outcome of biological evolution, but is governed by distinct and idiosyncratic mechanisms. Therefore, Witt is skeptical about the use of biological analogies in explaining the evolution of the economy. Important Non-Darwinian mechanisms include individual and social learning, the diffusion of knowledge, and the creation of variance through human creativity and imagination. These are the driving forces of socio-economic dynamics that manifest themselves in a process of self-organization. In Witt’s opinion, the role of natural selection in cultural evolution becomes negligible due to the immense increase in pace of evolutionary change and the huge reproductive success of the human species - supported by the evolution of cultural institutions. Thus, the “connection between natural and man-made evolution resolves into an ... indirect one” (Witt 2003, p. 17). In the light of CH, long term economic change is no longer mainly an optimization problem of economizing on scarce resources. Rather, economic evolution today is driven by cumulative knowledge generation and problem solving, guided by learning, insight and intentionality as well as the successive emergence of new problems. In this respect, Witt sees his CH in the tradition of Thorstein Veblen
Thorstein Veblen
Thorstein Bunde Veblen, born Torsten Bunde Veblen was an American economist and sociologist, and a leader of the so-called institutional economics movement...
, while it is “somewhat different from, but not incompatible with, the neo-Schumpeterian approach” (Witt 2003, p. 18).
The learning theory of consumption
One application of Witt’s “naturalistic approach” to evolutionary economics is his theory of “Learning to Consume” (LTC, Witt 2001) that integrates a needs-based approach with elements of social cognitive psychology to explain long-run changes in economic demand. The theory emphasizes the interplay of need satiation, biologically-founded learning mechanisms, and an appreciation of limitations on individual cognitive ability to illustrate the motivational foundations that underlie the dramatic shifts in long-run consumption patterns. By arguing that the ultimate end of consumption behavior is the satisfaction of needs, LTC attempts to offer an alternative to the subjective value theory of economics.Reinforcement and satiation
Contrary to the theory of demand within neoclassical economicsNeoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
, and its assumption of consumer insatiability (Deaton & Muellbauer, 1980), LTC suggests that need deprivation and satiation are key motivational factors, and thus useful to explain consumer behavior. States of deprivation (e.g. hunger) induce unpleasant emotions, (i.e. pain), thus motivating individual action. Ending the deprivation (=need satisfaction) is an inherently rewarding experience, encouraging and reinforcing said behavior, and facilitating its future repetition. When two or more needs are simultaneously deprived, LTC posits that the relative strength of a given need, or its salience, compared to all other needs is based on the average rewards that individuals have obtained from past need satisfaction. Consequently, individuals undertake consumption decisions proportional to these average rewards. In this manner, LTC posits that individual consumer behavior follows Richard Herrnstein’s (1997) matching law
Matching law
In operant conditioning, the matching law is a quantitative relationship that holds between the relative rates of response and the relative rates of reinforcement in concurrent schedules of reinforcement...
.
Motives and needs
Within LTC, motives, needs, and wants can be distinguished by the nature of their acquisition, i.e. the relevant learning process or lack thereof. Innate needs, like that for caloric intake, are genetically determined and therefore shared (with the usual genetic variance) among all humans. Acquired needs (also called wants in LTC) result from processes of conditioning learning (whether classical, operant, or social-cognitive). Similarities between individuals concerning their set of needs arise from the genetic basis of innate needs, as well as similarities in initial conditioning environments (e.g. a joint cultural background). Differences between individuals, however, can be caused by genetic variance, idiosyncrasies within conditioning environments (e.g. coming from different families), and/or cognitive interventions modifying reinforcement processes. These mechanisms suggest that preferences are not entirely subjective, but rather exhibit substantial generality across individuals within reference groups or even mankind.Changes in long-term consumption patterns
Long-term changes in aggregate consumer behavior occur due to the variance in deprivation/satiation dynamics across needs. While some needs (e.g. caloric intake) are easily satiable, others, such as those subject to positional or habituation effects, are not (e.g. the need for social status). Given the fundamental nature of the budget constraint, these differences between needs mirror systematic changes in the expenditure shares of consumption as income rises. In specific, expenditure on goods serving easily satiable needs is capped once these needs are satiated; therefore any additionally available income is devoted to needs still deprived, i.e. less easily satiable needs. Expenditure shares for the latter categories (e.g. housing) will thus rise, while shares for the former (e.g. food) will decline. Consequently, LTC provides a motivationally-based mechanism that explains why income elasticities differ across categories of consumption goods.Historical growth in demand and innovation
However, in absolute terms, expenditures even on food and clothing are still growing in affluent societies. In LTC, this fact is accounted for by emphasizing the innovative attempts of producers to escape satiation. Strategies to escape satiation include: (1) reducing the satiating component of the product (e.g. diet products, decaf coffee, or alcohol-free beer), (2) substituting equally satiating, but scarcer, more expensive ingredients, (3) integrating product characteristics that appeal to less easily satiable needs (e.g. fashion, status attributes), which LTC terms ‘combination goods’, and (4) the creation of cognitive motives to encourage multiple purchases within a given product category (“marketing innovations”). The final strategy, in specific, usually provides reasons for functional diversification for items such as shoes, and explains the motivation to always have ‘the latest model’.The origin of the firm and cognitive leadership theory
The evolutionary theory of the firm by Witt (1998) puts the role of the entrepreneur at center stage in explaining why firms come into existence in the first place and how firms evolve subsequently. Markets and firms are not substitutes: In addition to transaction cost considerations the organizational form of the firm is preferred over ordinary market transactions as it allows for benefits which are not realizable via market contracts (Witt, 2007). In particular, the entrepreneurial input in creating a new venture is mainly cognitive in nature as the entrepreneur conceives a business opportunity and provides a business conception of how to organize resources for a certain purpose (Witt, 1998). A business conception in this respect “consists of subjective, sometimes highly idiosyncratic imaginings in the mind of (potential) entrepreneurs of what business is to be created, and how to do it” (Witt, 2007, p. 1127).Based on this business conception and its implied division of labor, employment contracts do not specify a predetermined performance as in ordinary market transactions, but rather contract a “commitment to perform, on a reasonable level of effort, whatever turns out to be necessary when time comes” (Witt, 2007, p. 1127). This contractual framing allows for a high degree of flexibility to deal with unpredictable challenges and difficulties in the organization’s future. But the lower degree of specificity, in turn, requires the entrepreneur to coordinate and motivate the employees to adhere to the business conception. Such a coordination mode implies that the employees use the entrepreneur’s business conception as their own cognitive framework for their firm-related actions to interpret and assess incoming information (Witt, 1998, 1999, 2000, 2007). If the business conception is conveyed convincingly, the entrepreneur can rely on the governance regime of cognitive leadership as opposed to monitoring her employees. Consequently, the cognitive coherence among firm members opens up the possibility of a high level of creative, self-determined problem-solving initiatives from the employees which are nonetheless coordinated by the business conception and are intrinsically motivated (Witt, 2007). This governance regime of cognitive leadership is challenged over time when the firm grows (Witt, 2000). Coordination and communication of the business conception becomes more difficult as direct face-to-face interactions between the entrepreneur and employees become less frequent and rivaling social models might emerge based on informal communication processes among the employees. Therefore, the leader has to provide a convincing, appealing and sound business conception that can shape the informal communication beyond his personal interactions. One way to counteract the risk of rivaling behavior to become dominant is to implement a structure of subdivided entrepreneurship, in which division managers act as cognitive leaders themselves to ensure the cognitive coherence (Witt, 2000). Distinct developmental pattern of firm growth emerge as a result of specific transformative paths from the initial entrepreneurial firm to a larger company with several managerial layers.