3.1 The assumption debate
The first debate concerns the assumption debate centred on the assumptions that agents maximize
some objective under the assumption of complete information on all relevant data. Both evolutionary and
institutional economists have criticised at various occasions the poor descriptive value of the neoclassical
assumptions of utility-maximizing individuals (including profit-maximizing firms) under a regime of
perfect information. As Dosi (1984) put it, “we must abandon the neoclassical framework because we
cannot assume an exogenous and given context and many God-like actors who behave in accordance with
a uniform rationality” (p. 107). By contrast, evolutionary and institutional economists claim that
individual behaviour is guided by routines and institutions that provide the basis for decision-making in an
inherently uncertain environment (Veblen 1898; Simon 1955; Nelson and Winter 1982). As such, they
reject the atomistic view of economic actors that ignores the contextuality of human action, which is, at
best, held constant. This is not to say that evolutionary and institutional economists assume that agents do
not wish to maximize utility and profits, but that real-world agents are not able to do so.
Though there are multiple ways to approach this long standing debate in the history of economics, a
convenient starting point is the ‘marginalist controversy’ in the late 1940s (Vromen 1995). This debate
focused on the question whether business men really behaved according to the neoclassical assumption
that firms maximise profits, and in order to do so, equal marginal benefits to marginal costs. Empirical
research showed that business men used rules of thumb rather than precise calculation of marginal benefits
and marginal costs. One such rule of thumb is to determine the price from the average costs plus a mark
up. This debate, however, quickly resolved when Alchian (1950) and Friedman (1953) argued that the
question whether or not firms maximise profits is not the relevant question to ask. In reality, firms may
decide in different ways on the technologies they use, the quantities they produce and the prices they set.
Following Nelson and Winter (1982), one can use the term business routines to refer to the whole set of
decision procedures and technologies a firm uses. From this heterogeneity in business routines, firms that
act closest according to the prescriptions of neoclassical theory will then make most profits, while other
firms make losses. As a result, through an evolutionary process of selection, firms with routines producing
behaviour that is closest to the prescriptions of neoclassical theory for profit maximisation, will drive out
firms that do not. This process takes place irrespective of the way in which firms come to these decisions.
Different from natural selection in biology, however, economic selection need not take place through
differential reproduction rates (the analogy being spin-off companies), but also through different growth
rates of firms and imitation of firms with successful routines by firms with less successful routines. Also
note that an evolutionary reasoning applied to business routines requires these routines to be invariant over
time.
In this view, neoclassical theory is still useful as a predictive theory. For example, neoclassical theory
predicts that a change in factor prices will lead firms to change their technologies such that the factor that
has become more expensive is less used as an input. Although this prediction is derived by assuming firms
to maximise profits, which they do not, the prediction of factor substitution may well be right, as firms
adopting a technology that makes less use of the factor that has become more expensive, will prosper and
other firms will face losses. By invoking an evolutionary reasoning to defend the neoclassical theory of