Having sketched the domain of our inquiry, we turn now to the task of bringing new light to that domain. While the empirical phenomena discussed in the first chapter are complex and variegated, the broad subject matter of innovation and industrial evolution is familiar to a great many economists. Most of our readers know what it is about. On the other hand, the promise of “history-friendly modeling” as an approach to that subject matter is less widely appreciated. A principal purpose of this book is to lay out this new methodological approach and to demonstrate its usefulness. In this chapter, we develop the basic argument for this approach, which we then apply in the remainder of the book. We explain our reasons for believing that history-friendly modeling is a valuable addition to the economists’ analytic tool kit. In doing so, we discuss considerations ranging from the extremely general – “what forms of economic theory help us to understand the world” – to the very specific – “how does one construct a history-friendly model?” We follow the indicated order, from the general to the specific.

COMPLEMENTARY APPROACHES TO MODELING: “FORMAL” vs. “APPRECIATIVE” THEORY

Our development of the concept and technique of history-friendly modeling reflects our belief that present notions of what constitutes “good theory” in economics are inadequate to the task of analyzing and illuminating the kind of phenomena this book addresses. Theorizing about complex phenomena involves, first of all, discriminating between the most salient facts that need to be explained, and phenomena that can be ignored as not relevant or interesting, and second, identifying the most important determining variables, and the mechanisms or relationships between these and the salient phenomena to be explained. This requires screening out or “holding constant” variables and mechanisms that seem relatively unimportant, at least given the questions being explored. There is probably little disagreement about these general points. Regarding the principles for assessing theories, there is more controversy.

The illumination provided by a theory can be assessed on at least two grounds. The criterion most recognized by economists today is its power to suggest hypotheses that will survive sophisticated empirical tests, where confirmation is found in the statistical significance levels achieved in the tests and in measures of “goodness of fit.”