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JEPP
8,4
442
Received 20 November 2018
Revised 14 January 2019
Accepted 14 January 2019
Journal of Entrepreneurship and
Public Policy
Vol. 8 No. 4, 2019
pp. 442-469
© Emerald Publishing Limited
2045-2101
DOI 10.1108/JEPP-D-18-00084
Creativity in a theory
of entrepreneurship
James Lee Caton
Department of Agribusiness and Applied Economics, Fargo, North Dakota, USA
Abstract
Purpose – The purpose of this paper is to integrate a detailed theory of perception and action with a theory
of entrepreneurship. It considers how new knowledge is developed by entrepreneurs and how the level of
creativity is regulated by a competitive system. It also shows how new knowledge may create value for the
innovator as well as for other entrepreneurs in the system.
Design/methodology/approach – The theory builds on existing literature on creativity and
entrepreneurship. It considers how transformation of mental technologies occurs at the individual and
system levels, and how this transformation influences value creation.
Findings – Under a competitive system, the level of creativity is regulated by the need for new ways of doing
things. Periods of crisis wherein old means of coordination begin to fail often precipitate an increase in creativity,
whereas a lack of crisis often allows the system to settle to a stable equilibrium with lower levels of creativity.
Research limitations/implications – The combination of methodology and methods facilitates a
description of discrete building blocks that guide perception and enable creativity. This framing enables
consideration of how a changing set of knowledge interacts with a system of prices.
Practical implications – Policy makers must take care not to encumber markets with costs that
unnecessarily constrain creativity, as experimentation makes the economic system robust to shocks.
Social implications – This work provides a framing of cognition that allows for a linking of agent
understanding that permits explicit description of coordination between agents. It relates perception and ends
of the individual to constraints enforced by the social system.
Originality/value – As far as the author is concerned, no other work ties together a robust framing of
cognition with computational simulation of market processes. This research deepens understanding in
multiple fields, most prominently for agent-based modeling and entrepreneurship.
Keywords Heuristics, Entrepreneurship, Complexity, Epistemology, Agent-based model
Paper type Research paper
Introduction
Creativity describes an act that redefines categories of analysis or recombines them to
produce an object, process or perspective that did not exist before the creative act. Such a
creative act can transform a medium for understanding, such as with a piece of art or in the
development of a new or transformation of an existing field of thought. It may attempt to
reorder one’s beliefs or surroundings according to a different ordering principle than was
previously submitted to.
Creativity is integral to the entrepreneurial processes, but it is notoriously difficult to
model. Traditional equilibrium modeling leaves the entrepreneur and the institutions
navigated by him/her in the background (Kirzner, 1963; Wagner 2010). Although there
exists interest in developing an economic framework that integrates creativity into analysis
(Koppl et al., 2015), the path to a formal model of creativity has remained non-obvious.
This paper presents a framework for modeling creativity and agent cognition in a theory of
entrepreneurship. It applies this framework in an agent-based model in which agent decision
making is guided by heuristics and allowed to evolve through experimentation and sharing of
knowledge. Agent-based modeling presents an opportunity to integrate creativity into the core
The author owe gratitude to many for their supporting the development of ideas present in this article.
An incomplete list includes Richard Wagner, Peter Boettke, Robert Axtell, Abigail Deveraux, Cameron
Harwick, Alex Salter, the participants at the Texas Tech Free Market Institute's Research Workshop,
Pavel Kuchar, Erwin Dekker, my wife Ingrid, and the late Ion Sterpan. All errors herein are my own.
of a model of economic activity. Much discussion has focused on this potential without applying Creativity in a
the insight or framework to an agent-based model (Nell, 2010; Seagren, 2011; Gangotena, 2017). theory of
Newell and Holian (2017) included creativity in an agent-based model in terms of product entrepreneurship
diversity, but they did not integrate an evolutionary paradigm into their model. The author used
an evolutionary agent-based model to show that the level of creativity is endogenously
regulated within a competitive economic system. Before presenting the framework and model,
I consider the existing literature on entrepreneurship, knowledge and creativity. 443
A review of entrepreneurship, knowledge, creativity in economic theory
Entrepreneurship and knowledge
The entrepreneur and entrepreneurial adaptation are non-existent in the core model of the
neoclassical economic theory (Baumol, 1968; Kirzner, 1963; Buchanan and Vanberg, 1991), as
equilibrium is not a result, but an assumption of the model (Debreu, 1959; Arrow and Hahn,
1971; Muth, 1961; Fama, 1970; Axtell, 2007, p. 107; Wagner, 2010). Agent knowledge, which
consists largely of rules that aid interpretation of and interaction with objects and processes
present in one’s context and in light of one’s ends, is reduced to a utility function. The
traditional economic man is left to make decisions in response to changing prices according to
the calculus of optimization[1]. Over the course of the last half century, alternate framings of
the economic agent have been generated (Simon, 1969, 1972, 1974, 1979; Hayek, 1962; North,
1990, 2005; Kahneman, 2011; Koppl, 2002; Smith, 2003; Gigerenzer, 2008), but these have not
been synthesized in a manner that joins a systematic theory with felicitous modeling
comparable to econometric analysis or dynamic stochastic general equilibrium models.
In approaching this challenge, it is helpful to consider the essence of entrepreneurship.
All human actions have an entrepreneurial element. We apply and transform given means
with intention of creating and attaining value. Such an act requires creativity, as it is not
clear how means should be employed and which ends should be pursued (Sarasvathy, 2001).
The pursuit of value occurs in an environment that is bound to change over time, often in
ways that are unpredictable. Frank Knight (1921/1964) identified the entrepreneurial role as
one of overcoming uncertainty that may otherwise prevent him/her and others from
realizing his/her ends. The entrepreneur employs means to create value in situations about
which he/she has only partial knowledge.
Humans must adjust to a world that is continually changing. This change is driven by
physical circumstances as well as human agents themselves. These agents are also a part of the
environment and their attributes can also change. Reflecting on this, Buchanan (1979)
reconsidered Heraclitus claim that a man does not step in the same river twice because the river
is not the same river and neither is he the same man (p. 257). An essential characteristic of
being human is to change one’s own beliefs or, more fundamentally, one’s own character. These
are reflected in a change in his/her pattern of action. To adapt to changing circumstances
simply by one’s own effort is a uniquely human characteristic and is key to overcome
uncertainty. Human beings and their understanding are objects of their own analysis.
Together, the framework and model presented here investigate changing strategies and
their correlates in cognitive structure[2]. The human agent’s understanding of the
environment is embedded in a strategy: patterns of action aimed at some end (Nelson and
Winter, 1982)[3]. Most strategies can be defined in terms of context-dependent rules that
guide agent perception and action (Hayek, 1962). Using these strategies, agents interact with
the world, both responding to changes in it and influencing their evolution.
This can be compared with the traditional framework, perhaps best embodied by Stigler
and Becker (1977), that attempts to explain all actions in terms of response to changing
prices. They argued, “the hypothesis of stable tastes yielded more useful predictions” than
alternate hypotheses about apparently irrational behavior such as addiction (89). The
usefulness of the perspective is undeniable. Even so, a perspective that submits action solely
JEPP as a response to changes in relative prices frames humans as passive actors. This framing of
8,4 human action is unable to observe the fundamental role that sensing entrepreneurs play in
producing innovation and transforming the economic system (Kirzner, 1973). It reduces the
true complexity of knowledge and strategy (Klein, 2012).
As entrepreneurs become aware of new possibilities, they disrupt the previous socio-
economic order (Schumpeter, 1912/2004) and recoordinate the system in light of the new
444 innovation. They disrupt the old equilibrium arrangement, moving the system toward a new
one. Such entrepreneurial activity calls for “aggressive, bold, creative, leadership qualities”
that bring the fruit potentiated by entrepreneurial alertness into existence (Kirzner, 1999,
p. 13). Whether the shock to the economic system that was previously in a coordinated state
comes from innovation or less beneficial disruption, entrepreneurs work to move the system
to an efficiently coordinated state in light of knowledge of this disruption. The traditional
theory captures the move to equilibrium, but it is unable to consider the process of “creative
destruction” (Schumpeter, 1942/1994). Successful entrepreneurs adapt to dynamic
circumstances that include a changing physical environments, prices and knowledge and
preferences of themselves and others.

The role of creativity in overcoming uncertainty

Entrepreneurs imagine and develop worlds that would not exist without their leadership (Lewis,
2016; cites Shackle, 1979). Henry Ford is supposed to have said that if he “would have asked
people what they wanted, they would have said faster horses”[4]. Steve Jobs and Bill Gates
developed a market for personal computing when many in the industry believed they were
wasting their time (Isaacson, 2011). Entrepreneurs act to create value in often novel ways.
In the context of a market system more generally, entrepreneurs act as directors of
production whose efforts are guided by monetary profits (Cassell, 1932/1967, p. 171). Profit
seeking not only entails the development of increasingly efficient means toward a given end
already defined by consumers, but within a market ordering, successful entrepreneurs also
accommodate and influence the desires of consumers. Entrepreneurs discover and develop
profit opportunities as they act in a world that changes in ways that are difficult, if not
impossible, to predict (Knight, 1921, 1964). To overcome this problem, entrepreneurs must
continually transform their knowledge, often in ways that are indecipherable to others at the
time. They must be creative.
The structure of one’s knowledge plays a significant role in enabling the entrepreneur to
transform the world. Knowledge is a good. It is a means to action and coordination. Knowledge is
scarce and may be deemed by agents as having relatively greater value if it reduces uncertainty
compared to other knowledge that is otherwise the same. Ken Arrow (1974) explains:
Uncertainty means that we do not have a complete description of the world which we fully believe
to be true […] Our uncertainty consists in not knowing [emphasis mine] which state [of the world] is
the true one. (pp. 33-34)
This uncertainty is a cost. Thus, knowledge that reduces uncertainty is valuable.
Uncertainty that may be reduced to risk is ontological uncertainty (Lane and Maxfield,
2005). If one reduces ontological uncertainty by acquiring useful knowledge, he/she is able
to learn, or at least better understand, the true state of the world and is able to more
efficiently order his/her actions in light of his/her ends.
This knowledge allows the actor to link action and organization to real-world outcomes.
It exists in the form of rules that interpret an environment and define an agent’s response to
that environment. Rules that govern interaction with the environment are strategies (Nelson
and Winter, 1982, 2002, p. 30; Dopfer and Potts 2004, p. 198)[5]. The level of success that
these strategies promote is not known ex ante. Through a process of trial and error, agents
discover and share strategies that tend to promote sufficient adaptation for survival
(Macmillan and Low, 1988). In a pure market setting, as in the model, competition between Creativity in a
strategies and sharing of useful knowledge channels agent creativity toward outcomes that theory of
generate the greatest value for themselves and others (Gross, 2019). entrepreneurship
Successful adaptation entails the learning of useful knowledge. Humans continually adjust
the structure by which they interact with one another. This includes adaptation of productive
strategies and institutions. All of these – strategy, institutions, rules and so forth – fall
under the broader headings of technology[6] (Solow, 1957) and human capital (Becker, 1962, 445
1964/1965; Goldin, 2016). The evolutionary logic displayed in Becker’s (1962, 1963) debate with
Kirzner (1962; see also Alchian, 1950) describes the development of technology, embodied in
capital and its organization, in a manner coherent with the model described below.
Agents experiment with new strategies. They learn from those experimenters who
succeeded in earning high levels of profit (Bikchandani et al., 1998)[7]. This mechanism is
especially important when a system experiences an exogenous disturbance. An innovator
whose strategy yields a profit resulting from the change can lead others to adapt (Aldrich
and Martinez 2001)[8]. As Aldrich and Martinez argue, humans exhibit a tendency to
innovate and duplicate: “playfulness and experimentation are natural human impulses […]
However, people’s tendency to defer to the beliefs of others blunts the full expression of
these impulses”[9]. Creativity in entrepreneurship may be modeled as mass experimentation
accompanied by strategic emulation. This latter aspect is observed in the adoption of new
technology enabled by knowledge spillovers (Zhang, 2003).
Agents face opportunity cost entailed by the choice of one set of knowledge over another. If a
new set of knowledge is chosen for use, it is employed at the cost of foregoing the set of
knowledge that the agent would have used otherwise. Finding this appropriate set of knowledge
for accomplishing some end may only be possible by a process of trial and error ( Johnson-Laird,
1980). Even when transfer of knowledge is “free,” learning comes at a cost (Nelson and Winter
2002, p. 30). Sharing of knowledge requires some indicator that persuades the recipient of
knowledge that it is worthwhile to adopt (Nonaka, 1994[10]). Agents in Sugarscape integrate
knowledge from trading partners who are exceptional at accumulating resources.

The economy as a creative system

The level of entrepreneurial creativity is, in part, a function of demand for such creativity.
Entrepreneurs may “change existing obsolescent societal patterns (of relations,
organization, modes of production) to render them more compatible with the changed
environment (Etzioni, 1987, p. 176).” The greater the change in environment and subsequent
ontological uncertainty, the greater is the payoff for agents who are creative. If that
creativity yields value, the resulting categories and procedures provide structures that help
agents who use them to survive and even prosper.
Individual creativity undergirds much entrepreneurship, but the entrepreneur does not
create ex nihilo (Bibow et al., 2005). The potential for novelty generation must first be present
in the configuration of the system. This is the meaning of Kirznerian discovery (Kirzner, 1997).
There is feedback between the creative potential embodied within society and decisions of
entrepreneurs in it. The entrepreneur “must choose from the ‘plurality of rival possible’ ”
(Buchanan and Vanberg, 1991, p. 172; cites Shackle, 1983, p. 37). The entrepreneur searches
spaces of strategy and context. Together, combinations of elements from each space yield
outcomes whose value the entrepreneur must predict ex ante and evaluate ex post.
Felin et al. (2014) referred to this space of potential for creativity as the adjacent possible:
It is not possible to map all of these possible adjacencies, just as all the uses of a screwdriver are not
algorithmically listable, nor are all opportunities that arise listable or prestatable […] Moreover, the
unprestatable new use further alters the phase space of evolution in unprestatable ways,
precluding our ability to write laws of motion for that evolution (8).
JEPP The role of the entrepreneur is to choose action that brings into realization an adjacent
8,4 possible that he/she values most. Whether or not by intention, action chosen can lead an
entrepreneur to exploit hitherto unrealized profit potentiated by the system while
simultaneously creating new and removing other profit opportunities from the choice set. In
a similar vein, Foss and Klein (2012) argued that entrepreneurs create profit opportunities in
the process of exploiting other opportunities. Compared to Kirzner’s proposition of
446 discovery, Foss and Klein took the persistence of uncertainty as meaning that entrepreneurs
cannot know ex ante whether their plans will yield profit. Even if this can be described as a
discovery from an outside perspective, entrepreneurs themselves are tasked with imagining
and creating conditions that yield profit.
Successful entrepreneurs bring such realizations into the marketplace. They change the
trajectory of economic development, influencing the paths of others (Arthur, 1989). Just as
the evolutionary development of a swim bladder “constitutes an adjacent possible empty
niche, or ‘opportunity’ altering the future possible evolution of the biosphere” (Felin et al.,
2014, p. 7), the invention of petroleum refinement made possible the invention of internal
combustion engines:
It seemed clear to many would-be innovators that such engines could be mounted, somehow, to
wings to create a powered flying machine. Thus, powered heavier-than-air flight was part of the
adjacent possible for the Wright Brothers. (Koppl et al., 2015, p. 8)
The authors adopt a combinatorial view of creativity (see also Potts, 2000). This creativity
naturally emerges from the system:
If the system’s dynamics are creative in our sense, then it constantly generates new elements (and
new uses of old elements) that might be combined and recombined in novel ways (15).
This necessarily includes the recombination of knowledge.
Given the existence of the adjacent possible, a socio-economic system can never truly
enter a perpetual equilibrium. Although unexploited profit opportunities are always present,
they may remain unexploited due to ossification of a small set of strategies if entrepreneurs
become less inclined to develop new approaches[11]. More often, at least in the modern
context, profit opportunities are recognized by entrepreneurs. The arrangement of strategies
that at first dominate is followed by a period of reconfiguration that disrupts the old
arrangement. New technology integrates with the original configuration, replacing many of
the former arrangements. Transitions between technological epochs that occurred with the
development of efficient road transportation in the last century and the integration of the
internet and computers into nearly every facet of social organization over the last few
decades serve as two obvious illustrations of this phenomenon.
Israel Kirzner discussed this pattern in his attempt to ameliorate the differences between
the Schumpeterian and the Kirznerian entrepreneur. For Kirzner (1999):
[…] the essential element in that role [of an entrepreneurial leader] was its potential of impinging on
an initial state of disequilibrium, and, through alertly noticing (“discovering”) those errors of which
the state consists, moving equilibratively to correct them. (p. 7)
The entrepreneur creates or enacts an instance of innovation. He/she acts in light of existing
arrangements and prices, but also impacts them. Innovation disrupts the old order and
promotes a new, more efficient regime of coordination in the market.
An appropriate framing must accommodate the different types of knowledge and situate
them within competitive processes. All types of knowledge can be described through the lens of
cognitive structure. This is true whether the knowledge refers to a physical environment,
strategy in interaction with a physical environment, or the shared and compatible conceptions
that are referred to as institutions. Below, this knowledge is described, as it relates to the model,
and Searle’s framework of cognition and institutions is used to provide clear definition to the Creativity in a
model and connection to a theory of social economy. Following the presentation of the model and theory of
its results, potential applications of this framework and mode of modeling will be considered. entrepreneurship
Methodology
Although agent representation in the model is constrained as compared to the complexity of
cognition and institutions provided here, the cognitive structure implied within the literature
discussed is useful for framing agency within the model. The general structure of institutions
447
serves as a model for knowledge transfer and transformation, including the development of
strategy. All these fall under the broader heading of technology, as described by Solow. This
model integrates the sharing and development of cognitive structures used to interpret an
environment into formal analysis.
This exploration is not without precedent. Yang and Chandra (2013) suggested that
agent-based models are ideal for investigating competition and strategy present in an
evolutionary theory of entrepreneurship. Similarly, McKelvey (2004), Nell (2010), Seagren
(2011) and Gangotena (2017) suggested that agent-based computation is essential for the
study of order formation, as opposed to the study of equilibrium. The model follows Vriend
(2002) in that agents make decision by heuristics and McKelvey’s suggestion that processes
be identified where agents can make educated guesses[12].
Creativity in the heuristic version of Sugarscape considers the development of new categories
in agent awareness as well as recombination, both provided via mutation. As the composition of
the population changes, so does the array of strategies that will promote the survival of a given
agent. A strategy that does not work under one social context may be enabled by the emergence
and practice of new strategies in the model. Likewise, the development of some strategies may
disrupt the efficacy of strategies that would work otherwise.
It has been written elsewhere concerning the structure of agent cognition as it relates to the
economic theory and this model of Sugarscape (Caton and López, 2018). The model adopts
Searle’s framing of cognition and description of social ontology and institutions (Searle, 1995,
2005, 2006; Caton and López, 2018, 2019)[13]. In Searle’s framework, agents imbue objects and
processes with value by a status function. This takes the following form: X counts as Y in
context C. Since the purpose for using this model is to represent both the structure of individual
agent minds and coordinating forces, the following presentation develops the status function to
describe individual mental models, in addition to the shared status function described by
Searle. Agents in the model follow regulative rules that follow the form: if α, then β. These
regulative rules imply constitutive rules or, in other words, a description of reality accepted by
the agent. Application of these concepts helps to clarify them.
Economic exchange entails valuations of this sort. The double coincidence of wants
should be considered. It assumes ownership defined by the constitutive rule that defines a
possible use or uses of property by a property owner:
If an individual owns property (α), he or she may exchange that property for property from another
owner (β).
This implies a regulative rule that defines mutually a mutually beneficial exchange for two
property owners:
If party A values good or goods offered by party B more than the goods party that party A offers in
exchange (α1) and if party B values good or goods offered by party A more than the goods party
that party B offers in exchange (α2), then party A and party B will exchange ownership of the goods
offered by each (β)[14].
In a competitive environment, strategies concerning production and exchange must ultimately
defer to a status function that promotes survival. Otherwise, the strategy will disappear.
This plays a critical role in describing coordination within the Sugarscape economy[15].
JEPP Heuristic Sugarscape[16]
8,4 Agent cognition
Choice plays a role in the trajectory of the economy. Agents choose according to the system of
classification present in their structure of understanding. The individual chooses action
according to a rule or rules that he/she has inherited, such as a young man may save 10 percent
of his paycheck because that is what his parents taught him to do. Agents may also develop new
448 rules and new categories to guide action. Variety is generated via random mutation and
recombination. This represents pseudo-creativity since the categories are not actually created by
the agent. They are included in the program and made available for discovery during simulation
by mutation. Agent decisions generated from these rules are tested against the environment.
We observe this sort of creativity in the world around us. With much success, Steve Jobs and
Steve Wozniak combined existing circuit boards, processors, and other hardware in a manner
that made computing affordable for consumers. They integrated a graphical user interface – first
developed by Xerox – with this technology to create a more accessible computer (Isaacson, 2011).
The person or persons referred to as Satoshi Nakamoto created blockchain technology, a new
system of rules and procedures that improved privacy within an exchange and that cannot be
easily regulated by any third party (Nakamoto, 2008; Antonopoulos, 2016). Nakamoto combined
already existing elements to create a truly novel system. The success resulting from both of these
cases is a testament to the value that participants in each have created.
In its most abstract form, choice concerns the most valued end to which action is submitted.
It may be assumed that agents value survival. This is necessarily tautological. If agents do not
survive, then neither does their will, their intention, or any knowledge that they have not
propagated. Thus, for agents in Sugarscape or any world (C), survival (X) is the most valued end
(Y). Regardless of conscious intention, this principle operates upon individuals and collections of
individuals. It is this principle that guides the evolution of the Sugarscape economy.

Overview of agent strategy

Creativity is bound by the space of parameters and strategies made available to the agent. The
author has discussed in greater detail the operation of this heuristic model of Sugarscape in
Caton (2017). For discussion, the author provides only an essential description of the model.
Agents can choose from among eight possible combinations of agent strategies:
These represent different classes of agents. Each strategy has associated with it
parameters that are defined from a given range of values. An agent’s choice of strategy and
parameter values affects its expected levels of profit, and therefore its fitness.
Agent goals. Agent strategy governs agent goals in a less abstract sense, as they
determine particular action at a particular time and place. The goals implied by a successful
strategy must fit with the broader goal of survival. Agents consume two resources, sugar
and water, each at a given rate. If an agent is unable to acquire enough sugar or water, such
that the level of both remains above zero, the agent is removed from the population, such as
a firm that declares bankruptcy withdraws from the marketplace. The success of a strategy
is, therefore, judged by its ability to procure resources.
Classes. Agent strategies are divided into main classes and subclasses. An agent is either
one of the two main classes: Basic or Switcher. In each period, Basic agents move to the area
with the highest valued resource within their field of vision, regardless of whether that
resource is sugar or water. Switcher agents seek to acquire a particular type of good in a
given period. They move back and forth between the field of sugar and of water at some
rate, choosing to move to the area within their vision that holds the highest value of the
resource that they currently prefer.
The main class may be augmented by one or both of the available subclasses: Herder and
Arbitrageur. Herder agents copy the traits of their richest trading partner upon meeting
them. Arbitrageurs keep track of past prices and compare the average to a price they believe Creativity in a
represents the true value of each good. This price is chosen randomly when the agent is first theory of
instantiated. This allows for a total of eight particular instances in terms of agent class. entrepreneurship
Each of the eight instances of a class is represented by a different color in the visualization
of the landscape (Figure 1).
Decisions of agents from each class are derived from their regulative rules to which
behavior is submitted, implying constitutive rules that help to frame action. Arbitrageurs, 449
for example, integrate observed prices into this function according to a constitutive rule:
If the average price of a commodity purchased or sold by the agent is greater than the agent’s
valuation of the commodity, then the commodity is being underproduced by the market.
The agent believes that the market has so far failed to produce the quantity of good A that
would reflect true conditions of supply and demand. Good A is underproduced. This can be
stated symbolically[17]:
Pn
j¼0 pi;j
If 4E ðpi Þ; then Qi oQni ;
n
P
where nj¼0 pi;j =n ¼ average price of good i observed from agent's past n transactions; E( pi)
is the expected equilibrium price of good i by agent; Qmarket,i the quantity of good i currently
provided by the market; Qni ¼ quantity of good provided in equilibrium.

Notes: Basic Only: Black; Basic Herder: Grey; Basic Arbitrageur: Red;
Basic Herder Arbitrageur: Orange; Switcher Only: Brown; Switcher Figure 1.
Visual representation
Herder: Yellow; Switcher Arbitrageur: Dark Green; Switcher Herder of Sugarscape
Arbitrageur: Light Green
JEPP In reality, this constitutive rule is implied by the regulative rule:
8,4 Pn
j¼0 pi;j
If 4 E ðpi Þ; then harvest good i:
n

450 An agent may adopt this rule by chance of inheritance or he/she may be subjected to a
higher level rule that leads to the adoption of this rule, as in the case of a Herder agent who is
also an Arbitrageur. In any case, an agent must ultimately submit his/her action to such a
hierarchy of rules:
• The beliefs of Herders can be described in terms of rules and a status function:
• In regard to strategy in Sugarscape (C ), my wealthiest trading partner (X) is an
exemplar (Y )[18].
This yields a constitutive rule:
• If my current trading partner is wealthier than any other trading partner, his strategy
is superior.
The regulative rule is as follows:
• If my current trading partner is wealthier than any past trading partner, I will adopt
his strategy.
It is actually this last rule that the agent follows and that implies the constitutive rule and
the status function.
These latter two strategies represent means by which agents interact with knowledge in
the model. In the first case, agents transfer knowledge through their response to and
transformation of prices. In the second case, agents communicate strategies to observers.
Using the aforementioned strategies, agents compete and discover the strategies that most
efficiently create.
Exchange. Agents exchange with their neighbors. Sugar and water are traded directly for
one another. To decide how much to exchange and at what price, agents consider their
target reserve levels. These levels are chosen randomly when an agent is instantiated from a
distribution defined by the followingpequation
ffiffiffiffiffi and shownpin Figure
ffiffiffiffiffiffiffiffiffi
ffi 2 (bin size ¼ 20). The
algorithm randomly selects a value, Ri , between 1 and Rmax :

pffiffiffiffiffi pffiffiffiffiffiffiffiffiffiffi
1p T i p Rmax ; (1)

where Ri is the target reserve level of good i; Rmax the maximum target reserve level of good i.
The actual target reserve level is reflected by Ti.
In each period, agents may adjust their target reserve level for good i, Ti. This is different
than in Caton (2017) where agents only adjust price. Agents follow the following rule:

DT i;t þ 1 ¼ T i; t ð1 þyÞd ; (2)

where 0 oθ⩽1,

(
1 if qi;t 4 T i;t1
d¼ :
1 if qi;t oT i; t1
 Reserve Level Distribution Creativity in a
0.0025
theory of
entrepreneurship
0.0020

0.0015 451

0.0010

0.0005
Figure 2.
Distribution of initial
0.0000 reserve levels
0 500 1,000 1,500 2,000

If the quantity of the good demanded is less (more) than the target level, then the agent
will decrease (increase) that level. This occurs alongside an increase (decrease) in the
willingness of the agent to pay for the good. Thus, the agent behavior is subject to the
laws of demand.
Agents adjust the value representing the prices that they are willing to pay and accept
by comparing the quantities of each good held to their target reserve levels. A change in the
price that an agent is willing to pay or accept, denominated in units of water, is of the
following form:
    
Dps;t ¼ g ln T s;t1 =qs;t1 – ln T w;t1 =qw;t1 ; (3)

where Δpi,t is the change in the price of good i at period p; 0 og⩽1; Ti,t−1 the target reserve
level of good i at period t−1; qi,t−1 the quantity of good i held at period t−1.
According to regulative rule, if an agent has less of a good than is stipulated by
the target reserve level, it will raise the price he/she is willing to pay. If he/she has
more than the target reserve level, it will lower that price. The magnitude of the price
change increases with the size of the discrepancy between desired holdings and
actual holdings.
When two agents meet and each has excess of different goods from one another and each
has less than the desired quantity of the other good, and if each agent’s bid price for his/her
desired good is higher than the other’s ask price of that good, exchange will occur according
to a price randomly selected in the range between the bid and ask prices[19]:

pi ¼ eðlnðpi;A Þ þ ðlðlnðpi;B Þ – lnðpi;A ÞÞÞ

; (4)
[20]where pi is the transaction price of good i; pi,A the ask price of selling agent; pi,B the bid
price of buying agent; 0 ⩽ λ ⩽ 1.
Logged values are randomly selected and then converted to unlogged value. This adjusts
for bias that would occur if the values are selected from a uniform distribution that is not
logged[21],[22].
Mutation. Under certain conditions, attributes of newly created agents may mutate.
When an agent collects enough wealth, he/she can reproduce. The new agent receives a
portion of the parent agent’s wealth and also inherits the attributes of the parents. Agents
JEPP who are created in the initial instance of the model follow the template of a Basic agent and
8,4 are randomly assigned parameter values to begin. A mutation of an attribute alters the
initial value of the attribute assigned to a newly created agent.
Unlike in Caton (2017) where the mutation rate governing agent creativity is the same
between all agents, agents are assigned unique mutation rates. For every new agent
created, each attribute is subject to mutation according to an assigned mutation
452 parameter that is between 0 and 0.25, as would occur in a model of biological mutation
(Sims, 1994). Like any other attribute, the mutation parameter is assigned to agents at the
initialization of a simulation. The mutation rate is itself subject to mutation like any other
parameter. When an agent is born, each inherited attribute that is subject to mutation
will mutate if a random number generated between 0 and 1 is less than the mutation
rate assigned to the agent. If mutation occurs for a strategy, then that strategy is
switched on or off. Mutation of the Basic strategy transforms the agent to a Switcher
agent and vice versa.
The mutation rate is a proxy for creativity. Agents with especially high mutation rates
do not tend to survive, so the average mutation rate in the population typically falls early
in a run. The average rate of mutation across the population tends to fall over time so long
as the system does not experience an external shock or enter a configuration that is
suboptimal compared to a former configuration. If the environment experiences a shock,
then it is likely that new strategies must be discovered in order for the population of
competing agents to move to a new equilibrium configuration. In this case, then the level
of creativity will likely increase.

Survival
Agents compete with one another by choosing unique combinations of strategies and
parameter values. Agents do not know the value of a strategy before the strategy is adopted
[23]. The model is deterministic. It has a vast, but finite, space. We can, therefore, describe a
strategy in terms of its expected contribution to income.
The competitive market tends to select strategies that generate revenues sufficient to
offset costs. In each period, total costs are defined as the rate of sugar consumption, CS, and
water consumption, CW.
An agent consumes quantities of sugar and water that are exogenously determined.
This consumption must, on average, be offset by positive flows of income. Agents are
subject to inflows of resources in each period that are a function of agent strategy,
which includes parameter values. Average expected inflows of resources are defined as
E(Rs) and E(Rw). In this two-good economy wherein both goods are required for survival,
this is defined:

E ðDqi Þ ¼ E ðRi ÞE ðC i Þ: (5)

Agents whose expected net flow of either good is negative, E(Δqi) o 0, do not survive on
average. Agents with efficient strategies tend to earn non-negative profits and they
survive. Those with large positive expected flows of resources tend to flourish and
produce new agents.
Expected net flows of resources are themselves a function of the environment. This
includes other agents (Hayek, 1943). As strategies and positions of other agents in the
environment change, so does the expected income flows of a given agent who has not
changed. Under some conditions, the ratios of different strategies tend to stabilize. In others,
the mix of strategies experiences continual dynamism.
Simulations Creativity in a
Agent-based models provide a laboratory for observing the significance of creativity in theory of
economic activity. For this purpose, the model is intentionally shocked at particular period entrepreneurship
during each simulation. There occurs an exogenous disruption where rates of consumption
of sugar rise and the consumption rate of water falls according to the following equations:

C s; postshock ¼ C s; preshock ð1 þoÞ; (6) 453

C w; preshock
C w; postshock ¼ : (7)
ð1 þoÞ

In cases wherein the magnitude of change is small, the effects on coordination are limited.
As the magnitude of the shock increases, coordination requires a greater response from
agents. Significant pressure often promotes creativity, as development of new combinations
of strategies and parameter values prove useful for recoordinating activity under the
new conditions.

Results
Results are derived from simulations where the intitial rate of consumption of sugar is
adjusted from 0.25 units per period to 0.7 units per period. The intitial rate of consumption of
water is held constant at 0.5 units per period. Each parameter combination is tested using 20
different trials. After the demand shock, entrepreneurs must adjust their strategies to serve
the new structure of demand. The analysis given below considers the structure of
innovation before and after this shock, and compares how the response of entrepreneurs in
the system changes as the shock grows in magnitude.

Creative destruction in Sugarscape

The population dynamics among agents of different strategies reveals a series of
transformations, representative of Schumpeterian innovation discussed above, that move
the system from a given configuration to a new adjacent possible. Every run begins with the
same pattern. By the time the model progresses to period 1,500, most Basic agents have not
survived or have integrated Herder and Arbitrageur strategies (Figures 3 and 7)[24].
Arbitrageur agents proliferate as they gain profit from tremendous volatility common in the
early stage of a simulation (Figures 11 and 13). This strategy and others that follow tend to
raise productivity[25]. The relatively high rate of profit for Arbitrageurs is short lived. The
substantial increase in population of Arbitrageur agents that occurs in the first 1,000
periods sets the stage for the emergence of a new economic configuration that is dominated
by Switcher agents who are not necessarily, or even usually, augmented by an Arbitrageur
strategy. Switcher agents more efficiently fill the niche that had been held by Basic and
Arbitrageur agents (Figures 3, 5, 9, 11 and 13).
Changes in the composition of surviving agents can be explained by differences in per
capita wealth of each class. Early on, Basic agents who have survived the initial
disequilibrium are wealthy compared to other classes (Figures 12 and 14). They are soon
replaced by Switcher agents whose relatively high level of per capita wealth for the
remainder of the simulation indicate that they have adopted a more efficient strategy
(Figures 5, 6 and 11‒14). They expand their industry as these agents have sufficient
resources to replicate. As a simulation progresses, the wealth per capita of Switcher agents
usually approximates the normal rate of return[26] (Figures 4, 6, 8, 10, 12 and 14).
JEPP Demand shock
8,4 At period 7,500, the model experiences a shock to input costs where the rates of
consumption of sugar and water move inversely to one another by the magnitude of the
parameter governing shock size. This change in circumstances represents a change in the
payoffs of each strategy. The economy is no longer in equilibrium and requires a change in
the configuration of strategies. Agents must search the strategy and parameter space to find
454 the profit opportunities generated by this disruption. In some cases, the level of adjustment
required to move to a sustainable configuration is substantial, whereas in others, it is less.

Percent Basic Percent Basic

Period 7,500 Period 17,500
1.0 1.0 0.5
0.9 0.9
0.5
0.8 0.8 0.4
0.7 0.4 0.7
Shock Size

Shock Size
0.3
0.6 0.6
0.3
0.5 0.5
0.2
Figure 3. 0.4 0.2 0.4
Basic class as percent 0.3 0.3 0.1
0.1
of population: average 0.2 0.2
values across all 0.1 0.1
parameter settings 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70
Sugar Metabolism Scalar Sugar Metabolism Scalar

Basic Wealth Per Capita Basic Wealth Per Capita

Period 7,500 Period 17,500
1.0 300 1.0
0.9 0.9 260
275
0.8 0.8
250 240
0.7 0.7
Shock Size

Shock Size

0.6 225 0.6 220

0.5 200 0.5 200

Figure 4. 0.4 175 0.4
180
Basic wealth per 0.3
150
0.3
160
capita: average values 0.2 0.2
125
across all parameter 0.1 0.1 140
settings 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70
Sugar Metabolism Scalar Sugar Metabolism Scalar

Percent Switcher Percent Switcher

Period 7,500 Period 17,500
1.0 1.0
0.9 0.9
0.9 0.9
0.8 0.8
0.7 0.8 0.7
Shock Size

Shock Size

0.8
0.6 0.6
0.7
0.5 0.5
0.7
Figure 5. 0.4 0.6 0.4
Switcher class as 0.3 0.3 0.6
0.5
percent of population: 0.2 0.2
average values across 0.1 0.1 0.5
all parameter settings 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70
Sugar Metabolism Scalar Sugar Metabolism Scalar
Creativity and adaptation Creativity in a
There is a tendency for mutation rates to increase after the shock (Figures 15–21). theory of
Although this tendency is not universal, it is predominant across the parameter space. entrepreneurship
The misalignment between the existing array of strategies and the new conditions
demands creativity from the system’s entrepreneurs. If the given mix of strategies and
parameter values is insufficient for adjustment, agents develop new combinations. The
agents do not have direct knowledge that that there has been a shock to the environment. 455
Moreover, they do not even receive a command from the program telling them to increase
creativity. A change in the expected value generated from different strategies incentivizes
experimentation by entrepreneurs. Those agents who are less creative after the shock tend

Switcher Wealth Per Capita Switcher Wealth Per Capita

Period 7,500 Period 17,500
1.0 1.0 340
0.9 325 0.9 320
0.8 0.8 300
300
0.7 0.7 280
Shock Size

Shock Size

275
0.6 0.6 260
0.5 250 0.5 240
0.4 225 0.4 220 Figure 6.
0.3 200 0.3
200 Switcher wealth per
0.2
175
0.2
180 capita: average values
0.1 0.1 across all
0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 parameter settings
Sugar Metabolism Scalar Sugar Metabolism Scalar

Percent Herder Percent Herder

Period 7,500 Period 17,750
1.0 1.0
0.9 0.9 0.7
0.5
0.8 0.8
0.6
0.7 0.7
0.4
Shock Size

Shock Size

0.5
0.6 0.6
0.5 0.3 0.5 0.4
0.4 0.4 0.3 Figure 7.
0.3 0.2 0.3
0.2
Herder class as
0.2 0.2 percent of population:
0.1 0.1 0.1 0.1 average values across
0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 all parameter settings
Sugar Metabolism Scalar Sugar Metabolism Scalar

Herder Wealth Per Capita Herder Wealth Per Capita

Period 7,500 Period 17,750
1.0 1.0 320
0.9 320 0.9 300
0.8 300 0.8
280
0.7 280 0.7
Shock Size

Shock Size

260 260
0.6 0.6
0.5 240 240
0.5
220
0.4 0.4 220
Figure 8.
200
0.3 0.3 200 Herder wealth per
180
0.2 0.2 180 capita: average values
160
0.1 0.1 across all
0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 parameter settings
Sugar Metabolism Scalar Sugar Metabolism Scalar
JEPP to survive at a lower rate than those agents who are endowed with higher than average
8,4 levels of creativity. This should come as no surprise. In times of crisis, whether for a
person, a firm or a government, it is common for actors to adapt known strategies or to
implement strategies that have been untried. The system itself regulates the level of

456 Percent Arbitrageur

Period 7,500
Percent Arbitrageur
Period 17,750
1.0 1.0
0.8
0.9 0.8 0.9
0.7
0.8 0.7 0.8
0.6
0.7 0.6 0.7
Shock Size

Shock Size
0.5
0.6 0.5 0.6
0.5 0.5 0.4
0.4
0.3
Figure 9. 0.4 0.3 0.4
Arbitrageur class as 0.3 0.2 0.3 0.2
percent of population: 0.2 0.1 0.2 0.1
average values across 0.1 0.1
all parameter settings 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70
Sugar Metabolism Scalar Sugar Metabolism Scalar

Arbitrageur Wealth Per Capita Arbitrageur Wealth Per Capita

Period 7,500 Period 17,500
1.0 1.0
0.9 275 0.9
260
0.8 0.8
250
0.7 0.7 240
Shock Size

Shock Size

225
0.6 0.6
220
Figure 10. 0.5 200 0.5
Arbitrageur wealth 0.4 175 0.4 200
per capita: average 0.3 0.3
150 180
values across all 0.2 0.2
parameter settings 0.1
125
0.1
0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70

Sugar Metabolism Scalar = 0.55, Shock Size = 0.5

1.0

0.8

0.6

0.4

0.2
Figure 11.
Composition of
population by class: 0.0
average values across
2,500 5,000 7,500 10,000 12,500 15,000 17,500
all simulations in
parameter setting
Percent Basic Percent Switcher Percent Herder Percent Arbitrageur
 Sugar Metabolism Scalar = 0.55, Shock Size = 0.5 Creativity in a
500
theory of
450 entrepreneurship
400

350 457
300

250

200

150 Figure 12.

Wealth per capita by
2,500 5,000 7,500 10,000 12,500 15,000 17,500
class: average values
Basic Wealth Per Capita Switcher Wealth Per Capita Herder Wealth Per Capita
across all simulations
in parameter setting
Arbitrageur Wealth Per Capita Overall Wealth Per Capita

Sugar Metabolism Scalar = 0.55, Shock Size = 0.5

Experiment: 1 of 20
1.0

0.8

0.6

0.4

0.2

0.0 Figure 13.

Composition of
0 2,500 5,000 7,500 10,000 12,500 15,000 17,500 20,000
population by class:
individual simulation
Percent Basic Percent Switcher Percent Herder Percent Arbitrageur

creativity present solely through a change in the payoff structure that accompanies a
change in the environment.
Communication is critical in transition to a new equilibrium. Not coincidentally, there is a
significant overlap between regions of the parameter space where creativity increases after
a shock and regions where Herding and Arbitrageur agents increase in prominence after a
shock (Figures 7, 9, 11 and 16)[27]. An agent may adopt one of these strategies or both may
complement one another within an agent’s decision structure (Table I).
The widespread adoption of these strategies occurs in regions where the proportion of
Switcher agents was relatively higher before the shock. In these regions of the parameter
JEPP Sugar Metabolism Scalar = 0.55, Shock Size = 0.5
8,4 Experiment: 1 of 20

1,750

1,500

458 1,250

1,000

750

500

250

0
Figure 14.
0 2,500 5,000 7,500 10,000 12,500 15,000 17,500 20,000
Wealth per capita by
class: individual Basic Wealth Per Capita Switcher Wealth Per Capita Herder Wealth Per Capita
simulation
Arbitrageur Wealth Per Capita Overall Wealth Per Capita

Can also be Basic Switcher

Basic – No
Switcher No –
Table I. Herder Yes Yes
Possible strategies Arbitrageur Yes Yes

space, knowledge consisting of new strategies and price information must be quickly
integrated. Adjustments must be made to the formerly dominant strategy of switching back
and forth. Switchers lack the ability to respond explicitly to new price information. The
increased prominence of Arbitrageurs after a shock is especially apparent where a
population that had been composed primarily of Switchers is also subject to relatively
higher rates of sugar consumption (Figure 9). A large discrepancy between demand for
water and demand for sugar requires a more sophisticated strategy than a straightforward
switching. In other cases, adjustment may simply require the changing of parameters, as in
Figure 13 where Switching resumed its dominance after agents also adopted the Herding
strategy. The need for efficiency increases in this region of the parameter space is greater
and requires a more intense search. Taken together, the increased adoption of the
Arbitrageur and Herder strategies in the same areas where mutation rates tend to increase
after a shock shows the need for communication as part of the process of adaptation.

Multiple rates of return

Unlike the results from Caton (2017), there does not appear to be a single level of wealth per
capita shared between classes. Rather, multiple levels may emerge. This is likely an effect of
allowing agents to adjust reserve levels upward and downward, which they are not able to do
in the set of simulations from Caton (2017). This has reduced the profits of Arbitrageur agents
such that they tend to be outcompeted in many circumstances. Still, it is not uncommon for
them to find a niche in the market. When they do comprise a substantial portion of the Creativity in a
population, the wealth per capita of Arbitrageur and Basic agents tends to match that of theory of
Switcher and Herder agents. When returns for Arbitrageur and Basic agents are relatively entrepreneurship
low, wealth per capita of different classes tend to converge to two or more levels. Often, the
average wealth of Switcher and Herder agents will be greater than that of Basic and
Arbitrageur agents. In some cases, the per capita wealth of Arbitrageur and Basic agents also
diverges (Figure 12). When the average wealth of these latter classes tends to be transient, this 459
value tends to be volatile within individuals simulations, matching the average value of
wealth per capita briefly falling below the average (Figure 14).

Implications for economic policy

The results suggest that during a time of crisis, entrepreneurs adapt by discovering and
combining strategies from the existing pool of ideas or by transforming strategies in novel
ways to promote efficient patterns of production. Economic regulation inherently constrains
the scope of entrepreneurship (Campbell, 2012) and, therefore, the search for new strategies.

Price Variance
Period 17,500
1.0
1.4
0.9
0.8 1.3

0.7 1.2
Shock Size

0.6
1.1
0.5
0.4 1.0
0.3
0.9
0.2 Figure 15.
0.8 Price variance:
0.1 average values across
0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70
all parameter settings
Sugar Metabolism Scalar

Average Mutate Rate

Period 8,500
1.0
0.050
0.9
0.8 0.045
0.7
Shock Size

0.040
0.6
0.5 0.035
0.4
0.030
0.3 Figure 16.
0.2 0.025 Average and median
mutate rates: average
0.1 values across all
0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70
parameter settings
Sugar Metabolism Scalar
JEPP Sugar Metabolism Scalar = 0.7, Shock Size = 1.0
8,4 0.12

0.10

460 0.08

0.06

0.04
Figure 17.
Average and median
mutate rates: average
0.02
values across all
simulations in 2,500 5,000 7,500 10,000 12,500 15,000 17,500
parameter setting (1)
Average Mutate Rate Median Mutate Rate

Sugar Metabolism Scalar = 0.5, Shock Size = 0.2

0.12

0.10

0.08

0.06

0.04

Figure 18.
Average and median 0.02
mutate rates: average
values across all
simulations in 2,500 5,000 7,500 10,000 12,500 15,000 17,500
parameter setting (2)
Average Mutate Rate Median Mutate Rate

The unit banking laws in the USA that persisted through the Great Depression should be
considered. Federal law prevented the creation of branch banks across state lines and many
state laws limited or prevented branch banking. In areas where branch banks operated
alongside unit banks, branch banks experienced a much lower rate of failure than unit
banks (Calomiris and Gorton, 1991, p. 119). During the Great Depression, failure of unit
banks was so widespread that branch banks finally succeeded in overturning unit banking
laws in many states (Abrams and Settle, 1993). In this case, a crisis promoted the expansion
of the entrepreneurial strategy space.
Given the need for the discovery of new strategies during a crisis, policy makers who use
the opportunity to further constrain the scope of entrepreneurship weaken the system’s
ability to recover. Regulation limits the range and can even force a particular “solution” on
companies that are already struggling. The incentive to do so looms large for players in
 Sugar Metabolism Scalar = 0.5, Shock Size = 0.1 Experiment: 1of 20 Creativity in a
theory of
0.14 entrepreneurship
0.12

0.10
461
0.08

0.06

0.04

0.02 Figure 19.

Average and median
0 2,500 5,000 7,500 10,000 12,500 15,000 17,500 20,000 mutate rate: individual
simulation (1)
Average Mutate Rate Median Mutate Rate

Sugar Metabolism Scalar = 0.7, Shock Size = 1.0 Experiment: 1of 20

0.175

0.150

0.125

0.100

0.075

0.050
Figure 20.
0.025 Average and median
mutate rates:
0 2,500 5,000 7,500 10,000 12,500 15,000 17,500 20,000 individual
simulation (2)
Average Mutate Rate Median Mutate Rate

industry and national politics during economic crises (Agarwal et al., 2009). Bailouts, forced
mergers, liquidity provisions, and so forth attempt to steer market actors toward strategies
that would not typically be profitable, inhibiting the search for truly functional strategies
and even incentivizing the use of strategies that led to the problem in the first place
(Agarwal et al., 2009, p. 473). As this model has shown, failure of once successful strategies
that are no longer suitable for a transformed environment is a necessary part of economic
adjustment. A part of entrepreneurial strategy is the willingness of the entrepreneur to be
creative, which is parameterized as the rate of mutation of one’s strategy. The fact that
the average level of creativity tends to increase in time of crisis suggests that an extensive
search of strategy space is the solution naturally generated by the market system to a crisis.
A habit of intervention during crisis works against this process.
JEPP Population
8,4 Sugar Metabolism Scalar = 0.55, Shock Size = 0.5

800

700

600
462
500

400

300

200
Figure 21.
Population: average 100
values across all
experiments in 2,500 5,000 7,500 10,000 12,500 15,000 17,500
parameter setting
Population ±1.96 SD

Beyond productive strategies

The model has shown that innovation comes not only in the form of instances of obviously
productive technology, such as a screwdriver or computer, but in the form of new mental
technologies that we call strategy. Ideas concerning social organization – institutions –
follow the same structure. The development of shared mental technologies may generate a
change in the structure of agent interaction. Economists refer to these modes of
organization as institutions (North, 1990; Ostrom, 1990). Institutions are coordination
devices. Shared and interlocking conceptions, such as the norms and laws that agents
internalize, provide a low cost means of promoting coherence between plans and
mitigating the emergence of conflicting plans (Denzau and North, 1994; Crawford and
Ostrom, 1995; Koppl et al., 2015, p. 22).
Agents influence institutions by their actions and are continually engaged in a
conversation of institutional formation (Kuchař, 2016; Bloor, 1997; Koppl and Langlois, 2001;
Boettke et al., 2008[28]). The archetypal institution, language, which exhibits precisely these
patterns, should be considered. Concerning the causal force of such an institution, Bibow
et al. (2005) noted:
[…] we would wish to avoid the opposite extreme in which social structure bears so heavily on
people that they have no choice at all […]. Further, while someone in Britain who wishes to
communicate is compelled to conform more or less with the rules of English grammar in order to be
understood, those rules do not determine what the person says. There also exists the possibility
that the creative use of language (via metaphor, say) will lead to the transformation of the rules of
governing the use of language. (p. 522)

Agents coordinate around a stable set of beliefs that we may refer to as rules. Elements that
comprise the language are shared to a significant, but not perfect, extent. Allowance for less
than perfect coherence allows for coordinating games to evolve over time, as changes in agent
action promote recoordination (Wittgenstein, 1953/1958; Hayek, 1967; Koppl et al., 2015). This
leaves open the possibility for adaptation to changing context, as successful agents innovate
in a manner that is persuasive to others. Even a strategy is not immediately adopted, if it
survives the competitive process, its rationality is legitimized and can be integrated into the
economic system (Alchian, 1950; Kirzner, 1962; 1963b; Becker, 1962, 1963).
 Just as an agent-based model allows for agents to adjust their rules of behavior, it can also Creativity in a
allow for changes in meta rules or even allow for those meta rules to evolve among a population theory of
or populations of competing agents. A model similar to heuristic Sugarscape that allows for entrepreneurship
bottom-up transformation of institutions can allow us to closely observe the process of
institutional formation that is typically bound up with the game of exchange (Wagner, 2016).

Conclusion 463
In an earlier paper (Caton, 2017), the author has shown that the inclusion of knowledge that
is structured allows economists to investigate strategy and its relationship to search costs.
A fundamental principle of market order, the law of one price, was maintained within this
paradigm. This work extends that project, showing the relationship between coordination
and creativity. It provides a thorough methodology that systematically relates rule-
following behavior to agent preferences. The evolution of strategies is described by a
Searlean status function.
It extends the conversation concerning distinctions and similarities between Schumpeterian
and Kirznerian entrepreneur, both of which are functional types. Each seeks to earn profit and,
in the process, move the economy to an equilibrium present in an adjacent possible. Search for
strategy by entrepreneurs is a part of a stabilizing process, especially during times of crisis.
Schumpeterian entrepreneur brings new categories of means and ends to the social economy in
the process of innovation, whereas Kirznerian entrepreneur persists in application of this new,
useful knowledge until the economy has converged to a new equilibrium.
Innovation in the model occurs as changes and augmentations to strategy, rather than
innovation that manifests in new combinations of physical capital. Both are described here
under the more general term of technology. Schumpeterian innovators in the model produce
cost-reducing technology that manifests in the form of human capital as these new strategies
are executed. If we are to better understand the process of economic change, it is necessary to
view technology in terms of logic, its evolution and its manifestation in an environment through
agent action. Technology is essentially a blueprint of action and organization that evolves over
time. The model and framework presented here can shine new light on this evolution.

Notes
1. Stigler and Becker stated their preference for this formulation clearly:
The ambitiousness of our agenda deserves emphasis: we are proposing the hypothesis that
widespread and/or persistent human behavior can be explained by a generalized calculus of utility-
maximizing behavior, without introducing the qualification that ‘tastes remaining the same […] we
assert that this traditional approach of the economist offers guidance in tackling these problems –
and that no other approach of remotely comparable generality and power is available (76, 77).
2. While scope of consideration is limited compared to the totality of cognition, the model and its
results fit within a general description of cognition that is elaborated provided below.
3. The author follows Foss and Klein (2012) in understanding the firm in terms of as resources,
ownership and the structure through which agency of the owner or owners is exercised.
4. Although the quote holds the seeds of truth and seems to cohere with Ford’s view, it may be
apocryphal (Vlaskovitz, 2011): https://hbr.org/2011/08/henry-ford-never-said-the-fast
5. In the model, such knowledge exists as new strategies or routines and parameter values that help
the agent gauge the environment.
6. Solow refers to this as “technical change”.
7. Learning can also temporarily misguide investors if profits are illusory (Earl et al., 2007).
8. In this respect, the authors refer to entrepreneurs as innovators and reproducers.
JEPP 9. On social pressure and the blunting of creativity, see Asch (1955).
8,4 10. In the context of sharing knowledge within a team, Nonaka referred to the need to “build mutual
trust among members” (24).
11. Such an outcome is not an uncommon occurrence in the heuristic rendition of Sugarscape. Under
conditions of prosperity, creativity may grow to such low levels that the system grows
susceptible to economic crisis.
464 12. Agents in our model experience blind variation alongside strategic copying of strategies from
successful agents.
13. The framework bears some similarity to Aumann (1999) and Hedoin (2017), who emphasized the
structure of knowledge and its correlate in social structure. The simplicity and generalizability of
Searle’s framework make it more tractable for analysis.
14. This rule is defined below in terms of equations governing agent decisions.
15. Those interested in a more detailed description should consult Caton and López (2018).
16. Readers can access Heuristic Sugarscape at its GitHub repository: https://github.com/jlcatonjr/
Sugarscape-with-Heuristic-Agents-and-Exchange. The repository also includes the Python script
used to create the figures included in the results section.
17. Sugar: i ¼ s
Water: i ¼ w
18. Exemplars are goods or persons that a person deems worthy of emulation (Dekker, 2016).
19. This coheres with the initial description of exchange as guided by regulative rules that
immediately preceded the presentation of the model.
20. The value is randomly selected for each exchange. It determines the value within the range
considered acceptable by both parties. In the case that, all surplus goes to party A. If, all surplus
goes to party B. If, parties approximately split the surplus.
21. Some bias is present early in each experiment, but this bias tends to disappear after moving away
from the initial disequilibrium.
22. Unlike the standard economic theory, prices are set in a decentralized fashion similar to Axtell (2005)
and Epstein and Axtell (1996) and without neoclassical utility functions as in the study of Gode and
Sunder (1993). Agent valuations of goods early on do not systematically match their own consumption
rates. As a result, convergence toward particular level of prices takes longer than in Axtell (2005) and
Epstein and Axtell (1996), as the means to convergence is a process of trial and error.
23. This is true even in the case of herding agents who may find that the strategy of their wealthiest
trading partner is no longer the most efficient strategy as the environment evolves.
24. This and all other heatmaps presented below represent average values at each period for all
simulations across the parameter space (Caton, 2017).
25. Surviving agents must produce at least as much as they consume.
26. Figures 3–10 are pairs of heatmaps that compare the average values of different variables for
each simulation with a particular pair of values for “Shock Size” and the initial value of the “Sugar
Metabolism Scalar”.
27. Arbitrageurs are agents who intentionally respond to changes in observed prices. They choose to
produce a good as long as the average price of sugar remains above their expected price for the good.
This allows arbitrageurs to consistently target the good that is relatively scarce. With regard to the
rational expectations, arbitrageur agents do not need to guess the correct price. Rather, they need to
interpret prices in a manner that guides them to produced goods that are underprovided at the time.
When sugar tends to be scarcer, agents set their price expectations for sugar to be relatively low.
28. Leeson et al. (2006) provided a useful example of this sort of open endedness in their discussion of
conflict and cooperation.
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About the author

James Lee Caton is Assistant Professor at North Dakota State University. James Lee Caton can be
contacted at: james.caton@ndsu.edu

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