Strategy: notes for an economic and historical approach

Estratégia: notas para uma abordagem econômica e histórica

Abstract

The objective of this article is to elaborate an economic and historical approach to the notion/concept of strategy. More specifically, it aims to propose a definition of strategy that helps to unravel this important topic from a paralysing tangle of schools, approaches and definitions. It was also sought to delimit more clearly its nature and what can (and what should not) be considered as strategy. For that, the research work adopts a historical perspective and, as starting point, the approach proposed by Simon (1993). Besides that, it was made an additional effort to specify better and enrich the Simon’s driveway with the contributions from some other pertinent authors - mainly from the Keynesian and Schumpeterian schools.

Keywords:
Strategy; Decision-making; Uncertainty; Dynamic capability

Resumo

O objetivo deste artigo é elaborar uma abordagem econômica e histórica da noção/ conceito de estratégia. Mais especificamente, a intenção é propor uma definição de estratégia que ajude a desvencilhar este importante tópico de um emaranhado paralisante de escolas, abordagens e definições. Procurou-se, também, delimitar mais claramente a sua natureza e o quê pode (e o quê não deve) ser considerado como estratégia. Para tanto, adotou-se basicamente uma perspectiva histórica e, como ponto de partida, o enfoque proposto por Simon (1993). Adicionalmente, procurou-se ampliar e enriquecer o referido enfoque a partir das contribuições de alguns outros autores pertinentes, principalmente, das escolas keynesiana e schumpeteriana.

Palavras-chave:
Estratégia; Tomada de decisão; Incerteza; Capacidades dinâmicas

1 Introduction

“Strategy, one might say, is decision making that deals with the ‘Big Questions’” (Simon, 1993, p. 131)¹

Unlike what Marshall apparently imagined, the economists who succeeded him - especially those in the mainstream - never paid more attention to the notion (or concept) of strategy². A partial, but nevertheless noteworthy, exception was that of game theory that adopted, however, a very restrictive interpretation of the notion of strategy³ - that has become more a particular extension of the well-known theory of the subjective expected utility (SEU) than a true introduction to the notion of strategy in the economic theory (Simon, 1986,1993; Ancona, 1989a) (see below).

Notwithstanding, a relatively small number of economists, over the years, have more or less explicitly used the notion/concept of strategy. Besides Marshall, the best-known examples may be those of Veblen, Schumpeter, Morgenstern, Myrdal, J. Robinson, Kaldor, Bain, Penrose, Hirschman, Boulding, Caves, Porter, Perroux, Nelson, Freeman, Rosenberg⁴ (Langlois, 2003; Rumelt et al.,1991; Pavitt and Steinmueller, 2002; Freeman and Soete, 1997; Loasby, 2010; Foss and Stieglitz, 2012).

On the contrary, the study of the strategy has a very long tradition in the field of 'military art' (Ancona, 1989a; Mintzberg et al., 2003; Clausewitz, 1989). And, since the middle of last century, the conception of strategy has also been the subject of research and discussions in the social sciences. In this area, business scholars, mainly, and political scientists have excelled in incorporating the notion into their theoretical approaches and research methodologies (Rumelt et al., 1991; Mintzberg et. al., 1998; Simon, 1993; Lindblom, 1980).

It has also been observed the use of the notion of strategy by relevant scholars of sociology (Aron, Block, Dore, Mann, Tilly, Wallerstein), international political economy (Arrighi, Berger, Cox, Gilpin, Ostry, Strange), and international relations (Johnson, Kennedy, Kissinger, Morgenthau, Nye Jr., Waltz). In addition, we can as well mention some prominent historians (Anderson, Braudel, Carr, and Hobsbawm) and several economic and technological historians too (Chandler, David, Hounshell, Lazonick, and Rosenberg).

The general aim of this paper is to develop an economic and historical approach to the notion/concept of strategy. In a more specific way, its goal is to propone a definition of strategy that helps to unravel this relevant subject from a paralysing tangle of approaches, schools, and definitions. Also, it was sought to delimit more clearly its nature and what can (and what should not) be properly considered as strategy.

This article is structured as follows. Four other items follow this introduction. In the second topic, decision-making, game theory, choices, and strategies were focused from a critical perspective. In item three, we sought to advance a definition of strategy, which takes Simon as a starting point, but that was tentatively more broadened and enriched with the contributions from some other pertinent authors - mainly from the Keynesian and Schumpeterian schools. In the penultimate topic, we tried to present the probable determinants of the strategies. In the latter, the usual final considerations were made.

2 Decision-making, choices and strategies

2.1 Decision-making theory (DM) and game theory (GT): some brief comments⁵

In the dominant economic thinking -within what is known as decision-making theory-, what has prevailed is the normative (or prescriptive) approach, with special emphasis on the influential theory of the subjective expected utility (SEU). SEU theory is

“a sophisticated mathematical model of choice that lies at the foundation of most contemporary economics, theoretical statistics, and operations research. SEU theory defines the conditions of perfect utility-maximizing rationality in a world of certainty or in a world in which the probability distributions of all relevant variables can be provided by the decision makers” (Simon, 1986: 2; Vercelli, 1999; Fishburn, 1987; Arthur, 1992).

In summary, the subjective expected utility theory assumes that: 1) the decision-maker has a well-defined utility function and therefore can establish a cardinal relationship as the unit of measure of his or her preference regarding a specific set of future events; 2) the decision-maker may stipulate to the totality of future series of events a joint probability distribution (objective or subjective); 3) the decision-maker is confronted with a well-defined group of possibilities from which to make his/her choice; and 4) the decision-maker will opt for the alternative or choice that maximises the expected value of his/her utility function- for the set of events resulting from his/her choice (Simon, 1986).

The subjective expected utility theory, however, faces serious difficulties whenever, in economics, politics and other social contexts, there is interdependence/conflict of real or potential interest, non-coherent behaviour, and, especially, if they are combined with incomplete information and radical/strong uncertainty (Simon, 1986, 1993; Shackle, [1972] 1992; Sen, 1987; Vercelli, 1991, 1999; Carvalho, 2020; Davidson, 1996, 2011; Dequech, 2011).

By the way, we are adopting here the classic distinction between uncertainty and risk proposed by Keynes and Knight. In the literature on the topic, they are also usually referred to, respectively, as radical/strong uncertainty or risk (or, still, weak uncertainty). As Louçã appropriately pointed out,

“[t]here are in fact two possible concepts of certainty [or risk] and uncertainty: (…) for the second, uncertainty is epistemologically autonomous of certainty [or risk]. The opposition is rather sharp, since the first version implies the reduction of uncertainty concept to that of mathematical risk, as some precise distribution is assumed: that is, for instance, the strategy of the Rational Expectations models. Keynes argued extensively against this procedure (Keynes, 1937: 212-3), and so did Knight, defining uncertainty as a non-measurable value (Knight, 1921: 19-20) and Shackle, arguing that the irreversible quality of time prevented any meaningful knowledge of the probability distribution of economic actions (Shackle, 1990: xii)” (Louçã, 1997: 148; ea)⁶.

In its turn, the study of the actual processes of decisions, according to Simon

“reveals massive and unavoidable departures from the framework of SEU theory ”. (...) Increasingly, research is being directed at decision making that takes realistic account of the compromises and approximations that must be made in order to fit real-world problems to the informational and computational limits of people and computers, as well as to inconsistencies in their values and perceptions” (Simon, 1986: 5; ea).

It is particularly noteworthy that Keynes had already reached a similar conclusion regarding the characteristics of knowledge - in discussing causality in the realm of 'moral sciences'. In his pioneering work on probability, Keynes (1921 [2004]: 275; ea) had already concluded that, "our knowledge is partial, there is constantly, in our use of the term cause, some reference implied or expressed to a limited body of knowledge "⁷.

Formulated by the famous mathematician Von Neumann and the mathematician economist Morgenstern in 1944, game theory was, probably, the most ambitious attempt to answer the questions posed to subjective expected utility theory (Simon, 1986). The characteristic approach to game theory is to consider that: 1) the agents have full knowledge of the rules; 2) they are typically rational -that is, their preferences are compatible with the axioms of rational choice theory, and therefore they can be treated as maximisers of the subjective expected utilities-⁸; and 3) they have equal and common knowledge of their rationality and the rules of the game⁹.

However, as we know, the answers provided by the sophisticated mathematical theory of games are not seldom puzzling and ambiguous. “In many situations, no single course of action dominates all the others; instead, a whole set of possible solutions are all equally consistent with the postulates of rationality” (Simon, 1986: 7-8; ea).

Despite these and other limitations - as highlighted by Simon (1986 and 1993), Hollis (1994), Devetag and Louçã (2004), Hargreaves-Heap and Varoufakes (1995, 2004), Mirowsky (2002), Bunge (1997,1999), Possas (1997) and Prado (2006), among others -, the dissemination of the standard game theory in several areas of the economy has been very widespread -especially among mainstream economists -, and even other disciplines in the social sciences, such as political science and law, have also started to use it widely.

However, as pointed out by Devetag and Louçã (2004),

“[w]hile nowadays theoretical and applied I.O., contract theory, microeconomics, and even individual decision theory as applied to inter-temporal choice are completely pervaded by subtle game-theoretic nuances and increasingly and obscure concepts, it is quite interesting to note that, already in the 40s, several military officers at RAND corporation, where game theory had had its initial moments of glory, soon started to be absolutely dissatisfied with its developments, and began to consider its whole analytical apparatus simply irrelevant as an aid to solve complex international policy problems” Devetag and Louçã (2004: 12; ea).

In fact, it is at least quite surprising (and even intriguing) that what was obvious to the military and to some of those responsible for game theory section of RAND some sixty years ago does not yet seem evident to the mainstream economists: “namely, that game theory can be a useful tool to analyze strategic interaction in a novel and rigorous way, but its solution concepts are largely irrelevant except for simplest game (and even here there might be disagreement (…)”(Devetag and Louçã, 2004:13;ea; Mirowski, 2002).

Based on a broad critical appraisal effort that resulted in two well-founded books, Hargreaves-Heap and Varoufakes (1995, 2004) presented an assessment of game theory and its recent evolution that, besides being relatively synthetic and judicious, seemed very appropriate for the success of this our very brief approach to game theory.

“The ambitions claim that game theory will provide a unified foundation for all social science seemed misplaced to us ten years ago (when we writing this book’s first version). It still does. Our book started life, all these years ago, with an attempt to discuss the variety of objections to this grand claim. some were associated with the assumptions of game theory (for instance, that agents are instrumentally motivated and that they have common knowledge of rationality), some came from the questionable inferences draw from these assumptions (as when it is assumed that common knowledge delivers consistently aligned beliefs), and yet others sprang from the failure (even once the controversial assumptions and the inferences are in place) to generate determinate predictions of what ‘rational’ agents would, or should, do in important social interactions.

In the ten years that have come to pass, two things have happened: first, game theory’s appeal among social scientists grew in leaps and bounds. Second, many game theorists came to recognize the problematic nature of their subject matter. In this, we feel vindicated. For when our earlier book was published, it was criticised by some ‘loyalists’ as overly critical. It now seems that most of the criticisms in that book have become widely accepted as true and fair. Indeed, many of developments within game theory in the late 1990s and beyond are direct responses to this recognition.

The important developments of the last decade happened in three areas evolutionary game theory, the study of psychological games which stretch the limits of Homo Economicus, and some clever laboratory experiments. All three have combined nicely to illuminate the dialectical relationship between action and structure- the very type of relationship that conventional game theory assumes away, to its detriment we fear (Hargreaves-Heap and Varoufakes ( 2004: 302; ea)”.

To make the basic viewpoints adopted in this article even more clear, we should also clarify, in this subitem, what we mean by economic mainstream¹⁰. From our perspective, the dominant economy can be characterised synthetically as follows: a) by methodological individualism (or reductionism) (Schumpeter, 1994; Bunge, 1997 e 1999; Vercelli, 1991; Hargreaves-Heap e Varoufakes, 2004; Hollis, 1994; Louçã, 1997; Prado, 2006); b) by using the hypothetical-deductive method (Hollis e Nell, 1977; Vercelli, 1991; Lawson, 1997; Mirowsky, 2002; Hollis, 1994; Louçã, 1997; Prado, 2006); c) by adopting the maximising rationality axiom (Simon, 1986, 2000; Vercelli, 1991; Shackle, 1972; Possas, 1997; Hargraves, 1980; Louçã, 1997, Prado, 2006)¹¹; d) by using the equilibrium norm (Louçã, 1997; Lawson, 1997; Kaldor, 1985; Shackle, 1972, Vercelli, 1991, Possas, 1997; Ingrao e Israel, 2000; Prado, 2006)¹², and e) by assuming the widespread applicability of the so-called ergodic theorem to economic processes (Georgescu-Roegen, 1971; Vercelli,1991; Louçã,1997; Davidson, 2011; Mirowski, 2002; Arthur, 2010; Possas, 1997 e Carvalho, 2020)¹³.

Regardless of the merits and potentialities of game theory - or rather, game theories¹⁴ (Davis, 1997; Israel, 2007), especially non-standard (or non-conventional) versions - the point to note is that they are drastically restricted (or even rendered unfeasible), once they are subjected to the unavoidable limitations of the economic mainstream and its axioms and basic assumptions (as seen above).

This is the case, for example, with the cooperative games approach - which apparently has better potential to deal with the interdependence/interaction of the players- but which was neglected, not by chance, due to the non-cooperative approach (with Nash equilibrium), by mainstream economists (Israel, 2007; Hargreaves-Heap and Varoakufes, 2004). Something quite similar also occurs with evolutionary games - which introduced more realism in the treatment of institutions - and with psychological games (which increased the complexity of the approach to human behaviour): they can only preserve their heuristic potentials and introduce a higher dose of realism when not used together with the mainstream paradigm¹⁵ (Devetag and Louçã, 2004; Hargreaves-Heap and Varoakufes, 2004; Possas, 1997).

2.2 Choices and strategies

In this context of standard game theory, the term 'strategy' has been (and is) used in a very specific (and restrictive) sense - from the point of view of these authors - and, besides that, is not compatible with how the notion has been adopted traditionally in the field of 'military art', in the social sciences or even in most of the approaches to innovation strategies.

In fact, in this mathematical theory, 'strategy' is assimilated to choice - not any choice, a choice with interdependence, in which the agent “does not have complete knowledge, for he does not know which thing his opponent will do (...); [but] he knows what things his opponent can do” (Shackle, 1972 [1992]:161; ea). It is not, therefore, a situation of typical rational choice, since there is no complete knowledge.

Indeed, as insightfully observed by Shackle (1972 [1992]:183; ea), it is a circumstance of "quasi-rational choice of conduct": the agent does not know exactly what the opponent will do, but is supposedly aware of all possibilities of action. Or, to quote a very fortunate and perceptive expression of Georgescu-Roegen (1971:122; ea), these are “situations where the exact outcome is not known but the outcome does not represent a novelty”. On the contrary, the usual sense of strategy does not ignore the existence of surprise - “(...) the most powerful and incisive element in the whole art of war (...)” (Shackle, 1972 [1992]:161) - and novelty (Ancona, 1989a).

De facto, strategy assumes radical/strong uncertainty - in the sense in that it cannot be reducible to a probabilistic risk, as already seen before -¹⁶, bounded rationality¹⁷, incomplete information, significant interdependence and/or inconsistency of the agents' behaviour¹⁸, which characterise, contrary to what mainstream economists think - the main important and frequent circumstances in which human decisions are made -, not just those of an economic nature (Keynes, 1937; Schakle, 1966,1972 ; Simon, 1986, 2000; Hargreaves, 1989; Vercelli, 1991, 1999; Carvalho, 2020; Dequech,1999; Marroni, 2006).

In a hypothetical opposite situation, if the future is known - feasible of a perfect complete prediction (see below) - and the expectation of a certain event is certain, the conceivable choices regarding that future would in practice be reduced to a single one - the hypothetical choice (‘strategy’) that maximises profits and/or utility (Morroni, 2006; Dosi and Egidi, 1991; Simon 1986).

Therefore, a perfect complete prediction is equal to certainty and presupposes, simultaneously, a perfect knowledge of the actual results (theoretical knowledge) and a complete information processing ability. In turn, an imperfect complete prediction equals risk - objective or subjective estimation of probability distributions of all possible events. Imperfect complete prediction also supposes - as in perfect complete prediction, a complete information processing ability (Morroni, 2006; Dosi and Egidi, 1991; Heiner, 1983). In an imperfect complete prediction situation, the sum of the probabilities of all expectations would be equal to one, and there would exist space for various choices ('strategies'), all known, associated with the different risks involved.

The circumstance would change significantly, also from the point of view of the strategies, if the future is subject to an incomplete prediction - radical/strong uncertainty, this is, the impossibility of knowing the future events and, consequently, the not certainty associated with the expectations related to the occurrences to coming (Keynes, 1937; Shackle, 1972; Davidson, 1996; Dosi and Egidi, 1991; Morroni, 2006).

Incomplete prediction would result in a) substantive uncertainty (see next) - because of the combination of an incomplete knowledge of the list of possible events, due to a changing future, with a complete information processing ability - or in b) procedural uncertainty (see next) - resulting, alternatively, from the association of a complete knowledge of the list of possible events with an incomplete information processing ability (Marroni, 2006; Dosi and Egidi, 1991; Simon, 1986). In these last two cases of incomplete prediction, the sum of the expectations - which can be considered as propositions about the probabilities that certain future events will happen - would not be equal to the unit and the conceivable strategies would be multiple and would not be restricted only to known and/or perfectly predictable events and behaviours (Morroni, 2006; Keynes, 1937, 1921; Shackle, 1972, 1961; Davidson, 1996).

According to the authors (Dosi and Egidi), the terms substantive uncertainty - “the lack of all the information which would be necessary to make decisions with certain outcomes”(Dosi and Egidi, 1991: 145) - and procedural uncertainty - “[the] limitations on the computational and cognitive capabilities of the agents to purpose unambiguously their objectives, given the available information” (Dosi and Egidi, 1991: 145) - are clearly used in strict analogy with Herbert Simon’s distinction between substantive and procedural rationality¹⁹.

In this way, strategies would confront the complexity of the environment, the radical/strong uncertainties, the novelties and changes that an unpredictable future can bring. Strategies would then be formulated, implemented and adapted - under conditions of radical uncertainty (substantive and/or procedural) and usually modified in the light of new information and knowledge (Keynes, 1937; Shackle, 1972; Simon, 1986; Arthur, 1992; Dosi and Egidi, 1991; Tidd et al., 2005; Morroni, 2006).

Generally speaking, strategies would occur, basically, in nonergodic (changeable) systems/processes (Georgescu-Roegen, 1971; Davidson, 1982-83, and 2007; Vercelli, 1991) or in open systems - according to the concept of critical realism (Lawson, 1997; Bhaskar, 2008). Choices, in turn, would be attributes, mainly, of the ergodic (immutable) or closed systems²⁰

At this point, it seems timely to make a brief digression. The notion of strategy proposed in this article only makes sense in conditions of incomplete prediction, plus the circumstance that adjustments of forecast errors is time consuming (there are significant lags) and/or imply non-negligible costs. That is, if adjustments were immediate and/or with negligible costs - which, in general, does not prevail in the most relevant economic decisions (Keynes, 1921, 1937; Shackle, 1972; Davidson, 1996; Simon 1996) - there would be no significant practical difference between the incomplete prediction of the future on the one hand, and the perfect complete prediction and the imperfect complete prediction, on the other. And, in this case, the notion of strategy would cease to make sense, for it would not distinguish itself from choices.

From this point of view, strategies could be considered in the strict sense (and strong) of the term -and in a manner compatible with the interpretation usually attributed to this notion outside the mainstream economy-, since they would be developed, implemented and adapted under radical/strong uncertainty and nonergodic conditions (Morroni 2006; Tidd et al., 2005; Shackle 1972; Simon, 1993; Vercelli, 1991).

According to the perspective proposed here, 'strategies' (or choices) adopted under conditions of certainty or risk should be considered in the non-strict sense (or weak) of the term, since, in such circumstances, 'strategies' (or choices) would not confront surprises, novelties or even unforeseen events (Keynes,1937; Shackle, 1972; Simon,1993; Vercelli, 1991; Morroni, 2006).

Thus, it would be more appropriate to call them, perhaps, choices under certainty conditions, or yet choices under risky conditions (or even just choices), rather than 'strategies' - as economists who adopt standard (or conventional) game theory as a theoretical framework do, for instance. According to our standpoint, strategy denomination, in the strong sense (strict) of the term, would apply only to circumstances in which radical/strong uncertainty, incomplete information, significant interdependence/interaction, and conflict of real or potential interest and/or inconsistent behaviour of agents are observed (Shackle, 1972; Simon, 1986, 1993; Tidd et al., 2005).

Additionally, it seems useful to highlight the existence of a clear convergence between this proposition adopted here and the argument developed by Shackle (1961), regarding the distinction between the concepts of decision and choices. It is worth remembering that the similarity in question becomes even more evident when it is stressed that the definition of strategies in development here, considers the latter as a subset of decision-making, in line also with Simon's (1993) conception (see item III below).

In order to better clarify the nature of strategies, an additional distinction must be made between the former and the notion of crucial decisions, originally proposed by Shackle (Davidson, 1996). From our viewpoint, not every crucial decision - for example, a routine investment decision - would be configured as strategies. That is, strategies would be only a subset of the crucial decisions, since the latter is not just about 'big questions' (or ‘big decisions’), as in the former case (Simon, 1993; Barney, 1995) (see below)

3 An Attempt to define strategies

It may not be a total waste of time to seek to organise ideas with a view to obtain some theoretical and explanatory progress on the notion of strategy- notwithstanding, the previous considerations about the lack of agreement on this matter in the several areas in which it has been discussed. Perhaps the actual difficulty can be circumvented from an appropriate theoretical perspective - despite the entanglement of sometimes even conflicting notions of strategies.

Such a perspective has as starting point the Simon's (1986, 1993) contributions in the so-called decision-making theory in general, and especially in the more specific field of strategy. The subject of strategy had already been treated unsystematically in some others works by this influential American polymath (Simon,1996, 1978). However, it was just in a specific article -written for a special issue of the influential Strategic Management Journal- that Simon approached straighforwardly the question of strategy and proposed the following definition: “[s]trategy, one might say, is decision making that deals with the ‘Big Questions’ ” (Simon, 1993:131; ea)²¹.

More specifically, the definition proposed by Simon (1993) seems to offer a way to remove the notion of strategy from the apparent dead-end that the profusion of schools, approaches and definitions has caused (Mintzberg et al., 2003; Rumelt et al., 1991; Rumelt et al., 1995; Whittington, 2002). At the same time, the Simon’s (1993) definition is also compatible with most of the main characteristics that are usually attributed to strategies (Langlois and Robertson, 1995; Mintzberg et al. 1998).

Besides this, the definition of strategy suggested by Simon (1993) is still consistent with much of the recent research related to innovation strategies, in general, and technological innovation strategies in particular (Freeman and Soete, 1997; Tidd et al., 2008; Pavitt and Steinmueller, 2002). Likewise, the definition of Simon is also congruent with the interpretation that was consolidated in the field of military studies (Ancona, 1989a; Clausewitz, 1989) and with several influential approaches in the social sciences (Lindblom, 1980; Chandler, 1962, 1995).

With respect to the influential definition of strategies proposed by Chandler (1962, 1995), the compatibility is not total. Actually, the inclusion of objectives (or targets) as part of the strategies suggested in the delimitation of the emeritus US business historian render it not entirely consistent with Simon's definition (1993), although the similarities are, undeniably, significant. De facto, the objectives are part of what, as we know, Simon (1986) addresses as problem-solving, and they are thus excluded from his delimitation of strategies.

Besides being non-restrictive, the definition adopted by Simon (1993) places strategies within the appropriate framework of decision-making theory. By situating strategies in this field, Simon establishes a critical dialogue with both “[t]he classical formal theory [normative] of decision making” (Simon, 1993:134; Fishburn, 1987) and “[t]he concept of rational behavour” (Sen, 1987: 68)²².

It should be stressed that the descriptive (or positive) decision-making approach proposed by Simon and his collaborators is not confined to the theoretical dimension, but also incorporates a great empirical concern. Regarding the attention paid to the empirical dimension, the influential book by Cyert and March (1992) -Simon’s outstanding contributors- must also be detached.

With regard to the experimental results, it should be either highlighted -as it was appropriately appointed by Marroni (2006: 66)²³ - that “[t]he pioneering works concerning experiments on cognitive anomalies in perception and in the process of choice that prevent full rationality and optimisation were carried out jointly by D. Kahneman (...) and A. Tversky”.

In the same line, but based on a well detailed and extensive survey of the experimental results²⁴, McFadden pointed out at least twenty-five types of cognitive irregularities that results in the formulation of problems of choice, which are incompatible with perfect [full] rationality. Analogous way, he concluded either “(...) that perception-rationality fails, and that the failures are systematic, persistent, pervasive, and large in magnitude” (MacFadden, 1998: 28; ea).

Complementary to the previous arguments, Simon (2000) also added the perspective that the

“classically defined rationality, according to Albin [1998] simply go far beyond the capabilities of human actors to deal with the word’s complexities. These are the ‘barriers and bounds to rationality’.

However, Albin’s critique is somewhat distinct from and complementary to the critique of Tversky and Kahneman [and McFadden], and of Carnegie revisionists of the theory of the firm. Albin’s being based primarily on logical, the others primarily on empirical considerations. (…) his [Albin] chief argument is a logical and mathematical one: that human computation, being at most as powerful as a Turing machine, falls short, a priori, of the demands of classical theory. The argument has a number of distinct components deriving from Gödel’s theorem in modern logic, from computational complexity theory developed in computer science, and from the theory of cellular automata” (Simon, 2000: 245-6; ea)²⁵.

Furthermore, it can be postulated that strategies - that is typically a three-step process (development, implementation and adaptation) (Tidd et al., 2005)²⁶ - are usually formalised in plans, that result, in turn, from a more or less detailed planning process. Likewise, these plans jointly articulate, structure and coordinate the companies’ chief aims, their strategies, their top-level decisions and the intermediate (or operational) goals (Morroni, 2006; Rumelt et al., 1991).

Depending on the complexity and comprehensiveness, strategies (and their plans) can be subdivided into partial, relatively specific sub-plans (Whittington, 2001; Mintzberg et al. 2003). Often companies adopt, regarding strategies, a sequential aiming (or adaptive behaviour), which can be described as a dynamic process of retroactive adjustment of intermediate goals, based on new information/knowledge obtained in the organisation itself and/or economic environment - including competitors (Morroni, 2006; Simon, 1986).

This process consists of the successive examination of the partial objectives, which enables the implementation of the adaptive and sequential decision-making. This procedure is carried out on the basis of performance feedbacks -resulting from the monitoring of the successive attempts of success and failure- which, in turn, result from adjustments previously made (Morroni, 2006; Simon, 1986; Cyert and March, 1992).

Furthermore, the targets of these processes are to refine strategies and their implementations, reduce the costs and time involved in retroactive adjustments -that is, increase the degree of flexibility of the strategies and implementation procedures-, avoid premature commitment with a strategy and its implementation process (Morroni, 2006; Simon, 1986; Cyert and March, 1992; Vercelli, 1991).

4 Probable determinants of the strategies

Before starting this new item, it is necessary to give a brief explanation of an epistemological nature. Given that it does not seem an easy task (even when possible) to establish a clear hierarchy among the causes (or the necessary conditions) related to strategies and that the ranking of the causes looks to be, besides that, sectorally variable and along the time, it would be too pretentious and even reckless to postulate the status of determinants to the factors under examination.

It may be more prudent and appropriate, therefore, to call them alternatively probable determinants, given that if something ‘usually’ happens - how Keynes (1921; see below) and also evolutionary biology tells us- this does not mean that it ‘always’ happens (Mayr, 1982)²⁷. Indeed, in addressing the subject of causality, Keynes (1921[2004]: 275) had already proposed that “[i]t has also been convenient to speak of causal relations between objects which do not strictly stand in the position of cause and effect, and even to speak of a probable cause, where there is no implication of necessity and where the antecedents will sometimes lead to particular consequents and sometimes will not” (ea).

In this sense and drawing inspiration from Davidson (2011) and Mayr (1982), it’s possible to postulate that there are uncertainties regarding the causes of past events whenever it’s not possible to conceive a full list of the respective causes and/or no one can assigns probabilities/weights to all of them because the data is incomplete - there are epistemological and/or ontological uncertainties concerning the causes of previous facts -, so that they are not always perfectly orderable (or even orderable) (Keynes, 1921; Hicks, 1980)²⁸.

Putting it differently, the retrodiction of historical processes/ongoings -by frequently involving events subject to (ontological and/or epistemological) uncertainty- tends to be incomplete and/or provisional, since 'historical facts' are also subject the changes that new discoveries and knowledge usually bring (Keynes, 1921; Shackle, 1966; Mayr, 1982; Ziman, 2000).

Considering that we adopt here the conception that strategies are a subset of decision-making it seems reasonable to address the issue of the probable determinants of strategies from the analogous problem of the probable determinants of decision-making. Although the approaches to decision-making were initially dominated by the individual perspective, currently the conception that decision-making is of a collective organisational nature, at least at the corporate and political level, is gaining momentum - since that these agents and/or organisations are complex (or collective) (Simon,1978; Vercelli, 1999; Cyert and March, 1992; Morroni, 2006).

In the scope of organisations, there seems to be a relative consensus that the main conditioning of decision-making include hierarchical relationships; ownership structures and, in particular, the attribution of responsibilities -notably for those involved in decision-making - and control rights; the objectives of the companies; the rules and norms relating to collective decisions; the degree of rationality of agents' behaviour -and their dynamic capabilities - and their respective motivations; and also the incentive structure of the stakeholders. In complex organisations, these components/participants are obviously not isolated: on the contrary, they are strongly and mutually interconnected (Morroni, 2006; Teece et al. 1997; Simon, 1996; Cyert and March, 1992).

As a useful first approximation, it might be appropriate to summarise the interaction between the major probable determinants of decision-making (and, by extension, strategies) in organisations, as follows: 1) structure conditions/affects control rights; 2) the latter and the attribution of responsibilities play a relevant role in the choice of the objectives of the firms, which, in turn, configure, to an extent, the respective structure of incentives; and 3) this latter and the type of rationality - which is closely linked to the level of the dynamic capabilities (see below) - condition/affect, as well, individual/collective behaviour in the context of the organisational decision-making process and, by extension, the development, implementation and adaptation of the strategies (Morroni, 2006; Teece, 2007; Tidd et al., 2005).

Actually, the interaction process of chief probable determinants of decision-making - described above in a rather simplified way - is much more complex. De facto, this complexity may result from the innumerable feedbacks which can follow from the relations, in several directions, between the several important probable determinants of the decision-making process (and the development, implementation and adaptation of the strategies), and also from the non-negligible effects of many others less direct factors (Morroni, 2006; Simon, 1978; Tidd et al., 2005).

Similar to other social organisations, businesses are characterised by the need for power and control. Few would disagree that structures of ownership condition/affect control rights, which in turn influence significantly the decision-making process and strategies. The conditioning of the ownership structure and the relationships between ownership, control, and organisational configuration are often controversial and complex and are beyond the scope and space restrictions imposed to this article (Marroni, 2006; Cyert and March, 1992).

The aims and decisions -and strategies- of the firms are conditioned by the respective incentive structures which, in turn, are strongly related to the respective organisational and ownership configurations. Incentive structures are major conditioning to the evolutionary process of business organisations. Likewise, the behaviours of firm stakeholders are also main probable determinants of the decision-making process. Yet, the firm stakeholders’ conduct is usually shaped by several types of incentives and sanctions -among which the following are highlighted: 1) market stimuli and penalties, 2) incentives related to contracts between independent parties, 3) incentives related to the organisations that regulate the functioning of markets, and (4) the internal incentives to the business organisations themselves (Morroni, 2006; Cyert and March, 1992).

The type and level of rationality are either conditioning in the configuration of the decision-making process - and in the development, implementation and adaptation of strategies - in the organisations. The type and level of rationality are based on capabilities in the sense that the two depend on “the gap between agent´s abilities [capabilities]²⁹ and the difficult of the decision problem to be solved” (Heiner, 1983: 562; Morroni, 2006).

The noun capabilities were used to highlight the central role of organisational and administrative knowledge/skills to integrate/coordinate, construct, adapt and adequately reconfigure the internal and external competencies of firms -organisational and functional resources and attributes- in response to a changing environment (Teece, 2007; Nelson and Winter, 1982; Tidd et al., 2005).

The adjective dynamic was used both to emphasise the transformations of the economic context and to detach that companies -through the learning processes- become apt to develop new products, processes and even new capabilities. This means that companies are not passive in the processes of change -making the latter should be considered, therefore, as partially endogenous to the respective processes (Schumpeter, 1934; Dosi et al., 1990; Teece et al., 1997; Nelson, 1995; Tidd et al., 2005).

The capabilities encompass organisational and administrative processes and the current positions of firms in the markets. Processes should be understood as how things are done in companies (or their 'routines'). The positions relate, in turn, to the current endowment of technological assets and intellectual property, to their consumer base, to their relations with suppliers and distributors and to occasional strategic alliances with competitors³⁰ (Teece, 2007; Nelson, 1995; Tidd et al., 2005).

Likewise, the dynamic capabilities are the subset of the capabilities that enable firms -in response to changing market conditions- to create new processes, products and new capabilities through the learning processes. On the edge, the dynamic capabilities can even provide the conditions for the creation of new economic and technological trajectories for the companies (Dosi et al., 1990; Freeman and Soete, 1997; Nelson and Winter, 1982; Tidd et al., 2005).

To complete this subject, it can be added that the subset of the dynamic capabilities - that is directly related to the learning processes concerning the development, implementation and adaptation of strategies- can be understood, in turn, as strategic dynamic capabilities or even as dynamic meta-capabilities. If the arguments developed herein - based on the notions, mostly, of Teece (2007), Nelson (1995), Simon (1993), Tidd et al. (2005), and Morroni (2006)- are correct, it would be difficult to overestimate the importance of this last subject (strategic dynamic capabilities).

5 Closing remarks

It may be appropriate to start these final considerations by explaining what the strategies are not. Thus, flexibility, incrementality, adaptability etc. are attributes of strategies, but are not equivalent to them. At this point, a biological analogy seems to be useful. The strategies of reproduction and/or feeding of living organisms are characterised, among other attributes, by greater or lesser flexibility/generality and by greater or lesser adaptability to environmental changes. These qualities should not, however, be assimilated to the strategies themselves (Mayr, 1982).

Analogously, strategies should not be confused with tactics. As the former are concerned with decision-making related to the 'big issues' (Simon, 1993), it seems more appropriate to consider them as a long-term notion and therefore to be distinguished from the second (tactics), which, in turn, can be considered as being of short-term.

Indeed, the distinction between the general/very important and local/less important that is usually made among strategy and tactics in 'military art' can be replaced, with advantages, by the distinctiveness between long-term (strategy) and short-term (tactics) in economics, even because long-term decisions are generally more significant than short-term ones³¹.

Likewise, the objectives of the companies should not be muddled with their strategies, at least from the point of view adopted in this work (Simon, 1986). From this perspective, the strategies closely resemble what Sloan called corporate 'policies' (Whittington, 2001). Also, the strategies relate to how (and/or where and/or when) to do and not what to do. And how (and/or where and/or when) to do, to achieve the objectives, involves the use of means and capabilities available, but may also imply the creation of new means and/or the development of new capabilities.

As explained earlier, strategies have been defined herein as the decisions related to the 'big questions' of the companies. These resolutions are taken under conditions of radical uncertainty, subject to limited rationality, in the presence of (not-negligible) interdependencies between agents, conflicts of interest and without guarantees of behavioural consistency. Strategies are typical of nonergodic (or open) systems/processes. They concern, also, the long-term and are only a subset of so-called crucial decisions - which fall, in turn, within the broader scope of decisions (Shackle, 1972, and 1961; Simon, 1993; Davidson, 1996; Vercelli, 1991).

Although it is perhaps not as fundamental and ubiquitous in economics as it is in the biological sciences, diversity is certainly very relevant in several dimensions of the former, such as in the case of decision-making of economic agents -with their multiple objectives, strategies, capacities, structures, conducts/behaviours, and performance/competitiveness. These latter features are especially frequent and important in the oligopolistic market structures (Schumpeter,1942 and 1934; Shackle,1972; Simon, 1986; Dosi et al., 1990; Freeman and Soete, 1997; Nelson and Winter, 1982).

Lastly, the important relationship between the notions of strategies and international competitiveness should be highlighted. Indeed, there is a growing perception, in many works in specialised literature, that the international competitiveness has one of its chief conditions in the capacity to the development, implementation and adaptation strategies (Teece et al., 1997; Freeman and Soete, 1997; Nelson, 1995; Tidd et al., 2005; Melo et al., 2017). This last connection serves, in addition, to reinforce the observation made previously (see item II above) - since the link between strategy and the international competitiveness, here highlighted, also involves the Schumpeterian concepts of competition and innovation.

Acknowledgements

The authors would like to thank the comments and suggestions made by two anonymous referees who were helpful in drafting the final version of this article. However, the usual caveats should be applied.

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• JEL Codes:

  B5; L2; L1.

• Códigos JEL:

  B5; L2; L1

• 1
  This definition of strategy, proposed by Simon (1993: 131), is the starting point of the discussion on this important topic - unfortunately not very usual in economics - that we will develop in this article, especially in item III below.
• 2
  At the Appendix C of the Principles of Economics (PE), Marshall dealt with the notion of strategy with special attention. “It is recently, and to a great extent through the wholesome influence of the criticisms of the historical school, that prominence has been given to that distinction in economics which corresponds to the distinction between strategy and tactics in warfare” (Marshall, 1920: 453; emphasis added [hereafter ea]).
• 3
  Which, in addition to being incompatible with its more usual conception, is also conflicting with the classical interpretation of strategy proposed by Clausewitz, 1989.
• 4
  More recently, economists such as Williamson, Winter, Teece, Dunning, Langlois, Loasby, Foss, Krugman, Kreps, Milgrom, Stieglitz, Tirole, Mowery, Cantwell, Dosi, Metcalf, and Malerba, among others, have expanded the list of scholars interested in the notion of strategy.
• 5
  As DM and GT theory have a non-central role in this article, we will approach here only their basic aspects, being exempt from dealing with its most recent developments. For the latter, we refer interested readers, on DM, to articles (or books) by Vercelli's, 1999; Morroni, 2006; and Basili and Zapia, 2019 and 2010. On GT, we refer readers to articles Devetag and Louçã, 2004; Hargreaves-Heap and Varoufakes, 2004; Mirowsky, 2002; Israel, 2007; and Syll, 2018.
• 6
  As a more detailed discussion on this complex topic would certainly go beyond the objectives and limits of this article, we refer interested readers to the following authors in our bibliography: Schackle, 1966, 1972; Simon, 1986, 2000; Vercelli, 1991, 1999; Hargraeves, 1989; Carvalho, 1992; Louçã, 1997; Lawson, 1997; Possas, 1997; Morroni, 2006; Prado, 2006; Davidson, 1996, 2011; Dequech, 1999, 2007, 2011).
• 7
  Concepts of Keynes's work, such as 'weight of argument', 'non-numerical probabilities' and 'probabilistic causality', have received increasing attention from unorthodox economists in recent decades (Shackle, 1976; Vercelli, 1991, 2001; Basili and Zappia, 2019, 2010). As for the pioneering work of Keynes, see also Hicks, 1980.
• 8
  This topic will be resumed in item III below.
• 9
  Unless stated otherwise, the comments regarding game theory made in this article concern what can be considered the “standard [or conventional] game theory” - in the sense of that which “is explained in advanced textbooks,” and which is typically adopted by mainstream economists - as pointed out by Devetag and Louçã (2004: 12) and Hargreaves-Heap and Varoufakes (2004). In this regard see also Simon (1986), Possas (1997), Prado (2006), Israel (2007), Mirowski (2002).
• 10
  This is undeniably a controversial issue that will not be discussed here because it is outside the scope of the article and because the space limitation does not allow it. The intention here is to just make our viewpoint explicit and try to shed additional light on the relationship between the mainstream and the standard game theory. In this regard, see (Possas, 1997; Prado, 2006; Dequech, 2003; Hargreaves-Heap and Varoufakes; 2004; Lawson, 1997; Louçã, 1997).
• 11
  This point will be retaken in item III below.
• 12
  Not always properly explained - either as an assumption or as a result (to be demonstrated in the latter case), or as the resting state of a system, or as the evolution between two successive resting states.
• 13
  Although unusual - indeed, prominent mainstream authors who explicitly reiterate ergodicity in the economy are effectively few (Samuelson, 1969; Lucas and Sargent, 1981) (in this regard, see Vercelli, 1991 and Davidson 2011) -, the characterization of the dominant economic thinking, as being strictly linked to the supposed validity of the ergodic theory, finds, on the other hand, strong support in several non-orthodox authors we consider here.
• 14
  “The definition of game theory is very broad. There really isn’t a ‘theory’ of games; there are in fact many theories” (Davis, 1997: xiv).
• 15
  From our point of view, the so-called mainstream is constituted - due to the criteria previously explained - by the neoclassical schools (neo-Walrasian and Marshalian strands), by the old neo-Keynesian and monetarist schools, and by the recent new-classical and new-Keynesians ones (Possas, 1997, Prado, 2006; Dequech, 2007; Lawson, 1997; Louçã, 1997). By the way, what we calling, in generic terms, mainstream economics would correspond, approximately, to what Prado (2006) calls reductionist microeconomics, at the microeconomic level
• 16
  Schackle, 1966, 1972; Simon, 1986, 2000; Vercelli, 1991, 1999; Hargraeves, 1989; Carvalho, 1992; Louçã, 1997; Lawson, 1997; Possas, 1997; Morroni, 2006; Prado, 2006; Davidson, 1996, 2011; Dequech, 1999, 2007, 2011).
• 17
  “The term ‘bound rationality’ is used to designate rational choice that takes into account the cognitive limitations of decision-maker - limitations of both knowledge and computational capacity” (Simon, 1987: 266).
• 18
  Conditions which are particularly frequent in oligopolistic market structures (Dosi et al., 1990; Freeman and Soete, 1997; Nelson and Winter, 1982; Tidd et al., 2005).
• 19
  By the way, it must be noticed, as it was insightfully highlighted by Dequech (2011: 622), that “(...) procedural uncertainty is not mutually exclusive with all variants of substantive uncertainty”.
• 20
  This conception is, to a certain extent, compatible with the ideas found in Hicks (1980), for instance. See, in relation to this last point, Davidson (2011).
• 21
  Barney (1995), for instance, considers strategies as equivalents to big decisions. For perspectives consistent with this approach proposed by Simon, see Nelson, 1995; Freeman and Soete 1997; Pavitt, 1990; Langlois and Robertson ,1995; Morroni, 2006.
• 22
  It should also be mentioned that Simon's approach establishes an important connection with the so-called problem-solving theory, originated from cognitive psychology, but which has received increasing attention in the areas of artificial intelligence, of neuroscience, and from some economists (Simon, 1979 and 1986; Dosi and Egidi, 1991; Tversky and Kahneman, 1974; Kahneman, 2003.
• 23
  “Among the numerous papers by these two authors, see, for instance, Tversky and Kahneman (1974, pp. 3ff., 1992, pp. 44ff.); Kahneman and Tversky (1979, pp. 17ff., 1996, pp. 582ff.); Tversky and Fox (1995, pp. 93ff.); Kahneman (2003, pp. 1449ff.)” (Morroni, 2006: 66).
• 24
  “There are excellent surveys of behavioral decision theory by Camerer (1998), Machina (1989), Rabin (1997), and Thaler (1991); to reduce the overlap, I abbreviate my discussion of the areas of choice under uncertainty and behaviour in games which are emphasised in these surveys” (McFadden, 1998:16).
• 25
  For a broader and more critical discussion of the important issue of rationality in economics - which would certainly go beyond the scope and limits of this article - we refer readers to the following authors in our bibliography: Bunge 1985; Hollis and Nell, 1977;Tversky and Kahneman, 1974; Sen, 1987; Hargreaves, 1989, Hollis, 1994;Simon, 1978, 2000; Vercelli, 1997; Louçã, 1997, Lawson, 1997;MacFadden, 1998;Kahneman, 2003; Hargreaves-Heap e Varoakufes, 2004;Morroni, 2006).
• 26
  Strategies, like most decision-making, should also be conceived as "the terminal act of a problem-solving activity, preceded by the formulation of the problem itself, the identification of the relevant information, the application of pre-existing competences [capabilities] or the development of new ones to the problem solution and, finally, the identification of alternative courses of action” (Dosi and Egidi, 1991: 150).
• 27
  Regarding to the complex and relevant question of causality in economics, see, for example, Marshall, 1920; Keynes, 1937, and 1921; Kaldor, 1985; Georgescu-Roegen, 1971; Simon, 1987; Hicks, 1980; Vercelli, 1991; Lawson 1997. For the discussion of causality in general, see Bunge, 1997; Bhaskar, 2008; Ziman, 2000.
• 28
  As for the uncertainty - or indeterminacy, in the biology parlance - of (past) events in biological sphere, the arguments of Mayr (1982), the eminent evolutionary biologist, seems to be broadly consistent with our viewpoint introduced above.
• 29
  The terms skills and capabilities can be considered, in certain contexts, as synonyms. We have opted for the use of capabilities instead of skills because the former seems to be more appropriate to the collective context in which decisions (and strategies) are usually made in companies and the latter seems more suited to individual (decision-making). See, in this regard, Dosi and Egidi (1991) and Morroni (2006).
• 30
  Together, processes and positions delimit the possible trajectories of firms, that is, the available economic and technological alternatives, as well as the attractiveness of future opportunities (Dosi et al., 1990).
• 31
  It should be noted that instead of using the criterion suggested by Marshall (1920) to distinguish among strategy and tactics, we have chosen to adopt, alternatively, the Marshallian distinction either between long-term and short-term, as the most appropriate method for address this issue in the economic field.

Publication Dates

• Publication in this collection
  18 Oct 2021
• Date of issue
  May-Aug 2021

History

• Received
  05 Mar 2020
• Accepted
  17 Jan 2021