Equilibrium Fictions : A Cognitive Approach To Societal Rigidity

The rational choice framework assumes that individuals know what is in their self interest and make choices accordingly. Do they? When they go to the supermarket (in a developed country with a market economy), arguably they do: in such settings, they know, almost certainly, whether the choice would be beneficial, expost. Indeed financial markets in the developed market economies (usually) possess the essential characteristics consistent with substantive ration-ality. However, the diverse performance of economies and polities both historically and contemporaneously argues against individuals really knowing their self interest and acting accordingly. Instead people act in part upon the basis of myths, dogmas, ideologies and 'half-baked' theories. Ideas matter; and the way that ideas are communicated among people is crucial to theories that will enable us to deal with strong uncertainty problems at the individual level'. For most of the interesting issues in political and economic markets, uncertainty, not risk, characterizes choice-making. Under conditions of uncertainty, individuals' interpretation of their environment will reflect their learning. Individuals with common cultural backgrounds and experiences will share reasonably convergent mental models, ideologies, and

Having pioneered the concept in economics that institutions structure incentives, Douglass North's later work posed the question, in turn: what structures institutions? His approach explored the role of culture, norms, and ideas and eventually drew its focus on shared mental models as the basis of institutions. An ongoing literature takes up North's fundamental question. In this paper, we contribute to this literature by bringing together North's mental-models approach and the work of philosopher John Searle. Searle pioneered the concept in philosophy that institutions are constitutive rules, established through collective assignment of particular status to objects in the world. Drawing upon cognitive science research on knowledge, learning, and habituation, as well as computer science research on artificial intelligence, we develop Searle's framework to pose a simple yet general account of the cognitive origins of institutions and the implications of this link for social theory. Our framework reconciles the social science approach to institutions as regulative rules with the philosophy approach to institutions as constitutive rules. It also provides a basis for considering impediments to social interaction that arise when individuals possess conflicting normative ideas and affiliate into groups whose shared understandings appear to conflict. Acknowledgments: This paper has been prepared for an edited volume celebrating the contributions of Douglass North. We thank the editor, Andrés Marroquín, and the publisher, Universidad Francisco Marroquín, for the opportunity to contribute to this volume. Sections of this paper are based on our joint ongoing work, including López and Caton (2018) and Caton and López (2018). The usual caveat applies.

2013

Do paradigms in social science shift as swiftly as do many in natural science? This article surveys the evolution of economics as an example of how paradigms shift and interact in social science. Through comparative historical analysis of economic theories, psychoanalysis, and theoretical reflection, it submits that academic progress in social science has normative underpinnings that interfere with paradigm shifts. We coin the term “Sticky Paradigms” to explain the combination of emotional normative framework and reason. This paper will first conduct a review of different schools of thoughts in economics to examine if its intellectual history fits the standard of paradigm shifts. Second, we analyze how emotion and reason can work together to produce intellectualism. Third, we elaborate our conceptualization of “Sticky Paradigms”. We conclude with a discussion on the Hegelian dialectic, treating paradigms as competing myths rather than a pragmatic theoretical competition.

Cambridge Journal of Economics, 2003

Part of a Symposium entitled, "Say's Law Revisited," this note is dedicated to showing that both Say's and Ricardo's concerns about unemployment were deeper than even the Kates article (in this symposium) suggests, that this concern even led Say to advocate a clear Keynesian remedy for unemployment: public works. Correspondingly, the paper shows that Ricardo's disquiet about joblessness constitutes a good part of his reversal on the role of machinery (i.e., innovation) that so distressed his adherents.

The domain of "folk-economics" consists in explicit beliefs about the economy held by laypeople, untrained in economics, about such topics as, for example, the causes of the wealth of nations, the benefits or drawbacks of markets and international trade, the effects of regulation, the origins of inequality, the connection between work and wages, the economic consequences of immigration, or the possible causes of unemployment. These beliefs are crucial in forming people's political beliefs and in shaping their reception of different policies. Yet, they often conflict with elementary principles of economic theory and are often described as the consequences of ignorance, irrationality, or specific biases. As we will argue, these past perspectives fail to predict the particular contents of popular folk-economic beliefs and, as a result, there is no systematic study of the cognitive factors involved in their emergence and cultural success. Here we propose that the cultural success of particular beliefs about the economy is predictable if we consider the influence of specialized, largely automatic inference systems that evolved as adaptations to ancestral human smallscale sociality. These systems, for which there is independent evidence, include free-rider detection, fairness-based partner choice, ownership intuitions, coalitional psychology, and more. Information about modern mass-market conditions activates these specific inference systems, resulting in particular intuitions, for example, that impersonal transactions are dangerous or that international trade is a zero-sum game. These intuitions in turn make specific policy proposals more likely than others to become intuitively compelling, and, as a consequence, exert a crucial influence on political choices.

SSRN, 2019

This paper presents a theoretical argument focused on how social norms and formal institutions operate as cognitive coping mechanisms among groupings of boundedly rational actors who face fundamental uncertainty concerning their political and economic environments. Broadly speaking, informal and formal institutions facilitate strategic decision making by coordinating agents' understandings of their social environments and their conceptions of how myriad actions of involved participants (including themselves) may affect such environments, along with their positions and wellbeing. Yet institutions and the associated cognitive processes, are subject to periods of rapid transformation that sometimes exhibit properties of cascading imitation across individuals and groups. After addressing background concepts, this paper makes four related assertions. First, heuristics and, by extension, mental models respond to shared narratives in a fashion that often generates conformity of belief and action. Second, mental models follow the dynamics of punctuated equilibrium processes. Third, institutions are a type of shared mental model that convey basic understandings across uncertain environments. Fourth, by enabling boundedly rational actors to manage uncertainty, institutions effectively choreograph social activity. Discussion includes reference to classical, evolutionary and epistemic game-theoretic modeling. Social choreography thus follows punctuated equilibrium dynamics that offer relative predictability during stable phases and stark uncertainty during rapid phases of punctuation. The paper closes with a fewon implications on the political economy of institutional change.

Journal of Economic Issues, 1979