The economics of the mind

112 Pages·1999·6.282 MB·English

by  Salvatore Rizzello

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Edward Elgar

First published in Italian as .L'.Economfa.D e/fcMlent.
by Gius. Laterza &. Fig1i Spa,R oma-Bad
© Gius. Laterza &: Fig1i Spa, Roma-Bad 199.7
English language edition arrangedt hrough mediationo f the
Literary Agency Bulama
Contents
T'hi.se dition C) Salvatore Rizzello 1999
Tranlslatedfr om the Italian edition by ElenaP asquini
All rights.r eserved.N o part of &is publicationm ay be reproduced,s toredi n a Foreword by Massimo Egidi
Introduction
retrieval system or transmitted in any form or by any means.e lectronic.
mechanicalo r-photocopying, recording, or oQerwise without the prior
pemiissiono. f the publisher. ' PART ONE: HAYEK'S CRI'l:lCISM OF TILE
NEOCLASSICALP ARADIGM
Published by
l
Edward Elgar Publishing I,imited
Neoclassical paradigm and the anomaly of the Austrian School
GlensandaH ouse
1.1I ntroduction
Montpelier Parade
1.2 The rationality of agents in the neoclassical theory
Cheltenham
Ciosa LSoI UA 1.3 The general economic equilibrium
1.4T heA ustrianS chool'sd iflennt view on equilibium
1.5T he rationality of agent in the Austrian S.chool'sm odels
1.6T he object of economic analysis
Edward Elgar.Fiublishing: Inc.
136 West Street 1.7T he role of institutions
Suite 202 1.8 Concluding remarks
Northampton
Massachusetts0 1060 2. Hayek on competition and knowledge . I I
USA 2.1 Inuoduction
2.2 The theory of knowledge
2.3 Subjectivism and the criticism of constructivistic rationalism
A cataloguere cord for this book
2.4 The meaning of competition according to llayek
is available from the British Library 2.5 Communication
3. Mind and institutions 21
Library of Congress Cataloguing in Publication Data
3.1 Introduction
Rizzello, Salvatore, 1963-
3.2 The model of mind accordingt o Marshall
The economics of the mind/ by Salvatore Rizzello.
p. .cm. 3..3.Thi model of mind according to Hayek
3.4 Spontanei)us order
1. Austrian school of economists. 21 Neoclassical school of
economics. 3. Institutionale conomics. 1. Title 3.5 Criticisms. of the Hayekian idea of spontaaeousorder
HB98.R59 1999
330.1 5' 7--dc21 99- 34496
cn
ISBN 1 840641 63 0
PART TWO: SIMON'S CRITICISM: FROM SUBSTANTIVE PAK'f THREE: NE01NSTITUT]ONAL]SM: RULES,
LEARNINGA NDE VOLU'nON 95
RA'TONALITY TO PROCEDURAL RATIONALITY 39
4 Bounded rationality 4i 9. Tbe implications of the neurobiological approach 97
4.1 Definitions for economic theory(1): the decision-making process
9.1 !ntroduction
4.2 Genesis and development: from Comlfions
and Barnard to Simon 9.2 A glance to the past
9.3 }layek's sensory order and the decision-making process
4.3 Implications
9.4 The neurobiological dimension
4.4 Main applications
9.5 A few economic consequences
4.5 Concluding remarks
9.6 Concluding remarks
50
Optimizing and "satisficing"
10. Tbheim plications of thb neurobiological approachf or
5.! Definitions
economic theory(11): the process of exchange
5.2 optimizing and the satisnlcing "alternative' 113
with asymmetrical information
5.3 The levels of aspiration
10.1 Introduction
5.4 Sa6s6icing within organizations
l0.2 Neurobiology and asymmetrical infomiation
5.5 Concluding remains
l0.3 Implications for economic theory
l0.4 Concluding remarks
6.P roblem-solving - 56
6.1 Introduction
11 The implications of the neurobiological approach for
6.2 The philosophical background of problem-solving: J. Dewey 122
economicd teory(m): "Path-dependen'cy
6.3 The psychological background of 11. 1 Introduction
problem-solving: Gestalt's influence
6.4 Simon's contribution 11.2 Path dependency in economic henry
11,3 Applications in industry.ael conomics
7 Decision-making process: procedural rationality and lemming 67 11.4 'jbe microfoundations of pah-dependency
11.5i mplications for economic theory
7.1 Introduction
11.6C oncluding r4muks
7.2 The influences of th6 psychology of behaviour
7.3 A systematic picmre 140
12 Transaction costs and the new theory of the fum
7.4 Procedural rationality
g 12.1 inQ-oducdon
7.5 Uncertainty
12.2 The new role of the firm
7.6 Learning
12.3 The most recent approaches
7.7 Concluding remarks
12.4C oncluding remarks
INTERLUDE
13 Evolution. organizationsa nd institutions 156
79 13.1 Introduction
8. Economics and psychology
13.2I nstitutions and organizations
8.1 In&oduction
13.3 The emergence of rules: unplanned routines and decisions
8.2 From behaviourism to cognitivism
13.4T he evolution
8.3 Alternative models of mind: neural networks
13.5 Concluding remarks
8.4 Mind/brain
Contents
Keferemes 169
Indus 191
Foreword
by Massimo Egidi
7he .Economfcio f !he Mind is addressedt o bout the educatedr eader and
specialistsin the disciplinesM at study the mind and humana ction:
economics, psychology, the cognitive sciences.
The book is able to communicate with such. a diversi6ted audience because
it is structured to show the close conceptual connection between the human
sciences and the. sciences of the mti$1cial. The history of this connection, and
of how it has been broken and then restored in the course of this century, is
seta ut in the book. But this is not its specificp urpose,s incei t is a history that
emerges spontaneouslyw henever investigation is made of the key problem
that concerns the author: the role of knowledge in the explanation of human
action inside social institutions.
This problem is emerging today with renewed strength, afar a long walk
with many vicissitudes,i n economica nalysis:t he role of knowledge hasb een
considered crucial since the debate on planning between academic socialists
and the Austrian School in the 1930s. The exponents of the Austrian. School -
mainly Monger and Hayek - denied that it was .possiblet o construct a planned
economy that was as eHI.cleata s a market-basede conomy,a rguing on the
basis of ali original analysis of the role of knowledge.
According to Hayek, in order to understand whether an artificial order -
:$ the planned society - is able to replace the market, it is first of all necessaryt o
i' investigate how an economic saucfure like the market can "spontaneously"
arise, where '.'spontaneously" means non-deliberately and unconsciously.
IJnderstandingt he nature of the market 8nd the other economic institutions
hereford requires inquiry into hbw a social order that has not been
deliberately designed by an architect can emerge and establishitself.
Explicidy taking the paddy unconscjous nature of human decisions and the
limited extent of human knowledge as their analytical premises, the.A ustrian
School .suggestedth at the social institutions perform Me role of a collective
mind whose knowledge is dispersed and therefore partly unconscious. The
I problem is understandingh ow this collective mind works. That.is, how .it is
I possible for the institutions to function in the absenceo f a .plannero r a
1,,d ictator when the knowledge that they require to do so is scattereda nd
I fragmented in the social structure.
Foreword bT Mmsitno Egidi
TtwE contomicasf ttw Mind
Thereaaer, an immense amount of analysis was undertaken to Uanslate the
An important componenti n this position - which Rizzello's book rightly
notion of rational choice into well-deHlneda nd operational mathematical
stresses- is the suggestionthat the economic institutions function successfully
because they enable .a radical simplification of individual tasks. This .comes models. During the process, thq.naadiem of .
i;''«., '!
about through the division of knowledgea nd work, so that the bulk of
ial
people's everyday tasks are performed semia utomaticallya nd. without
nc
complex individual calculation. The complexiQ' . is "distributed" within the
'''YEf'this paradigm - now paramounta cer half a century of exceptional
institution through the division of tasks and knowledge.
On this view what we understanda bout die nature of the humanm ind is analysis ani conceptual extension - was increasingly undermined. by. the
stematic inaccuracy of its predictions and by its lack of explanatory
fuxidamental for comprehending the nature of the social institutions, and vice
versa. This profound philosophical assumption, which uaverses much of capacity. Precisely at the moment when the paradigm received its most
borough fomiuladon (principa[iy in ne amory of radona] expectations), it
European economic thought, is die !effmolff that mns though The .Economics
came up against its limits,. to predict. human economic actions- Why was this?
ofthe Mi.l d
The book surveysa "vision" of the role of the social sciencesa, nd The standardm odel af rational action had already bgglL.called into
u eriments and
economicsin. particular,w hich is the antithesist o the puadigm that
el.devant le risque: Critique
predominated until the 1980s, namely the neoclassical-tradidona! approach. ]t
direct attention to the fact dint there is a link between economics, psychology des postulate et axiames de {'Ecole Am6ricaine", -Eco ome/rica, 1953, 21, PP
503=46) were published in 1952, and therea&er a broad allay. of results in
and the artificial sciences. The matter is by no means obvious, becauseo ne of
the most important principles on which'neoclassica!e conomicsw as based psychology and experimental economics demonstrated Hie extreme fallibility
of human behaviour, compared with the behavioral noam envisaged by the
was the idea that the two disciplines of economicsa nd psychology should be
theory of rationality. Even if discussioni s restrictedt o the branch known as
treated ase ntirely difdnct.
the theory of expectedu tility. - the.theory, that is, which predicts radoaal
According to the Neoclassical School, in fact, the theory of rational choice
behaviour in conditions of uncertainty - t!!g.
provides economic subjects wiLh the model of optimal .action, and it therefore
Thus most notably Kahnemann and Tversky, shi
proposes a set of nomis which it is in everyone.s interest to obey..] :4 : .' cts
economic actors were prescribed thebest way to achieve their goals, audit is
assumed(Milton- Friedman)t hat those who failed to conform would be
however, although dlese facts are generally accepted, and even
gradually excluded by a process of .selection which permitted only "rational"
included in the economics textbooks, .there -are few attempts and great
operatom to survive. It -is thereforepoinaess-to investigate the psychological
difBculties to.draw all their It is very difficult to go beyond {he
mpects involved in decision-making,b ecausea t most.they could .only aid
passive reception of hose results, if one remains within the conccptua! frame
explanation as to why certain individuals are unable to behavei n an entirely
rational manner of the rationa]ity mode] and the epistemology on which i£ rests. A risky but
I The theory of rational action is well known, and here I shall merely .make potentially promising solution is to change the conceptual flame of reference.
The orthodox takes it for granted that the rationa]i€y mode]
I some remarks before resuming my argument. The theory wab .limpidly .ne o .ons it
A expounded in Lionel Robbins'' Esfuy oii rhd ]dafarz and SfgnJPfance of
or; But a
H Economics(i932), in which he defined economics as the science ofchoice
or
This is a highly general did abstract definition. It can be api)lied in all [he
of actors
n€
settings of human action and precisely becau?eo. f its generality still today
ands numerOUSp roponents. Robbins' essay 'Was the belated systematization 'rhe question [d In .two ways. .on to develop
the
of a long process of analytical inquiry into th6 purposes and nature of the
H ' UP,
human science that pewaded late. niiieteendl-century European culture and
whose frame of refemnce was provided by such outstandingt hinkers as
Weber, Meager and Pareto. In that period, the nod6ns of economic action and
rational action underwent profound. scrutiny:
Linnaeus of the social sciences, 'hho provided" 'ibi" first exhaustive
cli;iifiiiition of the typed'of social and economic aci
cle
Foreword la Massimo Egidi
TtwE conomicasf ttw Mind
spread by ae debate of the 1930s and which laid the basis for {he gr6wh of
4ioe= radical option is to !ssume that the abilities deployed by economic Elle cogui
actjRthan While $ojRg so, it ance again encounters an important Hom
envisaged by the standard theory of rationality Hayekian bought. In .952,
as undertaken to clarify this (conceiveidn the 1930sb uta ils slt lde), which numerous of
point and to identify the mental abilitie.s employed. ia economic and social rH'Bibb i i itQ3 I ili !.I/b)i
action - and much work still remainst o be done.I t was shownt hatfb!!gan ;i;6;='D;liZlilzalion of Behavfo r (1949), which laid the basic of modern
n a ments
i.gpality: ::ggBpeg neurophysiology and experimental psychology, The two works had so many
0 features in common that Hayek;w as tempted not to publish his book
or
These same years .saw the explosion of computer theory founded by Alan
Thus it was the Turing, Alonzo.Church.. Johnv on Neumann,W arren McCulloch and 'Walter
a s. Pitts. It is unfortunately not possible here to discuss that exuaordinary chapter
a of in the history of science,b ut it should be pointed out that the attempt to
human mind in analyse human.!n8glligence, and fomiulatK a reor&sentadon of.ilz..jnv( lied dle
.. - '-; :i joint enbrt! . of
on
at
10 no
to a diHerent VQtsion of thB problem: the
various mental abilities that are essential for explanation of human action
induction, order to sore
GEn sub 10 ex In .+fl:inad ali ilani iH :BH 'lane..in thin nunn in th last thiav
we have
within the cognitive:sciblices., as shave.sought to show. With the onset of the
idea of procedural radon;iitV, and with the empirical study(protocol analysis)
of. how individuals behave in complex strategic sitUgBons, it has become
evi the transmission of infomndon and
this line of of and on their classification, ate be
n: bess of and of has b-.
but in and .ve
(in 1). 0 feature to li;i;tian
a }!e answer' he question of why svsfemat
systemahc arise between hoary of numan a6iliiions: I sts the"iiuses of
the human
omniscient rationality and human behaviour; infomlauon asymmetries rather than taking them ag given, -as usually happens
mind is at once more the in economic analysis. In the book, of course, Rizzello mer61y proposes a
limited RHlitl n tpH {lxiB itilii hypothesis for fllrther research, without seeking to consauct an ouuight
(iFEiitliiiii of. symbolic manipulation, but more powerful in .generating .new model. But in so doing, he. noes the itnpasse in which the neoclassical micro-
symbolic representations of fhe problem addressed.T o coin a phfme, the road folindations have left llsi and proposes-a line of inquiry to resolve it. With .a
opened by lleTbert Simon's path-breaking work suggested that the old.idea of wealth of detai! he describes the challenge to which thd cognitive and social
the rallona/ agent.s hould be replaced by that of the flzreZJigenaf ctor. And it is sciences have reacted by reasserting heir status, seeking out new avenues of
discussiono f this crucial point that fomlsthd core of Rizze116'sb ook inquiry, .and discovering their shared foundations. Consequently, even the
In proposing a re-reading of one of the central problems..of .the .facial reader who does not agree 'oath same of the author's UWents will read the
sciences - the role of knowledge in the evolution of the sod:il-.institutions - book'withcuriosity and interest.
Zhe .Economicso ff/ze .i/fna(which could be retitled JI/ind:and InsrlMrfons), To conclude, .l belifys..dial..wg..sbQlild .reQQgnizQt.h. at we do lmt know
rightly goesb ack to the crucial issuesth at engenderetdh e theoryo f en6iigh;i bi;ii hi mehta.!p rocessedslg t .giver ise.t a:i6iii111ilii6ii;":a
omniscient rationality, and then traces the features of an alterDadve account gpiiigquentiyg natw e canniit'EliiEi;;;t;Q;p 11ediognl the basic; of q !Qulqly:
TheE conomicso fttw Mind
Inboduction
which we interpret economic reality are a highly partial
and incomplete representationof that reality, and consequently the actions
that they prescribe me unable to achieve Me goals set. It is therefore
in a worldabout which we have systematically
ingenious to assume: 'i'here never was nor will be a parson who has certain knowledge about the gods
incomplete knowledge and inf'oimation, that diery is a privileged observer in and about all the things lspeak of. Even if he should chance to say the complete
possession of [he only model that can prescribe [he collect course of action. auth, yet he himself knows not that it is so. But all may have their fancy
The path marked out by the artiHiciaJs ciences.f ollowing the pioneering
Work of Cyert, Much and Simon, takes direct account of the cognitive limits (Xenophanes,# n8menr 34)
that shave discussed. Precisely because it prompts us to conduit analysis of
human behaviour and the evolution of the institutionsi n a more penetrating
less laden with theoreticat prejudice, thanthe traditional approach, it .!. The economics of the mind is the econ(imics of creativity, uncertainty and
obliges us to invest gate d+ew orkings of human intelligence and the Origins of complexity:.t he economics of the mind is tne economICSO I man.
knowledge to Spin understanding of the insdmdons. And it thus forces us to abstract man, the social actoror the economic agent. The economics of the
fallacious and
shake off the &:tters of well-established but Hind deals Midi real men and women. It tells us how they assessthings, how
in the Gtle.
airy decide and act. The main thesis of this book is summed up
ch. A is the 0 ol
Rli.i .:
describing the
mechanisms of choice? Though Ido not want to run the risk of stating a
dispute on the definition of economic science and on its oblject(it might be
the subject of a whole book), Ideem it necessaryt o specify this concept
In one of her last corks, J..R obinson wrote that one of the conditions of
human life is that "life. as we experience it would not be p6ssibie if tile future
was known for certain"(1980a, p. 86). The .hypothesesc ontradicting this
simple principle have certainly been, in .the past, detrimental to economic
politics
Since the. end of the nineteenth .century, .economic theory has -tied to
explain producers' and consumers' bela'Viotir within the theory of exchange,
which cah.b e synthesizedi n the theory of prices. The essential characteristic
of this science can be found in Hayek's -deninidglL::pure. jogiQ£.gf .the !1lgbe:
Thus- asC oastw rote( 11988Cb,ii 6iEF'iJ:'iiiaead df $!16iif,gflii:ibgg:fi.we
nn
have orfafi 6f'kiefer?nc!?!..and instead. ol
!Dum
any specification of its
firms without
consumers without
P.
lchoide is
economic dleary.-! consider this assumptionas fully valid, but I also thjnk
hat the analysis should not be restrictedto consumption and production.
T
The Econotnics ofttw M.ind
importance
institutional level. I believe that a high number.o f the answersw e ue 16okingf or are to be
found in the limits and potendalities of the human tnind, and in the way Mey
allow us to act.
To start with, this book offers tbe readerc ritical roma'ks on the
microfoundadons of economic henry, through a quite original paa, i.e. a
how
systematic picture of the heterodox approach; 'Ibis will shed light on
ineHective 'the explanations of the traditional theory are, because of its
unreansucn ypolneses-
If our goal were to mention ia a rather extensive perspective all the
we should draw up quite a
scholars who questioned the prevailing theory,
lang list. We should includec elebrateda bhors, suchasM eager, Schumpeter,
Keynes, etc., to mention only the fewnameso f the most renowned and closest
in time to Walrus. But, when prefer to the heterodoxa pproach,I mean
those authors who the of the microfoundations
who ith of
to the
i
leswch certainly follows many diHerent lines, and Ido
havea ssumead guidelinea, kidd of "file
not expect to rev.iew them a]]. ]
rouge" of my analysis, andI have tried to follow it. It is my :6lxn beBef that
[he most effective criticism can be traced back to two separate lines; they both
deal with [he unreality of Me f'oundations of the neoclassical paradigm,
emphasizingu le discrepancyb etweenideal analysis and real data.
In 1937 Eic aFCt he comerstones of
{heie two tlf research: 'rEconomicsa nd Know
our 10
underline that the value of these uncles was [ged several
were or
}-
as' =od le prevailing
its foundations are
g
Monger's works, and F- von Hayek is its
fhe other line is more composite and its
institutionalist tradition of Ule smdies of organizations(J. Commons and C.
Introduction xix
The Economics afttw blind
I'hose issues are essential in the neoinstitutionalist paradigm, towards
Barnard), and in the analysiso f the.p rocesseso f social coordination between
which - .accordingto the thesisI have introduced- theset wo lines of research
;.;£l;t ;£d of
$ een converge and reach a satisfactory synthesis. If this can be said with refs:fence
to Simon, lthink that it is also coherenta nd consistentw. ith the outcomeo f
Hayek's thought(or even that it is its natural outcome). twill therefore ay to
shed light 6n how the mehodological and economic aspects of this new
approach have their roots in Hayek's theory of knowledge and in Simon's
theory of bounded rationality
There are certainly relevant diHerences between these t'&o. audlors, but the
points of convergences seem to prevail over the point of divergences.
I hopi that the following pagesd ull explain what Ihave just stated
Nevertheless, twill now underline a few relevant common elements of these
two authors,f or.the.readers.,w ho might Oiadm y bringing them together too
hasty, since they are usually perceived as quite-far hom each other.
Both Hayek and Simon, in their criticism of {he neoc]assica]p aradigm, try
to find &e object of economic science and they both 6iad it, Bursto f all, in the
dy.namicp rocesso f. individual behaviour,w hich is the opposite of de
prevailing: -statica. pproach.. ])ey both consider.the .p:!!bglggj£2Ldimension
imi)ortanint. o rdetro dis 6$ggso f
t enough as regmds Simon
wno is. aso Knownr or ms applying psychologicalt heory to econotnics),I
will demonstrate that it is as evident with reference to ]liayek. One of the
purposeso f this work is to make Hayek's psychologicala nd neurobiological
methodological assumptionse xplicit, as they are especially relevant for a full
and all-encompafiing;c61nprehension of the work of the Austrian Nobel
prize-winner. Such.a ssumptionss tayed in the background in die literature,
except ior isoiawa. cases.
Ag thesei ssues: are very important, we wi]] briefly enter the field of the
history of psychology, so as {o understandw hat kind of studies hose authors
could draw on..:Thereforeth e part of this.book called "Interlude" should not
surprise tito readersi t illustrates, also flom an historical point of view, the
psychological aspects we Me dealing with and, more
between economics..and .ogy.
cognitive limits and looking for a
more realistic explanation of the mechanismso f action and ch(!jge, the two
wor 0' mind, in
nrrler tn exnlnin humanb ehaviour. This is what Hayek and Simon do: and this
is why lwill systematically illustrate their models of mind
As regards Hayek, this is especially important, since in the literature I
found no systematicd escriptiono f his model. It is also important becausei t
will halo us better understand - and .maybe with a new perspective -. the
meth8a8i3g cal foiidaiit;ii that ari"iiii;i't;ii:g'6i;ilfTf tiED.m echanism of
i86iiiiiion acquisnion . ana use:""iiiH'Miler "spontaiie6ms- align'uf
institutions.