Transcript Learning, Institutions, and Economic Performance

Evolutionary Change in
Institutions and Markets
Chris Mantzavinos
Paris, December 9, 2008

I would like to formulate first the three main
questions to which I am going to provide an
answer in my talk today.

My book is - broadly speaking - on
Economics

But why is Economics useful?

Economics is extremely useful as a form of
employment for economists“
John Kenneth Galbraith
and…

„The only function of economic forecasting
is to make astrology look respectable“
John Kenneth Galbraith

2. Since we are all Institutional Economists
nowadays. Why is Institutional Economics
useful?

One of the reasons that it is useful is that it
deals with governments and their economic
policies.

But what is the government`s view of the
economy?

„Government`s view of the economy could
be summed up in a few short phrases: If it
moves, tax it. If it keeps moving, regulate it.
And if it stops moving, subsidize it.“
Ronald Reagan

3. My talk today will have as a subject
matter how assumptions about human
behavior and institutional economics are
interrelated. Why is dealing with this
subject matter useful?

„Most economists make the assumption that man is a
rational utility maximiser. This seems to me both
unnecessary and misleading. I have said that in
modern institutional economics we should start with
real institutions. Let us also start with man as he is. I
am not calling into question that more is demanded if
something becomes easier to get or that more is
supplied if the price is raised. But what is being
maximized? Some of my colleagues quote a statement
of Bentham`s to the effect that madmen also calculate.
This is a correct and, I believe, very important
statement. But I would stop there. I do not think that
we should draw the conclusion that madmen are also
rational.“
Ronald Coase
Evolutionary Change in
Institutions and Markets
1.
2.
3.
4.
5.
Introduction
Individual Learning
Collective Learning and Change
Path Dependence: Cognitive, Institutional
and Economic
Conclusion
1. Introduction

One of the greatest challenges in the social
sciences is to explain change, more
specifically: social, political, economic and
organizational change

Starting point should be an account of
human learning as the fundamental
prerequisite for explaining such change

Methodological individualism # Rational
Choice Theory
2. Individual Learning

Cognitive science: relationships among
brain, mind and behavior

Many competing explanations for
perception, learning, memory, and attention

For our own explanatory purposes as social
scientists, we want to use a theory that
satisfies the following three criteria:

An empirically testable account of
individual learning

A satisfactory account of choice processes

A foundation for explaining the processes of
social learning, since the ultimate
phenomena of interest are economic and
political change
In light of these criteria I propose to view
the mind as a complex structure that
actively interprets and at the same time
classifies the varied signals received by
the senses.
 Pragmatic notion of mental models

– They are typically formed in pragmatic
response to a problem situation in order to
explain and interpret the environment
– Learning is the complex modification of the
mental models according to the feedback
received by the environment
When environmental feedback confirms the
same mental model many times, it becomes
stabilized in a way. I call this relatively
crystallized mental model a “belief”.
 The interconnection of beliefs (which can
be either consistent or inconsistent) I call a
“belief system”.
 Old Problems
Rule-following
 New Problems
Choice

General Motivational Aspect: Increase of One`s Own Utility
 Pragmatic Cognition According to Rules
Forming of Mental Models of the Problem Space
Similar or identical to
one stored in human mind
Interpretation as an
Old Problem
Dissimilar to any available class
Interpretation as a New Problem
1st stage: Employment of Inferential Strategies
Unconscious employment
of solutions as designated
in the respective class:
routines
Success
Success
Acquisition of readymade solutions from
the environment
Failure
Failure
2nd stage: Process of Choice
Creation
of new
alternatives with
the aid of
imagination
Interpretation as a
New Problem
A1
A2
A3
A4...
Chosen Alternative
Success
Failure
Interpretation as a
New Problem
3. Collective Learning,
Institutions and Markets

Learning at the societal level can be best
conceptualized as a process of collective
learning. Two aspects:
– Static: Formation of Shared Mental Models as a
result of communication
– Evolutionary: Evolution of Shared Mental Models
over time
» Theoretical Knowledge (expressible in linguistic
terms): Science
» Practical Knowledge (not expressible in linguistic
terms): driving a car, typing a paper etc.

As collective learning takes place at the societal
level, the problem-solving capacity of the society,
encompassing both theoretical and practical
knowledge grows and is transmitted over time.

What we are most interested in here is a subcategory
of practical knowledge – the knowledge concerning
the solution of social problems of human interaction

Starting from the distinction between the rules of the
game and the economic games (markets) that take
place within the rules, the question is how
institutions and markets change and evolve over
time.

Evolutionary Change takes place at both levels:
– Evolution of rules and evolution of markets within rules

That the institutions matter for economic outcomes is
a common theme in every theory of political
economy
– Beyond that: Institutions come first
» This should be proved rather than only (implicitly) assumed

The fundamental proposition of Institutional Analysis
is that institutions can act as the rules of the game. In
a static context this is probably unproblematic. In an
evolutionary context, however, one has to
demonstrate theoretically why institutions can show a
relative stability vis-à-vis markets. Since only if
institutions are relatively stable can they ever play the
role of the rules of the game.
From an external point of view, institutions are
shared behavioral regularities or shared
routines within a population.
 From an internal point of view, they are
nothing more than shared solutions to
recurrent problems of social interaction. Only
because they are anchored in people’s minds
do they ever become behaviorally relevant

the elucidation of the internal aspect is the
crucial step that makes for the qualitative
difference between a congnitive approach
to institutions and other approaches
Difference between markets and
institutions



The knowledge concerning institutions is shared
among all (or nearly all) participants
The fact that people classify the recurrent stylized
situations of social conflict as old problems
allowing for already known solutions means that
they do not consciously attend to them. The
classification of institutions as old problems at the
cognitive level is concomitant with the
unconscious following of routines at the behavioral
level
In markets understood here as exchange processes
there is a division of labor that goes hand in hand
with a division of knowledge
Process of institutional change is completed
only when all interacting individuals have
formed the same mental models in their
minds.
 Therefore the tempo of change in rules will
be slower than the tempo of change in
markets → Institutions come first even if one
adopts an evolutionary perspective

Conclusion:
relative stability of institutions
due to cognitive reasons

Since institutions are relatively stable, they
can act as the selection environment of
evolutionary market processes
→ channeling of the innovative potential of the
agents



The main characteristic of problems emerging in
the market is that they are temporary. The diversity
of exchange acts is immensely greater and more
temporary than any recurrent social problem solved
by social institutions. Accordingly, economic
agents perceive in market settings a large number
of problems as new ones
This means that the economic agents concentrate
their innovative potential only on those problems
that arise in the markets and are not dealt with by
institutions. These problems are subjectively
interpreted as novel and allow for creative solutions
that lead to monetary profits
The channeling of the market process via
institutions is founded in this dual classification in
the minds of the economic agents
4. Path Dependence: Cognitive,
Institutional, and Economic

“reality”>beliefs>institutions>specific
policies>outcomes (and, thus, altered
“reality”)
» Mantzavinos, North, Shariq (2004)
5. Conclusion
What I have provided here is only a first,
crude and very imperfect approximation of
the role that learning plays in the formation
of institutions and in the economic games
unfolded within them.
 The questions that are open are many more
than the answers provided, but this could be
a good start for further work.


„It is better to be roughly right than
precisely wrong“
John Maynard Keynes
Work inspired by the presented
framework

Empirical Work:
– Ghecham (2005) on formal and informal constraints and
firm strategies in Egypt
– Rhee (2005) on judicial review and market institutions in
Korea
– Okazaki and Sawada (2003) and Okazaki (2004),
econometric studies of the Bank System in Japan
– Mendoza (2006) dissertation in process on indigenous
people in Guatemala
– Ben-Porat and Mizrahi (2005) on foreign policies in Israel
– Chabaud, Parthenay and Perez (2005) on electric industry

Applications
– Christian Joerges (2005) on European
Constitution
– Bleischwitz (2005) on Environmental
Economics
– Saam (2005) Simulation model on Evolutionary
Competition
– Engel (2005) Psychology and Law