1529-2134

The Spatial Market Process

My chum David Emanuel Andersson has just had this edited collection published. Here is an excerpt from his intro:

In what is perhaps the best-known article in the history of the Austrian school, Friedrich Hayek (1945) asserts that market prices distill and thus reflect the unique local knowledge of a multitude of individuals, each of whom resides and works in a particular place. Because only an autonomously acting individual can take advantage of her unique creativity, skills, and personal connections to others, centralization of economic decisionmaking guarantees that much useful local knowledge is irretrievably lost. It is impossible to communicate the totality of all local entrepreneurial ideas and tacit knowledge to a small group of top-down planners; their cognitive limitations guarantee substandard economic performance (Hayek, 1952). We should therefore not be surprised that it is valuable to possess ‘‘knowledge of people, of local conditions, and special circumstances’’ (Hayek, 1945, p. 522). Given the great number of citations to Hayek (1945) in the general economics literature, it would require no great stretch of the imagination to imagine that Hayek – and by extension the Austrian school – had set in motion a way of theorizing about economic phenomena that later gave rise to theories about knowledge spillovers, urbanization economies, and local social networks. But this was not to be. There are virtually no references to Hayek or any other Austrian economist in the spatial economics literature prior to the year 2000. The lack of interest in Austrian economics among spatial economists was reciprocated by a similar lack of interest in spatial economics among self-professed Austrians. To my knowledge, Pierre Desrochers (1998) wrote the first explicitly Austrian contribution that deals exclusively with spatial economic phenomena. In spite of this historical disconnect, Austrian ideas have entered the spatial economics, economic geography, and urban planning literatures because of the close parallels between the influential ideas of the urbanist Jane Jacobs and Austrian market process theory. While Jacobs (1961) does not refer to Hayek or any other Austrian, her Death and Life of Great American Cities at times reads like an Austrian theory of urban planning: [N]obody, including the planning commission, is capable of comprehending places within the city other than in either generalized or fragmented fashion. They do not even have the means of gathering and comprehending the intimate, many-sided information required, partly because of their own unsuitable structural inadequacies in other departments. Here is an interesting thing about coordination both of information and of action in cities, and it is the crux of the matter: The principal coordination needed comes down to coordination among different services within localized places. This is at once the most difficult kind of coordination, and the most necessary. (Jacobs, 1961, quoted in Ikeda, 2006, p. 22) With her emphases on (implicit) methodological individualism, the importance of local knowledge, and complex evolving orders, Jacobs provides a rich source of insights for those who wish to combine Austrian economic theory with a dynamic approach to agglomeration economies. Such a dynamic approach focuses on entrepreneurial processes rather than on idealized equilibrium states. Unsurprisingly, both Hayek and Jacobs figure prominently in this volume. But they are far from the only influences. This book is a collection of 13 essays that address spatial aspects of the market process from refreshingly diverse approaches. They range from the extension of Austrian theory to spatial phenomena over hybrid combinations of ideas from distinct traditions to state-of-the-art spatial models that integrate Austrian concepts such as ‘‘roundaboutness’’ or entrepreneurial innovation.

GetImage

Morals and markets

Sandel plugging his latest. The journalist’s quote below has much resonance to me.

Even to a toddler’s mind, the logic of the transaction was evidently clear – if he had to be bribed, then the potty couldn’t be a good idea – and within a week he had grown so suspicious and upset that we had to abandon the whole enterprise.

Unknown

Cognitive Opening and Closing: Toward an Exploration of the Mental World of Entrepreneurship

Here is Thierry Aimar’s intro to his paper for Hayek in Mind.

Contemporary analysis usually divides games of chance into three dimensions. In Machina and Schmeidler’s (1992) terms, this division can be viewed based on the example of an urn containing 90 balls of different colors, out of which an agent pulls a ball, of which he must ex ante guess its color to achieve a predetermined gain. If the agent knows that the number of red, white, and black balls is the same (30), he finds himself in a situation of risk: He knows the possible consequences and the probability distributions, that is, he has one in three chances of getting a ball of any particular color. However, if he knows that these balls are red, white, and black, but in indefinite proportions, he is confronted with situations qualified as uncertainty: The consequences are known, but the probability distributions are not. Yet again, if the agent knows there are 90 balls of different colors in the urn but does not know how many of these colors there are, he is in a state of incomplete information: The agent is unable to define the list of possible outcomes (situation of ambiguity) and can expect some surprises identifiable ex ante, as states of nature are identifiable. An extra dimension may be added to this distinction: If the agent has himself placed 30 red balls in the box, but he does not know what other elements of indefinite character and number there are in the box, nor the structure of gains or losses associated with various results, then we can consider that the agent is in a position of ignorance. Not only is he unable to define the list of consequences of the game, but he also does not know the distribution of events. The agent is able to define what he knows, but unlike the three previous cases, he cannot determine the scope and nature of what he ignores. The surprise is necessarily unexpected in the sense that the agent is unable to identify ex ante the possible states of nature. It is in this latter perspective that Kirzner (1973, 1979, 1982) argues that market actors face a phenomenon of ‘‘genuine ignorance,’’ reflecting their inability to know all the opportunities for exchange or profit available in an economy. At any point in time, each individual perceives only fragmentary aspects of social reality in which he participates, and not its other facets. Each exchange is made in ignorance of other exchanges performed at the same time; thus, there is no common knowledge of prices and no actor can perceive the whole. In a monetary economy, the consequences of these independent exchanges are mutually dependent. The implications of this genuine ignorance on the coordination of activities are thus considerable. Using the example of Schmeidler and Machina’s urn (1992) from the time when the consequences of a draw for each individual depend on the (unknown) number of elements (of unknown character) deposited in the ballot box by an (unknown) number of (unknown) people, the ability of such a game to produce a balance is at least questionable. The stakes of this phenomenon of ignorance compel us to identify its sources. These are not found in any complexity of information, neither in the cost of its acquisition nor in its treatment (deliberation) from a perspective of bounded rationality. They come from a more fundamental phenomenon of dynamic subjectivism. According to authors such as Kinder (1973, 1979, 1997) and Lachmann (1977, 1986), agents’ preferences, endowments, knowledge, and strategies should be defined as personal, unique. Therefore, each individual is a priori ignorant of how others evaluate goods and services. Economic analysis is not therefore based on a perfect, or even sufficient knowledge of actors to coordinate their activities. The diversity of actors’ preferences, interpretations, and expectations would certainly not be a problem if they were constants. A process of trial and error would lead to new learning, opening onto a price structure that would allow coordination. But this is in fact not the case because the individual performances would change continuously, according to an endogenous process, ultimately explained by ignorance or internal self-ignorance (Aimar, 2008a). As Hayek (1951a, 1951b) explained, the actor can only partially perceive the existing opportunities for satisfaction, for reasons related to the organization of the human brain and the tacit characteristic of knowledge. His conscious choices being ignorant of a portion of his subjectivity, he makes mistakes, expressed by disappointment with satisfaction. He undergoes a de facto internal discoordination, forcing him to change his representations to make his beliefs conform to the reality of his interior environment. But changing choices results in transforming his internal environment and de facto creates new unknown areas. The mind, constantly evading the consciousness’s desire to fully absorb it, makes the process of self-discovery never-ending. Thus, market discoordination, the result of genuine ignorance, is finally but an internal discoordination, consequence of a phenomenon of self-ignorance. It was around this phenomenon of genuine ignorance and its perverse effects on coordination between individuals that Kirzner introduced the theme of entrepreneurship. The entrepreneurial function, driven by the incentive of profit, is to discover unperceived opportunities. Mobilizing qualities of alertness, reflected in cognitive openness, it reveals previously hidden information. Through his discoveries being translated into new money transactions, the entrepreneur socializes his knowledge and contributes to pulling market activities toward coordination. He goes beyond reducing ignorance; he transforms ignorance into uncertainty. But according to Kirzner, a parallel mission of the entrepreneur is to organize already discovered opportunities in the form of firms’ production plans, in order to protect them from risk of obsolescence resulting from the volatility of data. In a dynamic world, discovery and exploitation of opportunity are then the two faces of entrepreneurship. The author argues that these two dimensions may be contradictory in the entrepreneurial mind. As much as discovery implies a cognitive opening to the outside, all exploitation of discovered opportunities is accompanied by elements of mental rigidity. These take the form of cognitive closure, thus opposing the entrepreneur’s perception of new opportunities. The aim of this contribution is to illuminate by the structure of this contradiction by economic analysis, to provide the means to verify it through experimental economics and to consider its extensions in terms of neuroeconomics. Our plan is this: After explaining the basics of the theory of entrepreneurship and the elements that determine its duality, we will define the bases for an experimental protocol likely to support our thesis of an opposition in the cognitive field between the relative strengths of discovery and the exploitation of opportunities in the entrepreneurial mind. The last section forms the conclusion.

1538.cover

Embodied economics

We know that extended mind discussion is entering unlikley quarters. The same it seems is happening with embodiment. Check out this recent paper “Embodied economics: how bodily information shapes the social coordination dynamics of decision-making” by Olivier Oullier and Frederic Basso.

To date, experiments in economics are restricted to situations in which individuals are not influenced by the physical presence of other people. In such contexts, interactions remain at an abstract level, agents guessing what another person is thinking or is about to decide based on money exchange. Physical presence and bodily signals are therefore left out of the picture. However, in real life, social interactions (involving economic decisions or not) are not solely determined by a person’s inference about someone else’s state-of-mind. In this essay, we argue for embodied economics: an approach to neuroeconomics that takes into account how information provided by the entire body and its coordination dynamics influences the way we make economic decisions. Considering the role of embodiment in economics—movements, posture, sensitivity to mimicry and every kind of information the body conveys—makes sense. This is what we claim in this essay which, to some extent, constitutes a plea to consider bodily interactions between agents in social (neuro)economics.

Hayek: Cognitive scientist Avant la Lettre

My published article is now available from here. Check out the full table of contents for this volume.