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Austrian Theory and Economic Organization: Reaching Beyond Free Market Boundaries

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The first volume (of two) edited by Guinevere Liberty Nell.

The Austrian economic school famously predicted and explained the problems of calculation in a socialist society. With their concept of spontaneous order, they challenged mainstream economists to look beyond simplified static models and consider the dynamic and evolutionary characteristics of social orders. However, many feel that Austrians took their victory too far and became ideologically devoted to laissez-faire.

Austrian Theory and Economic Organization is a collection of essays on problems and possibilities in economic organization, written by economists and political scientists with an interest in the dynamic and evolutionary nature of market economies. Each chapter explores areas of potential agreement between Austrian theory, market socialist economics, and other heterodox schools of economic and political science. The collection aims to bridge cultural and political divisions between free market advocates who stress individual rights and left-leaning thinkers who stress social justice and a culture of solidarity.

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Risky business

A new article in the latest issue of the PNAS entitled “Predicting risky choices from brain activity patterns (h/t to Shannon Selin).

This study reminds me of Daniel Kahneman and Amos Tversky’s work:

Prospect theory concerns the psychophysics of wealth utility: that is, the perceived tradeoffs between potential outcomes and the probability of some outcome occurring. Kahneman and Tversky reworked Bernoulli’s long established orthodoxy of wealth utility that supposedly explained loss aversion through quantifiable states of wealth. Instead, they took the view that by asking subjective questions rather than propositional (or abstract) questions regarding terms of loss and gain, they presented a richer explanation for loss aversion. They found that that though agents like winning and dislike losing, they in effect are orientated to dislike losing more. Kahneman and Tversky (1979) initially articulated decisions under risk (as opposed to decisions under uncertainty) involving at most two non-zero outcomes. Later as cumulative prospect theory (1992) they accommodated decisions under uncertainty and risky conditions that employs cumulative, rather than separable decision weights with any number of outcomes.

Kahneman, D., & Tversky, A. 1979. Prospect theory: An analysis of decisions under risk. Econometrica, Vol. 47, No. 2: 263-291.

Kahneman, D., & Tversky, A. 1992. Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty 5 (4): 297–323.

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Constructivist and Ecological Rationality in Economics

All those interested in extended mind/externalist/situated type thought should be aware of the field of Behavioral Economics (BE) in general and the work of Vernon Smith in particular. BE is a body of literature that was ploughing this trough some twenty years before the hypothesis of extended cognition took root in cognitive science. It is interesting to note that the Clark and Chalmers thesis took some inspiration from Herbert Simon (Clark & Chalmers, 1998). Simon writes:

Human beings, viewed as behaving systems, are quite simple. The apparent complexity of our behavior over time is largely a reflection of the complexity of the environment in which we find ourselves . . . [I] would like to view this information-packed memory less as part of the organism than as part of the environment to which it adapts . . . (Simon, 1996, 53, cf.8, 62, 99, 110).

But what is remarkable about this is that Simon in turn credits and endorses Hayek for this view:

No-one has characterized market mechanisms better than Friedrich von Hayek . . . [His] defense did not rest primarily upon the supposed optimum attained by them but rather upon the limits of the inner environment – the computational limits of human beings (Simon, 1996, 34).

What Simon has grasped is the corollary to Hayek’s spontaneous order externalism – “cognitive closure” (or in Simon’s terminology “bounded rationality” was a key presupposition to all Hayek’s work and set out in its most technical form in Hayek (1952/1976). Cognitive closure is the idea that the human mind is constitutionally delimited – a condition that can be ameliorated if the social and artifactual world functions as a kind of distributed extra-neural knowledge store.

Through the work of Vernon Smith (the provenance going back to his classical namesake, Adam), ecological or situated/bounded rationality has received its most recent and finest articulation. Unlike some Nobel Laureates (no names) Vernon is not a prima donna. He is exceedingly approachable, very kind, generous, modest and open-minded. I was lucky enough to meet  Vernon in Tucson and he put me at ease very quickly as did his charming wife. Recently, Vernon gave me an inscribed copy of his Rationality in Economics: Constructivist and Ecological Forms along with his autobiography Discovery – A Memoir, the former deeply informing my work; the latter interest taking wing from my talking to him about his Kansas youth.

Nobel Lecture

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Economics, cognitive science and social cognition

Here is the intro to Don’s paper:

This essay concerns the role of economics in the interdisciplinary study of social cognition. Increasingly many economists believe that economics has such a role. Most who hold this opinion do so because they think that, to some extent, important parts of microeconomics should collapse into psychology. They think this in part because they are convinced that most human motivation has turned out to be irreducibly social, whereas traditional microeconomics depended for maintenance of its distance from psychology on modeling people as if their social relations were incidental rather than constitutive. Bruni (2005) is a representative instance of the newer view.

The perspective I will defend here agrees that economics can and should contribute to the understanding of social cognition. Economics is an important part of a complementary suite of cognitive and behavioral sciences that accomplish more together than they could do in isolation. However, I do not believe that any part of economics should be collapsed into psychology, and I reject the widespread opinion that economics for much of its history ‘went wrong’ by ignoring the social dimension of value.

I will aim to do three things in the paper. First, I will describe the origins of the widespread misperception. As will be seen, both the cognitive revolution of the 1960s and the later interanimation of cognitive science and social theory are important parts of this story (see also Angner & Loewenstein, forthcoming). Then I will explain why I think the perception is confused. Finally I will indicate why all of this matters: economics can make its distinctive and important contribution to our understanding of social cognition (and social behavior) only if it is recognized to have a different role from that of psychology. Economics is not equivalent to the psychology of valuation, though there is (of course) such a psychology, which is partly social, and economics helpfully informs it. It would reduce confusion, I believe, if much of what is now called ‘behavioral economics’ were referred to as ‘psychology of valuation’ instead.The confusions I aim to dispel are historical in origin. Thus much of the essay will be about what economists call ‘history of thought’. Let me therefore note that my motives are not the historian’s. That is, I am not concerned per se with the way in which historical thinkers represented their own intentions and views to themselves. I am instead concerned with how we should critically regard previous episodes of reasoning in light of what we think we have learned that participants in these past episodes did not know. To illustrate with a simple example: the question ‘Why did Copernicus set the scientific revolution in motion?’ is not a question for the intellectual biographer, because Copernicus never imagined he was doing any such thing; but it is a perfectly good question for the historian of science who knows how events turned out and what led to what.

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Herbert Simon

Since I missed marking the birth of Simon on the 15th, here’s a belated posting of an obituary by his student Edward A. Feigenbaum. (I’m pleased to report that my co-edited project with Roger Frantz commemorating the centenary of HS’s birth is coming together very nicely. HS’s daughter has been incredibly responsive towards the project).

Herbert A . Simon, winner of the 1978 Nobel Prize in Economics, died on 9 February at the age of 84. He was Richard King Mellon Professor of Computer Science and Psychology at Carnegie Mellon University. In an era when universities assiduously preserve the names of their new buildings for generous donors, the new Computer Science Building at Carnegie Mellon University is instead named for Simon and another renowned computer scientist, Allen Newell.

The hallmark of Simon’s remarkable career is the extent of his cross-disciplinary contributions: from economic theory to psychology to behavioral science to computer science. Before his Nobel Prize, Simon had already won the A. M. Turing Award, the top accolade for computer science, prompting computer scientists to refer to him as “our Nobel Prize winner.” But psychologists also awarded him their top honor, the Distinguished Scientific Contribution Award, and they too claimed him as their own.

As his graduate student, in awe of his enormous knowledge and the range of his contributions, I once asked him to explain his mastery of so many fields. His unforget-table answer was, “I am a monomaniac. What I am a monomaniac about is decision-making.” Studies and models of decision-making are the themes that unify most of Simon’s contributions.

He challenged the assumptions of mid- 20th century economic theory, the so-called Rational Economic Man model. This model assumed the omniscience of human decision-making: that humans recognize all of their possible choices and the consequences of selecting each. Simon, the empiricist, observed that Rational Economic Man does not exist. The cognitive ability of people to recognize alternatives and calculate optima is in fact quite limited. He argued that economics could not be built upon a foundation of assumptions concerning human behavior that were patently false.

As a substitute, he introduced assumptions of bounded rationality and the concept of “Satisficing” Man, who cannot maximize – or minimize because the computational demands of doing so are beyond his capability. Satisficing man makes choices that are satisfactory-good enough, rather than the best. In the early 1950s, Simon introduced his theory with two classic papers in which he argued that objects (real or symbolic) in the environment of the decision-maker influence choice as much as the intrinsic information-processing capabilities of the decision-maker. In his book The Sciences of theArtificial (1), with his usual expository skill, he made this idea easy to grasp. His metaphor was the ant on the beach: The ant makes her way from a starting point to a food source along an intricate path. But the path appears to be complex only because of the patterns of the intervening grains of sand, not because of any complex information-processing by the ant.

Collaborating with James March, Simon applied the search model of problem-solving to the study of how organizations make decisions and how they innovate. Their book, Organizations (2), is the foundation of modern organization theory. March, Richard Cyert, and others extended Simon’s theory to microeconomic phenomena in the influential book, A Behavioral Theory of the Firm (3).

Simon, the theorist, sought to give these abstractions a concrete expression from which precise predictions of human problem-solving behavior could be made. Simon tried using mathematics but found its lan-guage was not rich enough to express the complexity of the problem-solving processes he was attempting to model. With Allen Newell in 1955, he discovered the right economics language: the language of the digital computer. Newell, Simon, and J. C. Shaw of RAND invented a powerful programming language for describing complex symbol processing. They used their new language to model problem-solving processes such as proving theorems in logic. This marked the start of the field of artificial intelligence and Si-mon considered this contribution to be his finest. Many computer simulation programs of human cognition followed. Newell and Simon’s 1972 book, Human Problem Solving (4), is perhaps .- the most important book on the scientific study of human thinking in the 20th century.

For the last 25 years of his life, Simon continued to experiment and build computer models of cognition. He designed models of human expertise, scientific discov-ery (he modeled how certain historically great discoveries of science were actually made), and human memory. He worked for decades on models of the processes through which symbols are learned, recognized, retrieved, and forgotten.

If one were to read a single book that would encompass the essential Simon, I would suggest the slim volume The Sciences of the Artificial (1), written for a broad scientific audience. In an elegant and lucid way, Simon explains the principles of modeling complex systems, particularly the human in formation-processing system that we call the mind. There is no better epilogue for Herbert Simon than that imparted by one of his Carnegie Mellon University colleagues: As Herb Simon struggled to recover from complications of surgery a few days before his death, this author of nearly a thousand papers and 27 books finished a manuscript he was writing and gave instructions to his daughter about its publication.

References

1. H.A. Simon, The Sciences of the Artificial  [The Karl Taylor Compton Lectures] (MIT Press, Cambridge, MA,1969).

2. J. G. March, H. A. Simon, Organizations (Wiley, New York, 1958).

3. R.M. Cyert, J. G. March, A Behavioral Theory of the Firm (Prentice-Hall, Englewood Cliffs, NJ, 1963).

4. A. Newell, H. A. Simon, Human Problem Solving (Prentice-Hall, Englewood Cliffs, N J, 1972).

From: SCIENCE VOL 291 16 MARCH 2001