1 Veblenian Themes in Institutional Economics 1. Thorstein Veblen and Institutional Economics 2. The Individual in a Social and Biological Context 3. Institutions and Habits 4. Reconstitutive Downward Causation 5. The Return of Habit 6. Conclusion Geoff Hodgson

2 1. Thorstein Veblen and Institutional Economics Thorstein Veblen, Asked “Why is economics not an evolutionary science?” (1898) Called for a “post-Darwinian economics” Wrote of “the natural selection of institutions” Wrote on institutions and their psychological underpinnings Inspired American institutional economics … Veblenian Themes in Institutional Economics

3 Modern evolutionary psychologists - Leda Cosmides, John Tooby, Howard Margolis and Henry Plotkin - reject the widespread assumption that rational behaviour is the state of nature. They criticise the Standard Social Science Model, with ‘context-independent’ cognitive processes in the mind. Cosmides, Leda and Tooby, John (1994) ‘Better than Rational: Evolutionary Psychology and the Invisible Hand’, American Economic Review (Papers and Proceedings), 84(2), May, pp Veblenian Themes in Institutional Economics 2. The Individual in a Social and Biological Context

4 Experimental evidence suggests that humans are not very good at abstract, logical puzzles. Wason tests  If a card has a vowel (A, E, I, O, U) on one side  then it has an even number on the other At the minimum, which cards have to be turned over to check if this is in fact true? AG25 vo Veblenian Themes in Institutional Economics 2. The Individual in a Social and Biological Context

5 Wason tests:  If you are under 18 years old  then you may not drink alcohol in a public bar Who or what has to be checked to see if the law is being followed? Person drinking beer - What age? Person drinking coke - What age? Person over 18 – Drinking what? Person under 18 – Drinking what? Veblenian Themes in Institutional Economics 2. The Individual in a Social and Biological Context

6 Person drinking beer - What age? Person drinking coke - What age? Person over 21 – Drinking what? Person under 21 – Drinking what? AG25 The two problems have a logically identical structure. These have to be checked to see if the rule is being followed: Veblenian Themes in Institutional Economics 2. The Individual in a Social and Biological Context

7 Our capacity to reason logically improves greatly when the logical problem is situated in a social context, particularly concerning the adherence to social rules. A challenge to the idea of context- independent rationality. Veblenian Themes in Institutional Economics 2. The Individual in a Social and Biological Context

8 The Principle of Evolutionary Explanation means that any behavioural assumption in the social sciences must itself be capable of explanation along evolutionary lines. Social science is not reducible to biology. But propositions in the social sciences must be consistent with those in biology. Global, all-purpose, context-independent, deliberative rationality is very unlikely to emerge through evolution. Veblenian Themes in Institutional Economics 2. The Individual in a Social and Biological Context

9 Individuals as Endogenous. Socio-economic systems do not simply create new products and perceptions. They also create and re-create individuals. Learning is more than the discovery or reception of information. Learning reconstitutes the individual. Douglas Vickers (1995) sees this as a “difficulty that economic analysis has been reluctant to confront”. With changing knowledge and learning “the individual is himself, economically as well as epistemologically, a different individual”. Veblenian Themes in Institutional Economics

10 3. Institutions and Habits What are institutions? Institutions are systems of established and prevalent social rules that structure social interactions. The term ‘rule’ is an injunction or disposition, that in circumstances X do Y. Language, law, money, table manners, firms (and other organisations) are all institutions. Veblenian Themes in Institutional Economics

11 Rules ‘work’ because they are embedded in shared habits of thought and behaviour. A habit is defined as “a more or less self-actuating disposition or tendency to engage in a previously adopted or acquired form of action” (Camic, 1986). Habits are formed through repetition of action or thought. They are influenced by prior activity and have durable, self-sustaining qualities. Veblenian Themes in Institutional Economics 3. Institutions and Habits

12 Institutions both constrain and enable behaviour. Constraints can open up possibilities. Institutions make up the stuff of social life. Institutions have the capacity to mould and change individual dispositions and aspirations. Veblenian Themes in Institutional Economics 3. Institutions and Habits

13 4. Reconstitutive Downward Causation A strong process of ‘downward causation’ is associated with institutions in all human societies. I N S T I T U T I O N S I N D I V I D U A L S Veblenian Themes in Institutional Economics

14 But we must avoid the mistakes of ‘holism’ or methodological collectivism. I N S T I T U T I O N S I N D I V I D U A L S But what kind of forces are involved here? Veblenian Themes in Institutional Economics 4. Reconstitutive Downward Causation

15 The opposite idea of ‘upward causation’ is widely accepted. Elements at a lower ontological level affect those at a higher one. I N S T I T U T I O N S I N D I V I D U A L S Veblenian Themes in Institutional Economics 4. Reconstitutive Downward Causation

16 The term ‘downward causation’ originates in psychology in the work of Nobel Laureate Roger Sperry (1964, 1969, 1991). With ‘reconstitutive downward causation’ - individuals and populations are not only restrained but also changed, as a result of causal powers associated with higher levels. Veblenian Themes in Institutional Economics 4. Reconstitutive Downward Causation

17 There are no magical ‘cultural’ or ‘social’ forces controlling individuals, other than those affecting the dispositions, thoughts and actions of human actors. The framing, shifting and constraining capacities of social institutions give rise to new perceptions and dispositions within individuals. Upon new habits of thought and behaviour, new preferences and intentions emerge. Veblenian Themes in Institutional Economics 4. Reconstitutive Downward Causation

18 Veblen (1899): “The situation of today shapes the institutions of tomorrow through a selective, coercive process, by acting upon men’s habitual view of things.” Veblenian Themes in Institutional Economics 4. Reconstitutive Downward Causation

19 I N S T I T U T I O N S I N D I V I D U A L S H A B I T S B E L I E F S Veblenian Themes in Institutional Economics 4. Reconstitutive Downward Causation

20 5. The Return of Habit Habits as foundational: Dewey (1922) “ The formation of ideas as well as their execution depends upon habit. … Ideas, thoughts of ends, are not spontaneously generated. There is no immaculate conception of meaning or purposes. Reason pure of all influence from prior habits is a fiction.” Optimisation itself relies on habits and rules. Rationality always depends on prior habits or rules as props. Veblenian Themes in Institutional Economics

21 BeliefsActionDeliberation Experience The Deliberative Conception of Action Veblenian Themes in Institutional Economics 5. The Return of Habit

22 Instincts Habits BeliefsActionDeliberation Natural Selection Cultural Selection Imitation of others Veblenian Cultural Evolution Veblenian Themes in Institutional Economics 5. The Return of Habit

23 References Veblenian Themes in Institutional Economics Hodgson, Geoffrey M. (2003) ‘The Hidden Persuaders: Institutions and Individuals in Economic Theory’, Cambridge Journal of Economics, 27(2), March, pp Hodgson, Geoffrey M. and Knudsen, Thorbjørn (2004) ‘The Complex Evolution of a Simple Traffic Convention: The Functions and Implications of Habit’, Journal of Economic Behavior and Organization, 54(1), pp

24 Results from joint work with Thorbjørn Knudsen, JEBO 2004 The evolution of a simple traffic convention The track on each side of the road is divided into 100 zones Cars cruise round the track - 20 in each direction Veblenian Themes in Institutional Economics 5. The Return of Habit

25 The movement of each car depends upon: Sensitivity to pattern of traffic, 10 zones ahead - 2 fixed coefficients Avoidance propensity from close traffic 1 zone ahead - 1 fixed coefficient Habit gene - the tendency to take account of acquired habituation - 1 fixed coefficient Habit, based on cumulative past experience If cars collide, new cars replace them. Veblenian Themes in Institutional Economics 5. The Return of Habit Instincts

26 Veblenian Themes in Institutional Economics 5. The Return of Habit The emergence of a convention w Habit = 0.2, ε = 0.01

27 Veblenian Themes in Institutional Economics 5. The Return of Habit 5000 sample runs The convergence value is the integral under each curve plot, averaged for 200 runs

28 Veblenian Themes in Institutional Economics 5. The Return of Habit 5000 sample runs Habit increases convergence:

29 5. The Return of Habit Veblenian Themes in Institutional Economics Generally, strength of habit can greatly increase the systemic rate of convergence towards equilibrium.

30 6. Conclusion Veblenian Themes in Institutional Economics The individual is not a free-standing entity. Individual reason and action are partly a product of the biological legacy and the institutional context.