COGNITION AND ECONOMICS PART 1 ppsx

ELEMENTS OF A COGNITIVE THEORY OF THEFIRM AUSTRIAN THEORY OF ENTREPRENEURSHIP MEETS THE SOCIAL SCIENCE AND BIOECONOMICS OF THE ETHNICALLY HOMOGENEOUS MIDDLEMAN GROUP THE ANTI-FOUNDATIONA

COGNITION AND ECONOMICS

ADVANCES IN AUSTRIAN

ECONOMICS

Series Editor: R Koppl

Associate Editors: J Birner and M Wohlgemuth Volume 6 : Austrian Economics and Entrepreneurial Studies

Edited by R Koppl Volume 7 : Evolutionary Psychology and Economic Theory

Edited by R Koppl Volume 8 : The Dynamics of Intervention: Regulation and

Redistribution in the Mixed Economy Edited by P Kurrild-Klitgaard

ADVANCES IN AUSTRIAN ECONOMICS VOLUME 9

COGNITION

AND ECONOMICS

Fairleigh Dickinson University, Madison, USA

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DOES THE SENSORY ORDER HAVE A USEFUL

ECONOMIC FUTURE?

SCIENCE AND MARKET AS ADAPTIVE

CLASSIFYING SYSTEMS

HAYEK’S THEORY OF KNOWLEDGE AND

BEHAVIOURAL FINANCE

INSTINCT AND HABIT BEFORE REASON:

COMPARING THE VIEWS OF JOHN DEWEY,

FRIEDRICH HAYEK AND THORSTEIN VEBLEN

v

ELEMENTS OF A COGNITIVE THEORY OF THE

FIRM

AUSTRIAN THEORY OF ENTREPRENEURSHIP

MEETS THE SOCIAL SCIENCE AND BIOECONOMICS

OF THE ETHNICALLY HOMOGENEOUS

MIDDLEMAN GROUP

THE ANTI-FOUNDATIONAL DILEMMA:

NORMATIVE IMPLICATIONS FOR THE ECONOMIC

ANALYSIS OF LAW

ALFRED MARSHALL MEETS LAW AND

ECONOMICS: RATIONALITY, NORMS, AND

THEORIES AS TENDENCY STATEMENTS

COGNITIVE THEORY AS THE GROUND OF

POLITICAL THEORY IN PLATO, POPPER, DEWEY,

LIST OF CONTRIBUTORS

William N Butos Department of Economics, Trinity College,

Hartford, CT, USA Alfons Corte´s LGT Capital Management AG, Vaduz,

Liechtenstein Geoffrey M Hodgson The Business School, University of

Hertfordshire, De Havilland Campus, Hatfield, Hertfordshire, UK

Roger G Koppl Institute for Forensic Science

Administration, Fairleigh Dickinson University, Madison, NJ, USA Carine Krecke´ LACS, Universite´ de Provence

(Aix-Marseille I), Aix-en-Provence, France Elisabeth Krecke´ CLERSE, Faculte´ des Sciences Economiques

et Sociales, Universite´ des Sciences et Technologies de Lille (Lille I), Villeneuve d’Ascq, France

Janet T Landa Department of Economics, York University,

Toronto, ON, Canada Thomas J McQuade New York University, Brooklyn, NY, USA Steven G Medema Department of Economics, University of

Colorado at Denver, USA Bart Nooteboom Tilburg University, The Netherlands

Richard A Posner University of Chicago Law School, USA Salvatore Rizzello Centre for Cognitive Economics, Universita`

del Piemonte Orientale and Department of Economics, Universita` di Torino, Italy Nick Schandler George Mason University, Fairfax, VA, USA

vii

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Universita` degli Studi di Padova,Italy

Mark PerlmanUniversity of Pittsburgh, USAJohn Pheby

University of Luton, England, UKWarren Samuels

Michigan State University, USABarry Smith

State University of New York, USAErich Streissler

University of Vienna, AustriaMartti Vihanto

Turku University, FinlandRichard Wagner

George Mason University, USALawrence H White

University of Missouri, USAUlrich Witt

Max Planck Institute, Germany

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INTRODUCTION TO A COGNITIVE METHODOLOGY IN ECONOMICS

Elisabeth Krecke´ and Carine Krecke´

The cognitive sciences, having emerged in the second half of the twentiethcentury, are recently experiencing a spectacular renewal, which cannot leaveunaffected any discipline that deals with human behavior The primarymotivation for our project has been to weigh up the impact that this ongoingrevolution of the sciences of the mind is likely to have on social sciences – inparticular, on economics The idea was to gather together a diverse group ofsocial scientists to think about the following questions Have the variousnew approaches to cognition provoked a crisis in economic science?1Should

we speak of a scientific revolution (in the sense of Kuhn) also in porary social sciences, occurring under the growing influence of the cog-nitive paradigm? Above all, can a more precise knowledge of the complexfunctioning of the human mind and brain advance in any way the under-standing of economic decision-making?

contem-Although it was not planned as such, this volume can be viewed

as something of a companion to volume 7 of this series, EvolutionaryPsychology and Economic Theory In that volume, pride of place was given

to the evolutionary psychology of Cosmides, Tooby, and others In thisvolume more attention has been given to neuroscience and cognitive sci-ence These different literatures overlap greatly and should be viewed

as complements, not substitutes We have invited scholars from variousfields, including institutional economics, evolutionary economics, cognitive

Cognition and Economics

Advances in Austrian Economics, Volume 9, 1–17

Copyright r 2007 by Elsevier Ltd.

All rights of reproduction in any form reserved

ISSN: 1529-2134/doi:10.1016/S1529-2134(06)09001-6

1

economics, Austrian economics, bioeconomics and law-and-economics, toprovide their current perspectives on the methodological and substantiveissues posed by the growing interdependence of the cognitive and socialsciences Finally, the contributions to our volume herald a genuinely inter-disciplinary project in which, however, we deliberately avoid the hegemonicimpulse habitually characterizing the synthesis of cognitive and socialsciences.

The cognitive sciences comprise a variety of disciplines including science, artificial intelligence, cognitive psychology, linguistics, anthropol-ogy and philosophy of the mind The methods of these different disciplinesare dissimilar and only partially compatible In spite of the diversity of theirresearch agendas, many cognitive scientists have traditionally shared acommon ambition: describing the human mind in terms of logical calcu-lations similar to those of a modern computer Already the pioneers of thesciences of the mind, who came from cybernetics and thought that mentalphenomena had been left for too long to psychologists and philosophers, feltthe need to express the processes underlying mental phenomena in terms ofmathematical formalism.2Subsequently, the early generations of cognitivescientists,3(relying on the so-called paradigm of ‘‘cognitivism’’ or ‘‘compu-tationalism’’4) described the mind as an information processor or, moreprecisely, as a system for the computation of symbols according to a set ofrules.5

neuro-Still today, the concept of cognitive science is frequently associated withthis particular research agenda, but the field is undergoing rapid and radicalchanges, and several schools of thought coexist Connectionism, forinstance, questioned from the start the idea that logic is the one and onlyapproach for cognitive sciences, and instead focuses on cerebral phenomenasuch as self-organization,6emergence, dynamics of associations, networks,etc.7‘‘Bringing the brain back’’8into the theoretical explanation of cogni-tion has become a priority in much of cognitive science Globally, twoantagonistic approaches are present within contemporary cognitive sciences:the one of computer scientists and logicians, interested essentially insimulating the cognitive functions, and the one of neurobiologists, studyingthe biological substrates or mechanisms underlying cognitive functions.The purpose of the sciences of the mind is to explain (either logically orneurologically) complex cognitive functions such as language, learning,memory, reasoning, understanding and perception Just like the theories ofinformation, they focus on knowledge problems and, in particular, on theproduction and the treatment of information – an issue that is also at theheart of economic science.9 Therefore, economics is one of the social

ELISABETH KRECKE´ AND CARINE KRECKE´2

sciences that are likely to be most strongly affected by new scientific derstandings of the processes of perception, cognition, learning and expec-tation Psychology is another Undeniably, cognitive sciences havecontributed to free psychology from the yoke of behaviorism thatcompletely dominated American experimental psychology between 1930and 1970 Behaviorism limited itself to the experimental study of averageresponses to given stimuli, thereby deliberately eschewing reference to innermental states As pointed out by cognitive scientists, a theory that reducesthe mind to a black box cannot allow for important aspects of humandecision-making, such as subjectivity, consciousness and intentionality.

un-To what extent can the innovative understandings of mental processescast new light on the concept of rationality and the ways we theorize abouteconomic phenomena? How can economists address the complex issue ofthe interrelation between the human mind and its social environment? Theseare some of the questions that contemporary economists must inevitablyface So far, reactions are manifold, reaching from unconditional enthusi-asm to more or less pronounced forms of skepticism To most economists,the contamination of standard economic analysis (the rational choicemodel) by cognitive sciences appears utterly destructive Indeed, what is left

of microeconomic theory once the neoclassical rationality assumption isdropped? What would economics look like without homo economicus? Untilrecently, the majority of economists preferred to avoid such potentiallydetrimental debates and hold on to the extrinsic and abstract concept ofrationality, ideally constructed, in order to satisfy accepted scientific norms.Many continue to accept the central contention of some variant of MiltonFriedman’s10claim that the realism of a theory’s assumptions is irrelevantfor judging the effectiveness of the theory According to Friedman, homoeconomicus is not an abstraction from normal human behavior, but a so-lution to a theoretical problem with a possible normative dimension.11 Inthis instrumentalist perspective, theories can be validated only by confront-ing the predictions of the model with empirical facts This implies thatresults, not assumptions, should be the main focus of scientific concern.12This point of view, which has been the dominant methodology of neo-classical economics for decades, is now more and more the subject ofcontroversy One major counter argument to neoclassical instrumentalismcomes from ‘‘behavioral economics’’, which is precisely concerned with theempirical validity of the behavioral assumptions The purpose is to discoverthe empirical laws that describe human behavior as accurately as possible.Bounded and procedural rationality13 and strategic behavior (‘‘opportun-ism’’14) are the key concepts of this highly influential literature; satisficing15

Introduction to a Cognitive Methodology in Economics 3

and rule-following behavior (routines, heuristics, conventions, habits) place the rigid neoclassical concept of optimization.16These analytical tools,derived to a large extent from modern psychology, have enriched economictheory by throwing a different light on phenomena that economists study, in

re-so far as they permit the analyst to reveal questions that the neoclassicalframework excludes In particular, the economics of organization largelydraws on cognitive sciences (above all, the prominent psychological work ofHerbert Simon) in order to theorize about the complexity (and intelligence)

of economic systems

In our volume, Geoffrey Hodgson presents a paper (Instinct and HabitBefore Reason: Comparing the Views of John Dewey, Friedrich Hayekand Thorstein Veblen) that focuses on the role of habits and instinct indecision-making occurring in complex social contexts Habits are defined aslearned dispositions, which are transmitted through culture and institutions,while instinct is supposed to be inherited through genes By liberatingthe conscious mind from the burden of evaluating enormous amounts ofdata, habits and instinct are assumed to play an essential heuristic role.Hodgson presents three thinkers as the precursors of modern evolutionarypsychology: Veblen, Hayek and Dewey As Hodgson explains, for Veblen

in particular, instinct is not the antithesis of reason but, on the contrary,one of its preconditions In rejecting the common dichotomy betweenintellect (reason) and sensation (instinct, intuition, emotion, etc.), Veblenanticipated by about a century Antonio Damasio’s criticism of ‘‘Descartes’error’’.17

Hodgson explicitly argues for a vigilant application of Darwinian ciples in social sciences The central idea of ‘‘evolutionary economics’’ is to

prin-‘‘bring back life into economics’’, as suggested by the title of a book byHodgson.18Evolutionary models generally focus on the social processes bywhich productive knowledge is stored For Nelson and Winter,19 for in-stance, the role of business firms as sources of innovation is related to theirfunction as ‘‘repositories of productive knowledge’’.20 An evolutionaryprocess (in whatever context) is defined as a ‘‘process of information storagewith selective retention’’.21According to Nelson and Winter, routines con-stitute the most important form of ‘‘memory’’ of the firm.22 Routines aredescribed as the persistent characteristics of organizations, comparable tothe genes of living organisms For ‘‘evolutionary economics’’, biologicalanalogies (concepts such as inheritance, path-dependence and selection) aremore appropriate to allow for the uncertainty of economic evolution thanthe physical analogies (such as the equilibrium of a lever23) on whichneoclassical models are built

ELISABETH KRECKE´ AND CARINE KRECKE´4

Bart Nooteboom pushes the cognitive–economic fusion farther by oping what he calls a ‘‘cognitive theory of the firm’’ The paper presented inour volume (Elements of a Cognitive Theory of the Firm) explicitly relies on aperspective of ‘‘embodied cognition’’, borrowed from modern neuroscience,

devel-in order to deepen the economist’s understanddevel-ing of decision heuristics Inparticular, Nooteboom derives from the idea of ‘‘cognitive distance’’ (ex-isting between individuals who have developed their cognition in differentenvironments) the notion of the firm as a ‘‘focusing device’’, whose rationale

is precisely the reduction of such cognitive distance for the sake of efficientcooperation and for the resolution of conflict Furthermore, principlesdrawn from the cognitive sciences are used to analyze the permanent tensionbetween the structural stability of the firm and the constant pressure ofadapting to changing environments The recourse to neuroscientific notionsallows Nooteboom to elaborate the basis for a theory of learning andinnovation in organizations (business firms) and, more generally, ineconomies

In contemporary cognitive sciences, ‘‘embodied cognition’’24 constitutesone of the most powerful alternatives to the old cognitivist ambition toexplain the mind exclusively in formal terms The central idea is that thebrain/mind is doubly embedded: not only in the body, but also in the en-vironment According to this anti-Cartesian perspective, the brain/mindshould not be studied as an isolated organ, but rather as a mediator thatconnects the organism with its environment To summarize, the purpose ofthe embodied cognition perspective is to put ‘‘brain, body and worldtogether again’’.25

In modern neuroscience, in which one of the most important issues hasbecome the study of consciousness,26evolutionary concepts such as ‘‘neuralgroup selection’’27have come to play a crucial role Surprisingly, this issuehas been addressed more than half a century ago by the economist FriedrichHayek, in a long neglected treatise on theoretical psychology.28 Hayekargues that an individual’s perception of the surrounding world is theory-guided in the sense that it is informed by pre-existing classificatory systems.Cognition is studied in terms of the habits or dispositions that characterizethe actor’s interactions with the environment Hayek insists on the impor-tance of rules of conduct that people adopt tacitly, in ignorance of theirorigin, their purpose or even their very existence A system of classification(and reclassification) is, according to Hayek, the product of a learning,which is acquired in an evolutionary process built on the natural selection ofsuccessful classificatory schemes This process reflects the accumulated ex-perience not only of the individual, but of the species One of the major

Introduction to a Cognitive Methodology in Economics 5