The Foundations of Evolutionary Institutional Economics : Generic Institutionalism [1 ed.] 9781136008641, 9780415810760

Citation preview

The Foundations of Evolutionary Institutional Economics

Generic institutionalism offers a new perspective on institutional economic change within an evolutionary framework. The institutional landscape shapes the social fabric and economic organization in manifold ways. The book elaborates on the ubiquity of such institutional forms with regards to their emergence, durability and exit in social agency–structure relations. Thereby institutions are considered as social learning environments changing the knowledge base of the economy along generic rule-sets in non-nomological ways from within. Specific attention is given to a theoretical structuring of the topic in ontology, heuristics and methodology. Part I introduces a generic naturalistic ontology by comparing prevalent ontological claims in evolutionary economics and preparing them for a broader pluralist and interdisciplinary discourse. Part II reconsiders these ontological claims and confronts it with prevalent heuristics, conceptualizations and projections of institutional change. In this respect the book revisits the institutional economic thought of Thorstein Veblen, Friedrich August von Hayek, Joseph Alois Schumpeter and Pierre Bourdieu. A synthesis is suggested in an application of the generic rule-based approach. Part III discusses the implementation of rule-based bottom-up models of institutional change and provides a basic prototype agent-based computational simulation. The evolution of power relations plays an important role in the programming of real-life communication networks. This notion characterizes the discussed policy realms (Part IV) of ecological and financial sustainability as tremendously complex areas for institutional change in the political economy, leading to the concluding topic of democracy in practice. The novelty of this approach is given by its modular theoretical structure. It turns out that institutional change is carried substantially by affective social orders in contrast to rational orders as communicated in orthodox economic realms. The characteristics of affective orders are derived theoretically from intersections between ontology and heuristics, where interdependencies between instinct, cognition, rationality, reason, social practice, habit, routine or disposition are essential for the embodiment of knowledge. This kind of research indicates new generic directions to study social learning in particular and institutional evolution in general. Manuel Wäckerle is a lecturer and research assistant at the Vienna University of Economics and Business, Austria.

Routledge advances in heterodox economics Edited by Wolfram Elsner University of Bremen

and Peter Kriesler University of New South Wales

Over the past two decades, the intellectual agendas of heterodox economists have taken a decidedly pluralist turn. Leading thinkers have begun to move beyond the established paradigms of Austrian, feminist, Institutionalevolutionary, Marxian, post-Keynesian, radical, social and Sraffian economics – opening up new lines of analysis, criticism, and dialogue among dissenting schools of thought. This cross-fertilization of ideas is creating a new generation of scholarship in which novel combinations of heterodox ideas are being brought to bear on important contemporary and historical problems. Routledge Advances in Heterodox Economics aims to promote this new scholarship by publishing innovative books in heterodox economic theory, policy, philosophy, intellectual history, institutional history and pedagogy. Syntheses or critical engagement of two or more heterodox traditions are especially encouraged. 1 Ontology and Economics Tony Lawson and his critics Edited by Edward Fullbrook 2 Currencies, Capital Flows and Crises A post Keynesian analysis of exchange rate determination John T. Harvey 3 Radical Economics and Labor Frederic Lee and Jon Bekken 4 A History of Heterodox Economics Challenging the mainstream in the twentieth century Frederic Lee 5 Heterodox Macroeconomics Edited by Jonathan P. Goldstein and Michael G. Hillard

6 The Marginal Productivity Theory of Distribution A critical history John Pullen 7 Informal Work in Developed Nations Edited by Enrico A. Marcelli, Colin C. Williams and Pascale Jossart 8 The Foundations of Non-Equilibrium Economics The principle of circular and cumulative causation Edited by Sebastian Berger 9 The Handbook of Pluralist Economics Education Edited by Jack Reardon 10 The Coming of Age of Information Technologies and the Path of Transformational Growth A long run perspective on the 2000s recession Davide Gualerzi 11 Cultural Economics and Theory The evolutionary economics of David Hamilton. William M. Dugger, William Waller, David Hamilton, and Glen Atkinson 12 The Cultural and Political Economy of Recovery Social learning in a post-disaster environment Emily Chamlee-Wright 13 The Foundations of Institutional Economics K. William Kapp Edited by Sebastian Berger Rolf Steppacher 14 Alternative Theories of Competition Edited by Jamee K. Moudud, Cyrus Bina and Patrick L. Mason 15 In Defense of Post-Keynesian and Heterodox Economics Responses to their critics Edited by Frederic S. Lee and Marc Lavoie 16 The US Economy and Neoliberalism Alternative strategies and policies Edited by Nikolaos Karagiannis, Zagros Madjd-Sadjadi and Swapan Sen 17 Technological Change and Network Effects in Growth Regimes Exploring the microfoundations of economic growth Torsten Heinrich

18 The Foundations of Evolutionary Institutional Economics Generic institutionalism Manuel Wäckerle This series was previously published by The University of Michigan Press and the following books are available (please contact UMP for more information): Economics in Real Time A theoretical reconstruction John McDermott Liberating Economics Feminist perspectives on families, work, and globalization Drucilla K. Barker and Susan F. Feiner Socialism After Hayek Theodore A. Burczak Future Directions for Heterodox Economics Edited by John T. Harvey and Robert F. Garnett, Jr. Are Worker Rights Human Rights? Richard P. McIntyre

The Foundations of Evolutionary Institutional Economics Generic institutionalism Manuel Wäckerle

First published 2014 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2014 Manuel Wäckerle The right of Manuel Wäckerle to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patent Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record has been requested for this book ISBN: 978-0-415-81076-0 (hbk) ISBN: 978-0-203-79896-6 (ebk) Typeset in Times New Roman by Wearset Ltd, Boldon, Tyne and Wear

To Kati

This page intentionally left blank

Contents

List of figures and tables Acknowledgements Introduction – evolutionary economic programs

xi xiii 1

PART I

Evolution – ontological foundations

11

1 Ontologies and heuristics

13

2 Dualistic approaches

21

3 Naturalistic approaches

33

4 Remarks and reflections on Part I

55

PART II

Institutions – generic heuristics

61

5 What are institutions?

63

6 Veblen heuristics

69

7 Hayek heuristics

95

8 Schumpeter heuristics

132

9 Bourdieu heuristics

167

10 Synthesizing heuristics with generic rules

190

11 Remarks and reflections on Part II

206

x

Contents

PART III

Complexity – methodological considerations

211

12 From semantic to synthetic programming

213

13 An agent-based model of institutional change

229

14 Power within networks

257

15 Remarks and reflections on Part III

267

PART IV

Policy realms

269

16 Institutions, technology and nature

271

17 Evolution of credit rules

280

18 Democracy in practice

299

Outlook

313

Notes Bibliography Index

317 322 338

Figures and tables

Figures 3.1 3.2 3.3 7.1 7.2 7.3 8.1 9.1 13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8 13.9

Levels of ontological foundations An evolutionary regime Ontological induction of different layers Hayek’s categorization of artificial and natural Khalil’s extended categorization Transmission and persistence in cultural evolution Illustration of Schumpeter’s long-wave three-cycle schema Bourdieu’s social space Directed graph Evolution of average societal trust with different memory sizes Average institutional durability in the baseline case Deviation of societal trust in the two-topology model Evolution of average leader satisfaction Evolution of average relative power Average institutional durability in the two-topology model Deviation of institutional durability in the two-topology model Average size of institutions and deviation from it in the two-topology model 18.1 A variety of democratic models

49 51 54 109 110 120 148 176 237 246 247 249 250 252 253 254 255 301

Tables 1.1 2.1 6.1 7.1 7.2 7.3 8.1 10.1 10.2

Ontological creeds and heuristic twists Classification of Schumpeter’s system of economic thought Mitchell’s overview of contemporary business-cycle theories Hawk–dove normal form in pure strategies Typology of conventions and social orders Evolution of markers Long waves of economic growth cycles Generic rule taxonomy Order of rules

15 29 84 103 107 123 150 192 193

xii Figures and tables 12.1 12.2 13.1 13.2 13.3 13.4 13.5

Language structures Modelling potential of the bottom-up approach Parameters for simulation experiments Payoff matrix for the micro games (prisoner dilemma) Payoff matrix for the institutional games (hawk–dove) Target variables for simulation experiments Initial parameter settings for simulation experiments (two-topology simulation) 17.1 A prototype taxonomy for bank-lending rules 17.2 A prototype taxonomy for demand-for-loan rules

213 224 244 244 245 245 248 295 296

Acknowledgements

The presented work builds upon my doctoral thesis which was handed in at the Vienna University of Technology at the end of 2010. My research at the ‘Research Group Economics’ was funded by two OeNB (National Bank of Austria) ‘Jubiläumsfonds’ research projects (13350, 14261) from 2009 to 2013. I am very grateful to my two project leaders, Hardy Hanappi and Heinz Handler. I want to especially thank the supervisors of my doctoral thesis, Hardy Hanappi and Wolfram Elsner, who encouraged me to pursue my personal research interests and introduced me to the wonderful scientific community of the European Association of Evolutionary Political Economy. I also want to dedicate special thanks to the scholars and participants of the evolutionary economic PhD schools in Graz/Austria 2007 organized by Heinz Kurz and in Jena/Germany 2008 organized by Ulrich Witt. Furthermore I am very grateful for the remarkable working atmosphere at the Research Group Economics at TU-Wien. Special thanks go to my colleagues Inga Freund, Alexia Fürnkranz-Prskawetz, Tobias Haberler, Bernhard Hammer, Franz X. Hof and Wolfgang Radax. I am also thankful to Kurt Dopfer for several in-depth discussions on the topic in Vienna. Finally I want to thank my closest colleague Bernhard Rengs who supported me in most steps of my work.

This page intentionally left blank

Introduction – evolutionary economic programs

Generic institutionalism offers a new perspective on institutional economic change within an evolutionary framework. The institutional landscape shapes the social fabric and economic organization in manifold ways. This research monograph elaborates on the ubiquity of such institutional forms with regards to their emergence, durability and exit in social agency–structure relations. Thereby institutions are considered as social learning environments changing the knowledge base of the economy along generic rule-sets from within. Since the seminal work of the early evolutionary economists such as Thorstein Veblen, Friedrich August von Hayek and Joseph Alois Schumpeter we can speak of an evolutionary turn in economics. This turn deals with the recognition of a continuity of change in economic operations and the selftransformation of the economic system from within. It is also due to these scholars that institutions have received major reception in the economic discourse, not only with respect to the governance of economic systems but also for the transmission and persistence of economic knowledge over time and space. In evolutionary economics we consider this knowledge as embodied and naturalized in economic agents and in institutions. This double character of agency and structure as knowledge repositories drives the co-evolution of the economic system. However, till today we have not elaborated any proper and foremost common synthesis of these co-evolutionary processes leading to selftransformation within an evolutionary institutional economics. Actual major economic problems, such as the ecological transition towards a sustainable mode of production and consumption, the interdependence between finance and industry in credit-driven innovation and, most importantly, the necessary redesign of democratic practices in political economy, imply crucial institutional problems of change. The fact is that the complexity of these problems is not addressed within the standard economic canon and conclusively the burning significance of an institutional economic discourse is tremendously marginalized. The present work delivers an introduction to this discourse, signalizes its generic importance as provoking all spheres of socioeconomic life and articulates a prototype synthesis across the affected fields. For evolutionary economics, a turn towards a synthetic scientific discipline could truly be a future challenge. Generic institutionalism outlines the

2

Introduction

cornerstones for such a possible trajectory by looking into the semantics of evolutionary language in economics, insofar as generic institutionalism is designed as a development kit for evolutionary economic programs with a focus on institutional change. The present work is not trying to state foundations in a paradigmatic, but in a pragmatic way. The foundations of evolutionary institutional economics are developed as constituents of a scientific language for generic evolutionary processes in the social and economic sciences. A language needs libraries for expressions and terms, procedures to form sentences and narratives to build meaningful sets of sentences. Generic institutionalism focuses therefore on ontology, heuristics and methodological considerations to draft evolutionary economic programs in a bottom-up, pluralist and interdisciplinary way. The differentiation between ontology, heuristics and methodology offers a qualified structure for such an endeavour and provides semantic and synthetic power ultimately to arrive at policy implications. Learning a language is always challenging and from my personal experience I can only admit that learning ‘evolutionary economics’ was far more complicated than orthodox economic languages or any foreign or programming language. Generic institutionalism provides a selected array of evolutionary institutional economic thought and method in order to understand this language, communicate and argue with it. It shows how evolutionary economic programs look alike and how one may re-implement existing narratives or even create novel ones. To this extent, it is not a coincidence that we speak of programs and not of paradigms in this regard, but why do we not speak of programmes? In British English the term program is used only for computational programs, in American English there is no distinction met and the term program is used for any set of procedures, schedules or rule-based definitions of a greater process-oriented whole or event. When it comes to science we speak of a research programme in the following way: ‘The programme consists of methodological rules: some tell us what paths of research to avoid (negative heuristic), and others what paths to pursue (positive heuristics)’ (Lakatos 1980, p. 47). Imre Lakatos conceives the history of science as the history of research programmes, where the positive and negative heuristics shape the ‘conceptual framework’ of a science. When Lakatos defines a conceptual framework as a scientific language, he understands the history of science as the history of scientific languages then. Now, if we move on to the particular scientific language of evolutionary economics it seems fruitful to refer to programs instead of programmes, as articulated by Hanappi (2003). The notion of a scientific research program – whether British or American English – extends the concept of a scientific language by the category of a programming language from a computational perspective. Science is considered as a collective programming project, from a semantic and synthetic point of view. Within such a perspective we may struggle with following question: does evolutionary theory provoke a paradigm change in the social and economic sciences or do we design science in a novel way by committing to the idea of evolution in a generic way? Paradigms or programs? Hanappi (2003) revisits the differentiation of Kuhn’s (1962) conception of scientific paradigm and Lakatos’ (1980) scientific research

Introduction 3 programme with convincing arguments. A paradigm consists of core sentences and a protective beltt around the core, according to Kuhn (1962). The ‘daily’ business of science is located in the protective belt, where the core sentences, theorems or axioms are tested via empirical observation. This belt of auxiliary theories produces scientific knowledge to defend the core sentences against other potential paradigms. Scientific revolution happens if these core sentences disappear in favour of a new paradigm. This aspect of a scientific revolution relates only to ‘research in the development of formal languages’, Hanappi (2003, p. 3). However Hanappi argues that there is a second type of scientific evolution, which is concerned with the synthesis of two worlds – the world of formal representation and the world outside of language. This distinction carries quite deep philosophical content, goes back even to Immanuel Kant and is a central concern in linguistics nowadays. Generally it is about analytical and synthetic propositions, where the latter refer to the synthesis of both worlds. Therefore it is suggested that evolutionary programs in economics – with regards to its pluralist and interdisciplinary nature – focus on the formulation of synthetic propositions or sentences, in contrast to the establishment of a new analytical paradigm. Where Hanappi (2003) refers explicitly to a strategic scientific shift towards a variety of synthetic evolutionary economic programs in comparison to a unified analytical evolutionary economics paradigm, others are more implicit, such as Simon (1996) or more recently Mirowski (2002) and Beinhocker (2007, 2011). Today a computer program establishes exactly this synthesis between the world of formal representation and the world outside of language. It is written in a language but it also performs something outside the language. . . . At first glance rather innocent, the turn to synthetic scientific disciplines and their programs proves to be a severe shift in perspective, indeed a reversal of many of the features of analytic language developing sciences. Where consistency and timeless generality ruled as ultimate goals to be achieved, they now only figure as partially achievable side-constraints that are dominated by the time-dependent and particular success indicators outside language. Using Peirce’s distinctions, semantic and pragmatic aspects dominate, even drive, syntactic aspects in synthetic scientific disciplines. [Peirce, 1988]. (Hanappi 2003, p. 4) Following Peirce (1998) in a very modest way, we aim for a categorization of different ontological and heuristic representations as well as interpretations of economic evolution, insofar as we identify a multitude of evolutionary economic programs and associate them in a sufficient way for further synthesis. Synthesis can be regarded as the magic word in this context, where economists may finally engage in modelling real world phenomena in a novel way. The fundamental difference between analytical and synthetic approaches relies on the distinction between core sentences and the protective belt, which becomes progressively redundant within a synthetic outline. Such an attempt switches from discovering

4

Introduction

to interpretingg the world. For those reasons the formulation and communication of a novel (evolutionary) language in economics becomes important. In evolutionary programs of economics we are able to simulate real-world phenomena within programs, rather than tweaking an analytical framework (axiomatic variation, cf. Kapeller 2011, p. 160) in tautological ways. The proposed approach in this work follows an evolutionary way of analysis, where economists gain new insights through new interpretations and recombinations. All heterodox economic approaches emphasize and share an intense communication culture about real-world phenomena for good reason. By this they sustain the synthesis of ideas and concepts, meaning in particular the reprogramming of the scientific language with informal as well as formal programs. But heterodox narratives could benefit substantially from improved visualizations of their messages via bottom-up simulations, concrete formal actualizations in a programmed set of synthetic sentences. Nevertheless major complications may also occur when shifting from paradigms to programs: At least some sentences of programs refer to items outside the language, they try to spell out simplified non-linear dynamics that are suggested as a model of essential ‘real’ world dynamics. Since such programs are produced (not discovered) by participants in the real process, these programs contain images of their producers. They even may contain images of their own production processes. In short, the problem of self-referential circuits between real and model dynamics appears. (Hanappi 2003, p. 4) This challenge makes computer simulation attractive as a formal language for synthetic sciences. The scientist becomes an active endogenous part of realworld dynamics. Concerning this matter, scientific achievement cannot be regarded as an isolated, pure and value-free artefact, which is still somehow a curious assumption within mainstream economic theory. In contrast, generic institutionalism categorizes, stresses and synthetizes differing or even contradictory value systems. Contradiction, distinction and diversity shape generic evolutionary processes by uploading spaces with power relations. Thereby it offers new research perspectives as well as policy implications in comparison to a nomological institutionalism. Institutional analysis cannot be drawn from a universal time-invariant law (nomos). Interdependencies between agency and socioeconomic structure are far too complex for a mere deductive derivation of expressions about the institutions analysed. Furthermore these interdependencies induce continuous change in institutional settings, transforming the political economy in an endogenous way. Nomological research programs build upon a mechanistic perspective of how systems change and how they are perceived. Systems are conceived as closed in such a picture, meaning in particular that any change needs added energy from outside. Research, based on a closed system approach, faces critical problems with the analysis of endogenous system transformation, stemming from the

Introduction 5 entities within. If the political economy is articulated, theoretically designed and modelled as a closed system, then institutions are exogenously fixed as externalities. The idea of a fixed and constant setup of institutions is a very weak point in economic research and needs to be advanced. Obviously such a design implies various crucial ramifications, which cannot be treated with axiomatic variation of the existing framework. Evolutionary theory itself does not represent a single law, it is a layered program of methodological rules aiming to explain endogenous change in open systems, also allowing recursive change of evolution by evolution. Accordingly we do not focus on specific outcomes or final states of a transformation process, we rather look deeply into the evolution of the process itself, i.e. generic analysis in contrast to operant. Economic research mostly deals with operant analysis, which deals with entities and relations actualized by a generic process. The term generic is etymologically connected to general, generative as well as genetic. The common syllable gene is well known from evolutionary biology and genetics, but within a more basic interpretation, it just refers to a carrier of information for certain operations (compare Dopfer and Potts 2008, p. 6). We interpret it as an entity or sequence carrying a blueprint for an operation, which is then defined as a rule in the further exploration of this book. By considering an institution – in a very abstract and minimized way – as a system of rules, then generic institutionalism refers to the analysis and implementation of synthetic sentences about the endogenous change of such rule systems. Furthermore we delve more deeply into (1) naturalistic realities of involved entities in institutional setups – the question of ontology; (2) certain frames of institutional transformation processes – the question of heuristics; and (3) appropriate methods to model and simulate such processes – the question of methodology. The development kit of generic institutionalism thus provides a language for the implementation of certain evolutionary institutional economic programs in a four-fold process: 1 2 3 4

ontological demands: set up ontological libraries of necessary expressions and terms heuristic frames: elaborate differing/contradictory evolutionary institutional economic heuristics as generic procedures methodological conceptions: consider formal bottom-up languages to recompile heuristics sustaining ontological demands with heuristic frames: conduct institutional narratives in concrete policy realms for future simulations

This schema represents the structure of the book, inspired by Witt’s (2008a) article on ‘Ontological creeds and heuristic twists’, discussed in Chapter 1. In particular, the first part of the book categorizes and analyses the ontological foundations of evolutionary economics. We give an overview of contemporary ontological strands in evolutionary economics as anchor points for evolutionary economic programs. This part provides new insights into the ontological roots of

6

Introduction

evolutionary economics, forming the basic theoretical design for institutional analysis within a complex and rapidly changing world. It is interesting to note that these ontological roots have almost all been developed recently. Ontology became increasingly a significant issue since the rise of neo-Schumpeterian economics in the 1980s, especially with the seminal contribution by Nelson and Winter (1982). Today we differentiate between dualistic (Chapter 2) and monistic ontologies (Chapter 3), where the former broadly use evolutionary theory as analogy or metaphor in economics and the latter as ontology within a naturalistic picture of economic evolution. Part I of the book surveys this systematic categorization and introduces current attempts with a focus on naturalistic approaches. Conceptualizations of a naturalistic ontology have been elaborated by Geoffrey M. Hodgson and Thorbjørn Knudsen, Ulrich Witt, Kurt Dopfer and Jason Potts. Since this ontological debate improves continuously with new articles every year, we will focus on the basic expressions, terms and concepts in order to understand the different meanings of economic evolution sufficiently. The idea of a generalized Darwinism is defended especially in the works of Hodgson (2002) and Hodgson and Knudsen (2006). Generalized Darwinism considers a very high level of abstraction and approaches naturalism via a radical interpretation of the Darwinian trajectory of variation, selection and retention along the notion of complex population systems, as recently restated in Hodgson and Knudsen (2012). Contemporary generic naturalistic approaches are articulated via the continuity hypothesis in Witt (2003, 2008b, 2009) and via evolutionary realism in Dopfer and Potts (2004, 2008, 2010). The continuity hypothesis suggests continuity between biological, cultural and economic evolution, but emphasizes generic evolutionary principles for economic change like novelty, dissemination and diffusion, as also articulated in Hanappi (1994). Quite similarly evolutionary realism also follows the principle of evolutionary continuity, but focuses on a layered ontology where complexity increases from a physical layer to a biological and finally to an economic layer, insofar as evolutionary realism focuses not only on continuity but also on systemic embeddedness with regards to degrees of complexity. In the concluding Chapter 4 we reflect on the elaborated ontological library and look briefly into extensions from critical naturalism and more systemic approaches such as the evolutionarydevelopmental outline. Part II leaves the realm of ontology and steps into discussion on heuristic frames of institutional change. An investigation of differing and even contradicting institutional heuristics provokes diverse procedural approaches and opens a space for the implementation of synthetic sentences on institutions, about their stability/fragility and life-cycles in general. In particular we present four different heuristics of institutional change, referring to the scientific legacy of Thorstein Veblen (1857–1929) – Chapter 6; Friedrich August von Hayek (1899–1992) – Chapter 7; Joseph Alois Schumpeter (1883–1950) – Chapter 8; and Pierre Bourdieu (1930–2002) – Chapter 9. The endeavour of this part relies on explaining major characteristics of central heuristic devices by focusing on following problems:

Introduction 7 • • • •

agency–structure interdependencies basic vision of an institution and its change the role of evolution within the specific heuristics the socioeconomic effects of institutional evolution

By looking into these problems we are able to locate basic commonalities and discrepancies in their work on economic and institutional change. The generic-rule based approach – elaborated by Dopfer and Potts (2008) – serves as a semantic programming language for a further heuristic synthesis then in Chapter 10. Dopfer and Potts offer a clear-cut concept for the development of generic evolutionary language, which clearly inspired the ambitions for generic institutionalism. The concept of generic rules invites the idea of formal representation via synthetic sentences in programs and constitutes the integral schema of generic institutionalism therefore. Within this schema we are able to draft institutional modules of Veblen, Hayek, Schumpeter and Bourdieu rule-sets as basic evolutionary economic programs of institutional change. This modularization offers a perspective of potential synthetic links across the fields. Otherwise it informs us also on the active and passive power relations within institutional change, with regards to the destructive as well as creative potential for transformation in the economic system. Synchronization, coordination and correspondence of rules and rule-modules shape the evolving political economy by distributing knowledge and power in consequence, which leads the transition to Part III. Concerning the formal character of evolutionary economic programs we refer to methods of bottom-up modelling, simulation and visualization. Chapter 12 gives an overview of potential candidates for such actualizations. Over the last decades the science of complexity has produced powerful concepts and tools to create formalized narratives of political economic change. The potential gains from bottomup modelling and simulation demonstrating complex evolving problems by decomposing them in understandable modules are significantly high from a didactic and pedagogic point of view. In particular, evolutionary institutional economists, who build concepts and theories upon the idea of social learning, should consider this aspect as a cornerstone for the analysis of institutional change. In this respect we consider evolution itself as computation (Beinhocker 2011), as experimental and recursive bottom-up modelling, simulation and realization of life, culture, society, politics and the economy. The elaborated concepts in Chapter 12 are driven from various fields, such as the economics of organization, complexity and network science, game theory and computational agent-based modelling. Thereby it provides guidance from semantic to synthetic programming. A great extent of this body of literature is then applied within an abstract agentbased model of institutional change with endogenous network formation in Chapter 13. Network analysis is used to outline the dynamics of power networks, with institutions as nodes and power relations between them as edges. Agents are able to interact and link each other in a simplified space. They play iterated games (prisoner dilemma) to structure institutions as cooperation enforcers, equipped with stylized social and economic capital. Furthermore, institutions also interact

8

Introduction

iteratively through their leaders in a social network on a higher level in this artificial society (via a hawk–dove game). The interaction on the more micro level and the interaction on the institutional or meso level shall represent the complex, adaptive dynamics of this basic artificial political economy, where institutions emerge and exit endogenously. This approach attempts to visualize evolutionary institutional change in a very generic way within a computational agent-based network. Additionally it provides new insights on stability and fragility of a rule-based political economy, depending archaically on trust and power relations. Chapter 14 concludes Part III with an elaboration of power as a network category, emerging out of synchronization, coordination and correspondence of institutional rule-modules. This more informal approach discusses the role of power in networked communities/societies, by elaborating on Herrmann-Pillath’s (2004) work on power within networks. Where Michel Foucault’s work is of great influence in the social and political sciences today, Castells (2009) integrates his discursive concept of power with other approaches and plays with the notion of power in a highly interesting way. He is concerned with communication power in the information society and conceives it as a relational ability to program and reprogram society, which fits perfectly into the greater picture of generic institutionalism. We may generally refer to an increasing convergence between post-structural philosophy, generic evolutionary economics and the science of complex adaptive systems. First synthesizing attempts in such a direction are interpreted within the Deleuzian social-philosophy of DeLanda (2006, 2011). Finally generic institutionalism would remain an empty hull of theoretical propositions if we would not consider it for the analysis of bottom-up power in current global challenges. Part IV of the present work considers evolutionary institutional economic programs as appropriate tools for policy analysis. Chapter 16 focuses on the ecological frontier, especially the relation between institutions, technology and nature. Schumpeterian innovation drives technological change and shapes institutions from the supply side. Hence the entrepreneur may act as a crucial element towards an ecological transition along green innovation. The other side of the coin is denoted from the consumption perspective of institutional change, in particular by Veblenian consumption dynamics. Obviously an energy transition is also possible along new sustainable socioeconomic practices. Both realms are capable of reducing entropy (Georgescu-Roegen 1971) via diversification within the economic system. The complexity of credit-money is the topic of Chapter 17 and applies generic institutionalism with regards to the credit-channel of monetary transmission. Thereby we investigate an all-time economic problem, but with current significant importance, the policy complex between industry and finance or the banking-macro link. Besides a brief overview of the history of monetary thought, we elaborate on an integration of post-Keynesian endogenous money and Schumpeterian credit-driven innovation along Minsky’s (2008 [1986]) blueprints. The institutional process of monetary transmission highlights the crucial role of the bank for systemic stability in the economy. Actually this emphasis was not only recognized by the post-Keynesian and Schumpeterian tradition of

Introduction 9 economic thought, but also by Austrian economics and American institutionalisms. We may thus consider the issue of credit-money not only as highly controversial in the history of economic thought, but also as one of the most important issues in institutional evolution, concerning systemic vulnerability of, as well as innovative potential in, the political economy. Furthermore, with reference to current work on the structural evolution of firm–bank networks and agent-based macroeconomics, it is outlined how institutional processes in monetary transmission can get synthesized within bottom-up models. For that reason preparatory work is suggested along a generic credit-rule taxonomy of bank lending, allowing for evolutionary economic programs of the banking-macro link by opening the black box of banking. Parallel to banking we also face major problems regarding the legitimization of power and power relations in our political economies. It is not by coincidence that new bottom-up movements emerged after the financial crisis of 2008. Democratic control of power establishes and justifies the existence of institutions in the first place. The challenges for appropriate democratic control in a globalized and highly diversified world are immense. It is therefore necessary to bring the issue of democratic practice (Chapter 18) to the forefront of evolutionary institutional economics. This last chapter excerpts a history of democratic models (Held 1996), elaborates the evolution of democracy and discusses current lines of the legitimization problem. We refer to Sen’s (2010) substantial distinction between a transcendental and a comparative institutionalism and improve the latter by bringing in the roots of institutional thought. Amartya Sen’s idea of justice and democracy is to a great extent congruent with early American pragmatism and institutionalism. It debates democracy as a theory of practice and raises the issue of information sharing to the top on the agenda. Knowledge controls democracy and its evolution shapes the political economy. Therefore it is important how decisions are made in a collective way with regards to private and public information, addressing the ultimate significance of social choice. Social choices depend on the variety of knowledge, therefore on the diversity of culture. We conclude this chapter with a subsuming argument for generic institutionalism as a development kit for evolutionary economic programs. Programming does not refer to a deterministic process, be it programming of a scientific language, of a formal model or even of nature, culture, society, politics or the economy. It is an open (evolutionary) process of learning by experimental testing of synthesizing individuality, sociality and the local environment in learning processes. It is a life-long process, it stops only by passing away. Now, we need to ask ourselves how learning is institutionalized in capitalism and what learning shall look like? Not for profitt is the message delivered by Nussbaum (2010) and why democracy needs the humanities for its own survival. Generic institutionalism emphasizes the notion of pluralist and interdisciplinary evolutionary economic programs with a focus on synthetic links, synergy and diversification, augmenting spaces for creativity and socioeconomic innovation from the bottom up.

This page intentionally left blank

Part I

Evolution – ontological foundations

This page intentionally left blank

1

Ontologies and heuristics

Ontology is definitely not a prominent topic in economics, but it has experienced increasing recognition from heterodox economic approaches during recent decades. And it turned out that ontology carries significant content for the making of economic theory. Heterodoxy is concerned with a more realistic re-compilation of economic science and therefore stumbled necessarily upon ontology, because it is about the nature and being of economic reality. The basic outline suggests that economic realities go beyond or even beneath mere individual preferences and their automatic coordination in virtual markets. Since heterodoxy aims at designing economics in a generic way, that means in particular addressing all economic provocations on life, one is interested in those beyond and beneath realities, like institutions for instance. The more we look into details, we find out that these realities also change themselves and their environment over time and are not accountable with static axiomatic conceptions. In sociology we find several principles of social causation (compare for instance Mouzelis 1995, 2007), capable of explaining dynamic change in society by looking into interdependencies between agency and structure. Why do we not just use these principles for a social ontology of economics? Tang (2011) follows a synthetic approach in his philosophy of the social sciences by investigating the integrative potential of social theories along their ontological priority. Tang understands synthesis in science in a similar way to that we have already elaborated in the introductory outline by emphasizing evolutionary economic programs. Human society is made of both material forces and ideational forces. Thus, any social science must be based on both materialism and ideationalism. A purely materialistic approach is obviously untenable because human beings invent ideas and ideas have profoundly (re)shaped human society and the physical environment. A purely ideationalistic approach will not do either, because even if one insists that an idea matters – and ideas do matter – one still needs to explain how that idea comes to exist and matter. And unless one is prepared to accept infinite regression, there is no alternative but to look at the material world for explaining how and why an idea comes

14

Evolution – ontological foundations to exist and matter. The challenge is how to synthesize materialism and ideationalism organically. (Tang 2011, p. 219)

Following Tang’s outline there are only two integrative conceptions in the social sciences capable of synthesizing materialism and ideationalism. On the one hand we are dealing with what Shiping Tang calls the Social System Paradigm (SSP) and on the other hand with the Social Evolution Paradigm (SEP). SSP was principally elaborated in several works by Niklas Luhmann, but primarily in his theory of Social Systems (Luhmann 1984). This unique endeavour could synthesize Bertalanffy’s (2001 [1968]) General System Theory into sociological terms of complex social systems. In SSP emergence and self-organization is already a central topic, but it lacks one significant building block for fully-fledged synthesis, i.e. transformation over time. SEP extends SSP by introducing time, by allowing time to potentially transform social systems. Then SEP integrates SSP and all other social paradigms into a greater theoretical whole. There cannot be any doubt that biological evolution provides the most fundamental part of human nature: socialization and antisocialization must have a material foundation, and this foundation could only have been provided by the biological evolution of the ancestors of our species (i.e., preHomo habilis species). The part of human nature determined by biological evolution, which in all likelihood is inerasable and universal, obviously holds ontological priority over both socialization and antisocialization. As our ancestors after Homo erectus began to live in larger and larger groups, the weight of social forces gradually increased. At the beginning of our group living, institutional structure was sparse, and socialization by the large society was relatively weak and antisocialization was even weaker. As a society’s institutional structure becomes denser, however, pressure for socialization becomes more pervasive and pressing. (Tang 2011, p. 228) In consequence it seems logical to follow a concept with higher ontological priority than a social ontology. But it does not say that principles of social causation are less important: on the contrary, they frame institutional change, where social pressures increase. The significance of social causation becomes apparent at the level of heuristics. However heuristic vehicles are an integral part of a greater evolutionary nature of being, but indicating also that natural selection does not work as a heuristic of social causation. The problem with biological evolutionary determinism is apparent: it fails to take social forces into account, at least not adequately. Because human beings and human societies today are a product of social evolution, rather than biological evolution alone, natural selection alone cannot possibly account for all, perhaps not even the major, drivers of human behaviors. Indeed, as I argue in

Ontologies and heuristics 15 detail elsewhere, artificial selection by human intelligence but within the constraints provided by the material forces has become the more powerful selection force in human society as humans produce more and more ideas. (Tang 2011, p. 228) In this respect Shiping Tang suggests investigating what he calls artificial selection within social evolution driven by institutional change. Evolutionary economists started to think about ontology by regarding exactly this sort of question. What is the difference between natural and artificial selection in biological and economic evolution? Is artificial selection even an appropriate description for generic evolutionary processes on the socioeconomic level? What role does it play in the greater Darwinian ensemble of variation, selection and retention? Early evolutionary economists such as Veblen, Schumpeter, Hayek or Georgescu-Roegen have also worried with these questions, some were more explicit, some more implicit. Today evolutionary economics delivers a broad and deep theoretical body capable of reflecting on its history, which is still one of the major driving forces of current theoretical contributions in the field. Witt provides a simple orientation schema to interpret not only the past of evolutionary economics but also its possible future. Table 1.1 indicates evolutionary economic programs with regards to ontological and heuristic orientation and shows basic dimensions of evolutionary thought in economics. This categorization offers a constructive and comprehensive schema, which is extremely instructive for people new to evolutionary economics. Obviously we may identify concepts like this as scientifically innovative, because it offers orientation points within and between the economic communities. With ontology an additional dimension gets recognized as a major extension to the theoretically content of evolutionary economics: the ontologicall level (what basic assumptions are made about the structure of reality), the heuristic level (how the problems are framed to induce hypotheses), and the methodologicall level (what methods are used to express and verify theories). (Witt 2008b, p. 548) Table 1.1 Ontological creeds and heuristic twists Heuristic twist

Ontological creed Monistic

Darwinian concepts (variation, selection and General retention) Darwinism Generic concepts (novelty, emergence and dissemination) Source: Witt (2008a, p. 14).

Continuity Hypothesis

Two-tier Neo-Schumpeterian Schumpeter’s Development

16

Evolution – ontological foundations

Each axis offers two options which lead us to four specific evolutionary ontological conceptions: General Darwinism, Neo-Schumpeterian economics, Schumpeterian economics, and the Continuity Hypothesis of evolution. The main ontological differences stem from different representations and interpretations of evolutionary theory in economics. Witt (2008a) supposes a distinction between a monistic and a two-tier relationship between evolution (nature) and the economy (society/culture). The monistic picture refers to a synthesis of matter and idea, of nature and nurture, of body and mind, meaning in particular that there is co-evolution between the economy and nature. It is further argued that economic change follows evolutionary principles in a generic way: because culture, economy and society are embedded within the system of evolution, it cannot escape. Alternatively the two-tier ontological perspective regards the economy and evolution as two separated systems. Therefore economists emphasize the borrowing of ideas from evolutionary theory as analogies, and application of them in economic models, but remaining as two separate systems of thought. Constructing analogies between different disciplinary domains is a frequent heuristic device that is guidance in framing problems and setting up hypotheses. A question to be distinguished from this is the ontologicall claims that theories make (often implicitly) regarding the connection between the disciplinary domains involved. (Witt 2008a, p. 10, original emphasis) Within this quotation Witt (2008a) urges on the one hand that it is necessary to borrow ideas and implement them in economics to create new hypotheses, comparable to the Schumpeterian system of new combinations. On the other hand scientific analogies may confuse things in a dramatic way, especially when it is not clearly defined which domain hosts the ontological core. Ontological claims are often different and incompatible with the imported heuristics. For that reason we need to ask whether an ‘imported’ theory meets the stated claims or whether the claims of the ‘foreign’ domain are congruent with the ‘domestic’? In our case we are confronted with two domains – biological evolution and socioeconomic evolution. Once a biological analogy is formalized in economics, we may benefit from a new heuristic projection in the economic domain, but we may also confuse the ontological base. It is exactly this synthetic problem which occurred in the evolution of evolutionary economics, as following proper definition exemplifies: If the ontological question of how economic change relates to change in nature is not entirely ignored, a kind of two-tier ontology is usually assumed. This means that economic and biological evolutionary processes are considered independent and disconnected elements of reality. (Witt 2008a, p. 11)

Ontologies and heuristics 17 Otherwise differences in the foundations of a theory occur also in heuristic twists, projections or devices. ‘These attitudes determine how problems are framed and hypotheses are formed in developing a theory’ (Witt 2008a, pp. 12–13). Projections determine the mechanisms of and forr change in evolutionary economics by framing the problem of change in a generic way. We have started the discussion by citing Hanappi (2003), as to whether there is a common mechanism of dynamic endogenous change in economics, driven by evolutionary rules or not. As Witt (2008a) follows, we may conclude that there is not a common agreement on the specific systematics of and for change in evolutionary economics. Apparently there are two major outlines which appear within the monistic conception: (1) the Darwinian logic driven by variation– selection–retention – briefly the Darwinian trajectory and (2) a generic approach with an emphasis on novelty, emergence and dissemination. Generalized Darwinism proposes a theoretical abstraction for all change in life along the Darwinian trajectory in a self-similar way, whereas a generic approach stresses the importance of different transmission mechanisms in economic, social and cultural environments, still recognizing the ubiquity of evolution. Both approaches follow the principle of co-evolution between genetic and cultural evolution and consequentially the idea of dual-inheritance, as highlighted by Boyd and Richerson (2005) for instance. Dual-inheritance represents a contested territory at the moment and seems to be the key element for future research in this realm. Scholars debate the plausibility of different vertical and horizontal mechanisms of economic, cultural and social reproduction, by repeating that genetic evolution is also driven not only by vertical mechanisms of reproduction. Hence the interaction between vertical and horizontal mechanisms specifies the modularity of the process. Otherwise we also observe huge gaps between biological (dual-inheritance) and reflexive cultural anthropology, the former focusing more on the grand themes of the emergence of culture and its evolution and the latter more on concrete narratives about social and cultural spaces with regards to field experiments. These gaps will not get closed soon, but efforts have to be taken in such direction. One major pillar within the generic economic outline of a naturalistic ontology is given by the continuity hypothesis (compare Witt 2003, Parts I and III, for instance). The hypothesis means in particular that there is continuity between genetic and cultural evolution. Quite similar, Hanappi (1994) suggests co-evolution between evolutionary theory 1 (ET1) and an evolutionary theory 2 (ET2), where the former relates to the biological realm and the latter to cultural, economic and technological change. Here systemic endogenous change, driven by selftransforming and self-organizing processes, becomes an important issue and complexity, emergence and novelty is addressed. This heuristic projection was also shared by Schumpeter (1997 [1911]). Nevertheless he made a clear separation between economics and evolution and avoided the word evolution in his work and rather used the German word Entwicklungg (development) to express familiar projections. The neo-Schumpeterian system of thought has followed the Schumpeterian ontological two-tier distinction, but has adopted a Darwinian heuristic.

18

Evolution – ontological foundations

Neo-Schumpeterian economics involves analogies and correlates from biological evolution. Nelson and Winter (1982) introduced genotypes (replicator) and phenotypes (interactor) into economics, as analogies for routines and organizations. Witt (2008a) follows that a heuristic projection of emergence, novelty and dissemination is a generic concept, because any evolutionary change can be explained through alternate introduction of novelty into a system and its corresponding dissemination. According to this hypothesis the Darwinian heuristic twist is just a biological special case of a generic concept of evolution. Otherwise with respect to the former, the Darwinian projection may postulate the same critique for the generic concept and vice versa, if we consider biological evolution as the most general expression of change. Witt’s continuity hypothesis proposes that the evolution of culture follows distinct mechanisms in comparison to genetic evolution, because human cognition allows for relaxation or even evasion of selection pressures through cooperative culture and/or technology. Additionally Witt (2008a) addresses the issue that we have to be very careful in using specific heuristic devices. Significant notice is given to the scientific community, that exclusive use of Darwinian concepts needs substantial explanation. Awareness stems from possible analogies with the theory of rational choice, as the dominant heuristic device in neoclassical economics, and the theory of selection, now used as a heuristic device in many works in evolutionary economics. However, in general current theories of economic evolution have a tendency towards a monistic ontological position, as Dopfer (2005) also observes. A diff ferent opinion is followed by Vromen: that ‘borrowing from evolutionary biology’, in the sense of assuming that the abstract structure of evolutionary theory in biology is a useful startingpoint for studying ongoing processes of economic evolution, does neither entail a denial of agency nor a commitment of reductionism. (Vromen 2004, p. 216) Vromen (2004) reaches a critical point in the discussion by challenging whether an ontological basis for economics should even be based on evolution at all. Critique of the evolutionary approach comes from post-Keynesian economists for instance, who are rather proposing a social ontology, because the naturalistic approach leads either into holism or reductionism, as argued by Lawson (2003). Inasmuch, as already articulated with Tang (2011), an evolutionary ontological claim does not neglect the social dimension of economic operations, rather the opposite. But evolutionary economic programs consider the social dimension in an inclusive way, within co-evolution of genetic and cultural evolution. Of course, an evolutionary ontology has to pay utmost attention to system and complexity theory, in order to understand the relation between economic entities and their coordination. This will be necessary to cover the developmental and systemic aspect of process modularity. As a consequence economics opens itself in a bottom-up, pluralist and interdisciplinary way throughout the sciences and humanities.

Ontologies and heuristics 19 But with what ontology should we start then? What ontology has sufficient credentials to play this role? Lawson’s assertion that all methods, frameworks and points of view have ontological presuppositions can also be turned upside down here. Any attempt to formulate an appropriate ontology presupposes a point of view and has epistemic presuppositions. (Vromen 2004, p. 218) Ontology does not have to turn into a race for a prima philosophia of social reality. However synthesis is always possible, even when we acknowledge that we come from different planets (epistemic presuppositions). Synthesis needs categorization and differentiation in advance, as Vromen proposes: •

•

•

The ‘biological metaphor’ and Universal Darwinism There are processes of economic evolution going on that exhibit the same essential abstract features as Darwinian evolutionary processes in biology. The Continuity Hypothesis Prior non-economic evolutionary processes made ongoing economic evolutionary processes possible. Furthermore, outcomes of prior noneconomic evolutionary processes and concurrently ongoing non-economic evolutionary processes still affect ongoing economic evolutionary processes. A Layered Ontology There are several related levels of organization in the economic realm that in turn are realized in lower levels of organisation (studied by psychology, biology, chemistry and physics), and at which evolutionary processes may be going on concurrently. (Vromen 2004, p. 222)

This categorization suggests three clusters of ontologies, where Vromen puts together the neo-Schumpeterian ontology with generalized Darwinism (biological metaphor) in the first cluster. In the second cluster we find the continuity hypothesis and in the third evolutionary realism with a layered ontology. Albeit Vromen’s schema is really instructive, it faces some contradictions with Witt (2008a, 2008b), because it favours heuristic instead of ontological priority. In generic institutionalism we work with an extended version of Witt’s schema addressing the ontological significance of a dualistic or monistic view, but also differentiating between continuity hypothesis and evolutionary realism. In this first part we will follow a major ontological separation between dualistic and naturalistic approaches. In the dualistic section there will be a distinction between neo-Schumpeterian economics – with Darwinian heuristics – and reinterpreted Schumpeterian economics – with generic heuristics. In the second ontological block a separation between Darwinian naturalism or generalized Darwinism and generic naturalism is suggested (generic ( naturalism understood as a superset for continuity hypothesis and evolutionary realism). Three

20

Evolution – ontological foundations

ontologically monistic approaches are brought together into one naturalistic ontological superset, which is then distinguished within the different heuristic projections. To conclude, the separated sections on the ontological level are represented and discussed from dualistic approaches and naturalistic approaches. The second distinctive argument on the level of heuristics has obviously a lot of semantic intersections with Part II of the book with regards to the work of Veblen, Hayek, Schumpeter, Bourdieu and proposed synthesis.

2

Dualistic approaches

Neo-Schumpeterian economics Neo-Schumpeterian economics has to be understood as an evolutionary economic program to fulfil the greater vision of the Schumpeterian economic system. Schumpeterian economics is about the driving forces for economic growth – or more exactly – the driving forces for economic change. Change and development is something different from growth at a deeper perspective, change lies on a lower systematic layer than growth; it needs change for growth, but growth is not needed for change. This is a very crucial point in Schumpeterian analysis, because innovation primarily induces change and development. In orthodox economic terms change is induced via an exogenous shock, changing the equilibrium state of the economy. It is exactly this process that carries the dynamics of an economy in heterodox terms. The Schumpeterian economic system exhibits a progressive analysis of what may change and how it may change; it is about innovation dynamics leading to disequilibria. Orthodox economic theory is inappropriate to describe and explain these specific dynamics. As we stressed in Chapter 2, analysis of Schumpeterian competition has proved a difficult task using orthodox theoretical premises. . . . Although these models [models with orthodox premises of profit maximization and equilibrium] have yielded some illuminating insights, they ignore essential aspects of Schumpeterian competition – the fact that there are winners and losers and that the process is one of continuing disequilibrium. An evolutionary analysis seems required if the model is to recognize those facts. (Nelson and Winter 1982, p. 276) This is a very crucial notion for a critical development of economic theory in general and especially for the economics of innovation. It is a theory of winning and losing, about a sequence of games as a continuous process of disequilibrium, due to incomplete information. Therefore Nelson and Winter (1982) introduce a very basic evolutionary concept to the game, i.e. imitation. Imitation is one of the most essential ingredients of social life. If there are winners and losers, the losers will keep on imitating the winners to improve their performance. ‘But, as

22

Evolution – ontological foundations

Schumpeter emphasized, a central aspect of dynamic competition is that some firms deliberately strive to be leaders in technological innovations, while others attempt to keep up by imitating the successes of the leaders’ (ibid., p. 275). Any economic analysis has to include heterogeneity and diversity within and between groups, classes or populations, compare D’Ippoliti (2011, p. 11) for an analysis of the concept of diversity in economics, in comparison to heterogeneity. Imitation and adaptation are central elements within this competitive logic. Imitating leaders presupposes a concept of selection on the other side, because a follower needs some orientation as to what shall get followed. In evolutionary theory we speak of differential success or fitness in a recursive way in this regard. The composition or heterogeneity within a population of firms follows this imitation and selection process in a first instance. The search process modularizes the alternatives insofar as a specific technique is only imitated if it is selected within the environment as prolific. Firms underlie a selection process then, which brings winners and losers to the front. The key development process he [Schumpeter] identified as the ‘carrying out of new combinations,’ and in the competitive economy ‘new combinations mean the competitive elimination of the old’. It is the entrepreneur who carries out new combinations, who ‘leads the means of production into new channels’ and may thereby reap an entrepreneurial profit. (Nelson and Winter 1982, p. 277, emphasis added) ‘If a firm is a successful innovator frequently enough or if one of its innovations is dominant enough, the consequences of successful innovation may be a highly concentrated industry structure’ (ibid., p. 308). Innovation frequencies determine the fitness of the firm and new combinations eliminate old ones. Successful entrepreneurs benefit from surpluses in an early monopoly, probably leading to a new industry structure through innovativeness and market power. This process can be interpreted as a selection process in an evolutionary way, where the fittest takes the lead and the others imitating it in a new emerging sector. Innovation itself emerges out of new combinations of either old products, old means of production or old modes of organization, as discussed in detail in Schumpeter’s heuristics (Chapter 8, below). Then the introduction of the Darwinian trajectory of variation, selection and retention represents exactly the so-called neo-Schumpeterian synthesis. Nevertheless Nelson and Winter (1982) establish this very deep innovation by an emphasis on the heterogeneity of firms, which even enables and justifies the usage of evolutionary ideas from a phylogenetic perspective. They distinguish them along the mode of production and the mode of organization. In the orthodox tradition extra profits may only be made by maximizing the modes of production, through more efficient techniques, but Nelson and Winter write about different modes of organization, which leads them to the concept of organizational routines and dynamic capabilities. These two concepts characterize the heterogeneity among economic entities in neo-Schumpeterian economics, representing the core of the neo-Schumpeterian agenda.

Dualistic approaches 23 Conclusively economic analysis in neo-Schumpeterian economics demands treating a population of firms with different behavioural manifestations and not just arguing as iff they show different behaviour. Textbook economics does not even address heterogeneous behaviour. The strict rational choice corpus does not allow for heterogeneous economic routines and techniques, therefore not allowing for innovation. Behaviour is a dynamic concept, it evolves continuous adaptation to the entity’s environment and it can never be fully consistent. The postulate that firm behavior results from maximizing choice leads the theorist to analyze an optimizing decision rule for the firm, a rule that maps from market conditions and other variables external to the firm to the feasible action that scores highest on the firm’s objective function. Both of the terms ‘maximizing’ and ‘choice’ warrant some scrutiny. . . . It is not clear whether the new most complex models of decision making with limited and costly information are intended to capture, as well, the fact of limited information-processing capacity, or the possibility that firms may be wrong in their understanding of the decision problems they face. (Nelson and Winter 1982, p. 66) Where Nelson and Winter refer to behaviour explicitly, Hodgson and Knudsen (2004) clarify that it is more useful to refer to routines as organizational dispositions rather than organizational behaviours. We come back to this issue in more detail in Part II. However, the above argument is crucial for the analysis of economic processes. It is not possible to extend traditional textbook models with firms’ behaviour, to simply extend the conventional decision and maximization rules. The point is to develop a new taxonomy, a new mode of modelling with new concepts that satisfy the empirically observable circumstances in real production units. Therefore Nelson and Winter introduce two essential concepts, which are important for a more general and generic concept of economic organization and innovation. On the one hand they indicate individual skills as a basic heterogeneous characteristic for individuals inhabiting an organization. On the other hand their theory implies a concept of organizational routines, which cumulates through individual skills and modes of organization. First they emphasize that those skills are programmatic and that their underlying knowledge is tacit, because it evolves habitually and not by mere codified learning – pure information processing. Here, both – skill and routine – evolve like programs via organizational learning. In the firm, routines are programmed by their operators (employees and employers) but also by the firm itself in a bottom-up way, as a greater whole. This conception of a skill or a routine marks the underlying complexity of organizational actions, where open programs and units have to interact in a complementary way, in order to manage a complex set of actions. In their analysis Nelson and Winter focus on the history or more exactly on the memory of an organization. Individual skills and organizational routines cumulatively sum up to a specific memory of an organization; this is what is called tacit knowledge of an organization, which is apparently a heterogeneous

24

Evolution – ontological foundations

property of the specific entities, because it is actualized differently by their operators or carriers. This memory and the underlying learning processes shape possible evolving paths for the organization. Path-dependency and contingency are introduced as evolutionary pillars in this respect. In order to understand the logic of an enterprise, organizational knowledge needs to be gathered, resulting from the organizational routines of the entities. Nelson and Winter’s neoSchumpeterian synthesis thus relies on an interpretation of organizational routines as genes. Hence those genes incorporate the tacit knowledge of the organization’s mode of production. Therefore we can assume that any organization has a different genetic code, because every organization – even if it operates in the same market segment – has to deal with different skills of its members and consequently develops different routines (also according to different cultural environments) which may further evolve in different contingency trees. Nelson and Winter specify the neo-Schumpeterian model of competition on these foundations, extend it to growth perspectives and industry evolution. The crucial element of this analysis reveals the ontological foundations of their approach. Neo-Schumpeterian ontology has to address the problem of the units of selection and the proposed selection process itself, determining the competitive dynamics in industries. Nelson and Winter (1982, p. 135) call this ontological core the subject of organizational genetics, but they note, that ‘the subject has barely been defined and the real work remains to be done.’ It is clear that Richard R. Nelson and Sidney G. Winter kicked off an avalanche of new ideas and theoretical concepts to treat economic change in an appropriate and evolutionary way. Nevertheless they also have left an ontological puzzle. We may reconstruct the ontological core along the unit of selection, i.e. represented by organizational routines – in biological terms as genes. The difficulty lies in explaining the interaction of genotypes (routines) and phenotypes (firms). The phenotype in the neoSchumpeterian system is considered as the whole organization, as the characteristic or actualization of underlying genotypes to a greater distinctive whole. Dosi and Nelson (1994, p. 155) point out four principal building blocks of an evolutionary theory, which may lead us to a more concrete understanding of ontological foundations of neo-Schumpeterian economics as an evolutionary strand. i ii

a fundamental unit of selection (the genes) a mechanism linking the genotypic level with the entities (the phenotypes) which actually undergo environmental selection iii some processes of interaction, yielding the selection dynamics iv some mechanisms generating variations in the population of genotypes and, through that, among phenotypes It is quite straightforward that one cannot construct a satisfactory theory of economic evolution simply by way of analogy with the biological model. Still, a reference to these four major building blocks of the biological model might help in illustrating the specificities of evolution in the social domain. (Dosi and Nelson 1994, p. 155)

Dualistic approaches 25 According to Witt’s (2008a) categorization of ontological strands, neoSchumpeterian economics is assigned to the dualistic-analogy-world instead of the monistic-ontology-world in evolutionary economics. Consequently we are confronted with some basic contradictions with Dosi and Nelson: it is pointed out that any theory of economic evolution cannot be built upon a mere analogy to biological evolution. Dosi and Nelson propose ‘the “primitives” which the evolutionary process is supposed to structure, modify and select are not genes but plausibly mental categories, representations, rules’ (1994, p. 155). The authors add that the proposed selection process in the economy does not necessarily need to be directed, but can be directed, as in most technology markets with the R&D budget for instance. Additionally, the selection process rewards or punishes whole organizations and not just specific behaviour. That means in particular that neo-Schumpeterian selection primarily interferes with the phenotype and not with the genotype or the organizational routines themselves, which reflects a rather confusing argument. Dosi and Nelson propose as a second building block for an evolutionary theory the mechanisms and criteria of selection. Selection is obviously the most dominant and central element in the neo-Schumpeterian evolutionary complex. The argument builds upon the idea that the criteria have to be multidimensional, like prices and quality of market products, which is an extremely innovative aspect and finds current attraction in many facets of evolutionary economics. Dosi and Nelson (1994, p. 157) point out: ‘the selection criteria – that is, the variables ultimately affecting probabilities of survival – remain relatively invariant: for example, the rates of reproduction, or the efficiency in accessing food.’ This notion represents a very broad definition of selection criteria, but remains rigid concerning the argument of invariance. Selection criteria have to be dynamic, variant and, of course, manifold and multidimensional. Adaptation and variation comes into play within the last building block. The authors argue that this block is about adaptation and learning processes of the agents. The agents’ behaviours are defined as rule-guided, context-specific and event-independent, whereas the agents are able to discover new rules and introduce new behavioural novelties into the system. Proposed adaptation and variation dynamics are explained by distinguishing them from the neoclassical concepts of behaviour and choice. Again this assertion of adaption along, for instance, organizational learning is instructive and helpful, but focuses on the heuristic aspects of evolutionary change and does not explain how the economic system is embedded within the evolutionary process. Furthermore it is not clear how organizational routines are shaped in a co-evolutionary way. On the contrary Dosi and Nelson explain the theoretical core of neoSchumpeterian economics by focusing too much on what it should not be, concerning the dominant critique on rational choice in neoclassical theory. In this regard, evolutionary economics does not show its full emancipatory potential. A critical argumentation strategy is necessary, but ontologically not very innovative. Sometimes it looks like the selection criterion shall function as an alternative agenda to rational choice. The selection criterion remains the most

26

Evolution – ontological foundations

dominant foundation in neo-Schumpeterian economics. Patterns of organizational routinization play the most significant role in the selection process and therefore in technological change. These patterns shape the differential process of reproduction in certain industries. Today most of the published work in neo-Schumpeterian economics is concerned with innovation dynamics in industry sectors, clustering and agglomeration of innovation networks, industry evolution, entry and exit of firms, the study of innovation systems, economic growth, technological change and hence the evolution of organizational learning and knowledge, as the seminal Elgar Companion to Neo-Schumpeterian Economics edited by Hanusch and Pyka (2007a) expresses. Neo-Schumpeterian economics has marked the way for all modern economic thinkers and theorists with an evolutionary bias, with creative concepts such as organizational routines, tacit knowledge and evolutionary competition with an underlying selection heuristic. Hanusch and Pyka (2007b) provide a ‘roadmap to comprehensive neo-Schumpeterian economics’, for principles of neo-Schumpeterian economics and its future. These principles concentrate on heuristic and methodological possibilities of neo-Schumpeterian economics and leave the realm of ontology to others. The primary focus is given to industry life-cycles. The authors outline the intellectual sources of neo-Schumpeterian economics in Schumpeter’s legacy, in the evolutionary economics of the 1980s, in system theory and in complexity science. The roadmap (Hanusch and Pyka 2005, p. 7) sketches a comprehensive picture for future developments of neoSchumpeterian economics upon three pillars: industry development; the development of finance; and the development of the public sector. This is a very ambitious claim. The authors argue that the relationship between the three pillars drives or hinders the development of the whole economic system in a nondeterministic way. Hanusch and Pyka also consider a neo-Schumpeterian corridor as a tool for economic policy. According to the authors economic policy should take this corridor seriously, in order to keep the economy in neither overheated (increasing possibility for speculative bubbles due to overinvestments) nor downside (increasing possibility for deflation and recession) macroeconomic circumstances. We may conclude that neo-Schumpeterian economics cannot offer a clear-cut ontological core for evolutionary economics in general and for further generic concepts of institutional change in particular. It attracts, thereby, a different species of evolutionary economic programs as its vocabulary indicates, in comparison to the outline of generic institutionalism.

The Schumpeterian system Schumpeter’s ontology is of very ambiguous nature and its interpretation is rather difficult, since his work is spread very broadly over several economic spheres without losing its necessary depth. His generic outline of economics makes his writings so interesting and opens so many spaces for creative engagement. In this chapter we focus on Schumpeter’s ontological claims, his

Dualistic approaches 27 philosophical nature and his vision of a generic economics, whereas in Chapter 8 we look more deeply into Schumpeter’s heuristics regarding the evolving economy, his dynamic conception of the agency–structure relation and his basic idea of the institutional nature and evolution of capitalism. Shionoya (2008) addresses Schumpeter’s ontological claims in a unique way. He argues that neo-Schumpeterian economics failed completely to fulfil Schumpeter’s legacy, because Schumpeter had a different ontological conception of the economy in mind, a different perspective of science. Therefore Yuishi Shionoya refers to Schumpeter’s ambitions towards the establishment of economics as a universal social science; in a modern interpretation towards the establishment of a generic socioeconomic science. Recent works on evolutionary economics, sometimes labelled ‘neoSchumpeterian economics’, are largely confined to the studies of economic development and technological change. . . . Compared with Schumpeter’s original view of sociocultural development, the current conception of evolution is narrow for two reasons: the lack of sociological perspective and of philosophical foundations. (Shionoya 2008, p. 15) Therefore the notion of evolution is just associated with Schumpeter’s dynamic economic theory, excluding the non-economic realm. However, Schumpeter was looking for a sociology-oriented universal social science, he wanted to analyse the evolution of capitalism from a civilization perspective (compare Shionaya 2008, p. 19). His work can be structured along the lines of his ambitions for substantive theory (economic statics and dynamics, economic sociology) and for a systemic meta-theory (philosophy of economics, history of economics, sociology of economics). In his famous Chapter 7 (titled Entwicklung) g in The Theory of Economic Development (1997 [1911]) he elaborates such a meta-theory. Nevertheless he omitted this chapter finally, because it would have attracted too many historians and sociologists. Schumpeter rather conceived his book as a product of pure economics, in order to get recognized as a pure economist: as a scientist within the hard sciences. This notion represents his inner conflict or dilemma between rationalized glamour and actual authenticity of his intuition/vision. Schumpeter feared that his book may lose economic influence if it highlighted sociological and historical concerns, insofar as it was his rational decision to exclude this seventh chapter from further editions of the volume. Schumpeter’s inner conflict has also revealed major inconsistencies unfortunately, as Hodgson (2008a) argues for instance. On the one hand he was looking for synthesis between economic theory, sociology and history, to overcome the past Methodenstreit. Elsewhere in Schumpeter’s (1954) History of Economic Analysis he argues in complete opposite direction, as Hodgson (2008a, p. 101) clarifies ‘In another passage, Schumpeter (1951: 819) opined that the study of institutions, including “economic institutions”, was the subject matter of “economic sociology” rather than economics.’ In fact Schumpeter danced several times on the

28

Evolution – ontological foundations

thin red line between economics and sociology, sometimes with more opposing and sometimes with more synthetic and integrative arguments. Schumpeter distinguished between the hedonistic-static economic agent and the energetic-dynamic agent. In the static concept the economic agent aims at attaining the maximum satisfaction of wants under given conditions, whereas in the dynamic concept the agent pursues creative forms in the economy. This differentiation accompanies him every time when he explains the most basic premises for innovation, development and evolution. According to Schumpeter, changes in technology/capital/labour/wants/organization cause adaptive responses to the economy involving the majority of economic agents. Therefore this kind of analysis remains in the subject matter of static economic theory. However the essence of evolution and development does not lie in technical changes per se but in energetic human activities, carrying out innovation – this part is truly designated to the entrepreneur, as Shionoya (2008) explains. Schumpeter followed the static-dynamic differentiation in order to explain the crucial points of evolution. This typology of the passive and active economic agent represents a cornerstone of Schumpeter’s ontological claims with regards to an evolutionary economics. Furthermore it manifests his critique of the Homo œconomicus and injects economics with a dynamic element. Schumpeter had an economic ontology1 in mind, in comparison to other economists who perhaps never thought about economic reality and pre-conceptions such as a vision. This vision is supposed to be pre-scientific knowledge, a conception of the economic world and its unfolding processes in general. In this way it can be also understood as a kind of intuition about the future structures and functions of the economic system. At the opposite of vision we find ideology. Ideology implies the historical background of the economic reality in ontological terms. In order to elaborate on ontological foundations, it will be necessary to discuss visions as well as its ideologies. As Shionoya (2008, p. 29) outlines, the synthesis of vision and ideology reflects the hermeneutic concept of Vor-Struktur (pre-structure) in Heideggerian terms, consisting of three sub-concepts: Vorhabe (what we have in advance), Vorsichtt (what we see in advance, also understood as prudence in German) and Vorgrifff (pre-conception). This set of concepts shows the structure of preconception in the prescientific process of knowledge formation, in which the duality of existential projection of the Dasein oriented to the possibilities of human beings (creation) and of its ‘throwness’ (Geworfenheit) into, or its constraint by, the historical and social world (tradition) should be developed. (Ibid.) This note is essential for Schumpeter’s ontology, because it shows the relatedness to the philosophical tradition of hermeneutics, which influenced many Austrian economists. But it also shows that Schumpeter truly understood the hermeneutical concept as an approach to the agency–structure problem, which is then about the interconnection of the history of social circumstances and of the

Dualistic approaches 29 creation of a real self in dependence on this ‘throwness’ (Geworfenheit); again identifying the demarcation between economics and sociology. Schumpeter was an economist who especially preferred the vision part of science, the romantic part, which was also part of his life-style.2 He was a man living in two philosophical worlds, namely in analytical and in continental philosophy. In this special respect he also oscillated between romanticism and historicism. Schumpeter’s writings are thus fascinating, because he was attracted by dichotomies and innate contradictions in a Marxian and Hegelian way. In between he found innovation. Shionoya (2008) classifies Schumpeter’s economic system of thought according to his theoretical roots and his responses to the problem complexes within them. Table 2.1 expresses Schumpeter’s vision of a universal social science emerging out of responses, ideas and critiques to his intellectual roots, i.e.: Neoclassicism, Marxism, Historicism. Schumpeter was influenced by the Austrian school of thought as well as by the German historical school. Inasmuch, he had to deal with the Methodenstreit der Nationalökonomie somehow. Of course the Methodenstreitt seems to be a rather dusty topic, but it still represents major struggles in economics today. It has not only influenced the ontological position of Schumpeter, moreover it lies at the heart of economic ontology in general, which needs to deal with a synthesis of economic history and theory. At the beginning of the 1870s three prominent books were published: The Theory of Political Economy (1871) by William Stanley Jevons, Grundsätze der Volkswirtschaftslehre (1871) by Carl Menger and Éléments d’économie politique pure (1874–1877) by Léon Walras. It is interesting to note that the publications did not have any immediate effect, but 20 years later, acceptance exploded. The classical system of political economy seemed to disappear in favour of a new orthodoxy. This era is often called the marginalist revolution in the history of economic thought, yet the term revolution is probably misleading, since we cannot speak of a concerted action in this regard. Hodgson (2011, p. 361) argues that this change from classical political economy towards neoclassical economics needs to be regarded as a gradual shift in European economics from the 1830s to the 1890s. The neoclassical school created a new set of axioms along a Table 2.1 Classification of Schumpeter’s system of economic thought Intellectual root/field Schumpeterian ideas

Schumpeterian concepts

Neoclassicism

Dichotomy of statics and dynamics in terms of the type of agent

Innovation

Marxism

Evolutionary development of society through Social unity interactions between social areas

Historicism

Notion of institution as the synthesis of theory and history

Source: own table, content Shionoya (2008, p. 22).

Institutional development

30

Evolution – ontological foundations

specific adoption of utilitarian philosophy (Screpanti and Zamagni 2005, p. 166). The central assumption concerns the principle of subjective value with respect to the rational calculus of human utility, insofar as human behaviour is exclusively reduced to rational choice. This point changed the discipline in a dramatic way. Even more crucial was the idea that producers and consumers are able to make perfect substitutes of commodities and services, because then decisions are totally reversible in theory, the opposite of an evolutionary position. Economic value is considered as subjective with regard to the consumer’s preferences, in contrast to the labour theory of value elaborated in classical political economy. The economic world and its social relations got atomized in a substantial and therefore ontological way, its time got flattened and smoothed along the differential calculus. As a further consequence the relevance of historical time, with respect to discrete events and their accumulation processes in series of discrete events (Bösel and Wäckerle 2013), has vanished in theory and model, in favour of a methodological individualist perspective of value added. Therefore Menger’s Grundsätze stood totally opposite to Schmoller’s historical perspective of economics and the Methodenstreitt had a climax in the year 1883, when Menger published his Untersuchungen über die Methode der Sozialwissenschaften und der politischen Oekonomie insbesondere (1883). Menger made two basic claims in this work, according to Screpanti and Zamagni (2005, p. 191). First, economics must be value-neutral with respect to normative expressions. Second, economics may only analyse the behaviour of individual microagents. From then on economics was divided in what Walras called ‘pure economics’ and ‘economic history and sociology’. The historical economic program of Gustav Schmoller – standing in the tradition of Wilhelm Roscher, Bruno Hildebrand and Karl Knies – clearly opposed the early rise of neoclassical economics: compare Pribram (1998, p. 419), Screpanti and Zamagni (2005, p. 163) or Milonakis and Fine (2008, p. 91). Schmoller as well as his followers in the Youngest German Historical School – Arthur Spiethoff,3 Werner Sombart4 and Max Weber – investigated the economic system under the umbrella of historical theory. As Milonakis and Fine (2008, p. 72) outline, this school represents a blind spot in the history of economic thought and is unfortunately underestimated. The basic reason for this kind of ignorance5 lies in an overemphasis of the Methodenstreit der Nationaloekonomie between Carl Menger and Gustav Schmoller. This issue led to a collapse of a whole theoretical economic program, a program concerned with a history of economic events and their accumulation within economic regimes. This notion is also shared by the old institutionalism, influenced by American pragmatism, as discussed in Chapter 6. However, it also inspired Schumpeter’s ontological claims to a certain degree. Schumpeter was in between the subjectivist ontological claims of the Austrians and the historical dimension of institutional constraints. His critical thoughts on early neoclassical economics dealt with the conception of the economic agent as static and timeless. For Schumpeter, it is on the contrary the dynamic agent who acts as the carrier of the creative power of life, shaping history. His conception of innovation regards the world as an organism with a vital unity,

Dualistic approaches 31 considering innovation and adaptation as integral parts of social life. Schumpeter intuitively tried to synthesize abstract theory and history to overpower the Methodenstreitt via the fundamental ideas of innovation, social unity and institutional development for his all-embracing vision of evolution of the society as a whole (compare Shionoya 2008, p. 16). Schumpeter’s ontological proposition of an institution is a means of generalizing historical events. The Schumpeterian system treats evolutionary development through interactions between various social areas. Therefore he is critical of Marx’s perspective of historical processes for unilateral relations from productive processes to political, social and cultural processes through the pivotal position of the class structure of capital and labour. Schumpeter’s theory of social class aimed to serve as a crucial link between the concept of leadership in various areas of social life and the concept of civilization (compare Schumpeter 2005 [1942]). According to these deliberations we may follow that Schumpeter added heterodox elements to all of his intellectual roots; he added the concept of leadership to neoclassical theory, the perspective of social unity to Marxism and the concept of institutional development to historicism. Starting with a philosophical perspective, Shionoya (2008) summarizes that Schumpeter intuitively introduced and integrated conceptions of continental philosophy to the analytical philosophy of the enlightenment. For Shionoya the question of how a specific vision emerges in the so-called prescientific stage is exactly the central problem of ontology and can be approached from two sides: the sociology of science and the philosophy of ontology. By vision Schumpeter means the perception of facts as having some meaning or relevance that justifies our interest in them. This is an essential intuitive approach to ontology. Contrary to that, he mentions ideologyy as pre-conceptions about economic processes, which are given to us before we start scientific work. Hence ideology and vision are interrelated ontological concepts in Schumpeter’s system of thought. Ideology always intervenes in the transcendence – in the sense of exceeding the historical bounds or exceeding a specific habitus – of a vision. ‘It can be argued that the relationship between creative vision and traditional convention in knowledge formation is patterned after the relationship between the creative destruction by innovations and the preservation of the existing order in economic life’ (Shionoya 2008, p. 26). We can follow from this quotation that creative destruction is equally a generic rule of novel innovation as it is the preservation of an existing orderr in the Schumpeterian sense. Therefore Schumpeter’s ontology stems from the linkage of those two contradictory pillars. Schumpeter stands between a historic, embedded, causal ontological conception and a hermeneutic core. Heidegger distinguishes between entity and its being, which is an essential ontological difference. Hence investigation of the entity as such can be interpreted as an onticall study and investigation into the being of those entities with regards to context is consequently an ontologicall study. In terms of ontological decision, Schumpeter’s Dasein was confronted with a tension between volitional projection and social embeddedness. . . . For

32

Evolution – ontological foundations him, the true crisis of capitalism is that the whole scheme of innovations in the economy has become an obsolete routine. Routinization of innovations is not innovation anymore. It is a paradox that innovations become a routine. This is exactly the case that Heidegger diagnosed as the degradation of the Dasein under the pressure of the historical givenness. (Shionoya 2008, pp. 32, 33)

Thus an evolutionary ontology, building upon this Schumpeterian vision, can provide a solid framework for socially embedded human creativity. Then innovation is not a matter of routinized industrial organization anymore, but of shifting human creativity to a non-economic realm. We argue that Schumpeter conceives institutional development as an ontological necessity for a creative society. Institutions act as generic devices for a bottom-up knowledge economy via the synthesis of theory and history. This outline also opens the discussion on Schumpeterian heuristics in Chapter 8. For now, we move on into discussions about a modern monistic and therefore naturalistic ontology, focusing on the continuity of change, the continuity of discontinuity. This vocabulary is still in development, but essential for a generic institutionalism.

3

Naturalistic approaches

Naturalism supposes unification of evolution throughout the humanities and the sciences; in this special respect it urges co-evolution of nature, culture, society and the economy. Currently there are two major attempts which tackle such a naturalistic foundation in evolutionary economics. First, there is a Darwinian perspective on naturalism, as generalized Darwinism (GD) proposes, and second, there is a generic (GN) perspective on naturalism, as advocated within the continuity hypothesis and evolutionary realism. Whereas the former (GD) works with the Darwinian vocabulary, the latter (GN) tries to identify a new vocabulary beyond the special case of biological evolution. The next sections give an introduction into these ontological claims and their related discussions.

Darwinian naturalism – generalized Darwinism The most influential supporters of a generalized Darwinism in economics are Geoffrey M. Hodgson and Thorbjørn Knudsen. Hodgson (2004a, p. 12) refers to the major gap between agency and structure as the ontological problem of change per se. Hodgson’s (2004a) seminal work on the evolution of institutional economics hints at a synthesis between the old institutionalism and its novel interpretation within a generalized Darwinian framework. This new synthesis establishes an explicit evolutionary ontology for the principle of cumulative causation via the Darwinian trajectory of variation, selection and retention. These perspectives have resulted in the proposal of a generalized Darwinism as a general framework for the social and economic sciences. What is especially ascribed to generalized Darwinism? What are the proposed ontological foundations for a unified evolutionary economics? Hodgson and Knudsen (2006) argue that all statements about endogenous economic change, crafted by evolutionary economists require the Darwinian principles of variation, selection and retention. As a starting point of their theory they discuss the specificities of the economic system under investigation. Here Hodgson and Knudsen (2006, p. 3) point out: ‘Rather than simple, mechanical systems, the objects of our discussion are complex systems, at least in the sense that they involve a variety of entities that interact with one another.’ This

34

Evolution – ontological foundations

proposition is foremost a clear-cut distinction between neoclassical economics and other mechanically thinking domains. The authors derive their argument from the concept of scarcity, in particular Hodgson and Knudsen argue that the entities populating the proposed systems face an omnipresent problem of local and immediate scarcity; therefore they are all involved in a struggle for existence as Darwin originally postulated. The selection criterion emerges out of natural struggle and in generalized Darwinism it represents a blind or unconscious test for adaptedness of a specific characteristic or entity in a specific environment. Selection is therefore not conceived as an optimization vehicle, nor is it evolution itself. Natural selection proves that a thing is adapted to its environment, but this process is never moral, just, linear, directed or purposeful in the first instance, according to Hodgson and Knudsen. Additionally it is necessary to distinguish between so-called survivor-selection and natural selection in a neoDarwinian sense, as Knudsen (2002) demonstratively shows. The most common interpretation of selection in economics is survivor-selection, where a specific entity is selected as the surviving entity in an environment, the survival of the fittest. In that sense, the survivor is also the most efficiently working unit. On the contrary and especially in this context, there is neo-Darwinian natural selection which is promoted by generalized Darwinism. This interpretation of selection works with interactors and replicators. Generalising natural selection can be accomplished by adopting ‘replicator’ and ‘interactor’ as substitutes for the genotype–phenotype distinction. . . . Replicators are anything in the universe of which copies are made. . . . Genes are ‘paradigm examples’ of replicators, but other things, such as the entire genome in asexual organisms or ideas in cultural evolution, can also be replicators. . . . Interactors are entities that interact as a cohesive whole with its [sic] environment in a way that causes differential replication. . . . Evolution, then, is defined in terms of variation accumulated over time because of the independent but causally linked sub-processes of replication and interaction. (Knudsen 2002, pp. 448–449) Here, Knudsen uses a gene-centred perspective of evolution and refers to Richard Dawkins’ view of the Selfish Gene (2006 [1976]). Knudsen (2002, p. 449) argues in favour of this further advancement of the neo-Darwinian synthesis to avoid a confusing vocabulary and thereby takes the bull by the horns. Sorting out terminologies is extremely helpful in this context, still the question remains if the replicator–interactor framework is appropriate for a generic outline of continuous change. The idea of the replicator is a very mechanicistic one, because it stems from a micro-evolutionary perspective, where the gene represents a very clean and pure unit of selection. Knudsen elaborates on a clearer differentiation of evolutionary economics from Lamarckism and sketches a nested selection model with three layers of implicit and explicit replicators as well as interactors. It is obviously not clear how replicators and interactors correspond in socioeconomic systems,

Naturalistic approaches 35 as Knudsen also admits. His following point is important in this context: ‘Furthermore, note that in biological natural selection, replicators provide interactors with instructions but no information is passed in the other direction. Since routines can be modified by their carriers, this is apparently not so in socioeconomic systems’ (2002, p. 451). This notion of so-to-say bilateral communication (similar to the concept of reconstitutive downward causation) between replicators and interactors marks a critical distinction between evolution in biological and socioeconomic systems. In Knudsen’s (2002, p. 450) model of nested selection he circumvents the problem by letting interactors communicate with explicit replicators, which then pass on information to implicit replicators. Conclusively, as Knudsen (2002, p. 452) argues, Lamarckian evolution, then, is a special case within the neo-Darwinian framework. The replicators in this model are routines in a Nelson and Winter (1982) interpretation. Furthermore the model gets advanced with firms as interactors, as vehicles for habits and routines, also articulated in Hodgson and Knudsen (2004). ‘In sum, we have an evolution of teams within firms by managerial selection and an evolution of firms in markets by competitive selection’ (Knudsen 2002, p. 463). This notion is considered as a multilevel selection mechanism with managerial and competitive selection, where phylogenetic arguments initialize the differential success on team level as well. It is clear that ontogenetic evolution with regard to the development of a single firm (managerial level then) is not addressed in this context. If we want to consider developmental properties and relations of the firm, principles of system sciences need to be revisited. If we briefly remember the introductory line in Chapter 1 and Tang’s (2011) arguments, systemic properties are subsumed in the evolutionary principle, but they are not banned from it. Knudsen (2002, p. 464) refers to this problem as the ‘local’ problem, which he solves via local copy selection, in his terms. What enables the transmission of tacit knowledge is a learning and socialization process by which the members of the unit selected for replication train the newcomers. Since tacit knowledge effectively serves as an isolation mechanism between units, direct face-to-face interaction through a prolonged period of training is needed to accomplish its transmission. (Knudsen 2002, p. 464) Furthermore he argues that local copy selection is different from cultural selection, ‘because the knowledge components in cultural selection are not tacit.’ (Knudsen 2002, p. 464). In fact, Knudsen wants to give an explanation for the causal mechanism of reproduction, which is missing in Nelson and Winter (1982). Thereby Knudsen (2002) elaborates the idea of local copy selection for the correspondence between managerial (within) and competitive (between) selection. However, it is not clear why he does not look into a system science perspective for this local problem of organization. The problem remains the same, but the approach changes slightly by the use of a simpler and probably

36

Evolution – ontological foundations

more comprehensible vocabulary. A developmental systemic argument on this level would not banish the idea of continuity in reproduction, which reflects the original Darwinian proposal. In general and especially for the further elaboration of generic institutionalism the idea of the replicator and interactor framework seems not convincing for socioeconomic system evolution. The vocabulary is highly connoted with respect to the biological domain and is additionally influenced by a gene-centred perspective. Besides, it does not incorporate the interdependencies of onto- and phylogeny and thereby opens a race for the smallest quantifiable social unit of selection, which is probably misleading. In particular we may argue for the ontological primacy of self-organization on this organizational level of analysis. With regards to the notion of differential reproduction and continuity of change, it may be promising to look into a different and perhaps more generic vocabulary, but this issue gets discussed later. Proponents of a theory of self-organization or self-transformation in economics, such as Witt (1997) or Foster (1997), argue that self-organization provides a very basic principle to describe evolutionary processes in economics. Otherwise Hodgson and Knudsen argue that selection is a necessary criterion for the origin of a new species. They ask for the sufficiency or explanatory potential of self-organization theory: ‘But is self-organisation sufficient to explain the origin of species and all complex biological phenomena? The definite answer is no. Darwin’s principle of selection is also required’ (Hodgson and Knudsen 2006, p. 6). Obviously, self-organization theory cannot be sufficient enough to explain all emerging phenomena, such as the origin of a species. Nevertheless it may fit very well for certain ontogenetic levels of evolutionary economic analysis. The selection criterion of the Darwinian trajectory represents the most powerful twist for evolution at all, hence it needs to be accepted as a universal principle of evolution. Due to the universal fact that all life and its products must pass, the Darwinian trajectory definitely is the most fundamental principle of any evolutionary theory. An emerging problem in this domain is the crucial notion of natural selection. Is it ‘natural’ if human beings intentionally/purposefully select their consumption behaviour or their social and economic network in a bounded way? It is still endogenously selected in the human social domain. Perhaps the problem lies in the time horizon, everything seems to be natural ex post. Hodgson and Knudsen (2006, p. 14) convincingly argue that any evolutionary process has to be consistent with the Darwinian trajectory of variation, selection and retention on an abstract level, therefore it works as a universal principle. But it is even more difficult to use the trajectory as a heuristic vehicle in the socioeconomic domain, because there is no explanation or common sense on specific units of selection in socioeconomic evolution yet, as the example above has shown. Even the nested selection model with local copy selection on the lowest managerial level seems to be too constructed to explain the process convincingly. The vocabulary may also lead to additional confusion or even more collective dissonance within the evolutionary economic domain. With regard to

Naturalistic approaches 37 generic institutionalism we argue that generalized Darwinism may not be generic enough for future scientific innovations in the domain, since its language is perhaps too closely connected to modern population genetics. Insofar as the authors also argue that a generalized Darwinism is not enough, it rather needs more explanatory tools, heuristic devices and methodological considerations. The following attempt (Stoehlhorst 2008) tries to bridge generalized Darwinism to the bottom-line processes of organizational evolution. Generalized Darwinism from the bottom-up? Stoehlhorst (2008) shows what a generalized Darwinism can offer in the bottomup processes of the business enterprise. Stoehlhorst starts with an ontology of the individual for further socioeconomic evolution, implying social as well as economic selection pressures, such as status, institutions and money. Thus he wants to articulate to ‘move beyond the truism of survivor selection and go beyond biological metaphors’ (Stoehlhorst 2008, p. 36). The author argues that evolutionary theories in economics focus typically on how markets select firms. The central argument refers to distance from neo-Schumpeterian theories of economic evolution. Stoehlhorst proposes that evolutionary economists should not start with the firm, but with the individual. Nelson and Winter (1982) start in the middle of the economy, they start with the firm. It is also their notion of routines which abstracts from individual behaviour. Hence, Stoehlhorst criticizes the absence of individual agency in evolutionary economics and favours a generalized Darwinism from the bottom-up in the following way. • • • •

behaviour of individuals is a historical linking-pin between biological and cultural evolution abstracting from individual behaviour is an unfortunate way of circumventing the problem of agency individual behaviour is an ontological pin for changes in organization due to the market the development of a theory of economic organization from the bottomup should be simply promoted, because it can be done now within the principles of Generalized Darwinism (Stoehlhorst 2008, p. 40)

Generalized Darwinism offers a general framework that is able to connect the selection of individual behaviour within and between socioeconomic contexts. With this major emphasis a proposition is given to fulfil the Nelson and Winter (1982) agenda. Accordingly Stoehlhorst (2008) defends the project of a generalized Darwinism by emphasizing that all design is a result of an evolutionary process, that events are path-dependent and endogenously connected. The principles of variation, selection and retention can also explain cultural evolution. Biological and cultural evolution have to be seen as one single naturalistic process following a multilevel-selection logic, that changes for new transitions

38

Evolution – ontological foundations

have to be within and between. Generalized Darwinism tries to understand major evolutionary transitions, which have the following characteristics in common: • • •

involving an increased division of labour made possible by a new way of transmitting information result in an additional level of selection

However, it is difficult to understand how Stoehlhorst (2008) links such huge transitional processes to economic agency, as an ontological pin. Even if all evolutionary metabolisms follow these characteristics in an abstract and self-similar way, it remains a puzzle how to bridge variation, selection and retention without any additional theoretical vehicle. As we have seen above, Knudsen’s (2002) attempt of local copy selection also covers this gene-centred perspective and does not provide any systemic concepts. It is rather difficult to work with generalized Darwinism as a bottom-up approach, because it lacks arguments linking agency and structure. Perhaps it is not very helpful to explain such linkages only with the universal schema of variation, selection and retention. The trajectory is a universal property of all evolutionary processes. Nevertheless it cannot be applied to the very ontogenetic development of a single entity in a socioeconomic environment, for the sake of simplicity.1 The genetic algorithm can be used to describe or explain structural change on a highly aggregated level, but the agents’ processes, flows, discourses and functions which lead to such a complex aggregate or structure need more detailed or particular explanation via generic heuristic devices, such as e.g. self-organization theory, or reflexive anthropological considerations. The universality of a principle makes it strong and incontestable for competitors, but it is the same property which makes it weak for heuristic and methodological explanations, i.e. particularity. Stoehlhorst’s (2008, p. 47) attempt to stretch the generalized Darwinian framework to economic agency needs to involve a Darwinian explanation of learning. This is crucial, because such an explanation somehow presupposes an evolutionary epistemology; compare for instance Popper (1972) or Hayek (1973). In a very simplified outline it implies that agents acquire information due to specific selection criteria, test them for adaptedness and generate knowledge via learning from testing. This logic may also work in a similar manner in social learning processes, where norms, customs and institutions are deliberately formed over time. It is the human being as such which is able to control seemingly her environment capable of culture and technology and selects purposefully; different from natural selection. Of course we need to argue that this artificial process is also an endogenous part of evolution, though it rather represents a co-evolutionary process, as also Witt (2003) and Dopfer (2005) would follow. The selection criterion may also delve towards neoclassical directions as an alternative to rational choice, which definitely includes some reductionist problems. Even if it is possible to explain or prove that individual and/or social learning also consistently follows the Darwinian trajectory with the help of neuroscience, there is still a huge scientific complex compound of social matters excluded. It has to be

Naturalistic approaches 39 admitted that there are sociopsychological processes going on, which still share the archaic notion of Darwinian evolution, but are also able to transcend them and invent novel particular social learning techniques in a generic evolutionary way. Ontological orientation cannot explain something particularly emerging, though a particular process will always share the ontology’s characteristics. In this context another question arises: why is there so much effort in defending generalized Darwinism at all, in light of different and probably more convenient explanations? Even Aldrich et al. (2008) classify that any ontological core needs to develop additional auxiliary heuristics and methodological tools to tackle particular problems. The devil lies in the details Vromen (2007) relaxes the discussion by asking what is generalized Darwinism looking for in particular? In principle he argues that it is not a problem to accept the principles of variation, selection and retention as universal properties of evolution, but it does not imply that our economic actions are set by a replicator– interactor framework in the context of the modern evolutionary synthesis. On my own count, if Generalized Darwinism is understood as a heuristic device for the development of new theories in evolutionary economics, with providing detailed causal explanations of actual processes of change in economies as its final aim, the odds are against Generalized Darwinism. (Vromen 2007, p. 1) In particular, Vromen criticizes the debate between proponents of generalized Darwinism and of the continuity hypothesis. He argues that this debate is not only unnecessary, but their theories apply to different clusters. In one cluster people tend to explain general principles that evolutionary processes have in common – looking for universality – and in the other cluster people want to explain the causal processes of co-evolutionary phenomena, asking how the products of past evolutionary processes influence ongoing processes in the economic domain – looking for particularity. It is clear where the two parties belong. Therefore it seems that different ontological stances within naturalism share a common thread but follow different evolutionary economic programs. Vromen (2007) and Witt (2008a) follow that these differences appear in the heuristic projections, where generalized Darwinism refers to the abstract ubiquity of evolutionary change and looks level-by-level for appropriate application of the Darwinian trajectory. Other naturalistic ontologies emphasize the interdependencies between particular systemic complexity and evolutionary continuity. ‘While evolutionary generalists typically marvel at the usefulness if not indispensability of simple, tractable formal models, evolutionary particularists tend to stress the limits and shortcomings of such models in dealing with the richness and complexities in actual evolutionary processes’ (Vromen 2007, p. 8).

40

Evolution – ontological foundations

It is outlined that the promising potential of synthesis and complementarity between naturalistic ontologies is extremely high. Vromen (2007, p. 8) argues ‘As such, simple abstract models and rich historical explanation are complementary, rather than competing’ by referring to Boyd and Richerson (2005, pp. 94–96). Simple abstract models of evolution have to learn their bounds, since their application with regard to the cultural and socioeconomic stream of coevolution is highly speculative at the moment. Replication and interaction are two different processes leading to natural selection in biological evolution. Generalized Darwinism needs to illustrate the representative processes of replication and interaction in the cultural domain in more detail, in order to stay consistent. There is no proof, yet, that there are such equivalences in the cultural domain; we may even say that selection and replication cannot be separated in the cultural domain. But Hodgson and Knudsen (2006) also remark that there is possible replication without replicators in the cultural and socioeconomic domain, if we start to interpret the replicator as bottom-up information processing in contrast to a classical mechanistic mechanism. In consequence we do not need the metaphor of the replicator anymore. Information processing and transmission truly is the big issue today, as Stoehlhorst (2008) also outlined. We will come back to this issue in Part III of generic institutionalism. Such ideas are promising and bring in other fruitful aspects, such as information and communication theory, as well as computational simulation.

Generic naturalism Continuity hypothesis Ulrich Witt has postulated an assumption or a hypothesis which became very prominent in the discussion about a common naturalistic evolutionary ontology in recent years: the continuity hypothesis. It became prominent because it is essential to understand the embeddedness of economic systems in the grand picture of evolution. It discusses the role of evolution for economics and the role of economics for evolution. The hypothesis proposes an ‘ontological continuity of evolution’ which means that we already know that the ‘human species is a product of evolution’, nevertheless ‘the modern economy is hardly explicable in terms of the theory of natural selection’ and ‘there is a point where the power of Darwinian evolutionary theory for explaining (economic) behaviour ends. But evolutionary change continues beyond that point – only with different means and in other forms’ Witt (2003, p. 3). In short, it means that evolutionary principles – determinants and properties of continuous change in a non-Newtonian manner – may change endogenously as well. Hence we may speculate that there is also an evolution of evolutionary principles going on. Human beings have endogenously developed new modes of cultural transmission, individual, social and organizational learning. Such cultural innovations were only possible because of the development of new cognitive capabilities through the evolution of language. Witt (2003) also postulates that evolution can get identified as generic change

Naturalistic approaches 41 driven by the emergence of novelty and its dissemination processes. The evolutionary economist investigates the linkages and connections of the co-evolution of biological and cultural, socioeconomic processes. This includes various research fields, the evolution of cognitive human capabilities or the evolution of consumer and supplier behaviour, as well as their relationship with ongoing macroeconomic structural change. The mechanisms by which the species have evolved in nature under natural selection pressure, and are still evolving, have shaped the ground for, and still influence the constraints of, man-made, cultural forms of evolution, including the evolution of the human economy. But the mechanisms of manmade evolution that have emerged on that ground differ substantially from those of natural selection and descent. (Witt 2008b, p. 550, original emphasis) This quotation reveals the spirit of the ontological continuity assumption. It is evolution sharing all reality, but with manifold facets and cannot be described via natural selection alone. Witt (2008b) explains why this debate in economics depends tremendously on the conception of reality, on the ontological characteristics. Theory itself underlies path-dependent principles or causalities, if we start with an arbitrary ontology, there may emerge a point of no return, a lock-in, on the heuristic or methodological level. We have to consider science as a tree of life, it is conclusively of utmost importance to put things concisely on the ontological level. Researchers mostly use some evolutionary heuristics for their concrete economic problem, but forget how these mechanisms work in detail. Witt argues that any use of evolutionary concepts in the social sciences needs a naturalistic foundation, in order to stay consistent: these are logical preliminaries. The argument suggests a strict avoidance of ponderous analogy constructions within evolutionary economics, such an endeavour can be guaranteed by committing to a generic naturalism: Consider something that evolves, be it a gene pool of a species, a language spoken in a human community, the technology and institutions of an economy, or the set of ideas produced by the human mind. Although such entities can change over time in response to exogenous, unexplained forces (‘shocks’), their genuinely evolutionary feature is that they are capable of transforming themselves endogenously over time. The ultimate cause of their endogenous change is the capacity to create novelty. The way in which this happens varies greatly across different domains. (Witt 2008b, p. 551) This is the idea of generic change articulated via the capacity to create novelty, the immanent potential of emergence. Then dissemination or diffusion of an acquired novelty refers to the next logical level. Interpretation of dissemination processes influences how the entity or the system will endogenously transform.

42

Evolution – ontological foundations Evolution can thus be characterized generically – in a way that is not domain-specific – as a process of self-transformation whose basic elements are the endogenous generation of novelty and its contingent dissemination. The generic concepts of novelty emergence and dissemination provide an overarching heuristic for interpreting problems and inducing hypotheses in the evolutionary sciences. (Witt 2008b, p. 552)

It is the interplay, the cross-fertilization of ontology and heuristics which processes a variety of valid evolutionary economic programs. But how is this novelty generated in the first place? The specific conception of novelty plays an important role to better understand change at all, on an abstract ontological level of research. Of course, the emergence of novelty is probably one of the oldest problems of philosophy in general, but evolutionary economists deal with it every day. In consequence we need a proper language to work with emergence and novelty in pragmatic way. It is everywhere and it always appears different, but organisms are able to realize and recognize it, ex post. The distinctive epistemological feature of novelty is expressed by the difference it makes when the ex ante view of what is novel (i.e. the view at a time t < ττ) is compared to the view one can take ex post (i.e. at time t ≥ ττ). Unlike in the ex ante case, ex post a (fictitious) observer is able, and typically is assumed, to know the relevant properties and meaning of what is emerged or is being created. (Witt 2009, p. 312) The problem shifts to a different perspective, namely that time τ is not in epistemological range: there are epistemological limits which bound our cognition. Furthermore Witt (ibid.) distinguishes between domain-specific novelty and universal novelty, which relates to the distinction of subjective and objective novelty. He makes clear that it is only possible to grasp the nature of the diffusion of subjective novelty towards other agents, whereas observation of objective novelty is epistemologically not possible and would even be irrelevant. Witt (ibid.) additionally calls this the difference of pre-revelation analysis and postrevelation analysis, where only the latter can reveal scientific epistemes and the former is simple fiction. So we may briefly conclude that analysing the emergence of novelty is only possible via its dissemination or diffusion, i.e. the dynamic change of something novel. This is a completely different ontological stand in contrast to neoclassical economics, where the observation of objective novelty is somehow possible and can be statically compared at different points in time. Witt (2009) assumes that this emergent process needs at least two operations, a generative and an interpretative one. The first one produces new recombinations of elements, the second one puts it in context, which can be either ‘a new emerging or a more general already existing concept’ (Witt 2009, p. 313).

Naturalistic approaches 43 The crucial point may be that the two operations are logically distinct but are happening in the same instance of time. We regard it as a procedural approach to novelty, where both operations are generic to the creation of mental novelty, the production and maintenance of internal models. Witt insists that the generative operation needs some pre-selection of elements which can be recombined. In particular this operation cannot be left to arbitrary or random choices. Hence Witt introduces some similarity or conformity criterion for this pre-selection process, to confirm that this operation is a strongly guided process. The second interpretative operation is not fully understood by cognitive scientists yet. Witt therefore proposes that this process of conceptual integration – of the new cognitive concept (idea, imagination) into some new emergent or already existing context – is done by intuition, pattern recognition from a computational point of view. Dopfer (2004) highlights in a similar way shared imagination as an important concept of this process of conceptual integration, whereas Aoki (2001) speaks of shared beliefs, though the term ‘belief’ may be misleading in this context. While the generative operation can be automatized mechanically or electronically outside the human mind, for example, by numerical algorithms and programs, the carrying out of the interpretative operation is bound to the medium of the human mind and can therefore not be automatized. (Witt 2009, p. 315) The process of novelty creation may be one of iterated recursions. So there can be a third logically distinct evaluative operation as well, with feedback tasks. This operation may then influence what novelty will emerge. In biological terms, the equivalent procedure for the generative operation would be the recombination of selected genetic material; for the interpretative operation it would be the epigenetic expression of the varied gene code in the development of the phenotype; the evaluative operation would then act indirectly through competition of successful phenotypes. Witt (2009) follows that this emergent novelty is then revealed via inductive operations. Carrying out these operations requires time, and thus prevents the meaning of novelty being instantaneously accessible. These inductions are somehow simulations in the human mind, iterations of generative and evaluative operations, which can reveal the emergent property over time, nevertheless the interpretative function is ‘inaccessible to deductive reasoning on grounds of principle’ (Witt 2009, p. 315). Finally we have to assume that ‘the emergence of novelty is not only a process that is iterated over and over again, but it is also a cumulative potentially autocatalytic process’ (Witt 2009, p. 316). By re-using newly created concepts in further iterations of the generative operation, an infinitely growing number of concepts can emerge from a finite number of initial elements, provided that the share of combinations to which a new meaning can be attributed is non-vanishing. (Ibid.)

44

Evolution – ontological foundations

If we could verify that there is a finite number of initial elements we could follow that there has to be some ultimate prior concept in the cumulative evolution of human knowledge, which was not cognitively created. This conception is similar to the embodied knowledge hypothesis, elaborated by Hayek (1952). It would need a digital machine with Turing complexity to understand, anticipate and interpret these interpretative operations outside the organic realm. Witt (2009, p. 317) further develops different degrees of novelty and its relation to uncertainty. In conclusion he derives differences of novelty-induced uncertainty in comparison to uncertainty in the probabilistic sense, a notion which needs to be followed in more detail in the future, since it is of utmost importance for economic modelling. Novelty disseminates in a local cultural, socioeconomic context along selforganization to a certain degree, as already indicated in the last sub-chapter: self-regulating processes (negative feedback) which stabilize given structures and temporarily self-augmenting processes (positive feedback) which destabilize given structure and, thus, are instrumental in establishing new structures. . . . The dynamic interaction between these two features of selforganisation has turned out to be a powerful basis for generalizations. (Witt 1997, p. 490) All living dissipative systems share these processes, according to the findings of biophysics and biochemistry. Concerning the significant role of selforganizing and autocatalytic processes in evolution at all, we have to take a more detailed look into system theory and the science of complexity, as well. Complex living systems share similar principles on an ontological basis, insofar as it is not the search for analogies which drive our interest in system science; it is the search for basic ontological properties of change at all. The science of complexity cannot tell us how change continues over generations in cultural and socioeconomic contexts, but it can tell us something about living systems in general, how they organize over time and space along filigreed membranes of exchange. Therefore we want to argue that neither selforganization nor selection alone may host an ontological basis for evolutionary economics, but both can help to understand how novelty disseminates in a complementary and very generic way. Self-organization and selection in evolution are extensively discussed by Kauffman (1993). Due to immense significance of the interplay of those two concepts we will treat some of Kauffman’s thoughts in the following. Eighteenth-century science, following the Newtonian revolution, has been characterized as developing the sciences of organized simplicity, nineteenthcentury science, via statistical mechanics, as focusing on disorganized complexity, and twentieth- and twenty-first century science as confronting organized complexity. (Kauffman 1993, p. 173).

Naturalistic approaches 45 Where neoclassical economics still finds itself in the eighteenth century, determining rigid natural laws for the economic behaviour of massively distinct people on earth, evolutionary economics moves with time and is watching out for dynamics in complex adaptive systems. A shift in economic thought is necessary, a shift from the idea of equilibrium towards the idea of disequilibrium. Complex systems are never in equilibrium, because they change and adapt continuously, albeit they may sometimes rest in stages on the edge of chaos and order, in stages of stable disequilibria or flow-equilibria.2 Such a state is, according to Kauffman (1993, p. 173), ‘a state which optimizes the complexity of tasks the systems can perform and simultaneously optimizes evolvability.’ Furthermore, complex adaptive systems share the notion of dynamical attractors which box the behaviour of a system. Furthermore we can associate complex adaptive systems with three broad regimes of behaviour, carrying ontological content for evolutionary processes: ordered, complex and chaotic regimes. Kauffman analysed random NK Boolean networks and concluded that in ordered regimes the elements freeze very fast and form a bigger cluster which spans across the system. In the chaotic regime there is no frozen component; instead, a connected cluster of unfrozen elements appears. Here small changes in the initial conditions may have strong and sensitive reactions to the whole system. Transitions from the ordered to the chaotic state are possible through phase transitions, where the transition region is called a complex regime. In this regime frozen and unfrozen elements are percolating simultaneously with very sensitive conditions. [M]assively disordered systems can spontaneously ‘crystallize’ a very high degree of order. Much of the order we see in organisms may be the direct result not of natural selection but of the natural order selection was privileged to act on. Second, selection achieves complex systems capable of adaptation. (Kauffman 1993, p. 173, original emphasis) Regime changes along phase transitions carry significant ontological content for the local micro-evolutionary processes with respect to the outlines in the last sub-chapter. They may even explain how social learning reaches states of local reproduction. Self-organization represents the driving force for order in a complex system, which can be achieved in a very spontaneous way as well. Then selection drives the adaptation process pending or choosing between different dynamical attractors, this reflects the meso-category of a phase transition; where the concept of meso is extensively discussed as a synthesizing concept for generic heuristics in Chapter 10. Self-organization plus variation, selection and retention influence dynamic change in a complementary way, with ongoing emergence on a very ontological level, if the elements in the system react autocatalytically3 in their contexts. The Darwinian trajectory drives the continuous change of the complex adaptive system (be it an organization or institution) then, via generic learning mechanisms.

46

Evolution – ontological foundations

Evolutionary realism Evolutionary realism is greatly developed in Dopfer (2005) and Dopfer and Potts (2004, 2008). In Dopfer and Potts (2008, p. 4) the authors assign ontological primacy to the ‘human mind as the carrier, originator and regenerator of all economic rules.’ The human mind is considered as an emergent substrate of biological evolution and is therefore naturalized, that means embedded, in the environment, insofar as evolutionary realism conceives a naturalization of Schumpeter’s ontological Dasein – compare the Schumpeterian ontological system in Chapter 2. The human mind is neither understood as an isolated instance of being nor as a general-purpose machine capable of processing information in a complete way, as it is projected in neoclassical economics, but as a naturally and socially embedded instance of the world. The authors argue that it is the genetic constituency of the human mind, which allows for ‘symbolic communication and cultural transmission of knowledge’ (ibid.). Since these genetic constituents are not constant but still change over time along genetic inheritance, there is no way around a naturalization of knowledge. HerrmannPillath (2008) follows Hayek (1952) in this respect. Hayek states that there are fundamental limits to knowledge because any attempt at comprehensively explaining the world would presuppose to explain the relation between the observer and the observed, i.e. the relation between the brain and the world. However, a theory of the brain eventually is a creation of the brain. (Herrmann-Pillath 2008, p. 139) Mind and body are inherently interconnected, one cannot think of the former without the latter and vice versa. Within such an outline it is clear that knowledge co-evolves with biological evolution, but it is not strictly conditioned by it. Evolutionary realism synthesizes a generic ontological framework by building upon the Schumpeterian ontological primacy of Dasein, the Darwinian idea of evolutionary continuity of change as well as on developmental positions given by the study of complex adaptive systems. Thereby focus is given to a generic conception of onto- and phylogeny in evolutionary economic dynamics. Evolutionary realism enables a variety of possible evolutionary economic programs through its innovative language. This section deals especially with the ontological premises of this language, whereas an explanation and interpretation of its heuristic conceptions relevant for institutional change are given in Chapter 10, regarding the generic rule based approach in micro–meso–macro economic analysis. If we consider the economy shaped by the evolution of knowledge and we centre the ontological position on a naturally and socially embedded human mind, we arrive consequentially at generalization problems of observed operations and interactions: ‘Any theory or coherent set of hypotheses (H) represents, in its bare bones, a generalization of a designated range of particular real

Naturalistic approaches 47 phenomena (R)’ (Dopfer 2005, p. 5). We assume that there is a need for inductive reasoning to arrive at general statements from particular cases. Dopfer follows further that the inductive procedure rests both in hypothesis generation and hypothesis testing; hence an inductive generalization of a particular real phenomenon comes before and after the derivation of hypothesis. Scientific inference follows an iteration of R–H–R4 then. Therefore we may also conceive the Methodenstreit der Nationalökonomie (as discussed in Chapter 2) as a scientific battle between R–H and H–R, which involves a battle of verification – positivist proponents (R–H) – and falsification – realist proponents (H–R). Since Popper (2004 [1934]), we assume that a statement is scientific if and only if it is falsifiable, i.e. a discovering process of ex post induction (H–R). Nevertheless in this respect Dopfer (2005) commits to Lakatos (1980)5 when he articulates that the synthesis of novel programs demands an inductive procedure even before stating some hypothesis, resulting into R–H–R by adding the Schumpeterian notion of a pre-analytical vision. This notion is also congruent with Hanappi’s (2003) argument to shift from scientific discovery to interpretation in the first place, as already articulated in the introduction. What are the procedures that allow us to arrive at a scientifically acceptable paradigmatic core? There are basically two methodological routes: the a priori and the a posteriori. The former belongs to metaphysics, but, interestingly, scientists also take an a priori posture when it comes to the issue of paradigm or central research questions. In his later writing, Karl Popper explicitly acknowledged the paradigmatic significance of the idea of evolution, but he argued that it was ultimately rooted in metaphysics. Science, by its own codex, cannot, however, rely on a priori stance; it is bound to take an a posteriori one. (Dopfer 2005, p. 6, emphasis added) However, the theory of evolution suggests very basic a priori positions, as Dopfer elaborates along the notion of empirical axioms. These are axioms stated in an Aristotelian tradition, in contrast to the outline of a principia mathematica. Positivism presumes that scientists have an ability to practise their metier in an objective fashion, as neoclassical economics understands the economic realm. In fact ontological positions differ substantially between scientific communities, but common agreement may be possible with regard to time-variancy, irreversibility and therefore evolution and process philosophy. By recognizing that economic evolution creates a surplus of generic rules (knowledge), we have to consider the necessity of a pre-analytical component in the three-phase inferential procedure. Dopfer suggests a meta-theoretical inference of ontological induction in order to arrive at ontological statements. These statements should be statements about all reality – ‘the unity that all existences share’ (Dopfer 2005, p. 6). This unity constitutes the idea of a generic institutionalism, where the continuity of change provokes socioeconomic life to sustain and maintain social

48

Evolution – ontological foundations

structures as learning vehicles. Of course such an axiomatic description demands a position distant from the ontology of classical physics for the further formulation of evolutionary economic programs. Economists were always influenced by physicists, because of their knowledge in creating laws of coordination and of motion. This was also the case within classical economics. Economists like Smith, Ricardo, Malthus and Marx were extremely interdisciplinary scientists. The comparison between natural and economic laws was always a starting point, but not the only driving force for their research. Dopfer (2005) asks why economists have chosen a mechanical/ hydraulic system as their mecca instead of a biological one. He suggests, by quoting Prigogine (2005), that this issue can be traced back to Cartesian dualism, ‘only the “hard” part of reality was considered to be amenable for scientific inquiry, empirical scrutiny and theory construction’ (Dopfer 2005, p. 9). Hence economics took over the calculus of Newtonian mechanics in order to describe economic activities in social contexts via non-changing laws. In this respect Dopfer (2005) goes back to Aristotle explaining that all things have an essential and an accidental property, which can also be interpreted as a generic and a concrete/tangible or operational one. Laws do not change endogenously, they do not incorporate the very notion of an event. Laws work with continuous time in a Newtonian picture and do not allow for discrete events. The value added of an evolutionary economics lies in its conception as a historical theory of process thinking. The economic canon took over the idea of time-invariancy as an ontological primacy. ‘It was a science of causality, rigid determinism and preordained order; in other words, it was physics prior to the Second Law of Thermodynamics’ (Mirowski 2002, p. 7). Conclusively actors move automatically as atoms towards equilibria by following universal laws in this mechanistic view. All theory sharing this idea works nomologically6 and develops in a typological way, in contrast to a generic outline of theory (compare Dopfer 2005, p. 20). Nomological worlds exclude process thinking and eventfulness, the matrix for creative learning within a human mind and between human minds. Economics without evolution represents a science of dead bodies without any minds. Until today evolutionary economics represents the only economic school, which strived for synthesizing the Methodenstreit der Nationalökonomie, by establishing a historical theory. Evolutionary theory is principally a historical theory. By a historical (economic) theory we mean one that makes theoretical statements about the historicity of economic phenomena. A historical theory differs from historical analysis in that it generalizes and, unlike historical analysis, does not attempt to provide an exhaustive account of all details of a time- or spacespecific singular case. During the process of generalization a historic theory employs criteria such as irreversibility, non-ergodicity, non-repeatability, non-periodicity or path-dependence. (Dopfer 2005, p. 16)

Naturalistic approaches 49 Such an understanding has inspired the heuristic conceptions of the early evolutionary economists, such as Veblen, Hayek and Schumpeter as well as the ‘evolutionary’ sociology of Bourdieu; all revisited in Part II. They have envisaged society and economy as a rule-based evolving system, in contrast to a law-based mechanistic system: this is what they have in common. Rules highlight the significance and locality of carrier information and knowledge, where systems of rules are further able to bundle information sets and encapsulate knowledge in social structures or economic populations for the transmission of knowledge. On this basis we are able to state first empirical axioms for the formulation of evolutionary economic programs. Empirical axioms are useful in a pragmatic manner if we anticipate evolution as a domain-independent necessity for processthinking, in contrast to a generalized perspective of genetic evolution, inspired by Metcalfe (2005). Let me emphasize again that nothing I have said is intrinsically a matter of biological analogy; it is a matter of evolutionary logic. Evolutionary theory is a manner of reasoning in its own right, quite independently of the use made of it by biologists. They simply got there first and, following Darwin’s inspired lead, built arguments for dynamic change premised upon variety in behaviour in the natural world. . . . Evolutionism is a distinct form of reasoning, of general applicability to problems of change and development. (Metcalfe 2005, pp. 420, 424) In order to use the features of evolutionary theory in a generic way, it is necessary to identify the levels of evolutionary thought (Figure 3.1). Such a schema distinguishes between typological and generic approaches. The typological

1.1 Newtonian physics 1. Typological Mechanics

1.2 Linnean biology 1.3 Equilibrium economics

Level of analysis Ontological foundations 2.1 Ontogenetic Developmental 2. Generic Evolutionary 2.2 Phylogenetic Darwinian Lamarckian

2.1.1 Individual genotype 2.1.2 Phenotype 2.2.1 Species, gene pool 2.2.2 Population

Figure 3.1 Levels of ontological foundations (source: reconstructed from Dopfer 2005, p. 20).

50

Evolution – ontological foundations

approach is associated with a mechanistic paradigm. On the contrary we can identify a generic approach, which associates the evolutionary idea of endogenous change with self-transformation. In general, ontogenetic analysis refers to a developmental analysis of an open system and its decomposability in modules. Dopfer (2005, p. 20) points out that ontogenetic analysis deals with the analysis of structure, the development of the system and its associations. Ontogenetic development influences recursively the long-run continuity of phylogenetic evolution, i.e. the population aspect, by tweaking the modularity of a specific system in a self-organizing way. The modularity of a system is then also influenced by the emergence of new generic constituents with regards to phylogenetic change. In particular ontogenetic development and phylogenetic evolution serve each other. Then in biology we consider a next-level distinction between genotype and phenotype. In economics there is no common agreement on genotypes and phenotypes or replicators and interactors as we already discussed. Phylogenetic analysis emphasizes the research of the many of one kind. In biological terms there is a distinction between the gene pool and the population, where the gene pool represents the genotype of one species and the population a set of phenotypes within a gene pool. Dopfer (2005) suggests analysing the interrelation between ontogeny and phylogeny in economics via an evolutionary trajectory defined in terms of a succession of evolutionary regime phases. Then the heuristic realm of meso serves as process modularity between onto- and phylogeny or evo-devo (compare also Dopferr et al. (2004) as discussed in Chapter 10 below). The Darwinian trajectory is instructive in explaining the transitional phases of complex adaptive systems in phylogenetic terms. The development of the systemic structure with regard to its environment can be analysed in ontogenetic terms via complexity science. The fact is that development and evolution is highly interconnected, meaning in particular that there are developmental mechanisms shaping evolution and there are evolutionary mechanisms shaping development. The emerging interfield of evolutionary developmental biology, also called evo-devo, focuses its research exactly on this issue (compare the introduction in Callebaut and Rasskin-Gutman (2005); compare Pigliucci and Müller (2010) for a collection of essays on an extended synthesis with regards to evolution and development). Thus evolutionary economic programs have to deal with the evo-devo interaction in economic systems somehow, where the idea of evolutionary regime transitions offers a first proxy. According to Dopfer (2005, p. 15) an evolutionary regime has to consist of a transitional cycle of Darwinian processes, as shown in Figure 3.2 and explained below. Such a cycle represents major macro-transitions in historical contexts and refers therefore to the phylogenetic population level. The entire sequence from (1) to (5) can be conceived of as an evolutionary regime. Evolution occurs as one or more transitions from one regime to another. The analytical unit of change is a regime transition defined as a process that occurs from (5) to (2). The case of non-change or meta-stability is

Naturalistic approaches 51 given by the link between (5) and (1). Change has as its starting point a metastable variety (1), and represents a transformation from this into a new variation pattern brought about by (2). This change works out along the phases of the evolutionary regime, and settles down in a new variation regime at (5). (Dopfer 2005, p. 16, original emphasis) The idea of evolutionary regime transitions on a generic level demands a proper definition of the units involved, as we have already articulated. Now we refer to the empirical axiomatic outline of evolutionary realism for economic theory. Axiom 1: All existences are matter–energy actualizations of ideas. Axiom 2: All existences associate. Axiom 3: All existences are processes. (Dopfer and Potts 2008, p. 3) According to Dopfer and Potts (2004, pp. 204–208) the axioms describe a fundamental position for the empirical foundations of evolutionary economic analysis and theory. All existences are bimodal, associated processes and refer to actualizations of ideas. Bimodality means that for each idea, there can be many actualizations, and is the observation of population in the constituent economic entities of time

(1) Variety informational fuzziness

(5) Retention meta-stability

(4) Selection direction

(2) Mutation discontinuity

(3) Adaptation relations

Figure 3.2 An evolutionary regime (source: reconstructed from Dopfer 2005, p. 14).

52

Evolution – ontological foundations (process) and space (association). . . . Or, translated into the generic category of bimodality: for each rule, there can be many carriers. (Dopfer and Potts 2008, p. 3)

The bimodality axiom says that there are two coincident modes of existence in reality; an existence is a matter–energy actualization of an idea, where an idea has at least one actualization and there is no actualization without an idea. This aspect emphasizes the fundamentally realist picture of an evolutionary ontology in economics and centres the human mind with a naturalistic conceptualization of knowledge. The point of bimodality is that any existence is never in pure form, which means it is neither pure matter–energy nor a mere idea, without the idea a certain matter–energy actualization loses its semantic content (information deleted) and becomes indistinguishable from other matter–energy actualizations. Dopfer (2005, p. 205) further explains that in an evolutionary ontology, the basic category is not energy and information, but ideas and actualizations. Conclusively Axiom 1 instructs that bimodality attributes existences as non-arbitrary, ‘in the sense of not being an actualisation of an idea. Bimodality says that there is one world, but with many rules, and in which each rule has potentially many actualisations’ (Dopfer 2005, p. 205). This notion implies an opposing argument in relation to the Cartesian system of thought. Evolutionary realism suggests that there is one world which is modally complex. The specific treatment of idea represents the point of differentiation. Assume that we observe different existences actualized as matter–energy, but not distinguishable by matter–energy alone, then Dopfer and Potts (2004) refer to the ontological category of idea. The authors mean in particular that the idea represents the momentum of distinction for socioeconomic terms on an ontological level. The ontological category of idea can be further understood as a rule in synthetic terms. The authors argue that any idea has a population of matter–energy actualizations on an ontological level. The bimodality axiom explains that ideas are non-arbitrary and have properties. Dopfer and Potts add that these properties are never a priori evident, therefore they introduce the second axiom, an association axiom. Different properties of ideas are revealed through different associations, hence all existences associate. When two ideas associate there is revealed information about these properties. Information is the revealed properties of ideas (or rules) by association. If two ideas cannot or do not associate, then there is no information. Similarly, the creation of an association is the creation of information, and hence novelty. (Dopfer and Potts 2004, p. 206) This axiom implies that information can only be revealed if we compare, relate and associate entities to each other. The association story brings in the notion of complex adaptive structure of idea actualizations in generic terms. The associations span a modular space of relations between existences and create hierarchical structure in a self-organizing way thereby. In cultural terms this space can be

Naturalistic approaches 53 of a geographical nature with regard to urban planning for instance, but it may also be of a social, political or economic nature. In consequence there is variety and diversity of different space topologies, emerging out of the specific complex adaptation of certain associations. Consider a price for a good: it is defined according to associations with other goods, labour input, capital cost and consumer preferences, then only through the process of association are we able to determine the value of the good; price or information becomes knowledgeable value through association in a certain space. In consequence information is neither constant nor complete. Dopfer and Potts (2004, p. 206) further follow that: ‘In an evolutionary ontology, the geometry of associations is always incomplete.’ In conclusion the association axiom deals with the developmental dimension of an evolving economy. In generic institutionalism we understand this structural component in ontogenetic terms, as outlined later. The process axiom attributes existences to dynamic continuous change. Every system of actualizations originates, adopts and retains in an evolutionary process. Associations of actualizations do not develop only because of self-organization in their respective space, they also evolve in an endogenous process of selftransformation. In generic institutionalism we understand this notion of a process axiom as the process component of structures in phylogenetic terms with regard to different populations in association spaces. In that manner we define the economy as an open system, which evolves historically in a contingent way, as Dopfer and Potts (2008, p. 4) outline. Interestingly we may describe the interrelated dynamics between onto- and phylogeny ex postt as a contingency tree then. Axioms 2 and 3, especially, are congruent with the continuity hypothesis. We anticipate evolution as a continuous process between different layers of regime transitions. Figure 3.3 suggests such a layered continuity of evolution with ontological induction. However the tricky part is that continuity is not understood in a Newtonian way, but as continuity of discontinuity. On an abstract level, evolution is understood as a layered, bottom-up, continuous process, where a physical level represents the most basic layer, a biological layer builds upon it and an economic, cultural or societal layer builds on the biological one. This also means that every layer shares ontological premises with their bottom layer. The squares indicate the scientific programs of the different disciplines, which remain mostly within their own layer and do not engage in interdisciplinary fertilization of pluralist programs unfortunately. These paradigmatic cores represent the inductive base for their ontological generalizations then, because the set of all empirical generalizations (white rectangles) is obviously too large for such a base. Therefore the ontological foundations of evolutionary economics stem from several inductive cores and principles from physics, biology and economics. Finally Figure 3.3 also indicates that evolution is a process of ever-growing complexity over the different layers and time. In correspondence this layered ontology suggests that there are generic features of reality which all layers share, but every layer carries distinctive characteristics which raise the complexity of continuous change on their level.

54

Evolution – ontological foundations

Complexity

Ontological generalizations empirical axioms P

Economics Biology Physics

Time

Figure 3.3 Ontological induction of different layers (source: reconstructed from Dopfer 2005, p. 202).

The empirical axioms discussed above aim at a generic ontology for the evolving economy then, in which the human mind is the carrier of rules. Certainly the mind is neither disconnected from a body nor from natural or social structures. Novelty and its dissemination are only possible via the association of rules in spaces and their further evolution through time. For that very reason carriers are dependent on the origination, adoption and retention of social structures for the communication of their rules. In consequence the evolving knowledge is ontologically distributed over space and time. Learning becomes an ontological category, because there is no being without learning, including failure and success. The different structures and processes of and for social and economic learning shape the heuristic projections in a generic way, as we discuss in Part II. It is the institutions driving the developmental and evolutionary properties of learning. We are able to model, program and synthesize knowledge over space and time with the help of institutions as social information processing and retrieval structures. It is not surprising that institutions influence consequently economic consumption, production, welfare and policy in an endogenous way. But before we dig deeper into this realm we conclude the ontological section with some remarks and reflections.

4

Remarks and reflections on Part I

Naturalism exhibits a very short history in economics, but more and more evolutionary economists discover the idea of naturalism as a consilient concept for socioeconomic and cultural studies. In short, naturalism refers to a philosophical conception of science locating and embedding the human being in a social and natural context. Herrmann-Pillath (2008, p. 132) follows Bhaskar (1989) in ‘defining naturalism as a specific epistemological stance where all social science explanations follow certain methodological principles of the sciences, yet simultaneously rejecting reductionism and scientism.’ A central motive in Bhaskar’s writing is to offer a philosophical stance between the lines. Bhaskar (1989, p. 15) identifies two dominant but different ontological positions in the philosophy of science, i.e. hermeneutics and positivism. The hermeneutics of Heidegger and his student Gadamer is especially interested in the ontological notion of interpretation, thereby emphasizing the existential understanding of experience. Hence experience gains the central attention in the search for true context. Consequently it has to be naturalistically founded, because understanding will somehow lead to the physical existence of being as such. We have already considered the idea of hermeneutics and simple Dasein in context of Schumpeterian economics and his central idea of a unified social science. We concluded that Schumpeter has envisaged a generic picture of institutional change, but never admitted its naturalistic dimension. Bhaskar criticizes hermeneutics for its reduction of social science to understanding experience: ‘that social science is (or should be) concerned with the elucidation of meaning and the tracing of conceptual connections – activities clearly lacking the inanimate world of nature’ (Bhaskar 1989, p. 17) This very basic claim stresses the point that reality is more than experience and consciousness, which are modalities only incorporated by animals and human beings. The second dominant ontological position is held by positivism. Positivism is a non-naturalistic strand which shapes orthodox social science today. Economics in particular is methodologically embraced or shackled by positivist thinking. The Friedmanian notion of as-iff is the typical style of argumentation in neoclassical economics. The idea of as-iff can be rendered very easily. ‘Friedman’s main point was that a theory’s validity should not be judged by the realism of its underlying assumptions but rather by the accuracy of its predictions. In effect,

56

Evolution – ontological foundations

theories should be viewed “as if” f their assumptions were true’ (Madden 2006, p. 1). Another position of positivism argues that social reality is far too complex to test assumptions about it. Hence it is more conflict-averse to state a naïve model of reality. In response to this, positivists tend to argue that the social world is much more complex than the natural world (‘interactionism’, already prefigured by Mill) or that the regularities that govern it can only be identified at a more basic level (‘reductionism’, prefigured by Comte), and that, in any event, concepts (or meanings), to the extent that they are explanatorily relevant at all, can only be identified, or hypotheses about them tested, empirically (i.e. behaviourally). Neither party doubts for a moment that empirical invariances are necessary for laws, or that the conceptual and the empirical jointly exhaust the real. (Bhaskar 1989, p. 17) Additionally most problems in the social and economic sciences stem from the two fetishes of empiricism and individualism, where the former arises out of positivism and the latter out of hermeneutics. Bhaskar’s notion of critical naturalism invites an innovative concept for ontological discussions, because it follows a radical naturalist outline. However, as Hodgson argues, Bhaskar develops an over-deterministic philosophical strategy, because his critical naturalism lacks to define changes in individuals. While there is an account of structural change, there is as yet no account of how individuals are changed. We are told how structures evolve, but there is no parallel explanation of the changes to individuals. Individual agency is rightly retained and emphasized. Bhaskar (1989, p. 80) and other critical realists argue that ‘intentional human behaviour is caused’ but ‘it is always caused by reasons, and that it is only because it is caused by reasons that it is properly characterized as intentional. ‘. . . It recognizes that beliefs are part of social reality, but gives no account of the cultural, psychological or physiological causes of beliefs or reasons themselves. (Hodgson 2007, p. 10) These concerns show that the ontological missing link between agency and structure is not only a complex topic for our concerns, but a very deep scientific problem, going beyond the foundations of evolutionary economics. We have seen that the ontological pins for evolutionary economic programs exhibit a highly contested territory. But why do we have such deep problems regarding a proper formulation of evolutionary economics? Elsewhere, Herrmann-Pillath (2007) explains that there is still a lot of confusion concerning the debate on evolutionary ontological foundations in economics, because most economists transfer neo-Darwinian concepts from the modern synthesis of evolution towards economics, as also outlined by

Remarks and reflections on Part I 57 Knottenbauer (2009). The modern synthesis suggests the following points in a brief summary. • •

•

replicator is the unit of information, it transfers information across generations through copying, it is the unit of variation. the unit of evolution is the population of replicators, it manifests changing population traits, the traits coalesce into the individual phenotypes, so that the unit of evolution is the population of individuals. the unit of adaptation is the interactor, which is constructed by the replicator interface between information stored in the replicator and the environment in terms of selective forces, hence phenotypes are individual. (Herrmann-Pillath 2007, p. 4)

These basic conceptions lead to the following implications then. •

• •

There is no evolutionary relevant information transmission on the level of the interactor and from the interactor to the replicator (Weismann doctrine). Observed fitness in terms of the differential reproduction of traits of the interactor is directly correlated with expected fitness of replicators. This implies that the interactor has no specific function in the evolution of adaptation, i.e. even if the interactive trait is irreducible to lower levels, the beneficiary remains the replicator. In particular, group selection is impossible. (Herrmann-Pillath 2007, p. 5)

In consequence evolutionary economists have to be careful if they use the terminology and mechanisms of the modern synthesis, since rather complex problems emerge for the realization of evolutionary economic programs. In particular the replicator/interactor framework is not applicable to the cultural and economic domain. If the interactor is not involved in the transmission of information, known as the Weismann barrier, then it is questionable how organizations and institutions shall be represented by an interactor, because they definitely send information back to involved individuals. If fitness is ultimately reducible to the role of the replicator, then organizations and institutions will not play any role as cohesive wholes, but only their incorporated routines and rules. However if we define organizations and institutions as durable social structures they represent more than the sum of their routines and rules and will therefore influence their fitness also in a non-correlating way with regard to the replicators’ roles. Finally, the modern synthesis excludes group selection in adaptation processes, which is highly problematic in cultural and economic environments. The transmission of knowledge is strictly dependent on learning which has tremendously high impacts on the group level. ‘As a result, the units of information and the units of adaptation emerge as the same, as has been most radically propagated by Richard

58

Evolution – ontological foundations

Dawkins’ gene-centred version of evolutionary theory. This is the atomistic approach in biology’ (Herrmann-Pillath 2007, p. 5). Correspondingly, an adaptation of the modern synthesis within evolutionary economics will lead to similar problems as the prior adaptation of Newtonian physics in neoclassical economics, meaning in particular that we exclude the human mind, the significance of habits and social practices again. This position is not only advocated explicitly by Herrmann-Pillath (2007) and Knottenbauer (2009), but also by Witt (2008b) as well as Dopfer and Potts (2008), as we have discussed in Chapter 3. Otherwise Gould (2002, p. 595) expresses that evolutionary biology faces similar problems as evolutionary economics, referring to the problem of the individual in an evolutionary context. In this case we may follow evolutionary biologists such as Ghiselin (1974) and Gould (2002) who have stressed using the term individuall as a generalization. That means in particular that an individual may be a unique organism, but can additionally stand for a species as well. Hence organisms refer to unique bodies, such as a human being, and individuals refer to a more general term of organized structures, such as species, lineages or organisms. Corning (2005, p. 187) works with the same idea but with a different terminology; he expresses this notion via superorganisms for higher level entities, as also Sober and Wilson (1998) and Hölldobler and Wilson (2009) suggest. Gould (2002, p. 601) refers to this terminological discussion in evolutionary biology as too confusing, again similar to the ontological problems for evolutionary economic programs, and refers to Hull. From the point of view of human perception, organisms are paradigm individuals. In fact biologists tend to use the terms ‘organism’ and ‘individual’ interchangeably. Thus biologists who wish to indicate the individualistic character of species are reduced to terming them ‘superorganisms’. The same claim can be expressed less misleadingly by stating that both organisms and species are individuals. (Gould 2002, p. 601, citing Hull 1976, p. 175) A proper solution to this problem as well as a linguistic clarification of terms is given by the emerging project of evolutionary developmental biology. The outline of evo-devo suggests integrating onto- and phylogenesis into a comprehensive framework, by looking into the modularity of structures and processes (compare Callebaut and Rasskin-Gutman 2005). Of course the proposed framework builds upon an extended synthesis of evolution then, as articulated in Pigliucci and Müller (2010). Concretizations of evo-devo in sociological contexts are already discussed by Wortmann (2010) and Müller (2010). These two approaches also indicate the potential of an extended synthesis for the economic realm, where even the idea of the dual-inheritance framework needs to get revisited and debated again. However, a generic formulation of a naturalistic ontology is already given along evolutionary realism. Dopfer (2005) and Dopfer and Potts (2008) develop a prototype typology for the formulation of evolutionary

Remarks and reflections on Part I 59 economic programs, in that they establish a well-defined generic library of expressions and terms to actually work with evolutionary economics. We consider this approach as a first proxy for a generic outline of an evolutionarydevelopmental ontology for economics, because it tries to synthesize onto- and phylogenesis via an integration of complexity science, evolutionary theory and culture, by referring to an evolutionary system science. Still it needs to elaborate more on the ubiquity of modularity and decomposability of evolutionary processes in complex adaptive systems. We regard this issue as the modularityresearch-frontier for future ontological investigations. Considering the heuristic dimension of this frontier in economics, a proper evolutionary theory of institutional change is demanded. Institutions modularize socioeconomic contexts and thereby shape the transmission of knowledge across space and time. This reflects the idea of generic institutionalism from an ontological perspective. The prototypes of institutional programs, their heuristics and procedures are discussed in Part II.

This page intentionally left blank

Part II

Institutions – generic heuristics

This page intentionally left blank

5

What are institutions?

By considering the elaborated ontological foundations we are able to define institutions as social learning vehicles from an evolutionary perspective. Social learning reduces uncertainty and institutions reduce complexity of socioeconomic interactions by encapsulating knowledge in affective, habitual and cognitive modules. The economy does not evolve without social learning, i.e. the contextual transmission of knowledge in space and time. Social learning establishes a continuity of change within and between culture, society, politics and the economy. Institutions are therefore the most central entities of cultural and economic evolution and cannot be regarded as exogenously given; on the contrary institutions, change from within in an endogenous way. Furthermore institutions cannot be associated with economic markets only, since social learning does not operate merely under the profitmaximization doctrine, consider the difference of social learning in school and in firm, for instance. The essential problem for institutional economics lies in the identification of the underlying dynamic mechanisms of social learning between social structure and human agency and its effects on socioeconomic operations. This is what we would call the heuristic projection of an evolving economy, meaning in particular a specific conceptualization of this continuous change. In generic institutionalism we want to look into the semantic and synthetic procedures of institutional change which are programmed in an evolutionary, non-deterministic and bottom-up way by economic agents. Institutional economics has a very rich tradition, which is greatly rooted in the work of Thorstein Veblen (1857–1929), Wesley Clair Mitchell (1847–1948) and John Rogers Commons (1862–1945). The early American institutionalists were otherwise influenced by scholars within American pragmatism, such as Charles Sanders Peirce (1839–1914), William James (1842–1910) and John Dewey (1859–1952). In economics we identify this approach as the ‘Old Institutional Economics’ (OIE), which stands contrary to the ‘New Institutional Economics’ (NIE). The latter is associated and originates in the work of Ronald Coase (1937, 1960, 1998) and Oliver E. Williamson (1975, 1979). The former OIE approach has received a renaissance within heterodox strands of economics, in evolutionary economics for instance. Another exemplary categorization of institutionalism can be drawn from a political science perspective. Hall and Taylor (1996) suggest thinking in three different institutionalisms, namely

64

Institutions – generic heuristics

historical institutionalism, rational choice institutionalism and sociological institutionalism. The authors explain that historical institutionalism has its roots in structural functionalism – where the emphasis is on the structural component of the emergence of an institution and not on the functional outcome as a response to the system’s needs – as well as in group conflict theory. Historical institutionalists have a close relation to the work of Karl Marx and Friedrich Engels. On the contrary, rational choice institutionalism conceives institutions as instruments to sustain specific human behaviour – institutions are articulated as the means to an end. The emphasis is on agency and institutions are conceived through the transaction cost perspective. This approach is represented in NIE. Rational-choice institutionalists have transported ideas and concepts from the new economics of organization literature into other realms such as political science for instance (compare Hall and Taylor 1996). Common neoclassical assumptions of the individual agent and its representative model are included in this outline of institutional thought, but primarily a fixed set of preferences and an optimizing agent is assumed. Sociological institutionalism has developed in the sociological domain of organization theory and, as the authors claim, gets more and more interesting for political scientists as well. This third approach, regarded from a political science perspective, stresses the issue of culture. In particular followers of this school argue that institutional forms or procedures used by modern organisations were not adopted simply because they were most efficient for the tasks at hand, in line with some transcendent rationalism. Instead, they argued that many of these forms and procedures should be seen as culturally specific practices, akin to the myth and ceremonies devised by many societies, and assimilated into organisations, not necessarily to enhance their formal means-ends efficiency, but as a result of the kind of processes associated with the transmission of cultural practices more generally. (Hall and Taylor 1996, p. 14) This emphasis on social and cultural practices is neglected within the neoclassical economic domain, which concentrates just on the rationality of the human mind and excludes underlying habits and affects. However knowledge transmission is not reducible to information processing and signalling in a pure engineering perspective. Social learning is strictly dependent on affects driving motivation. This concern of bimodality has to be taken seriously within appropriate evolutionary economic programs of institutional change. Only a few economists have managed to write about social psychology and philosophy as well as cultural anthropology without explicitly referring to it, where the greater extent of economists have not even tried to use such a stealth strategy. The semantics of institutional change, its procedural conceptions, demand interdisciplinary thinking in several ways, even if we are not able to model it formally in sufficient ways. Institutions evolve from bottom-up, an insight shared by early evolutionary economists Thorstein Veblen, Friedrich August von Hayek and Joseph Alois Schumpeter. These scholars

What are institutions? 65 emphasized the role of culture and society for the institutional evolution within the economy, by including basic human propensities and dispositions beyond the economic concept of rationality. Veblen followed the tradition of American pragmatism and the notion of a theory of practice. He considered a cumulative causation of habits of thought driving institutional change, where habit is understood as disposition. The late Hayek followed evolutionary epistemology to arrive at the idea of spontaneous order along a naturalization of knowledge. His domainspecific writings concentrate on societal and cultural evolution along the imitation of rules of conduct as the driving force for institutional change. Otherwise Schumpeter most followed consequently the hermeneutic tradition of Austrian economics and focused on a conceptualization of the dynamic and energetic economic agent. It is the entrepreneur shaping institutional change by introducing novel qualities into the economy. During phases of creative destruction the economy experiences processes of institutional reordering. It is interesting to note that all three of these early evolutionary economists had political tendencies towards technocratic – in the case of Hayek, nomocratic – visions of governmentality. In these terms economists act either as societal engineers or as wise guardians to govern or guide especially through transitional phases of reordering. Paradoxically such political fallacies can never mirror the idea of institutions as social learning vehicles in an evolutionary bottom-up way and needs more critical reflection. Therefore generic institutionalism follows a fourth stream of thought covering more the poststructural vision of institutional change and governmentality. In this respect Pierre Bourdieu’s work fits perfectly into the outline of generic institutionalism, because it provides a missing element, a theory of social practices. Of course we may criticize Bourdieu’s post-structural sociology for its attempt to transcend subjectivism and objectivism and in particular for its overemphasis on the positional and dispositional by asserting a minor role to the interactive and situational, as articulated by Hodgson (2007) referring to Mouzelis (1995). But Bourdieu (1982, 1994) offers a convincing theoretical outline of how social practices are inherited within society. Therefore we may understand his post-structural sociology as a complementary component for a generic evolutionary theory of institutional change. The evolutionary character of Bourdieu’s theory is visible in his naturalistic foundation of social practices, habitus is incorporated in the body–mind nexus. Moreover it is not by accident, that his theory of social practices is connected to the ethnomethodology of Levi-Strauss. Bourdieu’s notion shows certain similarities with Levi-Strauss’ hidden codes – which is hardly surprising, since the latter’s structuralism was a major influence on Bourdieu’s early work. . . . A more important difference is that Bourdieu, after an initial structuralist phase, came to think that social phenomena do not portray the order, symmetry and logical consistency implied by the codes of Levi-Strauss. . . . Habitus can therefore be seen as the missing link between structuralism and phenomenological/ethnomethodological approaches. (Mouzelis 1995, p. 109)

66

Institutions – generic heuristics

Bourdieu builds upon a practical logic of sociological theory, but does not implement any theoretical tools for social games played via interactive rational decision-making. In generic institutionalism we regard Bourdieu’s theory of habitus and the field as a heuristic extension to the notion of habit in Veblen building upon Dewey, because economic and social positions are related recursively to cultural dispositions, as also emphasized in Dewey (1958 [1925]).1 As suggested in the introduction of this book, synthesis of evolutionary economic programs is emphasized along theoretical complementarities. I myself see habitus and the interactive situation as rather complementary, in the sense that the games primarily based on conscious decision-making presuppose the quasi-automatic, non-conscious schemata of the habitus as much as do less ‘voluntaristic’ games. In as far as calculated decisionmaking does not take place in a socio-psychological vacuum, in as far as decision-makers operate on the basis of decisional premises they often take for granted, the involuntary schemata of action, thought, and evaluation that Bourdieu talks about may be viewed as key elements for enabling rational actors to intentionally elaborate strategies and arrive at more or less rational choices. (Mouzelis 1995, p. 113) We follow Mouzelis’ critique in favour of a modest interpretation of Bourdieu’s theory of habitus for the endeavour at hand, insofar as the proposed attempt tries to locate certain streams of generic heuristics by concentrating on their divergences as well as commonalities in a complementary and synthesizing way. Part II on generic institutionalism is not designed as a dogmatic–historical examination within the history of economic thought. On the contrary, it identifies the basic streams of heuristic projections within the work of the early evolutionary economists Veblen, Hayek and Schumpeter as well as the ‘evolutionary’ sociology/anthropology of Bourdieu, in a generic procedure. The following chapters entail also modern interpretations and follow-ups of these approaches to institutional evolution across the fields. Circling around the very notion or definition of an institution leads us to old and new interpretations of social causation in a generic evolutionary way. The most difficult problem for institutional analysis is defining and categorizing institutions. Searle (2005, p. 18) writes, ‘I do not much care if my account of institutional reality and institutional facts matches that ordinary usage. I’m much more interested in getting at the underlying glue that holds human societies together.’ Whereas Hodgson (2006, p. 1) argues, ‘This paper proposes that those that give up are acting in haste; potentially consensual definitions of these terms are possible, once we overcome a few obstacles and difficulties in the way.’2 Once we recognize the entire theoretical as well as practical importance of institutions, we may also recognize that they occur in a fractal way in society, multifaceted, self-similar and everywhere. In consequence it is a difficult task to define, distinguish, categorize and order them. Searle (2005) emphasizes that

What are institutions? 67 language is the first and most important institution in human evolution: without language human beings would have not been able to form different institutions, evolving with culture and technology. He stresses the notion that there is no space, no situation in human culture without institutions, hence we cannot imagine something like a natural or institution-less state. We have to anticipate institutions when we talk about institutions, or to put it in other words: we need institutions to explain institutions and their evolution. But what are the most common characteristics of institutional change? First of all, we may consider Ostrom’s (2005a, p. 137) analysis of institutional statements, which articulates a grammar of institutions involving three components. Every institutional statement may be a rule, a norm or a shared strategy. This concept of institutional statements can be compared with Searle’s (2005, p. 6) idea of institutional facts, evolving out of social facts, because both share the idea of deontic3 logic, moral and power. Institutions shape the evolution of morality (compare Hodgson 2012, p. 103), and power, they create, destroy and maintain moral systems, they define property rights, they enforce socioeconomic interaction. But institutions are a product of collective bottom-up programming, meaning that the evolution of morality as well as of power lies in our hands, from a pragmatist point of view. Institutions are not autonomous vehicles driving our future, on the contrary human agents shape them over space and time. Ostrom’s (2005a) grammar of institutions represents an evolutionary theory with a strong emphasis on strategic human behaviour. Human strategies may evolve to social norms and finally to rules within a strict syntax and modal operators.4 This emphasis implies also a path-dependent and contingent argument of institutional change. Ostrom has shown that economic agents are able to solve the tragedy of the commons in a cooperative way. But are all rule systems of the same generic nature? According to Hodgson (2006) some misunderstandings within institutional economics on the proper meaning of an institution arose with North’s (1990) contribution to institutional economics. North defines institutions as the rules of the game, whereas the rules have to be interpreted as institutions and the players as organizations. Hence an organization, according to Hodgson (2006, pp. 9–13), is not an institution in North’s framework, because it is treated as a single agent, due to North’s ambitions in investigating the macroeconomic consequences of institutional change on an aggregated level. Nevertheless an organization has to be considered as an institution as well, because it is also involved in a continuous process of deliberation and rule-design. Organizational routines reflect the institutional setup of an organization. ‘Organisations are special institutions that involve (a) criteria to establish their boundaries and to distinguish their members from non-members, (b) principles of sovereignty concerning who is in charge, and (c) chains of command delineating responsibilities within the organisation’ (Hodgson 2006, p. 18). Furthermore we are confronted with misunderstandings concerning the terms formal and informal or legal and non-legal, codified and tacit. It is difficult to argue whether an institution is still informal or already formal, since this twist

68

Institutions – generic heuristics

depends on the heuristic device5 used in order to imagine or envisage it. Hodgson proposes that these distinctions are very ambiguous and arbitrary, thus they should be either handled with intensive care or should be simply left out. For instance an organization is a special institution because it has a strong aspect on human agency, organizational behaviour and routines. Without doing too much violence to the relevant literature, we may define institutions as systems of established and prevalent social rules that structure social interactions. . . . Institutional economists in the Veblenian tradition, and modern and original pragmatist philosophers, argue that institutions work only because the rules involved are embedded in shared habits of thought and behaviour. (Hodgson 2006, pp. 2, 6) Economists have different heuristic devices in mind when they define institutions. They work with different ideas of shared habits of thought, behaviour, beliefs or imaginations. This notion makes institutional economics a challenging but fascinating interdisciplinary field of research. Of course Veblen focused on other socioeconomic procedures of economic evolution than Schumpeter or Hayek. Bourdieu emphasized the very nature and reason of art and science for socioeconomic reproduction for instance. The early evolutionary economists looked into institutions shaping consumption and production as well as the distribution of knowledge in society and economy. The latter represents a possible source for synergy between them, because it is dependent on habit or habitus formation and, moreover, because it produces inequality and therefore power relations. That is why we argue for institutions as social learning vehicles in the heuristic dimension of generic institutionalism. In particular we refer to two complementary heuristic frontiers, the Veblen–Bourdieu (Chapter 6 and 9) frontier shaping the theoretical bounds about durable social structures due to cumulative causation for the Hayek–Schumpeter (Chapter 7 and 8) frontier on the creative power of human agency restricted also by local naturalized knowledge. These frontiers provoke a modular interpretation of evolutionary institutional heuristics within an extended framework of the generic rule-based approach in Chapter 10. As already articulated in the introductory lines, this matrix offers a perspective discussion on power relations within institutional change, with regard to the destructive as well as creative potential of transformation in the economic system, discussed in Part IV – Chapter 14. Synchronization, coordination and correspondence of rules and institutionalized rule-modules shape the evolving political economy by distributing knowledge and power in consequence.

6

Veblen heuristics

Thorstein Veblen (1857–1929) was an extraordinary and outstanding American economist; unfortunately his works do not receive sufficient attention in economics today. Many evolutionary economists associate the birth of their discipline with Veblen’s institutional economic theory, insofar as they often refer to his most prominent article ‘Why is economics not an evolutionary science?’ (1898). Veblen’s article represents a warning to the community of economists at the end of the nineteenth century. He claimed the significant role of anthropological and evolutionary thought for the economic science. The men of the sciences that are proud to own themselves ‘modern’ find fault with the economists for being still content to occupy themselves with repairing a structure and doctrines and maxims resting on natural rights, utilitarianism, and administrative expediency.. . . Economics is not an evolutionary science – by the confession of its spokesman; and the economists turn their eyes with something of envy and some sense of baffled emulation to these rivals that make broad their phylacteries with the legend, ‘Up to date.’ (Veblen 1898, pp. 374–375) Veblen was rather harsh with his contemporary economic fellows, but made an important point. A hundred years later statements like these from Veblen’s article do still reflect the nature of economic science. For Veblen, economics has to be an evolutionary science about the cumulative causation of human habits of thought, a science about the motives of economic action. Habits are considered as situated and emerging out of the past. As an early evolutionary scholar in the social and economic sciences he also pointed out that evolution is not a teleological process. Veblen was a central figure within American institutionalism. His focus was primarily on society, technology and cultural evolution within an institutional concept of cumulative causation. Therefore we locate Veblen’s heuristic conceptions of institutional change within the greater picture of American institutionalism and discuss the institutional thought of Commons and Mitchell as well. For these purposes we refer to Reuter (1996) and Hodgson (2004a). Then we focus on Veblen’s emphasis on technology, habits and the machine process as an institutional anchor in the economy and its link to labour via the instinct of workmanship.

70

Institutions – generic heuristics

American institutionalism Three major developments shaped the evolution of American institutionalism, which can be identified with the philosophy of American pragmatism; the development of the institutional method as a critique of the neoclassical method; and institutionalism as a critique of capitalism. These three pillars shape the semantic triangle of institutionalist critique in practice. American pragmatism The era of American pragmatism is associated with the philosophy of Charles Sanders Peirce (1839–1914), who can be considered as its founder, William James (1842–1910) and John Dewey (1859–1952). Pragmatism introduces a diff ferent philosophical picture in comparison to the European tradition. Continental philosophy in the nineteenth century was still shaped by the idea of ideal truth and ideal humanity. The American pragmatist position offers a more problemfocused approach to truth and human development. Pragmatism is a philosophical school which is about the effects or consequences of things, instead of the pure identity of them. Those notions are recognizable in Peirce’s pragmatist maxim formulated by Peirce in ‘How to make our ideas clear’, an article published in 1878. ‘Consider what effects, which might conceivably have practical bearings, we conceive the object of our conception to have. Then, our conception of those effects is the whole of our conception of the object’ (Hookway 2008). The maxim of pragmatism is not focusing on ideal truth but on clearness, by reducing the meaning of a question to its experimental consequences. The pragmatism of James and Dewey used the notion of habit to articulate the dynamic or practical character of an idea. The habit makes the idea clear, whether it is true or false, building upon Peirce. Pape (2004, p. 7) explains that the Peircean system of thought is extremely complex and that his philosophy is radically incomplete. This notion deals with the fact that Peirce reconsidered his findings again and again: he never stopped developing his systemic thought further and delivered continuously ever-new system designs. Thus Pape (2004) argues that one can understand Peirce’s philosophy best by looking through the lens of logical idealism as a subset of objective idealism. Since this kind of logic is essential for Peircean philosophizing, building upon the principle of learning by experience. However, logical idealism offers in this respect a perspective to understand the seemingly contradictory themes of Peirce’s work, semiotics, pragmatism and evolutionary metaphysics. Therefore Pape (2004, p. 10) considers the success of Peircean philosophy within a synthesis of idealism and pragmatism. From a philosophical perspective we argue that the philosophical counterposition of pragmatism is rationalism, where the counterposition of idealism is materialism. Following Pape (2004, pp. 11–12) pragmatism is a theory giving priority to human agency (understood as the capability of a human being to act) for a philosophical understanding of the world. As a consequence one can

Veblen heuristics 71 develop pragmatism alongside materialism as well as idealism. The Peircean pragmatism relates idealism to the logical structure of concrete agency and its goals, which deals with the recognition of truth, according to Pape (2004, p. 13). Agency is only possible if there is a sufficient ‘fixation of beliefs’, via the method of tenacity, authority, congruity and science (compare Slater 2011, p. 15). Theoretical thought aiming for truth can only be explained via its relation to action, then. In this respect action and consequently agency earns a logical role, because it familiarizes a certain thought-independent reality which can be mobilized only via the actual condition for the action itself (compare Pape 2004, p. 13). Furthermore this kind of pragmatism is only expressive if there is a reflection about the intention of certain actions. This early American pragmatism seeks for a theory of clearness alongside consequential action. In actions, thought takes on concrete meaning. This process suggests the attempt or trial of thought as a procedure of learning by experience. Intention and purpose is relevant only within a concretization of thought which faces reality. Thus it is not surprising that Peirce neglected the Cartesian dualism and favoured a metaphysics of evolution. Peircean metaphysics is innovative and something novel, because it regards the evolutionary principle as an essential component for process thinking. Evolution is the universal process which generalizes the thesis of process in a cosmological sense (compare Pape 2004, p. 144). Even the natural laws are subject to evolution. Following Peirce’s pragmatism there is an anthropomorphism of change in behaviour. This anthropomorphism suggests that the common ingredient of biological life and the life of mind is reflected by their self-generating character. This means, in particular, that past action and idea may become habit as well as mindset constitutive for future actions or ideas (compare Peirce 1998, p. 52). The bimodality of living mind and matter expresses itself along the evolution of habits in order to establish sufficient self-control. The notion of self-control is necessary to retain structure in a sufficient way in the presence of continuous change. Obviously Peirce was also interested in advancing scientific method in general. We regard the principle of abduction as a major innovation within the scientific inference. In his writings on logic and scientific method he presents his perspective on induction, deduction and abduction. Induction stands for an inference procedure which starts with a random sample (particular real phenomenon) and derives generalizations for a whole population of phenomena. With deduction we mean inference where particular cases are derived from a generalized proposition in advance. Then abduction resembles the area of an educated guess or of a conjecture, which can be understood as a kind of probable argument from sample to population or vice versa, but the crucial point of a conjecture is about probability. Peirce’s scientific methodology builds upon these three basic principles of logic as phases. Scientific inference begins with abduction (stating a conjecture with regards to a specific observation), then follows deduction (conclusions are drawn and hypothesis is stated) and at last comes induction (hypothesis is tested and generalized). Therefore pragmatism is also regarded as a general ‘technique to respond on questions, solve problems and clarify terms’ Reuter (1996, p. 75)

72

Institutions – generic heuristics

Whereas William James and John Dewey advanced this pragmatist tradition and elaborated especially on the role of habit for societal change as a dispositional system (compare James 1890 and Dewey 1958 [1925]), William James’s scientific domain included also the realms of psychology and physiology, in contrast to Peirce. Reuter (1996, p. 75) clarifies that the pragmatists have not only focused on concreteness, but also on a relativistic picture of truth, which was more elaborated by Peirce’s followers James and Dewey. Truth, in the sense of James, is something which practically fits, in the sense of the best adapted or sufficient truth, in an evolutionary view. In the semiotic tradition truth is a matter of scientific interpretation and not of scientific discovery. Furthermore the mediation of truthful reality represents a process of trial and error, an evolutionary process. Dewey advanced pragmatism towards a more instrumentalist perspective. In his studies on education and democracy he refers to the experimental character of policy. Dewey (2008 [1916]) assigned democracy as the most basic evolutionary process in society, it reflects the idea of pragmatism in a bottom-up way (I write more on this issue in Part IV, Chapter 18). Dewey’s picture of pragmatism can be regarded as the most influencing philosophical foundation of the institutional economics of Veblen, Commons and Mitchell. Finally we may summarize some crucial points for the significance of pragmatism for institutionalism. •

•

•

•

Pragmatism denies historical processes as necessities, hence it believes in a free will of human beings. Then human beings are able to shape society and economy via their own criteria. The question of truth does not have any practical value for pragmatists. It is reduced to a question of practical consequences. The enhanced goal is to analyse and explain possible solutions for real-world phenomena in society and economy. Therefore it is necessary to focus on empirically ascertainable realities. Expressions about reality are true, if they solve problems in society and economy; else they have to be revised. A pragmatist theory has to co-evolve with reality. Hence a pragmatist theory has experimental properties and is open to new problems, experiences and insights. Science is therefore an instrument for action. The possibility of better founded insights increases via the capabilities and willingness of society to participate in the epistemological process. Therefore democratic discourse, participatory responsibility and participative management are in the centre of the theory. (following Reuter 1996, pp. 80–81)

Development of the institutional method The question of what is the institutional method or what is institutional methodology is floating like a ghost ship through academic circles. The new institutional economics (NIE) still denies that the old institutionalism (OIE) worked along

Veblen heuristics 73 any kind of scientific method, on the contrary OIE is considered as antitheoretical. Ronald Coase, Nobel Laureate for his theory of the firminstitutionalism and his works on externalities in 1991, considers American institutionalism thus: ‘The American institutionalists were not theoretical but antitheoretical (. . .). Without a theory they had nothing to pass on except a mass descriptive material waiting for a theory, or a fire’ (Reuter 1996, p. 99, citing Coase). As many other evolutionary and institutional economists have argued this point is unacceptable, arrogant and irreverent. But it goes on somewhere else: The phrase, ‘the new institutional economics,’ was coined by Oliver Williamson. It was intended to differentiate the subject from the ‘old institutional economics.’ John R. Commons, Wesley Mitchell, and those associated with them were men of great intellectual stature, but they were anti-theoretical, and without a theory to bind together their collection of facts, they had very little that they were able to pass on. (Coase 1998 p. 72) These quotations indicate the narrowness of the neoclassical doctrine and confirm Veblen’s (1898) introductory statement, that economics is somehow resistant to scientific innovation, even a hundred years later. It is this kind of thinking which dominates economic academia and it is also this kind of thinking which has not gained any insight from the past Methodenstreit. Furthermore we may argue that neoclassical economists tend to think that even institutional settings have to be explained within a corset of individually utility-maximizing representative agents, without any social context. If the modeller insists on transaction costs as the one and only social context, the modeller will lose a major component of economic change, namely the environment – culture, society and nature. The NIE transaction cost approach is misleading, because it is compound of pure individualistic agency, neglecting the status and the development of the economic system in space and time. Coase’s theorem suggests that economic externalities are internalized via market allocation within the price system, if just the transaction costs are minimized. But even if transaction costs run directly towards zero, there will still be human boundaries, like cognitive capabilities or personal animosities, making transactions costly in a natural way. Two issues have to be raised with regard to the transaction–cost-approach. At first there is the issue of solution. Neoclassical economists think in terms of problems, which necessarily commands analytical solutions. Considering the applied methodology, every problem must have a concrete and foremost explicit formal solution in closed form. Institutional change cannot be explained via clear-cut technical solutions, we can only provide heuristic hints for regulation. Institutional problems are complex, they evolve, they do not stay constant over time and they change from within, because agents as well as the environment change too. The second issue deals with the public and the common. It sounds fancy when technocrats have elegant, tidy and prosperous solutions for societal

74

Institutions – generic heuristics

and institutional concerns. It sounds even more impressive when these solutions do not need any democratic legitimization, when the problems are solved by the participants of the specific market on their own. Social, political and economic problems need democratic intervention as the pragmatists have suggested. Hardin (1968) articulates this problem in a short and easy-to-read piece of work, although it shows the extreme naïvety of humankind regarding their belief in solving social dilemmas with mere technical and mechanistic concepts. However, Hardin’s market-based preference does not help in this situation either, since common-pool resource problems are of a different nature and may get solved via cooperative individual strategies as well as via the establishment of common rule systems (compare Ostrom 2005a, p. 131). This notion represents one of the most central aspects we can learn from institutional economics for a whole range of community problems. In our day (though not in earlier times) technical solutions are always welcome. Because of previous failures in prophecy, it takes courage to assert that a desired technical solution is not possible. Wiesner and York1 exhibited this courage; publishing in a science journal, they insisted that the solution to the problem was not to be found in the natural sciences. They cautiously qualified their statement with the phrase, ‘It is our considered professional judgment. . . .’ Whether they were right or not is not the concern of the present article. Rather, the concern here is with the important concept of a class of human problems which can be called ‘no technical solution problems,’ and, more specifically, with the identification and discussion of one of these. (Hardin 1968, p. 1243) Hardin identifies the most critical issue of social, economic or political problems. There is a class of human problems which can be identified as nontechnical-solution problems. Such problems involve public or common goods and they are simply not treatable by societal engineering and market allocation; they have to be tackled via the state or via some community – a democratically legitimized body of control. Hardin (1968) refers to population growth as a specific member of this class of problems. It is true, by remembering the Malthusian trap, that population grows geometrically/exponentially. It is also true that people will lack food and resources in a finite world at some point in time. Now such a problem cannot face any technical solution, without changing the premises. The major problem is that a certain class of scientists still thinks that problems have to be solved by holding factors constant, considered a ceteris paribus solution. Obviously the greater amount of human problems will not be solvable in pure analytical terms. Only a criterion of judgment and a system of weighting are needed. In nature the criterion is survival. Is it better for a species to be small and hideable, or large and powerful? Natural selection commensurates the

Veblen heuristics 75 incommensurables. The compromise achieved depends on a natural weighting of the values of the variables. Man must imitate this process. There is no doubt that in fact he already does, but unconsciously. It is when the hidden decisions are made explicit that the arguments begin. The problem for the years ahead is to work out an acceptable theory of weighting. Synergistic effects, nonlinear variation, and difficulties in discounting the future make the intellectual problem difficult, but not (in principle) insoluble. (Hardin 1968, p. 1244) This whole issue is about heuristics, semantic and synthetic bottom-up programming of evolutionary economic programs by taking institutions serious. It is not about a closed-form solution within an analytical model or about a specific analytical method, which Coase denotes as ‘theoretical’. Hardin’s hint on a natural theory of weighting appears to be a familiar idea of what we elaborate here. The old institutionalists – Veblen, Commons, Mitchell – have established a welldefined framework, in order to capture the characteristics of institutional problems. Confronting a problem needs sufficient understanding of its nature and its development. If climate change is treated within a pure market allocation setup, we will get flooded faster than we may solve the optimization problem. Realism does not necessary mean pessimism. It is sometimes important to admit fallacies and boundaries of our human capabilities in face of institutional problems, but this does not necessitate giving them up in resignation. Within such a pragmatist perspective we may manage to better understand the full nature of institutional problems, which may lead us to more workable, practical solutions, instead of technical/analytical ones. The core concept of the old institutional method remains in the notion of situational embeddedness. Hence it is in the institutionalist’s interest to analyse specific societal situations and historical paths leading to these situations and moving away from them. The institutional context of a situation is the outcome of a cumulative process of causation, it is therefore necessary to investigate the milestones of this cumulative causation, in order to understand the stability and fragility of an institutional setting for instance. Otherwise it is necessary to understand this cumulative process as an evolutionary one. As we have sufficiently discussed in the previous part of the book, it means a major switch in the social sciences from mechanistic towards evolutionary concepts. This is also true for the American institutionalists: they have followed the ideas of the pragmatists and moved on from theory of static situations towards theory of dynamic processes. The old institutionalism focuses on empirical material and tries to understand its underlying dynamics, societal and agency’s forces shaping institutional contexts along cultural, social, economic and political needs and wants. Veblen (2000 [1899]) has introduced a new methodological perspective into economics which turns around holism and evolution. According to Reuter (1996, p. 105), Veblen focuses on the why and how questions of changes in the economy, instead of asking about what premises lead to the perfect outcomes.

76

Institutions – generic heuristics By formulating hypothetical historical reconstructions based on his principles of social action and institutional transformation, Veblen creates a heuristic construction that serves as a formula for observation and analysis of what he finds to be the essential meaning of existing behaviour. This gives to his work a critical style, but also a depth of analysis that is a degree of predictive validity. (Weed 1981, p. 67)

Weed, as well as Reuter (1996), constitute the major success of Veblen’s method in his style of hypothetical historical reconstructions. Veblen (1899) reconstructs the evolution of the modern industrial society by starting with hunter–gatherer societies who behaved in a very instinctive way. These instincts became culturally inherited over time and do still influence contemporary consumption patterns, as can be shown empirically via conspicuous consumption, for example. The formulation of theories of social institutions have often employed some sort of heuristic device that plays the role in the theory of pointing, by analytical comparison, to the underlying properties of social change. These heuristic devices represent abstract analytical descriptions where certain processes or principles of social relations can be represented in an unambiguous way. Some of the best known of these devices are the ideal type and the cybernetic model. The purpose of these devices is not so much to account for the relationships found in a particular body of data, but rather to provide us with analogies and metaphors which serve as a framework for comparative description and analysis. Thorstein Veblen uses one of these formulations, the hypothetical historical reconstruction, in his evolutionary theory. (Weed 1981, p. 67) Weed shows that hypothetical historical reconstruction is part of an institutional method based on cumulative causation. Additionally, Weed emphasizes the importance of using heuristic devices as abstractly guiding models or scientific strategies. He shows that institutional theory, in particular, needs such heuristic devices as anchor points for their approaches. Hence this position vindicates the concept of introducing different institutional theories along their heuristic devices, within this part of the book. Where Veblen’s approach is holistic, evolutionary and even sometimes genetic – therefore analytic – Mitchell refers more to the policy side. His expectations in economics are functional rather than descriptive. Wesley Mitchell insists that economists should participate in economic policy making. ‘[W]e shall at least be helping on that long process of trial and error by which mankind is striving towards control over its own behaviour’ (Reuter 1996, p. 109, citing Mitchell 1937). Mitchell also imagines the economic system as a continuous process of trial and error, hence with an evolutionary perspective. Albeit he treats economics as an evolutionary science, he does not try to build an evolutionary model for real

Veblen heuristics 77 economic processes. His emphasis on evolution differs from Veblen in a very important notion. Veblen concentrates on the long-run cumulative processes in society, from a system–theoretic position. Instead, Mitchell focuses on political potential in the evolutionary idea, the potential of trial and error in contrast to the religious idea of pure truth and absolute policy. This perspective enables the possibility that human beings are able to interfere with the system, that we can shape it along our own interests. It is even more than that, Mitchell recommends giving your own policy, so-to-say, a try. Mitchell refers to Veblen as an economist who is in search of real, actual economic behaviour, instead of trying to project behaviour on what people would do if the orthodox premises are reached. Veblen (. . .) chose to reason out human behaviour. (. . .) he sought to explain actual behaviour, not what men will ‘normally’ do; his conclusions are supposed to conform to ‘facts’ and to be open to testing by observation in a directer fashion than are most expositions of ‘economic laws’. (Reuter 1996, p. 110, citing Mitchell 1937) Nevertheless Mitchell was critical that Veblen’s world is admittedly stimulating but also, on the other side, speculative. His universe of thoughts awaits validation, as Mitchell outlines. Hence he felt responsible, as Veblen’s student and friend, to fulfil this validation. ‘He [Mitchell] wanted to swim and not to wade, to explore and not to turn round and round on a small piece of arid land’ (Reuter 1996, p. 111, citing Schumpeter 1950). Mitchell claimed more realism in economics. He was frustrated by the orthodox deductive and speculative system of thought. Therefore his destiny seemed to refer to Veblen’s legacy, in order to change the dominant orthodoxy towards more empirics, which also means to introduce more and more statistical testing towards economics. Empiricism was something completely new in economics in this period. Concerning this issue, Mitchell refused the idea of one rationality, working in all human beings, and tried to avoid introspective studies of a one-dimensional economic agent, according to Reuter (1996, p. 113). He stresses the idea of institutional factors shaping real economic behaviour in a diametric way, shaping manifold rationalities. [T]o find the basis of economic rationality in the development of a social institution directs our attention away from the dark subjective realm, where so many economists have groped, to an objective realm, where behaviour can be studied in the light of common day. (Reuter 1996, p. 113, citing Mitchell 1937) Emphasis is taken on the importance of relaxing assumptions on strict subjectivism in economics. ‘Economic theory of the speculative kind is as cheap and easy to produce as higher mathematics or poetry – provided one has the gift. And it has the same problematical relation to reality as do these products of

78

Institutions – generic heuristics

imagination’ (Reuter 1996, p. 115, citing Mitchell 1937). Imagination is real, although it is fortunately suggested to weight economic, social and political decisions with empirical facts, rather than with pure imaginings. Mitchell’s life as an economist began with his work on the so-called ‘greenback studies’. The greenbacks were paper notes, functioning as a non-convertible currency during the American civil war. Mitchell’s emphasis on empirics launched his interest in business-cycle theory, his mistrust in the quantitative theory of money and his interest in a central institution providing knowledge/ information/data about economic processes. He was a founding member and year-long director of the National Bureau of Economic Research, still one of the most important economic institutions worldwide. Mitchell’s work on business cycles is still a masterpiece in economic history and can compete with the greatest economic works in the last 150 years. Wesley Mitchell’s practical, pragmatic institutionalism is not another declaration of war from the historical school towards the so-called pure theory. [I]n the social sciences (. . .) investigators get forward by expounding hypotheses that seem at a given time to be plausible, working them out, seeing to what consequences they lead and then modifying their hypotheses. That is to say, they go forward by the method of trial and error. The more things that they try that are at all plausible, the harder they try them, the more thoroughly they work them out, the faster they get through with their series of blunders and the more advanced lies the stage in which they are making their current blunders. (Reuter 1996, p. 123, citing Mitchell 1937) Mitchell’s economic paradigm stands for synchronicity of the quantitative and the qualitative, the empiric and the theoretic, the inductive and the deductive research. ‘The more economists learned, the deeper grew their conviction that they must know the whole economy in order to understand any part’ (Reuter 1996, pp. 124–125 citing Mitchell 1937). Contrary to Mitchell’s rather broad empiric conception of economics John R. Commons developed a different but familiar perspective of institutional methodology. Commons was intensively involved in political tasks, negotiating with different societal groups. He was convinced that new insights from practical political life should be introduced immediately into theory. Commons’ theory of so-called ‘formulas’ was a contrary program to Max Weber’s Idealtypen, instead they were something like Realtypen. Instead, therefore, of a fixed ideal type which Weber names an utopia and which, indeed, becomes more utopian if it remains fixed as we proceed with our investigation, we have a changing Hypothesis, taking in new factors or retiring old ones, always seeking to make less utopian the utopias which our minds construct. Thus theory becomes, not only a mental process for investigation of facts, but becomes also an interpretation, correlation, expectation

Veblen heuristics 79 of facts. In short, theory becomes a different meaning of Weber’s ‘understanding’ – not the pedagogic meaning of fellow feeling, but the pragmatic meaning of insight on which we predict and act. (Reuter 1996, p. 127, citing Commons 1936) Commons persists on his formulation of theory, a holistic perspective as well. The real types change over time according to the whole, but the whole itself is just a configuration of developing patterns, as Commons (1936) addresses. Nevertheless it is often argued that his thoughts are muddled and difficult to decipher, because they mostly refer to general holistic issues, rather than concrete subsystems of society, like politics or culture. In consequence Commons’ institutionalism is very close to the pragmatists’ foundations of Dewey. It is designed as a process-oriented, problem-confronting theoretical toolkit, which shall adapt to the environment continuously. Critique of capitalism Veblen, Commons and Mitchell, as institutional pioneers, have known too well that the neoclassical paradigm in economics had nothing in petto to seriously fight economic crisis. More than this, they were all aware that crisis is a natural fact of any capitalist system. According to this premise, the institutionalists had something similar in mind as Marx’s theory of the evolution of capitalist societies, along their systems of production. But the institutionalists, with the exception of Veblen, had different consequences in their mindsets. For Marx, any capitalist production system has to break endogenously via its accumulation of crisis. The old institutionalism has different exit strategies for crisis. Crisis as an innate phenomenon of capitalist economic production systems (compare also the relation to the regulation school) just shows that there is a need for well-functioning institutions capable of stabilizing marketdriven overshooting leading to inequality. Veblen explains his criticism of capitalism along the historical development of humankind, in similar ways as Marx did. This theory of human development is articulated in Veblen’s (2000 [1899]) Theory of the Leisure Class, where he shows that in early phases of humankind people lived in original, peaceful and small societies. Then everything was changed with the rise of private property and equity, a phase of barbarism, as he called it. In fact, private property initialized competition among people. The production of goods and services let societies compete for surpluses, the owners of these surpluses could escape from the production processes (Veblen 2000 [1899], p. 49). Such development led to leisured or idle classes in the first instance and, second, towards conspicuous and wasteful consumption (ibid., p. 79). It is quite obvious that such consumption patterns demonstrate, establish and maintain the wealth and prosperity of just a few people in comparison to the working class. This development can be traced back thousands of years before the first industrial revolution; it evolved even before the machine economy. According to Veblen (2000 [1899],

80

Institutions – generic heuristics

compare also Reuter 1996, p. 159), capitalism evolved along following phases: • •

primal phase of peaceful social life: no private equity, weak competition, group solidarity barbarism: private equity, competition and egoism • predatory-martial: open fighting, ‘man vs. man’ • seemingly-peaceful: more subtle forms of fighting → demonstrative waste and conspicuous consumption • époque of craftsmanship • modern machine époque, i.e. modern capitalism

We can specify that Veblen does not conceive capitalism as something prosperous or inviting, on the contrary capitalism represents barbarism for him. Hence conflict and crisis have to be the dominant terms concerning the analysis of capitalism and its development. The problem of capitalism, indicated by Veblen (2000 [1899]), manifests in its unilateral characteristic of modes of consumption or different modes of taste (more on this issue in Chapter 9 on Bourdieu heuristics). Veblen shows that goodwill, sympathy, a sense for fairness or other ‘prosocial’ characteristics of human beings are not helpful in such a system; he insists that it is rather the opposite case, namely that socially positive, or as it is contemporarily called pro-social or altruistic behaviour, is misleading in a capitalist economic system. For Veblen, there are simply two classes within capitalism. Similar to the capital versus labour class distinction by Marx, Veblen assumed a distinction between the industry and the business classes, where the former follows industrial and the latter pecuniary motives. Correspondingly Veblen shifted the perspective on a different level confronting the industrial with financial organization, between manufacturing and profit-seeking maxims, between the engineer and the businessman. Veblen elaborated on those two classes along different patterns of habits, instead of property relations, insofar as the wasteful consumption of businessmen was his main target. It is a question not so much of possessions as of employments; not of relative wealth, but of work. It is a question of work because it is a question of habits of thought, and work shapes the habits of thought. (Reuter 1996, p. 165 citing Veblen 2009a [1904], p. 348) The Veblenian class system has to be interpreted as complementary to the Marxian, instead of supplementary. Those who gain financial profits receive power and can cumulatively influence crucial political as well as economic decisions, which would not be advantageous for the manufacturing industry. He anticipated the dominance of shareholder value and financial capital over industrial organization. Veblen’s critique on capitalism works with cumulative causation of habits of thought. Capitalism is not understood as a periodic phenomenon; it is more a universal struggle of hunters and gatherers within ever-new facets,

Veblen heuristics 81 which has manifold cultural outcomes in manifold cultural environments. Modern capitalism represents modern slavery of machines and workers servicing them in this outline. Therefore institutions shape the conditions of social value in an evolutionary manner. Veblen heuristics consider human-beings with an intrinsic instinct of workmanship. This instinct emphasizes the creative potential of manufacturing and in general of productivity.2 Production, work and labour are essential characteristics of value within human evolution. In hunter– gatherer times private equity had not existed, because production was for the best of the group. In conclusion individual benefits were subsumed by benefits for the group. Production had a specific societal function, commodities were not meant to reflect status in the first place; consider also the perspective of stakeholder value today. Property rights changed social life tremendously within an institutional perspective. Along the new role of property the instinct of workmanship changed and exaggerated in individual and foremost competitive races for status. Mere property evolved cumulatively, independent from actual material production/work. Sooner or later the institutionalization of property became a natural right. The ultimate ground of validity for the thinking of the business classes is the natural-rights ground of property, – a conventional, anthropomorphic fact having an institutional validity, rather than a matter-of-fact validity such as can be formulated in terms of material cause and effect; (Reuter 1996, p. 163 citing Veblen 2009a [1904]) Veblen emphasizes that people started to compare each other on symbolic grounds than on mere produced or crafted matter; such a notion reflects the onesided rise of wealth and prosperity as a typical institutional property of capitalism. Along the rise of modern industrial productive forces, consider the invention of the steam machine and the railway: this institution completely changed the modern world. The institutional method investigates and explores different patterns of economic habit: consumption, investment, production and saving in order to visualize the cumulative evolution of patterns in socioeconomic life, which may be called institutions. Veblen showed that private property rights in combination with industrial production enabled wastefulness as a specific characteristic of capitalism. Institutionalism needs to entail a critique of capitalism, therefore. Considering pragmatist thought again, criticism of the economic system is not necessarily pessimistic, it is an essential part of social learning within the political economy. A modern democratic society is capable of shaping the institutional environment of capitalism. The instinct of workmanship tempts members of the industrial class (engineers and workers) to imitate members of the business/leisure class (financial capitalists). This imitating process reflects Veblen’s model of cultural inheritance along habits of thought. The industrial class tends to consume the same wasteful commodities as the leisure class. It is a trickle-down process of tastes and preferences, similar to Bourdieu’s trickle-around model.3 Veblen’s trickle-down model of consumption

82

Institutions – generic heuristics

patterns is also associated with the Veblen-effect in standard economic literature. Lower-class members consume products and services which the higher/leisure class members consumed a certain period before. Of the three of Commons, Mitchell and Veblen, Veblen was surely the most pessimistic institutionalist. His business-cycle theory focuses greatly on depression and crisis, which is initialized via supply-side effects. Even if his businesscycle theory was not that prominent, he anticipated the important role of expectations, uncertainty, money and credit as the dominating factors, as it is the case in Keynesian, Hayekian or Schumpeterian approaches. The profit-seeking pecuniary interests of the business class lead to crisis, as his dualistic (business– industry) perspective of society suggests. Economic expansion is driven by productivity and increases variety in certain economic sectors. This aspect leads to increasing prices and consequently to increasing investments in production in other sectors, because overall demand increases and expectations for higher profits increase. These expectations play the crucial role in the business cycle. We know that such optimistic expectations may outplay high risk on the macro level and can invoke bubbles. Bubbles rise with an increase in investment goods which leads to further increases in prices on the whole macro level. Then, according to Veblen as well as Mitchell, these expected payoffs are calculated too high. Extensive orders are set and an enormous number of credits are issued with a good hope in future that interest rates may not rise. Due to the fact that prices rise faster than wages, rents and interest rates, the business class receives high payoffs (inflation payoffs) in the short run. Consequently with rising wages, rents and interest rates these payoffs decrease thereafter and expected long-run profits are overestimated. Then economic depression comes in when costs cannot be covered anymore, because of a too-optimistic picture in the first place. Along a cumulatively increasing pessimism recession is starting. Veblen then follows that depression is chronic in capitalism ‘depression is normal to the industrial situation under the consummate regime of the machine, so long as competition is unchecked and no deus ex machina interposes’ (Reuter 1996, p. 170 citing Veblen 2009a [1904]). According to Reuter (1996) we may follow that Veblen’s interpretation of how crisis and chronic depression can be assigned to the set of overproduction theories; whereby Veblen conceives overproduction as a monetary phenomenon. It is due to increasing prices that suppliers cannot sell anymore. His overinvestment theory is therefore comparable to Hayek’s treatment of the business cycle, albeit the rise in investments has other causes there (compare Hayek 1931). The key lies in the savings of households in Veblen’s account. However Veblen’s only exit strategy for chronic economic depression lies in the benevolence of planning by a strong and efficient expert leadership of economists, technicians and engineers.4 This notion represents a rather devastating point in Veblen’s work. Commons and Mitchell needed to ignore Veblen’s technocratic position and offer a democratic solution its place. Capitalism cannot be reformed for Veblen, not with the state and not within the rule of law.5 Therefore, considering his political perspectives, he was a true Marxist.

Veblen heuristics 83 On the contrary, Commons favours a more optimistic picture of capitalism. Commons emphasizes that society runs in the wrong direction if the individual is more important than a social structure. He considers the reasons for crisis in this relationship. Furthermore Commons argues, according to Reuter (1996, p. 177), that market participants do not necessarily have the same rights. This is a crucial notion, where contemporary political dialogue is still involved. The opinion that the market is a democratic institution is simply wrong, because the idea of freedom and property have changed tremendously since the industrial revolution. Commons argues that workers, especially, are discriminated against due to changing institutional factors of law and of property. In fact these factors still change a lot and show his critique as quite contemporary. Commons argues within an evolutionary perspective. In his view the market does not create a fair distribution of wealth; hence there is a need for democratic balancing within institutions. This leads to a conflict-centred perspective of economics, instead of a harmonic one, which is still propagated by market fundamentalists today. In the neoclassical paradigm the market distributes interests in a harmonic way, creating compromises; rather, the opposite is true, it creates inequality between different fields, classes or groups of society. Commons associates a solid institutionalism as the only possible strategy within capitalism. Commons was especially concerned with the development of property and freedom as constituent factors for individual action. This notion becomes recognizable in his studies on American property law and its gradual changes. Property evolved from physical (tangible) to intangible property; everything with exchange value can be possessed. Commons has shown, according to Reuter (1996, p. 180), that the most significant change in property rights came alongside the growth of big industries, where owners have the right to withhold instead of just hold. It was the initial possibility to withhold necessary goods from certain social groups, which changed the conditions. These new circumstances, in American courts, led to tremendous lagged disequilibria in power relations among negotiating parties. This lag emerged due to fast economic changes, enterprises changed from small- and middle-size to big industries; workers and their unions, and their rights, were left behind. Commons concludes that such changing power relations drive economic crises. The American government therefore endeavoured to compensate for these differences with occupational health and safety measures. Commons was sure that property as well as freedom rights should change due to new circumstances, contrary to the idea of natural right and natural law. Property and freedom are both social innovations and not something metaphysical. Conclusively there is no such thing as a nomological institutionalism. On the contrary, property and freedom are socially emerging properties of human interaction. This notion is quite close to Hayek’s analysis of the evolution of rules of conduct as emerging law, as we will discuss in more detail in the next chapter. Commons also refers to the difference of liberty and freedom in this respect.

84

Institutions – generic heuristics Liberty, as such, is only the negative of duty, the absence of restraint or compulsion. But ‘freedom’ is positive. (. . .) Freedom is power. It belongs to the ‘freeman’ (.. .). It is power to call on the officials to make one’s will effective (Reuter 1996, p. 184, citing Commons 1924)

Therefore we need well-functioning institutions, which on the one hand allow individual freedom and on the other, restrict property rights, in order to get at least similar pre-conditions for all people. Such circumstances can only be achieved through democratic collective efforts. In Commons’ perspective, capitalism does not solve socioeconomic problems on its own; additionally it does not ‘naturally’ produce fair order. Hence in a capitalistic system it is necessary to permanently fight for fair order within continuous collective interference with the law and with the economy. Capitalism can only prosper if all participants are somehow emancipated, without any exceptions. This can also be seen as some Leitmotiv of institutional thought, the nature of social learning by experience. Mitchell’s institutional critique of capitalism represents the prototype of the institutional method, which is grounded in his business-cycle theory. It is somehow surprising that Mitchell’s analysis is massively influenced by Veblen’s institutional investigations as well as by Schumpeter’s business-cycle theory. These circumstances gain even more importance if one considers that Schumpeter expresses himself very clearly on Mitchell’s business-cycle theory. Schumpeter made this especially recognizable by introducing the theory as seminal work on business cycles in two articles – ‘Mitchell’s business cycles’ (1930) and ‘Wesley Clair Mitchell (1874–1948)’ (1950). Mitchell was one of the first institutionalists looking for recurring patterns in the business cycle. Therefore, he observed the most dominant contemporary theories and tried to categorize them according to prevailing economic factors driving crisis and expansion. This endeavour let him conclude that economic events in cycles come and go in very complex manners at a first glance, according to the amount of different and conflicting theories of business cycles. Mitchell offered an interesting and very instructive categorization of businesscycle theories, as represented in Table 6.1. Mitchell clarified that a convincing business-cycle theory needs to incorporate three factors: physical, emotional and institutional factors as causes for boom and bust by connecting theory, statistics and history. Additionally he was pretty sure Table 6.1 Mitchell’s overview of contemporary business-cycle theories Physical

Emotional Institutional caused by endogenous changes caused by normal functions of in institutions institutions

Jevons

Pigou

Schumpeter

Source: table drawn according to Reuter (1996, p. 188).

Veblen, Lederer, Spiethoff, Hansen

Veblen heuristics 85 that the real causes for cycles lie in the monetary sector, as Veblen also insisted. This assumption stems from the idea that money is not just a tradable good – as it was originally anticipated – instead money is something which can be actively produced via credit in an institutional perspective (more on this issue in Part IV, Chapter 17). Hence there is always a trade-off between making money or commodities, which still reflects the problem today. According to Reuter (1996, p. 190) we may summarize Mitchell’s main hypothesis on business cycles thus: the economy gets subjected to fluctuations of expansion and crisis as more and more people get involved with either mere money business or profit-seeking. Mitchell was interested in the influence of organizations and institutions onto entrepreneurs’ expectations and behaviour in the money economy. In this respect Mitchell also refers to Simmel’s 1900) Philosophy of Money. Furthermore Mitchell conceives the problem of economic crisis according to Veblen’s criterion of usefulness of goods. Both criticized the ongoing production of goods for the business enterprise. Mitchell’s – central for his business-cycle theory – investigations of price fluctuations due to cycles showed that prices do not change in the same manner. Changes occur in response to institutional factors, which then represent incentives for higher or lower profit expectations for the entrepreneur in the money or goods economy. Cycles are tremendously dependent on the habituation and organization of trade-unions in wage negotiations of diverse sectors. It is due to the cumulative character of such systemic emotional changes in the economy, that it comes to crisis or expansion. It is epidemic, in his words; what is called herding behaviour 100 years later. Such herding may systemically change major directions of the economy. The world of business is a system comprising numberless independent enterprises, bound together by industrial, commercial, and financial ties. For the continuance of prosperity it is indispensable that a certain balance be maintained among the fundamental processes that constitute the activity of this system. (Reuter 1996, p. 194 citing Mitchell 1913) Along these imbalances, expansions in the economy may end in depression. Such conditions led Mitchell to the idea that there is a need for some economic planning elements in order to minimize uncertainties and increase general societal trust. More transparency of economic processes on the macro level can also minimize the risk for epidemic outbreaks. It is important to note that cycles are not necessarily caused by ‘mere’ economic factors, there can also be environmental as well as social or political reasons. Mitchell’s results of his businesscycle theory confirm Veblen’s considerations that a capitalistic economy necessarily drives into crisis, if it is not regulated. In conclusion we may argue that the institutional method is a heuristic device to identify socioeconomic and sociopsychological elements which can moderate capitalism, preventing it from driving against the wall. This aspect of institutional thought is present in Veblen’s and Commons’ as well in Mitchell’s work.

86

Institutions – generic heuristics

Instinct, habit and technology The following section deals with Veblen’s most crucial associations according to cultural evolution as a heuristic device shaping institutional change. These works include The Instinct of Workmanship (2009b [1914]) and The Theory of Business Enterprise (2009a [1904]). Veblen (2009b [1914]) refers to a naturally selected instinct of human beings which drives creativity and productivity; this instinct influences significantly technological change and economic growth on the macro level, due to cumulative effects. Furthermore Veblen thought that technological change shapes the habits of thought and consequently culture by the use of machines as productive slaves. Both issues, but especially the role of the machine process, which is elaborated by Veblen (2009a [1904]), have to be observed very critically. As Hodgson articulates, the interconnection of instinct and habit reflects the institutional method at best. But a second point is also of vital significance. It is a central tenet of the pragmatist philosophical and psychological perspective to regard habit and instinct as foundational to the human personality. Reason, deliberation and calculation emerge only after specific habits have been laid down; their operation depends upon such habits. In turn, the development of habits depends upon prior instincts. Instincts, as typically defined, are inherited. Accordingly, reconstitutive downward causation upon instincts is not possible. (Hodgson 2004b, p. 657) In consequence reconstitutive downward causation works on the level of habit. Habit is thereby understood as a dispositional component of human behaviour and intention. Hodgson (2004a, 2004b, 2007) and Hodgson and Knudsen (2004) claim that instincts and habits are the foundational elements of the emerging human mind and therefore of institutional change. The human mind operates after habits are laid down within an emergent process. Thereby habits gain significant value, since they are not inherited like instincts but culturally transmitted. In this respect they are subject to reconstitutitve downward causation. With regard to pragmatism it is convenient to argue that habit shapes the concrete character of an idea, following also the notion of bimodality. However habit is not only influenced by instinct, but also by affect, f as Spinoza and his modern interpretations in Gilles Deleuze, Félix Guattari and Brian Massumi have shown, compare Deleuze (2010 [1968]), Deleuze and Guattari (2010 [1980]) and Gregg and Seigworth (2010). Affect theory needs to be understood as complementary to the pragmatist notion of representation by habit. Semiotics is essential for a conceptualization of social learning, but there are affective elements of experience which go beyond rhetoric and semiotics: these characteristics are investigated in affect theory. If learning by experience is substantive for pragmatism, it needs an extended framework around the significance of human affect. The process character of the human

Veblen heuristics 87 mind, which connects thought with reality, depends on habit as well as affect, both underlying behaviour. Certainly this difficult issue is not something which is solved overnight, but we may assume that the components for emergent reason are manifold and probably not reducible to a single one. In consequence we probably need to reject the idea of habit as a cultural replicator and moreover the existence of a cultural replicator in general. But this short excursion indicates that the habit–affect–thought research frontier opens a huge universe for further investigations for a more elaborate bottom-up theory of institutional change. Hodgson remarks that the Veblenian perspective of instincts is very closely related to ‘the alleged dichotomy of pecuniary and industrial motives.’ Hodgson (2004a, p. 195). Orthodox economists usually assume that economic agents are labour-averse or averse to useful efforts, i.e. hedonistic. Veblen was suspicious whether this assumption may fit into the greater picture of human evolution at all. If such an aversion to useful effort is an integral part of human nature, then the trail of the Edenic serpent should be plain to all men, for this is a unique distinction of the human species. A consistent aversion to whatever activity goes to maintain the life of the species is assuredly found in no other species of animal. Under the selective process through which species are held to have emerged and gained their stability there is no chance for the survival of a species gifted with such an aversion to the furtherance of its own life process. If man alone is an exception from the selective norm, then the alien propensity in question must have been intruded into his make-up by some malevolent deus ex machina. (Veblen 1898–99, p. 187) Veblen argues that it is misleading to believe that an activity, like working, can represent an intrinsic aversion, due to following reasons. On the one hand the instinct of workmanship initialized the evolution of human beings from primates6 and generated stable and growing populations of the human species through the development of culture and language over thousands of years on the other hand. Working is a necessary condition for the survival of humankind, hence why should human beings build a consistent aversion towards it? Veblen’s argument works rather contrary. In contrast, hundreds of thousands of years of human evolution must have led to the selection of some propensity to engage in work that was useful for survival. This is the basis of his idea of an ‘instinct of workmanship’. (Hodgson 2004a, p. 196) Neoclassical scholars may argue that such aversion originated in modern capitalism, in the course of industrial revolution, where capitalism was increasingly dominated by the money economy. But even in a capitalist system with

88

Institutions – generic heuristics

pecuniary interests something material has to be produced in order to sustain social welfare, something industrial. This is the point where the machines come in. Furthermore this Veblenian dichotomy reflects his strict societal separation in business and industry, making money and making goods. It may be followed that grabbing money and seeking profits dominates industrial production. Here Veblen’s strong pessimism comes out with regards to capitalism, driven by cumulated reconstitutive downward causation. He anticipated certain cultural traits as major threats for the prosperity of mankind, because they harm potentially institutional structures. Otherwise pecuniary incentives, emerging out of a selective process of capitalism, somehow undermine its own capitalist foundations – industrial production. As well as the obvious parallel here with Marx’s position, note also the similarity with Schumpeter’s (1942) claim that a contractarian system undermines its necessary culture of devoted service, and K. Polanyi’s (1944) similar proposition that markets are corrosive of the social fabric. What is distinctive about Veblen’s argument, however, is its Darwinian framework of evolutionary selection. (Hodgson 2004a, p. 197) Veblen emphasized that capitalism leads to the selection of pecuniary attributes rather than productive ones. Nevertheless Veblen also made some categorical mistakes. [A]ny species could evolve a ‘consistent aversion’ to energetic activity, as long as a compensating productive activity was triggered when survival was at risk. Veblen overlooked both compensating inducements to work, and consequently a possible reason for an aversion to labour to evolve. (Hodgson 2004a, p. 199) To this extent, we have to consider Veblen’s analysis as incomplete regarding the evolution of the instinct of workmanship as a main propensity of economic behaviour, shaping institutions. Veblen simply ignored potential compensation for productive forces. Hodgson (2004a) further criticizes that Veblen also underestimated the role of social institutions as a driving force for workmanship. It may be followed that socially coercive power represents a better interpretation of workmanship than the instinct. Then, in an evolutionary context, the selection criterion would rather work on a social whole – understood as an emerged institution – than on an individual instinct, which is of high importance for an evolutionary theory of cultural change. Hodgson therefore suggests replacing Veblen’s instinct of workmanship with the concept of an institutionalized propensity to provision for human needs. The latter propensity is far more general and is able to explain the origins of human survival via productive efforts in a more comprehensive way. ‘Institutionalized’ implies that there were instincts in the beginning, but then cultural innovations compensated them in special ways, as for

Veblen heuristics 89 instance advocated in the division of labour. Therefore we may conclude that such an argument may only work on cultural species, where instincts can be compensated via social structures, such as institutions. Veblen’s concerns on pecuniary interests in the economy included the threat of corruption in political affairs. Modern (civilised) institutions rest, in great part, on business principles. This is the meaning, as applied to the modern situation, of the current phrases about the Economic Interpretation of History, or the Materialistic Theory of History. Because of this settled habit of seeing all the conjunctures of life from the business point of view, in terms of profit and loss, the management of the affairs of the community at large falls by common consent into the hands of business men and is guided by business considerations. Hence modern politics is business politics, even apart from the sinister application of the phrase to what is invidiously called corrupt politics. (Veblen 2009a [1904], p. 153) Today the business sector can be compared more or less with the financial sector. Financial institutions dominate political issues, even in times of crisis. Veblen’s story is about crashes initialized by new habits of thought in different communities – like wasteful habits and conspicuous consumption. New institutional settings create new financial/business products and demand stems from novel habits. The habits of thought as well as social practices need a counterpart to virtual, pecuniary interests, focusing on real, social interests. Institutions may change accordingly to regulate chronic financial over-shooting. The lesson of the institutionalists is that institutions need changes from within society, boosting or enforcing economic policies. Additionally it is not an issue of duality, nor of mere pecuniary or mere productive interests. The pecuniary interests enable innovations as well, which covers a great part of the Schumpeterian story discussed in Chapter 8. Innovations are essential components for the creative economic production. The characteristics of innovation within institutional change demand balancing evolutionary criteria in the economy. Innovation does not imply that the machine process makes us mechanically operating machines. Veblen’s analysis of the machine process went too far in these concerns. In short he attested that industrial production with machines invoked the capitalist habits of thought. He makes it clear in the beginning of The Theory of Business Enterprise. The scope and method of modern industry are given by the machine. . . . The scope of the process is larger than the machine. In those branches of industry in which machine methods have been introduced, many agencies which are not to be classed as mechanical appliances, simply, have been drawn into the process, and have become integral factors in it. (Veblen 2009a [1904], pp. 1, 3)

90

Institutions – generic heuristics

Machines determine the cornerstones of modern industrialized life; they even infected other non-industrial parts of economic processes with their logic. Veblen’s interpretation of the machine process is grounded in one of his philosophical problems, according to Hodgson (2004a, pp. 206–224). As a Kantian he believed that everything in life has causes, nevertheless these causes cannot be solely interpreted with scientific methods. Universal causation cannot be directly derived from experience, it needs presuppositions. The Kantian says that causation does not have any objective reality, causation rests in our minds. Hence also Veblen thinks that a principle of causation needs a metaphysical postulate, because causation itself is not provable. In Veblen’s terms it is the machine which creates a new ontology, a capitalistic ontology. The machine assigns us new presuppositions, namely that everything is matter of fact. As a consequential problem the machinist ontology leads to positivism; it instructs that there is no need for metaphysical assumptions anymore. However, there cannot be any science without any presupposition about the object, which has to be investigated. Veblen builds upon another dialectics, between matter-of-fact validity and institutional validity. This antithesis creates a doomed picture of capitalism, as also Marx and Schumpeter anticipated; a self-destructing property of capitalism. Veblen even titled his last chapter of the Theory of Business Enterprise: Chapter 10 – ‘The natural decay of business enterprise’. Broadly, the machine discipline acts to disintegrate the institutional heritage, of all degrees of antiquity and authenticity – whether it be the institutions that embody the principles of natural liberty or those that comprise the residue of more archaic principles of conduct still current in civilized life. It thereby cuts away that ground of law and order on which business enterprise is founded. . . . But the future of business enterprise is bound up with the future of civilization, since the cultural scheme is, after all, a single one, comprising many interlocking elements, no one of which can be greatly disturbed without disturbing the working of all the rest. In its bearing on the question in hand, the ‘social problem’ at large presents the singular situation. The growth of business enterprise rests on the machine technology as its material foundation. . . . The institutional basis of business enterprise the system of natural rights – appears to be a peculiarly instable affair. (Veblen 2009a [1904], p. 215) Concluding with Veblen therefore means that machines destroy institutions by homogenizing the social world, metaphorically speaking. A machinistic ontology creates matter-of-fact validity in comparison to a social/naturalistic ontology creating institutional validity. Veblen attempted to establish his presuppositions of universal causation and Darwinian evolution on the basis that they themselves were a historically contingent product of the machine age. His implicit metatheory included the proposition that such preconceptions are historically specific. But Veblen’s

Veblen heuristics 91 metatheory is itself universal and hence does not fit into Veblen’s own historically contingent scheme. An internal contradiction appears. (Hodgson 2004a, p. 215) Veblen misconceived the role of the machines. Clearly technology involves our lives and creates new socioeconomic circumstances, but it does not create or impute ontological presuppositions of how we may perceive the world and consequently reason. Here we can respond with modern critical realist or naturalist attempts nowadays, as robust ontological positions, instead of technological determinism. Within this broad, modern realist tradition, it has been demonstrated that it is possible to establish key ontological presuppositions that are consistent with the possibility of scientific enquiry. Within the more prominent versions of modern realism, the choice of presuppositions is not merely a matter of individual imputation, as Kant would have it, but disciplined by the recognition of a world beyond our senses, in which events are subject to causes and laws. (Hodgson 2004a, p. 215) Veblen wanted to show that the machine process undermines our understanding of causality, by so doing it changes society’s habits of thought. Nevertheless, as Hodgson (2004a) explains, working with or on a machine cannot influence the worker’s kind of reasoning, the notion of causality. The worker may only learn the specific mechanisms of the machine by operating it. There is another example Hodgson raises that contradicts Veblen’s materialistic explanation of the machine process. According to Veblen (2009a [1904]) the machine process engages a strong material determinism in society concerning explanations for and of causality. The US as one of the greatest industrial nations worldwide is also a very religious nation. If we take Veblen’s story of the machine process seriously, US citizens should be more secular as they in fact. are The same issue counts for the scientific process in the US. The US’s universities and research institutions have the best standing worldwide, so science is a significant pillar of the whole economy. However, Veblen misconceived that industry and business are not strictly separable. There will not be any factory without any management plan, accounting system or money calculus, this is simply not possible. Industrial interests have to be served by organizational matters as well, which are assumed. In conclusion Veblen was right by explaining the influence of technology, especially the machine process, on our culture, insofar as his explanations on cumulative cultural change as a heuristic device for institutions are outstanding, but as he moved to the example of industrial organization, he overestimated the effects of technology on our own habits of thought.

Instinct, cognition and learning Cordes (2005) sheds light on the cognitive issues and their relations to instincts, habits and institutional change. He presents an analysis of the cognitive

92

Institutions – generic heuristics

foundations of the instinct of workmanship, which is backed up with new insights from the growing neurosciences. Major importance is given to the differentiation between the biological aspect of innate instincts, the neurological aspect of cognition and the socioeconomic aspect of habits of thought, along the lines of the instinct of workmanship. Cordes (2005, p. 3) explains that human behaviour is influenced by ‘the impulse of instinctive factors and the drive to conform habits’, whereas Hodgson’s (2004a) analysis shows that Veblen was ultimately looking for a universal connection between instincts, habits and technology. Cordes focuses on the cognitive dimension of Veblen’s heuristics with respect to learning. The development and introduction of new technology may eventually, cumulatively and unintendedly, entail a change in the basic pattern of life and economic environment, ultimately leading to the development of new habits of thought that possibly come to replace the established habits and institutions. (Cordes 2005, p. 3) Two basic ideas are positioned. First, it is the notion of development and technology that matters. It is emphasized that the emergence of new technology may lead to changes in the institutional setting, but also to the further development of an existing technology. Second, these changes influence cumulatively new habits of thought. Cordes (2005) follows from Veblen that human instincts can invoke innovations, ‘in Veblen’s theory, the evolution of institutions is conditioned by the material circumstances and by the innate propensities of human nature’ (Cordes 2005, p. 4). Veblen’s major concern was to understand why workmanship vanished seemingly after the rise of the machines, i.e. the industrial revolution. This is a question of how the instinct of workmanship influenced continuously economic culture and economic institutions over centuries. Veblen’s answer is grounded in production as a social activity according to Cordes. The expression of workmanship in a production process is determined by two factors: first, it is the pecuniary interest of the business running the industry – degree of profit; second, it is the amount of machinery used in the production process. This expression also influences the degree of cooperativeness during a production process, because it controls the division of labour. It is evident that production processes change over decades; now Veblen argues that these changes imply changes in the degree of workmanship. Further the degree of workmanship – expression of the instinct – within an economic culture produces regularities over time, i.e. cultural or economic evolution. Hence Veblen wanted to provide an evolutionary theory of cognition, in a very broad sense. This was impossible to do concerning the status of cognitive and psychological theory in his time. Cordes rethinks these concepts according to new insights from the cognitive, neurological and psychological sciences. There is profound evidence that the human brain has specialized circuits for reasoning and learning instincts, which represent the most archaic regions of the brain. These different

Veblen heuristics 93 modules work semi-autonomously and were separated due to evolutionary pressures, according to new findings in neurogenetics and cognitive neuroscience; here Cordes quotes Pat Levitt and Alfonso Caramazza. Additionally these basic modules, for reasoning and instinct, are somehow genetically influenced. Caramazza suggests that the human mind organized according to evolutionary adaptations; certain pressures were dedicated to special brain mechanisms. This research also investigates the origins of humankind, concerning the use of tools/ artefacts, or in Veblen’s terms even the instinct of workmanship. Neuroscientists are able to show that the innovation of tool-using created a special domain in the brain, responsible for technical intelligence. It is further argued that the most basic learning capabilities, in the sense of adaptation, of biological lifeforms could not host such cognitive complexity of reflectively7 using an artefact or a tool. For that reason: ‘Specialized cognitive processes and capabilities were required for creating mental templates, planning sequences, and mental rotations of artefacts’ (Cordes 2005, p. 7). Furthermore neuroscientists found experimental evidence for such special brain domains or categories and correspondingly we may identify information structures near to the primary sensory and motor areas of the brain, which are activated when an object is acquired. Evidence has shown that these areas especially – information structures – are accessed when a manipulative object is identified by a testperson. It is even more astonishing in this context that research in the field of neuroscience found such regions in the brain and has already tried to decode the mechanisms which are exceptionally necessary for learning from other individuals. Cordes (2005, p. 8) allocates to these areas and mechanisms the capability of cultural transmission of knowledge. Learned habits operate as filters of experience, then. In an evolutionary selective way these adapted filters prefer perceived information, according to current significance. These neuroscientific investigations can be regarded as cognitive foundations for the motivational importance of instincts and habits driving economic action. Nevertheless the story expands when intelligence comes into play, a notion also emphasized by Veblen. In his terms, the natural selection of instincts during human phylogeny has provided man with a set of basic dispositions. In addition, the cultural heritage of habits and institutions, which has also evolved through time, is acquired by an individual during his process of socialization. In the course of habituation, habits of thought and behaviour are passed over from one generation to the next via various forms of cultural learning. (Cordes 2005, p. 10) The instinct of workmanship guides an act of deliberate choice also shaping expectations, whether rational or not. Cordes (2005) follows that an individual’s acquired culture is a product of socialized learning or social transmission that is constrained by evolved domain-specific properties. That is a notion which was made very prominent by Boyd and Richerson (1980). In their evolutionary anthropology they observe that the process of cultural transmission is not neutral

94

Institutions – generic heuristics

towards the behaviour being transmitted. This can be regarded as a major and basic insight in the theory of cultural evolution. Social learning is strictly dependent on the individual’s dispositions or expressions emerging from innate instincts and habits of thought and is therefore conditional on heterogeneous prerequisites. Especially the instinct of workmanship falls into a category where human beings have strong domain-specific mechanisms in the brain, i.e. heterogeneity within the brain, governing knowledge as an evolving complex adaptive system for itself. These filters and selective properties of the brain initialize creativity and provoke novel interpretations. Albeit there is a complex set of complementary components involved in economic action, the instinct of workmanship remains a never-to-be-underestimated bias for institutional change. The emphasis on the interdependences of instinct, habit, cognition and even affect for an operable human mind give attention to the significant role of social learning within evolutionary institutional economics. Veblen heuristics characterize social learning as a central ingredient for evolutionary economic programs, because it instructs about the procedures of cultural, societal and economic bottom-up programming in the capitalist world. Therefore it is not only the notion of conspicuous consumption, the institutional method or the instinct of workmanship which identifies American institutionalism, but moreover the encouragement for political engagement and controversy within this logic. These are theoretical items which are essential for a generic institutionalism.

7

Hayek heuristics

F.A. von Hayek (1899–1992) was a diverse and highly controversial economist. His writings range from the economic analysis of capital and money, his business-cycle theory, methodological subjectivism in his early years, to the psychological and sensorial analysis of knowledge, to his sociophilosophical writings on societal evolution in the 1960s and 1970s, where we may also identify a climax within his research. This section on Hayek heuristics deals mostly with Studies in Philosophy, Politics and Economics (1967) and his writings on Law, Legislation and Liberty. But before we dig deeper into his evolutionary theory of institutional change we take a look into the motivations and origins of Hayek heuristics by examining briefly the economic struggle between Hayek and Keynes, which somehow dominated Hayek’s whole intellectual life. Hayek was an exact and dedicated writer, Wapshott (2011) even calls him a ‘punctilious logician and dogged contrarian’. However his work experienced a mystification with the rise of neoliberal politics. Hayek is regarded as the godfather of neoliberalism today, with reference to his book on The Road to Serfdom written in 1944 and his founding role within the Mont Pelerin Society. Even at this point he followed his introverted, scholarly and sometimes naïve habitus, felt deeply ashamed and made a retreat in his autobiography: At about the same time, I discredited myself with most of my fellow economists by writing The Road to Serfdom, which is disliked so much. So not only did my theoretical influence decline, most of the departments [at the London School of Economics] came to dislike me. (Wapshott 2011, p. 209, citing Hayek’s autobiography Hayek on Hayek) k It is interesting to note that he was completely astonished as The Road to Serfdom was attacked in such a harsh way and that for good reason. Hayek was influenced by his Austrian teachers and peers, Carl Menger (1840–1921), Eugen von Böhm-Bawerk (1851–1914) or Ludwig von Mises (1881–1973). He started his intellectual career with a subjectivist picture of economic change; a hermeneutic outline of human action. We can also associate his business-cycle theory with this tradition. Hayek wrote his first major book after the Great Depression, developing his business-cycle theory.

96

Institutions – generic heuristics

Obviously his ideas on the economic dynamics of crisis and crisis management stood in complete contrast to the Keynesian conception (compare Steele 2001 and Wapshott 2011). Keynes (1883–1946) wrote the General Theory of Employment, Interest and Money in 1936. Monetary policies are considered to expand the monetary base heading for a consequential increase in aggregate demand as well as substantial investment in production. The Keynesian theory aimed at the regulative prerequisites for full employment by looking into capacity utilization. Hayek was looking for emerging order in free markets and emphasized the stability of prices. In the shadow of the Great Depression there was no other economic escape than developing a monetary theory preventing further economic meltdowns, leading into political turmoils. Steele’s (2001) gateway for a comparative analysis of their intellectual lives deals with their pre-analytical visions in a Schumpeterian meaning. Hayek and Keynes were both aware that complete information and perfect foresight are not adequate assumptions in an economic framework. Both dealt with uncertainty but in very different ways. Uncertainty gets institutionalized in the economy via the monetary system; currencies, sovereign bonds, interest rates and inflation indicate the macroeconomic notion of uncertainty. Accordingly to the household and the firm it is the wage and price level which influences broadly their saving and investment rate. Keynesian and post-Keynesian economists concentrated on the evolution of wages and investments as determinants for aggregate demand and the demand of money thereafter, whereas the early Hayek looked into the stability of the price system and articulated that it is cheap money (understood as money expansion) disturbing the trade cycle. The crucial point for Hayek heuristics in general is that even the early Hayek anticipated regular disturbances of equilibrium, i.e. disequilibrium (compare also Witt and Brenner 2008). This must be the aim of all theories which set out to explain disturbances in equilibrium which, by their very nature, cannot be regarded as immediate consequences of changes in data, but only as arising out of the development of the economic system itself. (Hayek 1933, p. 101) Some years later Hayek analysed the structure and function of national monetary systems enabling these disturbances in his view. He conceived monetary intervention, in particular expansion, as the origin for disturbances in equilibrium. Hayek (1989 [1937]) argues that central banks need to get denationalized. His argument deals with the stabilization of the international money system. This complex structure, which is often described as the one-reserve system, but which I should prefer to call the system of national reserves, is now taken so much for granted that we have almost forgotten to think about its consequences. . . . In the first place I would emphasize that bank deposits could never have assumed their present predominant role among the

Hayek heuristics 97 different media of circulation, that the balances held on current account by banks could never have grown to ten times and more of their cash reserves, unless some organ, be it a privileged central bank or be it a number of or all the banks, had been put in a position, to create in case of need a sufficient number of additional bank notes to satisfy any desire on the part of the public to convert a considerable part of their balances into hand-to-hand money. . . . I shall try to show that the existence of national reserve systems alters the mechanism of the international money flows from what it would be with a homogenous international currency to a much greater degree than is commonly realized. (Hayek 1989 [1937], pp. 12–14) In these thoughts we may already identify Hayek’s later concerns regarding the denationalization of money, arguing for a free market of private money. Hayek and his fellow Austrian economists argue for a free and private banking system capable to catalyse the ‘healthiest’ currency. The late Hayek (1976a) argues that there is no need for a central bank anymore, or any governing structure monitoring and controlling money flows. Money has to be spontaneous and denationalized, whereas Keynes’ agenda headed up for the complete opposite, focusing on the possibility of an international or global central bank system with just one global currency. His original idea for the Bretton Woods conference in 1945 was to introduce the ‘Bancor’ as a global currency. Where Hayek wanted to get rid of all monopolies in the most radical way, Keynes emphasized the technical and analytical capabilities of skilled macroeconomists monitoring, shaping and designing the capitalist world via intervention and regulation at least in the short run. In the following some anecdotes are given indicating their political economy perspective or in Steele’s (2001) words their pre-analytical visions. Keynes on capitalism: the decadent international but individualistic capitalism . . . is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuous – and it does not deliver the goods. In short we are beginning to despise it. But when we wonder what to put in its place, we are extremely perplexed. (Steele 2001, p. 27 citing Keynes’ National Self-Sufficiency) Keynes on liberalism: It is the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice. . . . For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experience as well as of tradition and of fancy, it is the most powerful instrument to better future. (Keynes 2008 [1936], p. 380)

98

Institutions – generic heuristics

Hayek on laissez-faire: while the presumption must favour the free market, laissez-faire is not the ultimate and only conclusion. (Steele 2001, p. 26, citing Hayek (1933), ‘The trend of economic thinking’, Economica) We have no longer even a generally understood name for what the term ‘free system’ only vaguely describes. Certainly neither ‘capitalism’ nor laissez-faire properly describes it; and both terms are understandably more popular with the enemies than with the defenders of a free system. . . . Laissez-faire was never more than rule of thumb. It indeed expressed protest against abuses of governmental power, but never provided a criterion by which one could decide what were the proper functions of government. Much the same applies to the terms ‘free enterprise’ or ‘market economy’ which, without a definition of the free sphere of the individual, say little. (Hayek 1973, p. 61) At least some commonality within their work deals with the recognition that the locality of knowledge and its continuous change is the essential issue in economic theory. In correspondence these two seminal but immensely diametric scholars recognized the fundamental role of institutions in economic evolution, a notion which is so often neglected or misunderstood today. Moreover they conceived institutional processes as shaped by human beings and not by Homo œconomicus. Hayek treats the notion of limited, but evolving knowledge in The Sensory Orderr (1952) and Keynes treats the issue of uncertain knowledge in the ‘Treatise on probability’, published in 1921. Furthermore both of them shared an aversion to utilitarianism in economics. Steele (2001) emphasizes that the differences within their philosophical homes, between hermeneutics and realism, can be regarded as the main source of their theoretical struggle. Probably this ontological clash added fuel to the fire. Till today these two philosophical streams of thought shape the rivalries between Austrians and post-Keynesians. The ontological divide between Austrians and post-Keynesians underpins an age-old controversy over man’s place in nature and the rival notions of human free will and determinism. Where Austrians emphasise the capacity of individuals to change the course of events, post-Keynesians emphasise the organic structure of an economic system whose parameters constrain individual action. Since post-Keynesians argue that those societal parameters can be changed through the exercise of a political will, the debate turns on the manner in which an individual may affect the destiny of himself and others. (Steele 2001, p. 168)

Hayek heuristics 99

Spontaneous order Hayek’s most crucial concerns in defending and promoting a theory of spontaneous order are grounded on a pronounced aversion to constructivist theories of human life. Hayek (1967) distinguishes principally between human action and human design. In this respect he takes very radical positions, in order to dissociate himself from constructivist schools of thought. He argues that social institutions are not the result of human design, but rather emerge along complex human interaction. Then Hayek (1978) stresses the notion that he does not criticize social or political potential to create or design something deliberately per se, but rather concentrates first on the origins of human enlightenment. The argument concentrates on his strict separation of natural and artificial. Descartes had taught that we should only believe what we can prove. Applied to the field of morals and values generally, his doctrine meant that we should only accept as binding what we could recognise as a rational design for a recognisable purpose. (Hayek 1978, p. 5) This emphasis on purposeful rational design – understood again in relation to absolute truth from a different perspective than the prior discussion on pragmatism in Chapter 6 – involves a narrow perspective of human agency. Experienceable truth concerns more than mere rational purpose. Hayek argues implicitly that trustworthiness is not only a matter of formal, hard-coded institutions, which are purposely constructed. Trust is rather intrinsically dependent on informal institutions, such as social learning via rules of conduct. Hayek argues that rational constructivism – addressing a strict dichotomy of the natural and the artificial – exaggerates an overemphasis on authoritarian belief. In this respect Hayek finds very critical words regarding Rousseau’s social contract: ‘The belief in the unlimited power of a supreme authority as necessary, especially for a representative assembly, and therefore the belief that democracy necessarily means the unlimited power of the majority, are ominous consequences of this constructivism’ (Hayek 1978, p. 6). Further: What I want to show is that men are in their conduct never guided exclusively by their understanding of the causal connections between particular known means and certain desired ends, but always also by rules of conduct of which they are rarely aware, which they certainly have not consciously invented, and that to discern the function and significance of this is a difficult and only partially achieved task of scientific effort. (Hayek 1978, pp. 6–7) Hayek refers to the unintended properties of human action, which guide behaviour. These innate characteristics have evolved culturally, they frame human behaviour and they constrain human will and choice. These rules equip economic

100

Institutions – generic heuristics

agents with the ability to act within a social order, or even to anticipate some kind of order. Human beings are able to establish social order along the cultural transmission of these rules. Hayek (1978) refers here clearly to group selection as a co-evolutionary mechanism for this transmission. This postulate stands contrary to a constructivist purposeful design of social order, i.e. individual selection of rules in his meaning. Hayek objected the teleological foundations within constructivism. In consequence he became a passionate promoter of evolutionary theory insofar as he shared the evolutionary epistemology of his Viennese colleague Karl Popper. Evolutionary epistemology serves as the blueprint for further explanations of the very existence of social order building upon interactive trial and error of rules of conduct. In Hayek’s view the rules of conduct carry and distribute knowledge within generations and from generation to generation. This point of Hayek’s institutional theory is essential because it connects the interactive complexity of rule systems with their role for the evolution of knowledge. A cultural selection process detects best-practice rules in space and time, thereby establishing order in a self-organizing way. It is a complex process of knowledge transmission via institutional carrier systems. Of course this story builds upon Hayek (1945), on the use of knowledge in society. Knowledge is transferred to locations where it is demanded, deriving a systemic perspective of knowledge which he compares with the price system. Social order can be interpreted in a similar way, where prevailing rules of conduct are transmitted through cultural inheritance within society. By this we may follow that Hayek pointed up the difference between purposeful design and emergent design along social learning. He claims that order emerges spontaneously in the context of learned and transmitted culture. This concept of order is different from constructivist rational design, which means also that it cannot get fully decomposed in scientific terms. Hayek’s idea of spontaneous order follows David Hume’s moral philosophy, elaborated in Hayek (1967). The Scottish tradition of moral philosophy sheds, too, more light on his specific conception of agency and methodological individualism. In contrast to the dominant opinion that there is just one methodological individualism, we have to propose a more differentiated perspective regarding this issue. Contemporary orthodox economics highlights the notion of rational choice of the human being as a utility-maximizing individual. This concept delivers the utilitarian roots for Homo œconomicus. Hayek attacked vehemently the rationality issue as well as the utilitarian notion of behaviour. The neoclassical conception of the economic agent suggests a purposeful rationality, i.e. constructivist human design. Hayek never defended a methodological individualism, as provided by Paul Samuelson or Gary Becker for instance. Hayek’s counter draft emphasizes especially an evolutionary interpretation of economic action, where human action is the result of learned and imitated characteristics. The main difference within Hayek’s naturalistic perspective is given by the historicity of the economic agent and the involvement within a cultural and social environment. Every formal institution has informal historical roots and is therefore a cumulative result of the history of human agency. This notion is especially considered by Hayek (1973, p. 8) in his writing on construction and

Hayek heuristics 101 evolution. The Hayekian evolutionary picture offers space for free choice, creativity and reason. Choice and reason are always considered in relation to their specific history of events; they are always bounded, framed and embedded in their evolutionary process. Knowledge is factually and permanently limited by the nature of the human body and its embeddednes in the environment, but it can be transmitted via institutional carriers from one location to another, spatially as well as temporally. For Hayek (1973, p. 35), there are two kinds of order: constructed order or ‘taxis’ and evolved order or ‘cosmos’. His trilogy on Law, Legislation and Liberty (Hayek 1973, 1976b, 1979), was considered an evolutionary theory of social order. For this purpose it was necessary to discuss the emergence of order as the most important foundational pillar. By ‘order’ we shall throughout describe a state of affairs in which a multiplicity of elements of various kinds are so related to each other that we may learn from our acquaintance with some spatial or temporal part of the whole to form correct expectations concerning the rest, or at least expectations which have a good chance of proving correct. (Hayek 1973, p. 36) Hayek’s order is about the continuity of social processes allowing for common expectations. Hence he criticizes that academia has focused more on a deliberate concept of order, founded on human design. This constructivist access to order repelled a lot of advocates from classical liberalism. Hayek was always in fear of an anti-emergentist concept of order. He associates the taxis with command and obedience and breaks therefore with the dogma that order can be just understood as forced from outside, representing a closed-system perspective. Hayek concludes that a framework of spontaneous order thus offers different and additional properties of continuity; properties which emerge endogenously during the formation process of an ordered state. Societal change is considered in flux. Hayek (1973, p. 37) notes that cybernetics, as the regulatory study of systems with feedback, was also an upcoming scientific branch focusing on emergent phenomena on a structural layer. The potential constructive power of a social environment gives rise to organizations in his terms, as a form of purposefully established order. Hayek’s distinction between cosmos and taxis reveals his categorization between institution and organization. In this respect Hayek also switches from ‘purpose’ to ‘function’. By that he means in particular that an order does not necessitate specific purposeful action of all the agents involved, nevertheless the order may establish some purpose endogenously; as a kind of function. The mechanism of organization is then understood alongside self-organization and Hayek articulates that it is not necessary to design institutions as a plot, but it is possible to arrange the conditions where order can evolve spontaneously. In this respect we can compare this notion with the ordoliberal outline of his former colleague in Freiburg, Walter v. Eucken. Ordoliberalism represents a mode of governmentality1 where

102

Institutions – generic heuristics

competition is enforced by a system of legal rules (ordos) to crowd out monopolies, as an expression of a (fundamental) principle of order. The proposed order acts as a principle and guarantees order from within, similar to the notion of eidetic2 order. Hence, such a cosmos strives for a complex path on the edge between chaos and order. Legal rules have to be established in a very sensitive way, correspondingly. Hayek (1973, p. 41) refers to the complexity of cosmos, then. Spontaneous order cannot be understood universally, but we can pick out particular rules of conduct and analyse them. It is therefore not proposed to understand the universal character of order, it is auxiliary enough to understand certain proxies or rules which condition the role of cosmos. The market order in particular will regularly secure only a certain probability that the expected relations will prevail, but it is, nevertheless, the only way in which so many activities depending on dispersed knowledge can be effectively integrated into a single order. (Hayek 1973, p. 42) Hayek admits that a spontaneous order will only produce common expectations to a certain degree; by that he means that the predictability is dependent on the degree of orderliness. Therefore order can only be understood as a multitude within society. Nobody has access to the complete information of this order with regards to dispersed knowledge. Hayek (1973) also admits that organization as designed order is probably the most powerful social technology that human beings have achieved, when he refers to government as the organization of the state. Furthermore Hayek argues that both systems of order (cosmos and taxis) are conditioned to different sets and conditions of rules. Therefore the next step in Hayek’s analysis focuses on the characteristics of rules which are able to establish such orders. This issue concerns the different usage of commands versus rules within an organization, where the latter may achieve ‘use of knowledge which nobody possesses as a whole’ (Hayek 1973, p. 48), whereas commands demand specific functions of organizational members in a linear way. An organization needs to have objectives. Hayek’s argument points at the impossibility of human will to purposefully establish spontaneous order. In his eyes it is impossible to replace spontaneous order with organization and vice versa. Hayek is concerned with law and liberty in co-evolution. Legal positivism always tried to separate law from liberty and conceived law as restricting freedom. Hayek introduces law in favour of guaranteeing liberal action. He classifies spontaneous order in comparison to organisms (as well as its misinterpretations) and organization. This relatively concrete character of the order of organisms shows itself in the fact that their existence as distinct wholes can be perceived intuitively by the senses, while the abstract spontaneous order of social structures usually can only be reconstructed by the mind. (Hayek 1973, p. 53)

Hayek heuristics 103 This distinction shows quite obviously what the human mind is capable of and what somehow transcends its capabilities. Both structures reflect organic selforganizing forces, mechanisms and functions, nevertheless only the cosmos is considered as truly organic. Of course Hayek does not say much about the diff ference between conventions and social orders. Modern interpretations of spontaneous order discuss the topic within game-theoretical terms, as Sugden (1989) initialized, Young (1996, 1998) and Aoki (2001, 2007) followed. Looking into Sugden’s (1989) attempt on order and rules we return to an issue already discussed in the Veblen heuristics, namely property. Sugden argues for an archetypical role of property in institutional theory. These archetypes emerge through conventions. In a spontaneous order a convention evolves to a rule, ‘the institution of property itself may ultimately be a form of order’ (Sugden 1989, p. 86). A convention is just one possible solution of a game, hence agents following conventions cannot be regarded as fully informed and consequently not as fully rational. Sugden refers to the normative issues in this respect and claims that welfare economics regards moral judgements just as overall judged constructions of welfare, consider also Sen’s (2010) distinction between transcendental and comparative institutionalism in this respect, discussed explicitly in Chapter 18. Such welfare functions within overall judged constructions work according to simple rational principles. The conventions which create order in a free society are supported by moral beliefs: people believe that they ought to keep to these conventions. But there is no independent principle of justice that provides a rational basis for these beliefs. (Sugden 1989, p. 87) Sugden means in particular that there cannot be an objective rational base for beliefs in conventions. For that purpose he refers further to a Hawk–Dove game defining a property dilemma. The dilemma is about who takes a common good into custody. The Hawk strategy is an aggressive/invasive one and the Dove strategy is a conciliatory one. In pure strategies the game looks as given in Table 7.1. If both players choose Dove, then the two players divide the common good equally. The specificity of the Hawk–Dove game is that it has two Nash Table 7.1 Hawk–dove normal form in pure strategies Player B

Player A

Hawk Dove

Source: Sugden (1989, p. 87).

Hawk

Dove

(–1, –1) (0, 1)

(1, 0) (0.5, 0.5)

104

Institutions – generic heuristics

equilibria in pure strategies (the asymmetric strategy pairs Hawk–Dove and Dove–Hawk), because of its anti-coordination characteristics, meaning in particular that the two players fight for a common resource, which is of rivalrous but non-excludable nature. The game has an additional Nash equilibrium in mixed strategies. Sugden (1989) introduces a signal as a pivotal element to circumvent the anti-coordination character; this element decides which player will be A or B and fixes their strategy. Player A plays Hawk and B plays Dove. These possible outcomes are pure-strategy equilibria, which Sugden describes as conventions on common property.3 The signal-rule takes over the real coordination task, because it is self-sustaining in stable equilibria, if the two players act differently due to a signal. Indeed, it is arbitrary that the players should use this particular signal to coordinate their behaviour: any signal that gave one label to one player and a different label to the other would serve equally well. Any such convention may be understood as a de facto rule of property. (Sugden 1989, p. 88) However, receiving the signal is sufficient enough for both players to recoordinate the game, which is about conventional information via an assignment rule. Both players benefit from applying to the convention, therefore the rule is self-enforcing in a Hayekian sense. The crucial point concerning rationality in this context is connected to the synchronicity of one-shot games, where rationality gets circular. We may argue as if there were unique rational strategies for both players. Sugden (1989) further explains correspondingly that it does not imply that a found Nash-equilibrium has to be uniquely rational. Hawk–Dove or Chicken games do not have a unique equilibrium, they have multiple ones. Therefore the argument has to follow the characteristics of the specified convention, which is in our case: ‘A plays Hawk and B plays dove’ (Sugden 1989, p. 89). A convention is consistent with rationality but not prescribed by it. In consequence rational choice theory does not suggest a specific strategy within the constraints of classical game theory in this special game, because these players are inexperienced, though super-rational. Sugden argues, that ‘ordinary people with limited rationality but some degree of experience and imagination might have no difficulty in coordinating their behaviour’ (Sugden 1987, p. 90). Hence games with multiple equilibria or even repeated games, which also do not have equilibria in pure strategies, provoke the players to establish a pivotal signalling or information structure of the game as a rule of thumb, especially in coordination questions. Otherwise players get trapped in infinite regress (compare Schelling 1960). Participants in a common-pool resource problem have to rely on internal models as well as on the creative potential of shared imagination to establish a top-level information structure. This potential assigns social learning a pragmatic role for the resolution of social conflict. Sugden (1989, p. 90) refers to common experiences in this respect. Of course shared imagination is more probable if we can speak of a common social history among

Hayek heuristics 105 the persons involved. The rules of conduct imply this notion in the terms of Hayek. Therefore we may conclude that a spontaneous order is favoured by social history, as a prerequisite for the evolution of institutions. Sugden (1989) shows that such conventions are not the product of human reason, but rather of creative socialized human action. Hayek (1976b) once explained that economics may not be the best term to explain the social learning processes involved in an economy. For a proper understanding of the character of this order [spontaneous] it is essential that we free ourselves of the misleading associations suggested by its usual description as an ‘economy’. An economy, in the strict sense of the word in which a household, a farm, or an enterprise can be called economies, consists of a complex of activities by which a given set of means is allocated in accordance with a unitary plan among the competing ends according to their relative importance. The market order serves no such single order of ends. . . . The term ‘catallatics’ was derived from the Greek verb katallattein (or katallasein) which meant, significantly, not only ‘to exchange’ but also ‘to admit into the community’ and ‘to change from enemy into friend’. . . . From this we can form an English term catallaxy which we shall use to describe the order brought about by the mutual adjustment of many individual economies in a market. A catallaxy is thus the special kind of spontaneous order produced by the market through people acting within the rules of the law of property, tort and contract. (Hayek 1976b, pp. 108–109) In this respect Hayek refers to a different concept of economy as we have in mind. The catallaxy represents a non-teleological moral community system with an order emerging from mutually adjusting individual economies in the market. It is a market system of law and spontaneous order. It may be interesting to compare this antiquated and naïve concept of catallaxy with the notion of a ‘moral community’ addressed in Hodgson (2012) for instance, also related to the notion of ‘community governance’ in Bowles and Gintis (2005) as discussed in the group-selection subsection. Building on this Hayekian terminology, Klein (1997) investigates the two diff ferent concepts of social order, referring to the economy as activities within the firm, the state and the household, as an order of conscious planning and referring to the catallaxy as a spontaneous order of an open society. He refers to Schelling (1978) and the study of emergent macro behaviour on the grounds of micromotives. Under such dependency macro-patterns arise without any macro-rule. Klein (1997) argues that Schelling indeed writes in tradition of Smith and Hayek, but with different terminology. Klein focuses on a distinction between two types of coordination, on the one hand he discusses emergent conventions associated with Menger, Schelling and the path-dependency literature and on the other hand spontaneous order as a distinct concept of social order associated with Smith, Hayek and Polanyi. Hence Klein locates synthesis in Hayek’s work

106

Institutions – generic heuristics

concerning the debate on social order, because he followed and admired Smith as well as Menger. Where Smith was more concerned with spontaneous order, Menger focused more on emergent conventions and left out the complexity of order. In this respect Klein also criticizes the prior elaborated work of Sugden (1989) as well as Arthur’s (1989) conception of path-dependency and lock-in.4 Sugden’s example of a coordination game involves a focal point, which is required to establish the coordination, because it is not possible to achieve a stable equilibrium within mere strategies, as already elaborated. Now, Hayek’s interpretation of spontaneous order goes beyond such a scenario. A two-player game can just point to the real complexity of spontaneous order. Hence there are two explanations for coordination, the former Schelling type of coordination indicates phenomena where people coordinate themselves in a reflexive manner, which has to be understood as a mutual process. The second understanding would imply an arrangement concerning a rational coordination. In the Hayek meaning, the concatenation of affairs in cases like the catallaxy is not actually coordinated by a Great Arranger, but, as Smith’s famous metaphor demonstrates, their idea of coordination is clarified by an allegory of the affairs being ‘led by an invisible hand’. (Klein 1997, p. 326) This is why Klein insists on ‘meta-coordination’ as the right term in the understanding of Smith and Hayek. The crucial point lies in the reflexivity of the participants involved. Reflexivity opens a spectrum between those two ideas of coordination. The convention hints at behavioural regularity in a social coordination problem, where the regularity represents just one possible equilibrium of the stated problem. The economic significance of conventions is that they reduce transactions costs. Imagine the inconvenience if, whenever two vehicles approached one another, the drivers had to get out and negotiate which side of the road to take. . . . Conventions are also a notable feature of legal contracts. People rely on standard leases, wills, purchasing agreements, construction contracts and the like, because it is less costly to fill in the blanks of a standard contract than to create one from scratch. (Young 1996, p. 105) Young emphasizes the feedback-loop characteristic of conventions, actually becoming rules, then. We may conclude that conventions play an important role in creating institutions in a spontaneous way. ‘Conventions are a manifestation of coordination, and, by providing a precedent, they are an aid to coordinate’ (Klein 1997, p. 328). Nevertheless the issue of social order is even more complex, social orders subsume conventions. Hence it is necessary to distinguish between coordination and meta-coordination. Here Klein (1997, p. 331) clarifies with a significant categorization (compare Table 7.2).

Good for MC (3)

Bad for MC (2) British/American system of weights and measures Chinese writing

Good for MC1 (1)

Common Law Gold standard

Good for MC (7)

Bad for MC (6) Tragedy of the commons

Good for MC (5)

Catallaxy Roller skating [in group] Common law creation

Bad for MC (8)

American winter clock setting

Bad for MC (4)

Notes 1 MC stands for metacoordination; cells (7) and (8) represent organizations in Hayek’s terms of taxis. The other cells do all represent institutions, but cells (5) and (6) are the only ones representing Hayek’s terms of cosmos.

Activities within the firm and Centrally planned economy other organizations

Planned order (taxis)

Spontaneous order (cosmos)

Metric system

Designed conventions

Designed

Emergent conventions

Source: reconstructed from Klein (1997, p. 331).

Social orders (Meta-coordination)

Conventions (Coordination)

Undesigned

Table 7.2 Typology of conventions and social orders

108

Institutions – generic heuristics

First of all, Klein states that Hayekians are mostly misunderstood when they speak about spontaneous order and conventions. They mean in particular that coordination can only be achieved by competition, but referring to metacoordination. The Schelling type of coordination represents something categorically different. It is not beneficial to establish artificial competition in a Schelling coordination, because it will have negative effects. The organizational body of a firm cannot be the result of a spontaneous order as well, it needs a certain hierarchy with a certain role allocation or division of labour, to coordinate its productive means for reasonable goals. Therefore we do not associate a firm with spontaneous order, it is only an institution in a more abstract sense. However the firm needs specific coordination as well, otherwise it would default; i.e. coordination in a more conventional way than social order within an explicit taxonomic rule setting and not an implicit one. Respectively, Klein (1997, p. 330) highlights that the Hayekian emphasis on competition is mostly misunderstood, because it is anticipated in a different context. When Hayek speaks about cosmos he proposes a metacoordination problem, which deals more with rules of conduct than with conventions. Klein’s (1997) typology of conventions and social orders focuses additionally on the separation of undesigned and designed coordination. For conventions, there is the further issue of whether the standard (or rule) was designed, such as the QWERTY keyboard, and whether its adoption or emergence as a convention was designed. My focus here is the emergence. Thus we say the QWERTY is an undesigned, or emergent, convention, even though it is a designed standard. . . . For a convention, the issue is whether it is good or bad for achieving metacoordination. The assessment is based on comparison with other plausible or relevant conventions, not with the state of affairs where there is no convention at all. For a social order, the issue is whether it is good or bad in achieving metacoordination. (Klein 1997, p. 332) The original complexity of conventions and social orders, their different interpretations and categorizations open a huge spectrum of possible social patterns, where Klein focused just on two of them. What is a strategy, what is a norm, all these topics invite more and more conundrums of social change. His critical perspective gives new insights into the treatment of coordination and the role of conventions in comparison to social orders. Hayek focused on the major distinction between natural and artificial, as we have already analysed. Albeit he criticized extensively the constructivist tradition, he himself used these terms also very misleadingly. For Hayek an organization is an artificial construction of deliberate human design. On the one hand a firm obviously is made on human purpose and design to follow certain goals, on the other hand a firm is still a natural entity like an institution. Even a centrally planned economy is something natural, it does not and cannot have an exact blueprint as a clock for instance, an example used by Khalil (1997, p. 309).

Hayek heuristics 109 Therefore artificial simply does not fit for something socially designed. Moreover in case of an organization the design focuses on hierarchical constraints and perhaps some modus operandi, but it cannot cover all actions of such a social structure. Still, organizational members develop routines according to the knowledge structure of the organization, which is not involved in a so-called blueprint or ‘Bauplan’. This notion reflects the inappropriateness of the word artificial in this context, because tacitness implies natural knowledge for instance. In this respect Khalil (1997) suggests an alternative or extended categorization for institutions, as Figure 7.2 shows in comparison to Hayek’s very simple schema given in Figure 7.1. Khalil (1997) looks for a deeper classification in this respect. For him the categorization in cosmos and taxis is of a different dimension than the proposed Hayekian dichotomy of natural and artificial, for the following reason. Hayek explains that the two types of order, either organization or self-organization are at the top level of this issue – i.e. natural or artificial – but Khalil explains that Hayek used this topology just for different types of institutions – i.e. nomos and thesis. Hayek distinguished nomos – ‘law of liberty’ – and thesis – ‘law of legislation’. Law of liberty reflects something generic, meaning in particular that there are rules and conventions which may generate laws of liberty, without any purpose or deliberate design, in a spontaneous way, i.e. cosmos. Whereas the law of legislation ascribes to a positivist or constructivist perspective of rules; they are positively constructed to purposely constrain liberal actions, which is a deliberate order – the taxis or the thesis. To summarize the issue at stake, the former conception of nomos/cosmos invites a legal, political and economic framework of institutions enabling liberty; the latter conception of thesis/taxis invites a legal, political and economic framework of institutions constraining liberty. Of course these two approaches to law and liberty need each other in a complementary way to establish something like social justice. Hence the Hayekian taxonomy of cosmos and taxis fits for the two different coordination sets of institutions and organizations, because they are social orders, therefore natural orders. Khalil (1997) is right by arguing that Hayek’s distinction between cosmos and taxis is not located within the same category. At

Phenomenon

Artificial (artifacts, deliberate organization or taxis)

Natural (market, cultural institution, selforganization or cosmos)

Figure 7.1 Hayek’s categorization of artificial and natural (source: reconstructed from Khalil 1997, p. 310, Table 2).

110

Institutions – generic heuristics

the end of the day cosmos and taxis just represent two of eight possible cells in the category of Table 7.2, in particular the two different meta-coordination states. Institutions can be more than social orders, there is still the realm of conventions and norms. Otherwise we have to talk about institutions only in the strict context of specific social orders, i.e. meta-coordination. For Hayek, rules and conventions are not institutions, but they enable potential emergence and evolution of institutions.

Rules of conduct and cultural evolution Human action is guided by rules of conduct. It is the individual who follows the rules and the society which evolves on their grounds. It is very significant to acknowledge (compare Hayek 1967, p. 44), that these rules of conduct just implicitly reflect the know-how of acting and not explicitly. He anticipated the methodological consequences and referred to Friedman’s prominent as-if argument: ‘(A being endowed with intellectual powers of a higher order would probably describe this by saying that the billiard player acted as if he could think.)’ (Hayek 1967, p. 44). This short note indicates the tautological and therefore sideshow character of Friedman’s example. Within a footnote he explains the core problem regarding explicity. Hayek postulates two statements in German, we translate them into English. First: ‘I know how to play tennis.’ Second: ‘I can play tennis.’ The first character knows the rules of the game and probably learned something about the technique literally, but perhaps the player cannot even hit a ball. The second one just knows how to play, by meaning that the player is capable of hitting the ball and playing the game. This example involves the difference of

Phenomenon

Artificial (artefacts)

Regime

Organization (deliberate firm and state)

Natural

Structure (purposeless market and its rules)

Institution (formal/informal conventions and paradigms)

Figure 7.2 Khalil’s extended categorization (source: reconstructed from Khalil 1997, p. 310, Table 2).

Hayek heuristics 111 codified and tacit knowledge, which we already discussed a bit in Chapter 1. Now if we refer to the as-if clause in neoclassical economics, it is simply not sufficient to model economic agents as iff they follow a certain formula. Human actions and rules of conduct will always be shaped by some implicitness which goes beyond the postulate of as if. f Therefore, for the scientist, it is necessary to reconsider the assumptions about reality and specify them in a coherent way. If conclusions are made from a model, it is necessary to stress its obvious limited validity. Thereby a model may work well for didactic reasons but not for prognosis. For these concerns, Hayek also writes about the specific sense of something. People have some sense to follow a rule, which is implicit within the action only. Hayek explains that even if rules of conduct cannot be stated explicitly, rules can still be learned and transmitted. This kind of learning or transmission necessitates perception or identification of a rule which brings in the social or cultural character of rules of conduct, i.e. social learning via imitation in Hayek’s terms. The most crucial aspect of imitation may be that imitation itself represents a rule of conduct and can only be understood in situational contexts. The actual transmission process is not conceived as a transmission of information in a kind of receiver–sender system. Hayek describes it as a mechanism where patterns, abstract orders or arrangements are transferred. Hayek (1967, p. 49) calls it a ‘mechanism of sensory pattern transfer’. Specific focus is given to the recognition, identification or insight of a certain abstract order or pattern which gets imitated. Imitation is about recognizing and integrating a pattern, implying difference from copying. Furthermore Hayek explains that imitation involves a diversity of sensations. He notes that these different sensations follow also a continuity of imitations, they become synchronized over time and space in an evolutionary way. Relevant sensations for an imitation process – transferring also affects in the form of a Gestaltt – are of a visual, tactile, kinaesthetic and auditory nature. We assume that not only our own different sensations may be ‘on-beat’, but also the sensations of different people may be ‘on-beat’ for certain points in time. Timing and locality make the culture. Hayek explains that the neural apparatus of different people has to have common features, in order to be capable of even forming same or similar abstract patterns. ‘It is the classification of the structure of relationships between these abstract attributes which constitutes the recognition of the patterns as the same or different’ (Hayek 1967, p. 50). He was concerned especially with the distinct generation of patterns through behaviour, perception and sensation in his book on The Sensory Orderr (Hayek 1952). It seems that social learning through imitation depends strictly on a composition of habitual and sensory (affective) patterns, as also discussed in Chapter 6. Hayek insists that these aspects may serve as a template for higher order pattern recognition: ‘‘What at first may have originated with an innate and fairly specific movement pattern may thus become a learnt and abstract mould for classifying perceived events.’ (Hayek 1967, p. 51). This short note shows again the complementary character of phylogeny and ontogeny, the one necessitates the other and vice versa. It also indicates that phenomenology

112

Institutions – generic heuristics

may crucially assist in explaining imitation processes and cultural evolution at all. Our senses recognize patterns or conduct which cannot be described explicitly. There are concrete instances for our sensation, although they are not accessible to our mind, to articulate them or codify them for explicit reuse. Hayek (1967, p. 54) notes that these affective patterns and foremost their stimuli ‘cannot be defined in “physical” terms’ and are therefore ignored by behaviourists; though they reflect intuitively perceptible wholes with potential for imitation and consequently cultural evolution. Additionally these perceptions are the most cunning properties for an explanation of social learning. Hence in conclusion, imitation does not depend significantly on behavioural patterns, but more on the underlying affects and dispositions, which are all non-behavioural elements of cultural evolution. Hayek (1967, p. 55) argues in particular, ‘It is from such perceptions that we derive most of the information which makes the conduct of others intelligible to us.’ Intelligibility offers a crucial point in the evaluation process of rules to imitate or not. It proposed an unconscious evaluation, the value of intelligibility is indeed a value of practicability. Here we may compare Hayek’s multitude of chains of rules, the complex composition of perception and action rules, with Dewey’s notion of habit and with Bourdieu’s concept of habitus. This point in Hayek’s theory of cultural evolution is actually the closest to the former elaborated pragmatist considerations in Chapter 6 and the post-structural considerations elaborated later in Chapter 9. Every perception of a rule in the external events as well as every single perceived event, or any need arising out of the internal processes of the organism, thus adds to or modifies the set of rules governing the further responses to new stimuli. It is the total of such activated rules (or conditions imposed upon further action) which constitutes what is called the ‘set’ (disposition) of the organism at any particular moment, and the significance of newly received signals consists in the manner in which they modify this complex of rules. . . . Indeed, in view of the inter-connections between the sensory and the motor elements on all levels, it becomes impossible clearly to distinguish between an ascending (sensory) and descending (motor) branch of the process; we should conceive of the whole rather as one continuous stream in which the connection between any group of stimuli and any group of responses is effected by many arcs of different length, with the longer ones not only controlling the results of the shorter ones but in turn being controlled by the ongoing processes in the higher centres through which they pass . . . what we have to deal with is a set of relations between two systems of rules. (Hayek 1967, p. 57) Hayek argues that the set of rules governs further responses to stimuli. In this respect they shape and, foremost, constrain certain possibilities or potentials of the further so-called ontogenetic development of a certain human being. Hayek (1967) moves from the hermeneutical5 to the evolutionary level of epistemology.

Hayek heuristics 113 Sensory patterns have to be regarded under the header of Verstehen (understanding) and the recognition process of this understanding procedure has its social epistemological meaning in Einfühlungg (empathy). Adam Smith (1984 [1759]) discusses sympathy extensively and its influence on institutional factors, such as property, corruption, prosperity, benevolence, approbation and merit. To this extent, this notion confirms another connection between Hayek and the moral philosophers. For such intelligible interpretation there is a need for common mental structures. Conscious processing of phenomena and its explanation in explicit statements does not represent the only level of our mental capabilities. Even if subconscious processes are at lower levels in a psychological classification, they may deal with the most important mental functions of all, such as sensory, habitual and affective pattern recognition for instance. The imitative process of rules of conduct among human beings represents an interwoven system of such pattern recognition on several layers. Hayek’s (1967) focus on these underlying mechanisms in social learning and cultural evolution, influenced by his 1952 book The Sensory Order, should confirm his concept of the market as a system of dispersed and emergent knowledge in Hayek (1945). Austrian economists were influenced by the Vienna Circle and especially by the philosophy of Ernst Mach (compare Siemsen and Siemsen 2009). The Machian sensualist phenomenology may also offer an interesting link to the American pragmatist thought of Peirce, James and Dewey. We find convergence in both streams on the emphasis of knowledge by experience and on the notion of habit as a disposition or sensory stimuli. From a social learning perspective it is the focus on education and democracy as a trial and error process which connects both philosophical outlines. However the issue of rationality bothered Veblen and Hayek in comparable terms, since they focused exactly on these underlying mechanisms prior to intention and decisive for cultural evolution. It is also interesting to note their different use of machine metaphors, since Veblen associated the machine process with exaggerated rationalization of economic operations from an industrial mechanic perspective. Hayek otherwise used a different machine metaphor, he referred explicitly to the market as an information processor, i.e. a computational system and implicitly to the economic agent as a Cyborg. Mirowski (2002, p. 235) considers Hayek as one of the central protagonists of economics as a Cyborg Science, ‘The pivotal agent provocateur in disseminating the germs of these cyborg themes in both cases was Friedrich Hayek.’ Regarding this issue Mirowski (2002, p. 232) debunks a great deal of Hayek’s ambiguous research strategy. Hayek was a central protagonist in the ‘socialist calculation controversy’ of the 1930s and 1940s and argued vehemently against central planning. In his terms, economists would never be able to compute the Walrasian system of simultaneous equations. That is the way Hayek understood and considered central planning. In consequence he advocated the view that ‘economic calculation qua computation’ (Mirowski 2002, p. 235), implies consequences that economists should be aware of and otherwise he created the market as an information processor. This ambiguity also indicates, as Mirowski (2002, p. 232) outlines that ‘he never really

Institutions – generic heuristics

114

attained membership in good standing of the Cyborg Club’. With the Cyborg Club, Mirowski (2002, p. 238) associates especially John von Neumann and Oscar Morgenstern, Hayek’s former colleague in Vienna. Morgenstern associated with Hayek’s presence rather unpleasant feelings, to put it in modest terms. The Morgenstern diaries deliver quite interesting anecdotes in this respect (Mirowksi 2002, p. 238). Hayek’s emphasis on systems of rules of conduct and the role of sensory stimuli in processes of imitation may fit with the complexity perspective of early automata theory, but Hayek would probably never have supported modern attempts such as applied game theory or agent-based modelling. However the insights from complexity theory open in the very same direction as Hayek’s explanation of cultural evolution. The emerging order is not implied in the individual actions of economic agents, hence the evolution of social order does not follow a deterministic process. In this special respect Hayek (1967, p. 66) distinguishes between systems of rules of conduct, which govern the behaviour of the members of a group and the social order resulting from the group as a whole. We follow that this may be regarded as a proposed theoretical attempt to overcome a methodological dualism by means of evolutionary epistemology or naturalism. It is quite interesting that Hayek mentions also the second law of thermodynamics in this respect, i.e. the entropy principle, concerning the issue of regularities in the elements and systemic patterns, as Nicolas Georgescu-Roegen or William Kapp articulated (compare also Berger and Elsner 2008). An intuitive assumption from Hayek was that a group is associated with disorder or chaos. Nevertheless a group of living entities will always need a specific order of actions for certain costs of energy (remember that order is quite cost-intense); which does not imply that all rules of conduct do create order, they may also engage in chaos. Nine notes regarding the difference of social order and a system of rules of conduct are given by Hayek. 1

2

3

4

A particular order of actions can be observed and described without knowledge of the rules of conduct of the individuals which bring it about: and it is at least conceivable that the same overall order of actions may be produced by different sets of rules of individual conduct. The same set of rules of individual conduct may in some circumstances bring about a certain order of actions, but not do so in different external circumstances. It is the resulting overall order of actions but not the regularity of the actions of the separate individuals as such which is important for the preservation of the group; and a certain kind of overall order may in the same manner contribute to the survival of the members of the group whatever the particular rules of individual conduct bring it about. The evolutionary selection of different rules of individual conduct operates through the viability of the order it will produce, and any given rules of individual conduct may prove beneficial as part of one set of

Hayek heuristics 115

5

6

7

8

9

such rules, or in one set of external circumstances, and harmful as part of another set of rules or in another set of external circumstances. Although the overall order of actions arises in appropriate circumstances as the joint product of the actions of many individuals who are governed by certain rules, the production of the overall order is of course not the conscious aim of individual action since the individual will not have any knowledge of the overall order, so that it will not be an awareness of what is needed to preserve or restore the overall order at a particular moment but an abstract rule which will guide the actions of the individual. The concrete individual action will always be the joint effect of internal impulses, such as hunger, the particular external events acting upon the individual (including the actions of other members of the group), and the rules applicable to the situation thus determined. The rules upon which different individual members of a group will at any moment act may therefore be different either because the drives or external circumstances acting upon them make different rules applicable, or because different rules apply to different individuals according to age, sex, status, or some particular state in which each individual finds itself at the moment. It is important always to remember that a rule of conduct will never by itself be a sufficient cause of action but that the impulse for actions of a certain kind will always come either from a particular external stimulus or from an internal drive (and usually from a combination of both), and that the rules of conduct will always act only as a restraint on actions induced by other causes. The orderliness of the system of actions will in general show itself in the fact that actions of the different individuals will be so co-ordinated, or mutually adjusted to each other, that the result of their actions will remove the initial stimulus or make inoperative the drive which has been the cause of activity. The difference between the orderliness of the whole and the regularity of the actions of any of its individual parts is also shown by the fact that a whole may be orderly without the action of any particular individual element showing any regularity. This might be the case, for instance, if the order of the whole were brought about by an authority commanding all particular actions and choosing the individuals who have to perform any one action at a given moment at random, say by drawing lots. There might in such a group well exist a recognizable order in the sense that certain roles were always filled by somebody; but no rules guiding the actions of any one individual (other than perhaps the commanding authority) could be formulated. The actions taken there by any one individual would not be derived by means of a rule from any of its properties or any of the circumstances acting on it (other than the commands of the organizer). (Hayek 1967, pp. 68–69)

116

Institutions – generic heuristics

Social order differs from the system of rules of conduct in consideration of its emergence. The interesting aspect of point four is that ‘The evolutionary selection of different rules of individual conduct operates through the viability of the order it will produce.’ This notion connects the entropy law with the evolutionary process in a recursive way through the viability of a specific order as a recursive product influencing the individual conduct. Orderliness arises from within a group and cannot be explicitly reconstructed from the individual rules of conduct. As such the order is relevant for the preservation of the group and not the specific individual regularities. Emerging orders regulate the further evolution of the system of rules of conduct; they can operate on selection, mutation as well as variation. This property can be regarded as a feedback mechanism from social orders back to individual rules of conduct. Hayek’s cultural evolution, via group selection, stands on the shoulders of individual conduct, but operates on a social emerging layer. This idea combines phylo- with ontogenesis within an institutional context. Hayek (1967, p. 69) also adds that the most visible and simple examples for the development of an emerging order are spatial patterns of living groups, such as swarms for instance. He mentions the arrow formation of migrating wild geese or a defensive ring of a buffalo herd. Swarms do reflect specific social orders, where individual entities just follow a few rules like, for instance, parallel movement with distance, following the closest member of the group and evasion of obstacles. Nevertheless swarms, as well as insect states, for instance, lack certain capabilities, in order to compare them with institutions. Institutions have two great advantages in favour of lower-level complexities. First, they are able to store knowledge over time and space. Second, they are able to transform this knowledge endogenously in a cumulative process. This aspect of knowledge needs a higher degree of abstractness and pattern recognition among a group. The individual may have no idea what this overall order is that results from his observing such rules as those concerning kinship and intermarriage, or the succession to poverty, or which function this overall order serves. Yet all the individuals of the species which exist will behave in that manner because groups of individuals which have thus behaved have displaced those which did not do so. (Hayek 1967, p. 70) The advantage of group selection in comparison to individual selection remains in the flexibility of a group to change itself as a whole in response to certain environmental changes. Without such a capability, individuals would be lost. Even changes in the individual rules of conduct will not automatically lead to changes in the whole, because the whole is an emergent social property, where evolution operates. Hayek shows that social theory has to deal with emergent patterns and properties – as well as their structuration potential and the cumulative change of them – as orders. Although we may never reconstruct the emergence of social order in analytical terms, we may compose synthetic sentences

Hayek heuristics 117 about it and decompose its evolutionary process for better institutional design. It is exactly this co-evolutionary process of the regularity . . . between the conduct of the elements and the regularity of the resulting structure. . . . Norms are thus an adaptation to a factual regularity on which we depend but which we know only partially and on which we can count only if we observe these norms. (Hayek 1967, pp. 77, 80) The comparison with norms as adaptations to factual regularities is rather interesting. It implies, as Hayek outlines, norms are activating people and are, thereby, cultural and social enforcers. Processes of group selection are neatly connected to this enforcing mechanism of norms. In the long run these norms, also understood as moral activators, shape the formation of institutions. Sanctions, disciplinary methods or dispositives of power as Foucault (2004 [1974], 2005 [1994])6 called them, are also shaping governmentalities as inherited institutional structures, evolved cumulatively over hundreds of years.7 ‘The possibility contemplated here is not that all normative rules can be interpreted as descriptive or explanatory rules, but that the latter may be meaningful only within a framework of a system of normative rules’ (Hayek 1967, pp. 80–81). Hayek signalized carefulness with regard to a top-down implementation of institutions and normative settings. What may result from imitation? It is social learning which gives potential to something between instinct and reason and that is the extended order. That is, I am chiefly concerned with cultural and moral evolution, evolution of the extended order, which is, on the one hand (as we have just seen), beyond instinct and often opposed to it, and which is, on the other hand (as we shall see later), incapable of being created or designed. . . . Learning how to behave is more the source than the result of insight, reason, and understanding. . . . It is not our intellect that created our morals; rather, human interactions governed by our morals make possible the growth of reason and those capabilities associated with it. Man became intelligent because there was tradition – that which lies between instinct and reason – for him to learn. (Hayek 1988, p. 21) In fact, Hayek gives the answer to one of the questions – one that economists most struggled with – about his theoretical legacy in this anecdote, his conception of cultural evolution along group selection. There is no explicit Hayekian theory of group selection, since he would not have considered any formal apparatus capable of expressing the complexity of social learning. However he articulated group selection as a natural fact of human interaction, as the mechanism for the transmission of knowledge.

118

Institutions – generic heuristics

Group selection Fracchia and Lewontin (1999) communicate the scientific controversy about culture, evolution and history as a minefield, and describe it as a hundred-yearold struggle among cultural anthropologists talking about evolving culture. That struggle has, in part, been a philosophical consequence of a diversity in the understanding of what distinguishes an evolutionary from a ‘merely’ historical process. In greater part, however, it can only be understood as a confrontation between the drive to scientize the study of culture and the political consequences that seemed to flow from an evolutionary understanding of cultural history. (Fracchia and Lewontin 1999, p. 53) Fracchia and Lewontin (1999) argue against a population approach to culture and against the idea of society as if it is an organism. The population notation is misleading in context of human culture if we use it in biological terms for a group or species of organisms capable of biological reproduction. Of course there is no problem if we use it as a statistical term for a sample taken from an empirically ascribed population of observations. The terminology of a group can be easily associated with the same empirical notification, but when we refer to group selection we need to define identifying markers in order to distinguish one group from another. This question is truly one of the hard-core questions in evolutionary economics. As outlined by Witt (2008c, p. 5) instinct and reason are ‘widely acknowledged as rather independent, and significantly differing sources of evolution in the human domain’, but the difficult issue of cultural evolution and social learning therefore in particular remains in the layers between them. Hayek conceived these in-between layers along ‘the rules of conduct, morals, and traditions’, Witt (2008c, p. 5) as emerging from human interaction. Do we talk about behaviour, routines, habits, habitus, dispositions, affects, ideas or even bits in a post-industrial context or do we consider just the very basic strategic enforcers for abstract group identifiers along cooperation or defection in anticoordination games? The point may well be that all of these wonderful human characteristics work as symbolic markers which can be positively or negatively enforced for the identification of a certain group, with same priority, along distinct mechanisms working on the corresponding characteristics and group members. Consider two group identification mechanisms working via two distinct characteristics (routines and habits for instance). The first group identifies itself due to a distinct routine. Then a second mechanism working along habit affects a subset of the group indicating the familiarity with a second group. Suddenly we may have to deal with a subset identifying itself with both groups (the intersection group) due to two different symbolic markers (for the one group it is a routine and for the other it is a habit), insofar as other members of the two groups (the ‘residuals’) may not even identify the other as a group, because of a different cultural code,

Hayek heuristics 119 marker or discourse. Then the question remains if the intersection group identifies itself as a third novel group capable of translating the first into the second code and vice versa in such a sufficient way that all the ‘residuals’ confirm the argument of distinction between the first and the second, still not identifying themselves with the other group in contrast to the intersection group. Then the two groups are equally comparable in a sufficient way, otherwise the comparison would lack significant empirical information for proper identification. This is what we call an emerging social norm then, capable of institutionalization via transmission and persistence. If there is the possibility and capability of translation from one discourse to another then the argument of group selection makes sense and we can speak of evolving culture. Social learning requires the formation of social norms as translation between discourses and enables institutionalization processes making the norm durable and persistent over time and space. If this translation is not possible then we lack an argument for comparison and cannot select a certain group respectively. In the following we assume that there is significant potential for translation between discourses, apart from that the chances for social learning would be quite limited without the emergence and persistence of translating norms. However such a process involves additionally individual learning or improvization, since somebody has to find a way for proper translation, then we can regard this translation act as a social innovation also. Correspondingly the levels of selection are multiple with regards to mechanisms and characteristics as well as scale. In consequence it is probably necessary to refer to multilevel selection instead of group selection, meaning in particular an ontological decomposition of selection levels in the spectrum between the individual and the whole. Multilevel selection was recently elaborated with more detail; compare a general assessment by Wilson (2010) in the context of the extended synthesis of evolution and Vromen (2011) for a treatment of routines as multilevel mechanisms. For instance Vromen points out that it is useful to refer to skilful individual behaviour as ontologically linked to routine firm behaviour, indicating that ‘Without skilful individual behaviour, routine firm behaviour would be impossible’ (Vromen 2011, p. 176). Otherwise Boyd and Richerson (2005) articulate the generic character of social learning via group selection with the notion of persistence and transmission. The authors use the terminology of mental representations which are transmitted from experienced to inexperienced individuals. Thus such internal models do not have to persist over generations in a strict sense. They will persist only if they are used and articulated, or captured in some institutional context. Figure 7.3 provides an idea of how transmission and persistence interact in cumulative cultural evolution. Individuals need to acquire information to manufacture something, which represents the transmission part of cultural evolution. Boyd and Richerson (2005, p. 56) discuss the example of ‘using a tool’. Transmitting the necessary information is performed via social learning, individuals need to observe others in using or manufacturing a tool and store this information for them, and in this respect we talk about observational learning. Consider Witt (2008c) for a concrete Hayekian explanation of observational

120

Institutions – generic heuristics

Transmission and persistence

No transmission

No persistence

Figure 7.3 Transmission and persistence in cultural evolution (source: Boyd and Richerson 2005, p. 57).

learning with rules of conduct as well as an analytical outline similar to the one presented below along Boyd and Richerson (2005). We compare this transmission process with the third stick-figure sketch in Figure 7.3. Useful information about a specific tool is transmitted from an experienced individual towards an inexperienced individual, for example from mother to child. It is rather obvious that such a process needs bidirectional information transmission, so that it goes beyond mere sending and receiving. The second process involves persistence via performance. Cultural variation occurs only if the mental models which are transmitted are also concretized in an active, practical manner; in case of fabricating a tool for instance Such persistence may fail to occur for two different reasons: individuals may forget how to make or use the tool, or they may, as a result of interacting with the environment, modify the information stored in their brains so that they make or use the tool in a significantly different way. Without both transmission and persistence, there can be no culturally transmitted variation. (Boyd and Richerson 2005, p. 57, original emphasis) Indeed, cultural transmission demands both mechanisms, transmission as well as persistence. The first stick-figure sketch in Figure 7.3 shows that the transmitted knowledge is actually used and a specific cultural or socioeconomic practice is reproduced and definitely not copied. It is very important to note that these two processes are not articulated as a genetic metaphor, though they may be rooted or entangled in the human genetic code. A corresponding question regarding the

Hayek heuristics 121 issue of transmission of behaviour arises in context of natural selection. The authors dedicate their work to the question, to what extent does the transmission process depend on the evolution of genes, i.e. the degree of nature in the coevolution of culture and biology. The authors conclude that natural selection may favour persistence, which represents a logical assumption. The crucial thing is to identify traits, conducts or behaviours which cannot be acquired by mere individual learning or where individual learning is too cost-intense. This emphasis was made clear by Hayek, the rules of conduct imply models which cannot get learned individually. Consider an individual willing to learn everything on her own, equipped with a hypothetical ultra-egoism. The point is, ‘The average fitness of a population at the evolutionary equilibrium is greater than the average fitness of individuals who do not imitate as long as the probability of the environment changes is less than half’ (Boyd and Richerson 2005, p. 42). We translate the wording now and argue that such a totally egoistic individual would not be able to successively push the ultra-egoism as an evolutionary stable strategy, because the individual’s capacities and conducts would be worse adapted to the environment than some individual pushing a social learning strategy over space and time. Otherwise a totally altruistic concept would not be evolutionary stable either, because a changing environment would handicap the imitators. They would cease in the face of a lack of inventions and innovations created by individual learning promoters. Assuming that appropriate adaptation implies an evolutionary advantage, then it is crucial whether and how often the environment changes. ‘Learning entails an evolutionary trade-off’ (Boyd and Richerson 2005, p. 19). Obviously a frequently changing environment promotes learners instead of imitators who start with first guesses and adapt their behaviour on their own. In such a case imitators get a disadvantage because they initially fail in the new environment. Learners will only prevail if they find imitators maintaining their individual improvements; otherwise they need to start from scratch each period, which implies very high costs. The whole issue carries a huge trade-off and demands a mixed evolutionary strategy. Capacities that increase the chance that individuals will learn behaviours that they could learn on their own will be favoured as long as they are relatively cheap. On the other hand, even though the benefits of cumulative cultural evolution are potentially substantial, selection cannot favour a capacity for observational learning when rare. Thus, unless observational learning substantially reduces the cost of individual learning, it will not increase because there is an ‘adaptive valley’ that must be crossed before benefits of cumulative cultural change are realized. . . . A theory of mind may have initially evolved to allow individuals to better predict the behaviour of other members of their social group. (Boyd and Richerson 2005, p. 61) The reference to ‘A theory of mind’ connects easily to the Hayekian arguments on the systems of rules of conduct and their potential emergence within a

122

Institutions – generic heuristics

meta-coordination state of social order. This capacity entails the main difference between human and animal cultures and weakens substantially the position of sociobiology. The clue is that such an evolved theory of the mind implies something like shared imagination (compare Dopfer 2004), or shared internal submodels working as a common social or cultural rhythm. A further point within this outline of group selection concerns the question of imitation, observation and learning by doing. This agenda sets group selection on top of the list, because in a cultural environment we are able to choose, deny or select transmitters of cultural heritage to a great extent on our own; despite the fact that we are not able to choose our initial geographical position as well as our family background. Human populations are richly subdivided into groups marked by seemingly arbitrary symbolic traits, including distinctive styles of dress, cuisine, or dialect. Such symbolically marked groups often have distinctive moral codes and norms of behaviour, and sometimes exhibit economic specialization. Ethnic groups provide the most obvious example of such groups, but the phenomenon includes groups based on class, region, religion, gender, and profession. . . . The evidence is fairly clear that the symbolic marking is not simply a by-product of a common cultural heritage. . . . Moreover, since groups are typically fairly large, such processes likely produce symbolic marking as an unintended by-product of human choices made for some other reason. (Boyd and Richerson 2005, p. 99) Symbolic markers identify us as in-group members or out-group individuals among different groups. Such a symbolic marking procedure conceives diversity and heterogeneity within and between groups. Group selection, understood as symbolic marking, involves several subissues; for instance selective imitation, rapid cultural adaptation, ethnocentrism and group cooperation. Boyd and Richerson (2005, p. 105) define culture as information capable of affecting individuals’ behaviour, this information then includes skills, attitudes, beliefs and values. Furthermore it can be acquired from others by teaching, imitation or generally social learning mechanisms. The authors argue that some information, drawn out of this possible set, represents a cultural variant. Another interesting family of problems in this realm deals with coordination of such symbolic markers in correspondence to behavioural traits among groups. We treated this issue already in this chapter by looking into the emergence of conventions. Boyd and Richerson (2005, p. 118) together with Richard McElreath use a simple coordination game to model the subdividing process of cultural groups along symbolic or ethnic markers. The game in normal form is given in Table 7.3. In this model markers work as coordinators: they allow people to interact with each other along a specific codex. The model shall meet three assumptions. First of all, interactions among people with shared beliefs are promoted with

Hayek heuristics 123 Table 7.3 Evolution of markers Player 2

Player 1

1

0

1

1+`

1

0

1

1+`

Source: Boyd and Richerson (2005, p. 119).

higher payoffs than interactions among people with discordant beliefs. Second, individuals favour interactions with individuals of common culture or common observable trait. Third, people imitate successful people and behaviour with higher payoff spreads in the population. As the authors argue, these assumptions meet common empirical findings. Given two instances of traits; the behavioural trait is either 1 or 0 according to the specific strategy of the players, given in Table 7.3. The marker trait is assigned randomly – again either 1 or 0 – according to e; if e = 1 individuals interact at random else e = 0 individuals interact only with individuals carrying the same marker. Basically the model explains the diff ficulty of migrating into a group; to identify the right marker at a first glance; hence individuals who do not know the common marker traits or symbols (inherited codex) get a disadvantage. The next part is about imitation, individuals who are successful get imitated; this concern is implemented in the assumption: W'ij

W

Where i denotes the behaviour and j the marker trait; W is the specific payoff and __ W represents the average payoff in the group. Combinations of behaviour and marker with a higher payoff than average get imitated. Then the authors derive an expression capable of changing the frequency of behaviour and marker in each group, along imitation and social interaction. ;}.PI

Where R

= c5U{(PI

- po)(1-(1-e))R 2 }

{= .fuv}

(7.1)

is the correlation of behaviour and marker; U and V are the

variances of behaviour and marker, D is the covariance of them. If R = 1 then everybody in the group with behaviour 1 also has marker 1, with R = 1 every individual with behaviour 1 knows marker 0. In case of R = 0 there is random action. (7.1) explains that if more individuals perform 1 than 0, then the change in the fraction of group one, Δp Δ 1 increases, otherwise it decreases. So the R2 gives information about the correlating marker, if it is near 1 people are highly correlated with the same marker at given behaviour. Additionally if e is rather

Institutions – generic heuristics

124

small at the same time, they almost always interact with individuals with the same behaviour and gain low advantage from common behaviour. If R2 is near 0, most interactions occur at random and individuals gain advantage from common behaviour. Now, frequency of marker 1, i.e. q1 changes along equation (7.2): Aql "" 26D(PI -

po{ l-~ )

(7.2)

The validity of (7.2) depends on the covariance of behaviour and marker, if it is small then (7.2) is quite valid; i.e. when the individual’s marker predicts little about the behaviour. An increase in D leads to a decrease in the dependency of marker towards behaviour; originally if marker 1 is associated with behaviour 1 and if behaviour 1 increases in group, so does marker 1 as well. So this effect decreases by increasing D. The last part of the model concerns migration: An

= m{D-D+(PI -

PI)(ql -gi)}

(7.3)

This effect is about group mixing, m denotes the number of individuals moving from one group to another, but consider this effect as an exchange; so people are exchanged from two groups. Mixing will reduce the differences in frequencies of behaviour and marker between neighbouring groups. Further migration _ increases ( ) between marker and behaviour within the group. p1, __ the covariance (D _ q1 and D denote the average values for the frequencies in behaviour and marker as well as in the covariance, in neighbouring groups providing immigrants. A last effect is supposed to be recombination; i.e. individuals acquire sometimes marker and behaviour traits from different individuals, leading in randomization of behaviour and marker. This parameter is denoted with r. The authors have run numerical simulations with this model with two interacting groups and a parameter space of e (chance of interacting at random), m (migration), δ (effects of social behaviour on individual welfare – coordination game payoff parameter) and r (recombination rate). A counted four degrees of freedom obviously enable some complex dynamics. These runs have shown the following results, in brief,8 1 2 3 4 5

Stable behavioural differences between groups usually become ethnically marked. Spatial structure is needed to generate ethnic markers but not to maintain them. Increasing the number of populations increases the range of initial conditions that give rise to ethnic markers. Group differences are strongest at boundaries. A more general model of social interaction leads to similar results. (Boyd and Richerson 2005, p. 122)

The parameters m and δ create ecological circumstances: they influence environmental conditions for people migrating or overall social conditions. By contrast

Hayek heuristics 125 the parameters e and r shape the psychological conditions of the agents. Boyd and Richerson (2005) argue that social interactions in which common behaviours have a high payoff lead to the establishment or evolution of markers. This result shows that the model is quite reasonable within its assumptions. As an overall result, we may conclude that in the coordination setting, groups benefit best when their behaviours are honestly signalled by markers, then both markers and behaviours prevail because of successful imitation. Migration is favoured by accessible and true markers in order to orientate, imitate and select the successful ones. This kind of marking process is compared with the concept of cooperation in the works of Epstein and Axtell (1996) and Young (1998). The authors argue, further, that intuitively the idea of evolution of symbolic or ethnic markers as meta-coordinating elements can give orientation for individuals how they could cooperate and moreover with whom they could cooperate. In a more extended framework with markers, cooperation and punishment we are able to transform the cooperation problem of a prisoner dilemma into a coordination structure. Another group selection model in Boyd and Richerson (2005, p. 134) is motivated by a crucial question of societal evolution. What in human history forced large-scale cooperation? In early cultures, we lived in small kin-based societies, then at some point in time we have developed higher forms of culture, grounded on large-scale cooperation, leaving the horizon of a mere family network. Therefore Boyd and Richerson (2005, p. 134) and co-authors show how cultural group selection and contingent cooperation, i.e. the question of reciprocity, work together in favour for evolutionary stability in large-scale groups. Unfortunately a major problem occurs. In a repeated game, such as an iterated prisoner dilemma, any pattern of behaviour can be sustained by mutual self-interest. Game theorists called this the folk theorem. Hence cooperation and reciprocity are not able to explain the puzzle of large-scale cooperation among non-relatives in human societies alone. Nevertheless, simulations have shown that reciprocity is a very likely evolutionary outcome (compare Axelrod and Hamilton 1981). Reciprocators like to interact with other reciprocators rather than with defectors. Research focused then on n-person prisoner dilemma, instead of pairwise sequential gaming, as articulated in Axelrod and Hamilton (1981). The reciprocity effect inflates. This inflation can be mastered only if defection is not tolerated via punishment. In the presence of growing groups, defectors prosper geometrically, hence in order to explain the puzzle of large-scale cooperation in human societies we need a kind of moral punishment. Trivers (1971) introduced the idea of moralistic punishment. In a second-order game a cooperator punishes a defector. Of course the cooperator has costs for punishing, but the whole group benefits, because defectors are induced to change their behaviour to cooperation. Why should selection favour moralistic punishment? In such a game there are two strategies, either moralistic punishers (who cooperate and punish defectors) or reluctant cooperators (who defect until they are punished). The essence of punishment or sanctioning is that it can stabilize any kind of behaviour, if there are enough punishers left. Now remember the folk theorem: it is not about a

126

Institutions – generic heuristics

specific strategy, such as cooperation or defection, but this model is about the sustainability of strategy enforcement in the long-run. This insight is also consistent with the idea of the evolution of symbolic markers, since markers are the enforcers of real-acting behavioural traits. Otherwise history has also shown that human beings are not necessarily that moralistic, in order to punish defectors. It is common that individuals ignore defecting and therefore act as second-order free-riders. A second-order free-rider is an agent relying on somebody else to punish the first-order free-riders (defectors) in favour of cooperation on the group level. Hence, there is no reasoning ground for individual selection in this matter. Of course it is tempting to cooperate without punishing defectors of a second order. Boyd and Richerson (2005, p. 241) indicate that group selection can stabilize moralistic actions. In their model, group selection occurs via intergroup conflict, so groups may go extinct. The model proceeds in a two-stage game, where at the first stage agents either cooperate or defect and in the second stage cooperators punish defectors or not. A further part of the model includes migration and imitation in a similar manner as we discussed in the previous model. During an ‘interwar’ period between pairwise groups, groups can be conquered by each other, which is modelled as a replacement. The higher the rate of defectors in a group, the more likely it is that a group is conquered and defeated: this enables moralistic punishment to stabilize. Results show that on the one hand group selection can maintain moralistic/altruistic punishment and on the other hand this punishment can assure altruistic cooperation in large-scale groups in the long-run. It is important to see that punishment leads to increased cooperation only to the extent that the costs associated with being a punisher decline as defectors become rare. . . . Group selection is more effective in this model than in standard models for two reasons: first, in groups in which defectors are rare, punishers suffer only a small payoff disadvantage compared with contributors, and, as a result, variation in the frequency of punishers is eroded slowly. Second, payoff-biased imitation maintains variation among groups in the frequency of cooperation, because in groups in which punishers are common, defectors achieve a low payoff and are unlikely to be imitated. (Boyd and Richerson 2005, pp. 246–247) We follow that in such a group selection model perspective long-run evolutionary outcomes are associated with equilibrium selection, looking for equilibria between groups generating group-beneficial outcomes. Intergroup competition always works on a population structure where multiple equilibria are quite common. The authors note that such intergroup competition in populations leads to evolution of group-beneficial traits in 500–1000 year scales (compare Boyd and Richerson 2005, p. 204). In general ‘These models show that the evolution of cooperative norms is a side effect of rapid, cumulative cultural adaptation’ and that ‘group selection is a much more important force in human cultural evolution than it is in genetic evolution’ (Boyd and Richerson 2005, p. 143). In consequence. . .

Hayek heuristics 127 We owe our success to our uniquely developed ability to learn from others. This capacity enables humans to gradually accumulate information across generations and develop well-adapted tools, beliefs, and practices that are too complex for any single individual to invent during their lifetime. (Boyd et al. 2011, p. 10918) .

The adaptation to the so-called ‘cognitive niche’ allowed for social learning according to the authors. This niche construction led to the human ability of ‘improvisational learning’ as a substrate of social learning, in contrast to ‘dedicated learning’ representing the limits of social learning in the animal kingdom (compare Boydd et al. 2011, p. 10918). The actual mechanisms of social learning are dependent on the local environment of acting agents, since it is the community of involved agents which expresses the specific nature of a learning environment. Bowles and Gintis (2005) discuss the role of group selection with regards to in-group moralistic punishment on social capital and community governance. The authors claim that governance necessitates essential moral sentiments in society to build upon. These sentiments imply social capital understood as trust, internalized in a concern for associates and ‘a willingness to live by the norms of one’s community and to punish those who do not’ (Bowles and Gintis 2005, p. 379). Hence the focus of what governance needs shifts significantly from the concept of Homo œconomicus to an institutional context of economic action. In general, the idea of social capital implies solidarity in group-like social structures, communities or institutions. For that reason social capital is considered as an endogenous or emergent governance property of groups (compare for instance Bourdieu 1992) as discussed in Chapter 9. Bowles and Gintis (2005) express the importance of community governance, as a self-organizing, governing characteristic of communities. Thereby community governance enters political economic realms where either markets or states fail to coordinate, allocate and distribute. Nevertheless we need to consider the question of power in the context of community governance on different scales. Social capital accumulates quite differently in distinct cultural environments. For that reason it entails also different potential to fulfil its role as a bottom-up stabilizer of market and state failures. This insight is backed up by evidence from Putnam (1993, 2000) for instance. Studies like these on the performance of institutions with regard to the specific endogenous accumulation regimes of social capital can be used as arguments for either free markets or state intervention. ‘All recognized the bankruptcy of the ideologically charged planning-versus-markets debate’ (Bowles and Gintis 2005, p. 381). The authors address a critical point regarding the popularity of social capital. They conclude that capital is connected to ownership, but social capital cannot be owned, it is an emergent property of ongoing interactions. This is why they foster the aspect of community instead to study governance in local environments. The framework focuses on communities as a third party within the policy triangle of markets, states and communities, also followed by Ostrom (2005b). ‘Rather, it is predicated on strong reciprocity, which is a predisposition to cooperate in a collective enterprise, and a predisposition to

128

Institutions – generic heuristics

punish those who violate cooperative norms, both of which are individually costly but conducive to strong social capital’ (Bowles and Gintis 2005, p. 382). Community governance does not work with individual selection in the context of Homo œconomicus, but builds upon strong reciprocity in a group selection context. Bowles and Gintis (2005) emphasize that well-designed institutions make markets, states and communities mutually reinforcing, otherwise poorly designed institutions induce the exact opposite, by crowding out community governance. What had been de facto community property became de jure government property. . . . In reality, it then became de facto open access and unregulated property. . . . First, public pronouncements stress that only short-term selfish actions are expected from ‘the common people.’ When this is the case, solving collective-action problems requires public policies that are based on externally designed and monitored inducements. What we know from social psychological research, however, is that external inducements tend to ‘crowd out’ intrinsic motivations when individuals feel like they have lost control. (Ostrom 2005b, pp. 266–267) Ostrom (2005b) treats this discussion with even more drive by addressing the property circle within the political triangle of Bowles and Gintis (2005). Thereby, property rights influence the evolution of community governance. The significance of community governance increases when the community’s common-pool problem impacts on larger scales and exceeds their small-scale environment insofar as the size of the group is very critical for a well-working environment and its governance, as also highlighted in Elsner (2007, 2010) and Elsner and Heinrich (2009). A community exceeds its critical size if its governance potential is corrupted by third parties and if contingent trust is violated (Elsner 2010). With regard to the organizational context this corruption is then addressed as the violation of an ethical rule where at least two agents are involved (compare Hodgson 2012, p. 161). The elders in communities transmit their acquired knowledge with regards to collective-action problems to the younger part of the community and earn special governance functions in the community in correspondence. This aspect was truly exaggerated by Hayek referring to a nomocracy (rule of law) of wise governments fixing formal rules in contrary to the ‘arbitrary’ government of the majority in a democracy. The major point of the community issue relates to the recognition that community-based observational or social learning mechanisms are far cheaper than individual learning. Consequentially the community benefits are conserving cultural heritage. This conservation also entails comparative advantage towards other communities and possible trade options. ‘Communities thus make an important contribution to governance where market contracts and government fiats fail because the necessary information to design and enforce beneficial exchanges and directives cannot effectively be used by judges, government officials, and other outsiders’ (Bowles and Gintis 2005, p. 384).

Hayek heuristics 129 This quite brief observation of the potential benefits from community governance raises a crucial point within generic institutionalism. The members of communities are knowledge insiders of a specific group of collective-action problems and correspondingly share a kind of tacit knowledge which is inaccessible for outsiders. This implies an underestimated advantage of communities, also covering norm formation and norm maintenance. Community norms shape their own distinct framework of cultural transmission representing their success in treating a collective-action problem. This knowledge is culturally encoded in a tacit way, internalized in rule-like routines, habits, affects and habitus. A community may only be sustained with effective monitoring and punishment, as it needs moralistic interventions to protect the good of the whole against individual or even egoistic incentives. Of course these processes necessitate democratic legitimization, as outlined in Chapter 18. Otherwise moralistic enforcers may also create decisive problems for communities, regarding the issue of insider–outsider distinction. If a community becomes powerful and wealthy, it will start to strengthen its borders. Outsiders may be exploited, in consequence. Such potential problems need to be covered by the state, consequently. Community governance evolves from the bottom up, along groupselection processes, so there can never be a perfect template for its governance structure. Therefore the entire spectrum of rules enforcing and enhancing the working of a community is diverse, versatile and large. In generic institutionalism we explore this diverse spectrum step-by-step. Hayek’s conception of societal evolution as introduced above is grounded in an optimistic, probably naïve, vision of human interaction. His conception of the liberal and open society does not entail free-riding, since this aspect is somehow conceived as controlled exogenously by the law. Of course there are several societal problems where free-riding is not and cannot be a matter of law, but of mutual trust and communication as indicated in the example of community governance in the prior subsection. Witt articulates Hayek’s consideration of rule of conduct in a very instructive manner. A typical example of a ‘rule of conduct’ within a group of interacting agents is the ‘convention’ resulting as equilibrium point [sic] in a coordination game . . . or the non-cooperative solution in a one-shot prisoner’s dilemma game. Since the latter, in contrast to the former, has a devastating impact on societal evolution, it represents the case of a destructive rule of conduct that Hayek seems to have neglected – perhaps because he believed that societies unable to prevent the spreading of destructive rules of conduct are bound to decline and eventually disappear. (Witt 2008c, p. 10) In this respect, we regard this aspect of neglect in favour of the cooperative solution as a true puzzle in Hayek’s system of thought. If Hayek’s political vision of liberalism is considered only with rules of conduct associated in the cooperative solution of a prisoner dilemma, then of course there is no need for a social contract.

130

Institutions – generic heuristics

We face two different kinds of liberalism, the one proposed by Hayek in the tradition of the Scottish moral philosophers, like Hume, Ferguson or Smith, the second one originating in the French tradition principally elaborated by Voltaire, Rousseau and Condorcet, then reinterpreted by the British utilitarianism. Where the latter is founded on a rational constructivist perspective of the world, the former builds upon a naturalistic evolutionary framework. Hayek wanted to cast the philosophical foundations of a naturalistic liberalism. Vanberg (1994) revisits Hayek’s legacy with regards to his dialectic treatment of liberalism. Vanberg argues that Hayek’s conception of liberalism hints in two counteracted directions and moreover that these different positions form some necessary dialectics for the establishment of liberal order, which is also consistent with his overall work. Vanberg calls these two positions ‘rational liberalism’ and ‘evolutionary agnosticism’. The former position deals with Hayek’s arguments for the rational establishment of a liberal order, expressed in his earlier writings and in Hayek (1973, 1976b, 1979). The latter position focuses on Hayek’s argument of cultural evolutionary processes in comparison to deliberate institutional design. The rational or positivist theoretical part can be considered as a work on the science of legislation. We noted in the beginning of the chapter on Hayek, that he was far away from the idea of laissez-faire liberalism and always insisted in a positive way that there has to be a ‘framework of rules and institutions that allow a liberal order to flourish’ (Vanberg 1994, p. 181). In this respect Hayek also referred to such a framework in two possible ways, where the first one represents the construction of a rational system of law. Under this rule of law people are meant to be free, following their own preferences and a systemic framework of social orders and prohibition. Vanberg (1994) also considers an important point in Hayek’s article on ‘Free enterprise and competitive order’, presented in 1947 at the first meeting of the Mont Pellerin Society. [He] suggests there that it is more adequate to interpret ‘the fundamental principle of liberalism’ not as an absence of state activity, but ‘as a policy which deliberately adopts competition, the market, and prices as its ordering principle and uses the legal framework enforced by the state in order to make competition as effective and beneficial as possible.’ (Vanberg 1994, p. 182) Hayek never clarified how the positive effort of describing a liberal legislation should look, though, as also Vanberg argues, it fits perfectly into the ordoliberal approach of Walter v. Eucken or Franz Boehm of the Freiburg school. In consequence we probably need to understand Hayek’s liberalism in similar terms as von Eucken’s for instance, in the context of constitutional and order economics. Concerning Hayek’s elaboration on cultural evolution Vanberg explains that it is necessary to distinguish between his factual and his normative claims. More briefly, in order to have the noted implications, Hayek’s evolutionary argument would have to have empirical and normative content. It would

Hayek heuristics 131 need to have empirical content in the sense that it tells us what kinds of rules and institutions can be expected to prevail in evolutionary competition. And it would need to have normative content in the sense that it would tell us why the kinds of rules and institutions that tend to survive in evolutionary competition are desirable. We therefore need to examine the question what empirical and what normative content Hayek’s theory can be said to actually possess. (Vanberg 1994, p. 183) Although he criticizes the Hayekian arguments such as ‘guided not by reason but by success’ as tautologies, Vanberg also emphasizes that such phrases may only guide as ‘conditional conjectures’. In short, Hayek mostly concentrated on evolution as such, how it works in culture, and not on the constraints that are shaping it within the cultural, economic and political process. Therefore Vanberg argues that the desirability for individualistic constituents makes the rules and institutions beneficial. Rule-guided individual actions or conducts create mutually beneficial social orders in an emergent way, which are only beneficial on the social level, because the individual aims are followed. Cultural evolution favours institutions desirable to the persons involved, where these persons still develop new modes of cultural evolution on their own behalf.

8

Schumpeter heuristics

In Chapter 2 we have already discussed the ontological core of the Schumpeterian economic system of thought as one of four combinations of monistic/ dualistic ontology and Darwinian/generic heuristics, where we associated Schumpeter with a dualistic ontology expressed through generic heuristics. This section of course follows up on the previously elaborated outline, but enters the theoretical realm of heuristic projections. Concerning Schumpeter heuristics we discuss his concept of development and change as an evolutionary system as well as the role of the entrepreneur in his business-cycle theory. Then we focus on two timeless hard cores within Schumpeter heuristics, i.e. the interrelation between credit, institutions and capital; and the issue of technological change. insofar as we highlight the sociological components of his generic evolutionary theory of innovation. The drive in Schumpeter’s economy comes from within the society and attaches the puzzle of economic evolution to the sociology of the economic system. Most references to Schumpeter’s treatment of social institutions or economic sociology in particular relate to Schumpeter’s History of Economic Analysis (1954). Arena (2008, p. 71) also starts his analysis with Schumpeter’s separation in economic history, statistics and theory. Arena highlights that Schumpeter conceived the science of organization as a part of economic sociology, indicating the need for an institutional theory of economic change. First, economic sociology must ‘generalize’, ‘typify’ and ‘stylize’ the empirical forms of institutions and organizations in order to transform the historical set from which they are drawn into a more abstract set of ideal types on which the economist can then build his analytical assumptions. (Arena 2008, p. 72) Economic sociology reaches its raison d’être as a synthesizing element in Schumpeterian terms, then. Studies on institutional change imply bridging between economic history, statistics and theory. In consequence institutional economics focuses not only on the integration of society and economy, but also on the synthesis between different layers of scientific economic programs. This aspect confirms the idea of generic institutionalism provoking economic theory as well as praxis.

Schumpeter heuristics 133 Second, referring to the example of fiscal sociology, Schumpeter (1918 [1953]: 177, n. 18) emphasizes that the historical order according to which institutions and organizational forms emerge, develop and decline must not be confused with the analytical process by which sociology provides a logical explanation of these changes. (Arena 2008, p. 72) This point clarifies the notion of contingency and path-dependency in the historical chronology, which needs to be stylized and theoretically synthesized. His third component concentrates on the extraction of economic content from history as a specific task of economic sociology. As outlined in Arena Schumpeter presupposes a ‘relative autonomy or ‘selff containment’ of the economic sphere.’ Economic sociology, according to Schumpeter, can thus be defined as the science of emergence, maintenance and decline of societal institutions and forms of organizations that influence economic behaviour. From this standpoint, according to Schumpeter, human motives are never strictly individual. (Arena 2008, p. 72) Interestingly, Schumpeter conceives the sociological environment of economic interaction also in a two-class perspective, but in a far more abstract manner, as we have already discussed. These two categories deal with leaders and followers, an essential assumption for his theory of the entrepreneur, . . . ‘[w]e are content to say that social leadership means to decide, to command, to prevail, to advance. As such it is a special function, always clearly discernible in the actions of the individual and within the social whole’ (Arena 2008, p. 73, citing Schumpeter). In this respect entrepreneurs represent the economic leaders in capitalism capable of setting novel institutional patterns in motion. Institutional change is induced via leaders who deviate from routine, as we will discuss in more detail in the next subsection. However the success of an innovation depends truly on the community of followers or imitators, if they accept or not. Arena (2008, p. 87) summarizes this aspect insofar as ‘The notion of resistance to institutional change is particularly important for Schumpeter’s approach to capitalist market economies.’ In particular it means that institutional change takes a lot of time and that it is not a goal-oriented process, referring to the ubiquity of institutional inertia in scale and type. Schumpeter’s central institutional components – reflecting this inertia with respect to creative destruction in capitalism – are given by the institution of entrepreneurship, the institution of money and credit and the institutional role of finance shaping the mutation of savings to investment from an industrial and technological perspective. In consequence institutional change carries the dynamic development of economic modes in capitalism, an aspect central to Metcalfe (2008, p. 116) who explores the common thread in the work of Marshall, Schumpeter and Hayek. This common thread concerns the interrelation of wealth creation and the growth of knowledge as a central link in evolutionary institutional change.

134

Institutions – generic heuristics One of the great strengths of Schumpeter’s approach is that his scheme of innovation is grounded in wider sociological considerations. Any innovation may meet hostility from established incumbents because the gains to novelty are necessarily losses to tradition, and so it is essential that the system is guided by institutions that are sufficiently open to accept the challenge from novelty. (Metcalfe 2008, p. 116)

It is the ambiguity of institutions that allows for effective regulation in the capitalist world. Interventions for and on behalf of novelty are only effective if institutions manage their double role as enabling and framing vehicles in the evolving economy; these are the two sides (enabling and framing) of the same diffusion operator for social learning in general. The institutional process constitutes the level of individual and collective uncertainty through its sociological environment. Metcalfe (2008, p. 120) recognizes this significant role of institutional change with regard to ‘cultural acceptance’. Of course innovationdriven change implies economic consequences resulting in inequality within society and demands institutional redistribution, therefore. However the thin line between institutional enabling and framing is the central issue in monitoring and shaping the political economy through an institutionalist’s lens in space and time. ‘We are straying here into the ethical foundations of capitalism and of how a balance is to be struck between the beneficial effects of creation and the detrimental effects of destruction’ (Metcalfe 2008, p. 121). Metcalfe discovers the central paradox of capitalism with regard to this notion, in showing the isomorphism in the Schumpeterian and Hayekian institutional framework. Just as Schumpeter saw the importance of an enduring frame of institutions, so Hayek points to the importance of tradition. Only conservative systems can change in an orderly way, and this is one of the central paradoxes of the capitalist system. It can only change from within because its structure generates conjectures of how it might be changed; instability in the small must reside within stability in the large. All progress presupposes tradition, but tradition is not immutable; it too evolves through variation and selection with the potential value of new rules and practices only ascertainable in relation to existing rules and practices. . . . It is the necessarily uneven pattern of knowledge-driven progress that unites Hayek with Marshall and Schumpeter, and demarcates their account of economic development from anything connected to the idea of a regularly expanding, proportionally growing economy. (Metcalfe 2008, pp. 129–130) This generic aspect of economic development through institutional change, through the creation and adaption of novelties characterizes economics as an evolutionary and complexity science.

Schumpeter heuristics 135 The historical or ‘evolutionary’ nature of the economic process unquestionably limits the scope of general concepts and of general relations between them (‘economic laws’) that economists may be able to formulate. There is indeed no sense in denying, a priori, as has been done sometimes, that any such concepts or relations can be formulated at all. . . . But it is true that ‘economic laws’ are much less stable than are the ‘laws’ of any physical science, that they work out differently in different institutional conditions, and that neglect of this fact has been responsible for many an aberration. (Schumpeter 1954, p. 34) Even Schumpeter – who strived so much to discover the economic laws of change – made a retreat in front of the complexity of the evolving economy and admitted the limits of economic laws in general. He recognized thereby the evolutionary and sociological aspects of economics in comparison to the idea of an economics conceived as a science of classical Newtonian physics. It is the dimension of social learning which makes economic processes so hard to predict and foresee. Schumpeter considers a particularly critical point, that generalizations are problematic in the social and economic sciences. But the one and only possibility for a consistent synthetic elaboration of economic evolution is given by the study of institutional change and its ubiquitous structure and process components. Schumpeter notes that institutional conditions enrich the economy with variety. Hence different institutional environments and cultural circumstances influence and shape the economic processes and consequentially economics as a science, since the observer is always endogenously attached to the process itself. This insight reflects an important message in Schumpeter’s first arguments in the History of Economic Analysis (1954). He states that ideologies condition the economic observer and correspondingly the politico-economic process itself, a notion which is totally ignored in economics today. We receive a feedback loop between economist, politician and economic agent which is fed by the institutional environment, as also Marx and Engels pointed out several times. Marx called a system of ideas an ideology and he assumed that ideological biases create economic realities. Schumpeter argues that Marx conceived the ideological bias of his time shaping the economics of industry and the commercial bourgeoisie. Today we go further by observing the process primarily shaping institutions and then, second, shaping economic realities and biases again and again. Ideologies influence the institutional environment and the basic characteristics of social learning but are, as well, re-influenced by institutions and their corresponding economic realities, like, e.g. production regimes (car industry, semiconductor, bio-technology . . .). Social location undoubtedly is a powerful factor in shaping our minds. But this does not amount to saying that our minds are exclusively shaped by the economic elements in our class position or that, even so far as this is the case, they are exclusively shaped by a well-defined class or group interest. (Schumpeter 1954, p. 36, original emphasis)

136

Institutions – generic heuristics

This notion is quite interesting in the context of the previous analysis of group selection, because such a group interest clearly emerges by a mix of in-group and between-group competition as well as within contingent cooperation. Ideologies are formed by the composition of moral sentiments and material interests in group selection processes, but in Schumpeter’s terms they do not exclusively shape our minds, implicitly referring to the creative power of the entrepreneur. Additionally this short note brings in the issue of path-dependence once again, in contrast to social class-determination. A highly significant, but often ignored or misunderstood domain in economics is represented by the ‘history of economic thought’, although Schumpeter insisted on writing a History of Economic Analysis. Perhaps the crucial point for his focus on analysis lies in his belief in economics as a true science, integrated in a consistent apparatus of analytical tools defining economic laws. Instead the notion of thought still entails the ideologies, which he criticized as economic prejudices so much. The same applies to what we define as Economic Thought, that is, the sum total of all the opinions and desires concerning economic subjects, especially concerning public policy bearing upon these subjects that, at any given time and place, float in the public mind.. . . We shall, of course, never neglect the general environment of economic thought in which, at various times, analysts did their work. But these environments and their historical changes are never our main object of interest.. . . The development of analytic work, however much disturbed it may have been by the interests and attitudes of the market place, displays a characteristic property which is completely absent from the historical development of economic thought in our sense and also from the historical succession of systems of political economy. (Schumpeter 1954, pp. 38–39) Schumpeter speaks of the disturbances of analytic work and considers ideologies as bad noise for the real deal. It seems interesting to note that Schumpeter did not care much about the real applicability of analytic work in his studies. He was interested in the mere scientific process in analytic terms, besides major real economic developments. In respect of scientific progress, Schumpeter speaks of threats to the analytic enterprise, which are composed of biological biases and political doctrines or systems of thought. This is the point where his popular argument of scientific vision sneaks in: ‘In other words, analytic effort is of necessity preceded by a preanalytic cognitive act that supplies the raw material for the analytic effort. In this book, this preanalytic cognitive act will be called Vision’ (Schumpeter 1954, p. 41). For that reason, it was Schumpeter’s quest to look into the emergence and maintenance of economic visions from Aristotle till the twentieth century. These visions – deductive preanalytic perspectives – drive scientific progress and shape economic analysis, because they are the foundational elements of scientific models. Schumpeter also notes that these visions form analytic cores, which

Schumpeter heuristics 137 should be more or less immune to ideological bias. He considers the major task of economic science as a process trying to minimize and eliminate ideological delusions from the analytic core.

Schumpeter on population and evolution When Schumpeter (1954, p. 250) speaks about population and the size of human societies, he emphasizes that a ‘perfectly detached observer’ would look into this issue at first, concerning economic questions. But is it possible to speak of a population as an aggregate with an optimal size and maybe an optimal economic lifestyle? And what can we even tell about the evolutionary story of economic populations? Schumpeter gives a rather prompt answer; he says that the key to understand historical processes is hidden in the variation of populations, which occurs due to technology, religion, class struggle and so on. These characteristics have institutional factors in common or at least cultural criteria or social norms. They transform societies and create populations from within. The idea of a population implies that there are certain membranes constraining them or differentiating them from others, in dissipative terms. The dissipative structure of human groups makes them difficult to distinguish in a gradual and explicit way and that is for good reason, since variation is the main driver in the emergence of novelty. Population problems accumulate if there is significant over- or under-population, which is mostly associated with too high fertility or mortality rates. Schumpeter (1954, p. 251) articulated that nations aimed historically for a rapidly growing population, in order to have available a growing pool of citizens or slaves engaged in agriculture or craftsmanship to establish prosperity, for instance. This ancient political doctrine received a significant shock after the formulation of the Malthusian trap1 at the end of the eighteenth century. If a population grows so fast that agriculture cannot provide enough customized food anymore, people will have to rely on subsistent modes of economic production again, caring for their own food supply. This specific problem arises as an additional threat for all non-renewable resource markets today, because in a scarce world we are confronted with limited resource capacities. Hence the population problem invoked a new style of economic analytic thinking, since economists had to change their rationale from populationist to antipopulationist visions. This means in particular that the opinion had to change, that more people – equally an increase in population – increase per capita growth or wealth.2 Of course Adam Smith conceived this circumstance just as a natural fact and not as something we have to panic about. If the economic law is something natural, shall we consider the Malthusian trap as a social or as an evolutionary problem? The point is that it does not matter whether we consider it as social or evolutionary, because in a naturalistic generic perspective the problem is of the very same nature. Social phenomena constitute a unique process in historic time, and incessant and irreversible change is their most obvious characteristic. If by Evolutionism we mean not more than recognition of this fact, then all reasoning about

138

Institutions – generic heuristics social phenomena must be either evolutionary itself or else bear upon evolution. Here, however, evolutionism is to mean more than this. (Schumpeter 1954, p. 435)

This uniqueness of socioeconomic phenomena establishes variety and diversity in populations. Primarily Schumpeter distinguishes between five approaches to evolutionism, i.e. philosophers’ evolutionism; Marxist evolutionism; historians’ evolutionism; the intellectualist evolutionism of Condorcet and Comte; and Darwinian evolutionism. He considers these intellectual heritages as major influences of the Zeitgeistt of the nineteenth century, where modern analytic economic science made its major steps forward. In the nineteenth century the common opinion on evolution had slightly changed in scientific realms. Schumpeter indicates that in the eighteenth century people considered evolution naïvely just as progress. In the following century this perspective had changed, at least scientists started to recognize that evolution is just about continuity in change. It is rather embarrassing that even now in the twenty-first century people still associate the former with evolution; unfortunately it seems that this notion will not change in the future, if there is no evolutionary pedagogy applied. Such pedagogy explains the modes and characteristics of evolution in a generic way but also the way of evolutionary thinking and social learning. For now, we will briefly discuss four of these five major streams of evolutionary thought, which have significantly influenced the rise of economics and also Schumpeter himself. Hegel’s evolutionary system needed metaphysics. It suggests that, to imagine absolute objective truth in a metaphysical state, then this state is defined as reality; i.e. ‘reality as the totality of all actual and potential observational facts’, according to Schumpeter (1954, p. 437). The question then arises of what are these observational facts: they are ‘(manifestations of) f that entity’ which are characterized along: ‘whatever is, is rational (conforms to reason) and whatever is rational (thinkable), is’ (Schumpeter 1954, p. 437). The Hegelian evolutionary conjecture suggests that this entity is involved in a continuous evolutionary – still logically dialectic – process, characterized by the German word Aufhebung: The German verb aufheben means both to cancel and to raise. Hegel averred that a thesis, A is B, and its antithesis, A is not B, aufheben each other into something higher, a synthesis that comprises the content of both. (Schumpeter 1954, p. 437, footnote) Anything real entails such a dialectic process. The Hegelian story builds upon creative destruction as endogenous change, in a nutshell. Schumpeter describes this conception of evolutionism as emanatist. The Hegelian emanatist conception of evolution serves as a theoretical template to turn ideas into something real observable; this can be shown via the following quotation: ‘reasoning from the conception of a metaphysical entity, which in unfolding its own contents produces a sequence of changes in the reality of experience, we call emanatist’ (Schumpeter 1954, p. 437). First of all, it is good to know that Schumpeter

Schumpeter heuristics 139 considers metaphysics as a theoretical conception, as a theoretical playground. Then the evolutionary dialectics is described as an unfolding process from metaphysics (ideational) to the reality of experience (matter), via some object, which constitutes itself through some contents. That is the way Schumpeter interprets Hegel and how he visualizes the emergence of novelty and innovation at the end of the day. This system of thought or analytic corpus, suggests that ideas create real change, along evolutionary dialectic dynamics. Evolution is therefore considered as a generic system of change in human culture. Hence Hegel’s evolutionary system is grounded on an idealism, which does not contradict a realism. Marxian evolutionism cuts out the ideational part of the Hegelian system, but remains independent from it. History develops in a dialectic process, but the unfolding is not of emanatist nature anymore; it depends only on material changes. Schumpeter adds that Marx adopted the Hegelian language and the specific sound of reasoning, his dialectics, but he introduced something new. History, culture, the economy are not products of ideas anymore, they emerge out of the modes of production and are structured by economic forces. The rules for this hypothesis by nature are characterized as following. 1 2

3

All the cultural manifestations of ‘civil society’ – to use the eighteenth century term – are ultimately functions of its class structure. A society’s class structure is, ultimately and chiefly, governed by the structure of production (Produktionsverhältnisse), that is, a man’s or a group’s position in the social class structure is determined chiefly by his or its position in the productive process. The social process of production displays an immanent evolution (tendency to change its own economic, hence also social, data). (Schumpeter 1954, p. 439)

The Marxian analysis of the capitalist system suggests that there are two classes, the bourgeoisie and the proletariat. Thereafter we may follow that the class struggle ‘provides the mechanisms – economic and political – that implement the economic evolution’s tendency to change (revolutionize) every social organisation and all the forms of a society’s civilization that exist at any time’ (Schumpeter 1954, p. 439). As a consequence politics, policies, art, science, religious and other beliefs or creations, are all superstructures (Überbau) of the economic structure of society; historical evolution is propelled by economic evolution; history is the history of class struggles. . . . This is as fair a presentation of Marx’s social evolutionism as I am able to provide in a nutshell. (Schumpeter 1954, p. 439) Schumpeter synthesizes these concepts in an ingenious way. He is precise, brief and foremost comprehensive in his argumentation. He emphasizes that the Marxian evolutionary system works only along economic constraints. In this

140

Institutions – generic heuristics

respect it diverges from different social or cultural evolutionary approaches. Marxism insists on the dominance of economic productive circumstances, which decide on the future of culture and society and not the other way around, as many different cultural approaches to evolution would suggest. Further it is the only economic theory in that period, which was built on evolutionary thought. The economic process was considered through accumulation and crisis from within; i.e. immanent evolution. Perhaps it was also this specific characteristic of Marx’s grand vision that influenced Schumpeter to think about endogenous change and creative destruction. Schumpeter (1954) associates intellectualist evolutionism primarily with the Marquis de Condorcet (1743–1794). It was the kind of social evolutionism which initialized the movement of the Enlightenment and the French revolution. Actually it is that kind of evolutionism or rational constructivism which was heavily criticized by Hayek, as we have seen in the previous chapter. The idea of the human mind capable of constructing or engineering social institutions in an instrumental way via deliberate design is also criticized by Schumpeter (1954). The critique focuses again on the contingency of the historical chronology, where we assume that institutions evolve due to their past associations. [I]t fails because it postulates what it is to explain. Changes – adaptive and, possibly, also autonomous – in beliefs, in stocks of knowledge and techniques, and in habits of thought are no doubt historically associated with other manifestations of social evolution. But they are conditioned, to say the least, by the facts of a changing social structure, and so are their modi operandi. . . . In fact, we have done nothing: we have only renamed the problem. (Schumpeter 1954, p. 443) Of course institutions are shaped and designed from period to period by human minds, but they are never rationally constructed, because this would imply that there was not any institution prior to it. We confront this issue from the adaptation characteristics in institutional evolution. The problem is, as Schumpeter argues, that if we imagine a perfectly working human mind which is able to coordinate and redistribute resources in a perfect way, we would have already won the game. This kind of evolutionism misses the message, because it is not about the process itself, it is about a hypothetical, imagined solution for the stillongoing process. Schumpeter also criticizes Auguste Comte, because of his too narrow conception of the development of civilization. There are three stages in Comte’s system of positivism: the religious or magical stage; the metaphysical stage; and the scientific stage. The Schumpeterian critique deals with the assumed invariant law of sequential evolutionary stages. For this reason, this kind of evolutionism treats the problem of continuous change in a far too linear way. Concerning Darwinian evolutionism, it is briefly referred to in Schumpeter’s thoughts on the biological evolutionary concept and its consequences for the social sciences. Schumpeter (1954, p. 445) highlights the significance of

Schumpeter heuristics 141 Darwin’s work as the most influential contribution to the Zeitgeistt of the nineteenth century, because it broke with every traditional idea of change. In this respect he compares the impact of the theory with such innovations such as the heliocentric system; which also signals his huge respect for evolutionary concepts in biology. In summary we associate Schumpeter’s understanding of evolution with the Hegelian and Marxian evolutionism. We find his generic notion of evolution especially in the idea of permanent struggle between productive forces and in the omnipresence of contradictions. The Hegelian concept of Aufhebung g as synthesis of thesis and antithesis fits with Schumpeter’s explanations of the capitalist process of creative destruction. The latter aspect is investigated by Reinert and Reinert (2006) in a novel way, since the authors associate the concept of creative destruction, which Schumpeter learned from Werner Sombart, with the philosophy of Friedrich Nietzsche. It seems that Schumpeter has not only borrowed or learned the concept of creative destruction as a metaphor for evolution in society and the economy from reading Nietzsche, but also the concept of the entrepreneur equipped with a powerful will and a will to power. As Reinert and Reinert (2006) outline, this is the most often mentioned connection between Schumpeter and Nietzsche, but Schumpeter himself never made these connections explicit with quotations. The notion of creative destruction confirms even better the strong familiarity with the German philosophy of the nineteenth century. Werner Sombart who influenced Schumpeter heavily refers in several quotations to Nietzsche’s Zarathustra, as Reinert and Reinert clarify. However Schumpeter must have been too proud to reveal his theoretical roots and origins in German philosophy, in order to remain associated as a highly original economist. The influence of Nietzsche on Schumpeter provides a highly interesting research programme, which Reinert and Reinert build upon. Schumpeter also played the role of the Übermensch in his whole career in such a dominant way, that his colleagues looked back to him and bowed their thanks. Gottfried Haberler – Schumpeter’s colleague in Harvard – is often quoted, expressing the unique character of Schumpeter as a person but also the uniqueness of his vision of the entrepreneur in the economy. ‘In his obituary to Schumpeter, his Harvard colleague Gottfried Haberler indeed quotes Nietzsche’s laudatory remark on Schopenhauer: “Seht ihn nur an – Niemandem war er untertan” [Just look at him – He was subject to no one] (Haberler 1950: 344)’ (Reinert and Reinert 2006, p. 57). It is exactly this romantic spirit of the entrepreneur which makes him a hero in the daily routinized business. Schumpeter gave economics a heroic touch, which is still visible in the habitus of the most successful industrial entrepreneurs worldwide. The entrepreneur represents the heroic safeguard of capitalism in Schumpeterian terms.

Entrepreneurship, innovation and business cycles Schumpeter’s economic theory became popular for its emphasis on the entrepreneur as a deviant force in the economy. More than this, Schumpeter made the

Institutions – generic heuristics

142

entrepreneur responsible for swings in the business cycle. Innovations emerge out of true uncertainty and the risk of speculative investment is the cherry on the top insofar as the entrepreneur is a dynamic economic agent who is loaded with lots of energy and adventure, standing opposite static consumers or businessmen. For sure Schumpeter’s story is a romantic one, but it has a very true theoretical core: innovation drives economic change in a path-dependent but still unpredictable way. The entrepreneur gains success through new combinations of goods and services in trade for high risk and experimental production. Hence from a theoretical point of view it is of utmost importance to understand and analyse the foundations of economic decision making under uncertainty. Schumpeter built upon methodological individualism in a heterogeneous way. These specific economic actions can be done only by distinct or even extravagant personalities, who differentiate themselves from the rather rational mass. His methodological individualism stands in contrast to the standard rational choice, Homo oeconomicus model (compare Dopfer 2012, p. 142). Schumpeter focuses on certain personalities who are able to change something real in the economy, because of their ambitious dedication. The entrepreneur’s incentives emerge out of irrational contexts, at first glance. Success is understood as a matter of experimental variation, diversity and clever selection of combinations. Schumpeter mentions several times, at most in his writings on the entrepreneur, ‘Unternehmer – in Handwörterbuch der Staatswissenschaften’ (1928), reprinted in Leube (1996), that entrepreneurship is about leadership. Leadership is a very ambiguous concept and very difficult to discuss in the social sciences, because it is about will, perseverance and power. Otherwise leadership represents a necessary element within any theory of social learning and group selection. Especially in situations of high uncertainty it is tough to push decisions to actions as an entrepreneur. Furthermore entrepreneurship is not just about a unique personality, it is also about organizational governance. Leadership in organizational contexts cannot work along rigid military hierarchy, where commands are simply accomplished. Schumpeter summarizes the tasks of an economic leader – the enforcement of new combinations – as follows.3 1

2 3 4 5

Die Erzeugung und Durchsetzung neuer Produkte oder neuer Qualitäten von Produkten. The creation and enforcement of new products or new qualities of products. Die Einführung neuer Produktionsmethoden. The introduction of new methods of production. Die Schaffung neuer Organisationen der Industrie (Vertrustung z.B.). The creation of new industrial organizations. Die Erschließung neuer Absatzmärkte. The disclosure of new sales markets. Die Erschließung neuer Bezugsquellen. The disclosure of new sources of supply. (Leube 1996, p. 168, English translation by the author)

Schumpeter heuristics 143 First of all, Schumpeter considers himself as one of these necessary, vital, energetic, dynamic, economic leaders, capable of changing the economic environment. In order to succeed as an entrepreneur and to reshape the economy it is necessary to do something unexpected, to evade routines and to overcome our rules of conduct. ‘[U]ns vom Diktat der Routine zu befreien’’ (Schumpeter (1997 [1911], p. 100) means in particular ‘to free ourselves from the dictation of routine’. Die Bedürfnisse, die hier befriedigt werden, sind nicht die des ‘Wirtes schlechtweg’, nicht die, welche die ratio des Wirtschaftens bilden, und nicht die, auf welche allein deren Gesetze passen. . . . Da ist sodann der Siegerwille. Kämpfenwollen einerseits, Erfolghabenwollen des Erfolgs als solchen wegen andererseits. . . . Wirtschaftliches Handeln als Sport: Finanzieller Wettlauf, noch mehr aber Boxkampf. [The needs that are met here are not those of the ‘simple host’, not those forming the rationale of economic activity and not those on which fit only their own laws. But thereafter there is the will of the winner. A willingness to fight on the one hand, a willingness for success just on behalf of success on the other hand. Economic activity as a sport: financial race, but still more a boxing match.] (Schumpeter 1997 [1911], p. 138, translation by the present author) The entrepreneur represents more than the ordinary, rational or routinized host. The needs which have to be satisfied are far away from the laws of rationality. Schumpeter speaks about Siegerwille, which can be associated with the will to win; this characterized an entrepreneur in his opinion – to succeed in the economy, to win the boxing match. Schumpeter’s conception of the entrepreneur is deeply connected to the vision of for power-striving liberal men, willing to break with habits and tradition. But how can this vision succeed in an organizational context, how may the leader create appropriate organizational circumstances and establishes new methods of production? Brian Loasby (1984) argues that innovations driven by Schumpeterian entrepreneurs are successful with newly-created enterprises, start-ups. Economic change also needs a change in the productive methods or means of organization. In this respect all five rules (stated above) need to be satisfied for innovative, disturbing change. Organizational leaders have to be innovative in social and cultural matters as well, in order to prevail in economic terms. ‘[I]nnovation implies change, whoever introduces it, and the question at issue is whether organisations which are well practised in a particular activity may be expected to be less adept at innovation than outsiders’ (Loasby 1984, p. 176). This statement raises some crucial points regarding the role of organizational routines. Schumpeter himself did not care much about the practicability of routines or their specific evolution in organizations. The role of outsiders in a market always needs attention, because they work with different and novel organizational routines or

144

Institutions – generic heuristics

industrial practices, so their chances to establish innovations increase in niches. Otherwise routines play a specific role in the adaptation to new innovations, because new organizational routines are selected by the market, in boom phases for instance. This is also a point incorporated in Nelson and Winter (1982). The authors introduce organizational arguments into Schumpeter’s entrepreneur and innovation argument. Additionally Nelson and Winter’s success depended foremost on a combination of Schumpeter’s theory with elements of Herbert Simon’s organizational decision theory, which built upon bounded rationality (compare Simon 1982, 1991, 1996). The entrepreneur steps out of the circular flow with irrational or just unexpected behaviour and modes of decision making which allow for collective and cooperative awareness. Nelson and Winter (1982) introduce competition in intermediate sectors, such as industries; which are regarded as autonomous selection environments. Then organizational routines gain more and more significance, even for the whole business cycle. A possible justification for this practice [the use of the industry as a theoretical organizing device] is that innovation is not confined to pre-existing industrial boundaries: the process of creative destruction redefines the structure. Yet the impact of particular innovations is usually concentrated on a few sectors, and effective competition is usually competition among relatively few. (Loasby 1984, p. 176) Hence industries get redesigned via innovation in a process of creative destruction. Creativity enables a new product, a new mode of production or a new form of organization, but the dominant selection environment gets disturbed and sometimes even destroyed. Creativity may also endanger economic environments, especially when uncertainty and risk is very high; hence ‘Crisis is always potentially around the corner’ (Loasby 1984, p. 177). The potential threat of crisis forces enterprises towards more rigid organizational structures. Today large organizations have research and development departments (R&D), to accomplish safe innovation. Nelson and Winter (1982) used the concept of routines as their main analytic element, so search routines represent the innovative cores of corporations. Loasby (1984) announces some problems of routines for innovations, i.e. forgetting, unlearning or deletion. Routines go hand in hand with conduct. Employees probably follow them for decades with regard to the specific domain. These routines have made corporations successful and entrepreneurs and employees happy, nevertheless they can represent constraints for further innovative capacities. In order to create something novel, new modes of production are necessary and these modes usually demand the erasure of old habits. Such issues invite complex problems for organizations, since people will not understand why they should give up their welltrained routines and for the organization it may also mean to reinvent or even format its hard-earned tacit knowledge from time to time, the notion of tabula rasa. Leadership, firm size, efficiency in production and innovativeness form a set of tricky trade-offs regarding innovative action and economic change.

Schumpeter heuristics 145 ‘The apparent conflict between well-structured operating efficiency and effective innovation may help to explain why most large firms seem to get a poorer return for their research effort than smaller firms’ (Loasby 1984, p. 180). This is the challenge of entrepreneurship, the challenge of carrying out innovations, as Nelson (1984) defines it. Nelson analyses the incentives and motives for entrepreneurship. ‘Entrepreneurship is seeing an opportunity that others may not see, or which others discount, and taking the plunge’ (Nelson 1984, p. 182). Nelson criticizes heavily the neoclassical approach, also, concerning its narrowness, because in neoclassical models possibilities and in consequence creativity are given, so there is no room for a new introduction of organizational patterns or productive methods, even in endogenous growth theory. But what are the incentives to take the hard road of innovation? • • •

technological opportunity: requirements of R&D and other investments for innovation; which is also field dependent the size of the market: number of potential users of an innovation and how much each could benefit from its use ability of an innovator to appropriate the returns from his initiative: profits from innovation, differentiated from profits that imitators have made (Nelson 1984, p. 186)

These factor classes are also associated with potential net social returns, at least the first two of them, according to Nelson. Social gains create incentives for entrepreneurs to innovate, though it is not clear whether they strike out potential dangers from early adopters or so-called template externalities. Then investments in innovations are not recapitalized anymore. Additional backups for the Schumpeterian engine of innovative progress are institutional structures, such as universities or independent R&D centres. Nelson argues that applied science is not implemented in common models of competition and innovation. In recent years this situation has changed, there is a lot of work on the connection between knowledge spillovers, patents, government support, institutional set-ups, science, technological diffusion, innovation and economic growth, a taste of it is given in the subsection on technological change. We can refer to extensive work in the field of innovation systems, where institutional contexts are considered as biotopes for fruitful innovation. Schumpeterian competition and entrepreneurship demand a systemic approach, capable to deal with complex contexts, interrelations and interconnectedness. Innovation is about endogenous emergence and a good theory of innovation entails the parameter space of incentives and institutional factors nurturing creativity. Nelson indicates a strong trade-off between process and product innovation. Obviously it is easier to keep a product secret with patents than to keep a whole production process secret. In the latter case the entrepreneur will need trustworthy employees, able to protect important information on new processes and production methods. Potential joint gains from both kinds of innovation will make good entrepreneurship successful.

146

Institutions – generic heuristics

Regarding the connectivity of institutional structure and potential technological innovation, Nelson argues that science creates public as well as private knowledge. In particular, applied science creates greater incentives for entrepreneurs to cooperate and invest, because it develops private technological knowledge. Otherwise public technological knowledge is developed in the basic sciences. It is related to ‘broad design concepts, general working characteristics of processes, properties of materials, testing techniques’ (Nelson 1984, p. 191). The specific institutional context assigns specific potential for innovative entrepreneurship, basic science needs to be open for access and cannot be patented. Hence the perspective of innovation systems merges with institutional and governmental frames. Countries specialize or focus on the technological and industrial fields which are appropriate and crucial for them via the clustering of creativity, ideas, science, institutions, technology and entrepreneurship. The next critical step in Schumpeter heuristics concerns the transition from entrepreneurship and innovation to a theory of business cycles. First of all, Schumpeter (1997 [1911], p. 318) explains that his theory of business cycles is a theory of periodic waves which depends on innovative entrepreneurship, instead of a theory of periodic crisis. This theory builds largely upon the work of Arthur Spiethoff (1873–1957), who was engaged with modern business cycle theory his whole career and was a later colleague of Schumpeter; Joseph Clément Juglar (1819–1905), who was one of the main modernizers of business cycle theory and Schumpeter respected him a lot; and Adolph Lowe (1893–1995). When entrepreneurs introduce new combinations, the market will move into a boom phase as long as new products are available. Such a phase is then followed by depression which lasts until the ‘resorption process’ of the novelty is finished.4 Schumpeter’s main conditions for successful entrepreneurship rely on the existence of new possibilities in the private sector and a good, stable and calculable environment of the political economy. A crucial element for a rising boom phase is that new capital is arranged for new machinery and equipment. Further, these new investments give impulses to the markets of resources, labour and interior. The announced properties of the boom phase are quite similar to Spiethoffs’s explanations. The main difference between them deals with the reasons for depression at the end of a boom phase. Spiethoff concentrates on an overshooting in the production of capital goods, according to Schumpeter (1997 [1911], p. 318). This overproduction stands in no relation with available capital and cannot be satisfied by demand. Otherwise Schumpeter (1997 [1911], p. 318) explains depression with the massive occurrence of new following firms, which interfere with the current conditions of ‘old’ firms and with the condition of the political economy in general. In this context it is of the utmost importance that novelties do not grow gradually upon the old but emerge out of new combinations and consequently stand parallel to the old in strong rivalry, as already elaborated. This competition changes the economy from the bottom and invokes a strong integration process leading into disturbance and at last depression.5 These major changes shape institutional structures as well, since the political economy needs to restart again. Pure economic actions, whether they even exist or not, are

Schumpeter heuristics 147 not able to pull an economy out of a depression. The economy’s institutions adapt and vary during such a down phase and at the end of the day novel socioeconomic patterns are selected for the next push, in an endogenous process. Schumpeter’s theory consists of huge transformation processes captured in a wave-like rhythm. The transformation itself can be so strong that even the most dominant values can be eliminated. Nevertheless, these waves do not follow strong geometrical rules; they are involved in chaos and asymmetry, only the periodicity of ups and downs may show some regularity. We need to consider that entrepreneurs do not emerge continuously one by one, but in discrete cumulated mass points. These critical points initialize boom phases. Their origin is almost always due to a major innovative recombination by successful entrepreneurship. Then adopters follow step by step and fuel an economic wave by changing the economy’s institutions cumulatively. Schumpeter (1997 [1911], p. 369) concludes that waves are necessary even if they exaggerate economic conditions and values. Additionally the theory of long waves strikes out circular theories of capitalistic change in any respect. They exaggerate rise and shine, boom and bust, harmony and conflict, but the process of creative destruction is necessary for the emergence of something novel. Institutional environments depend strictly on the dialectic introduction of novelties. Beides, Auftrieb und Deklassierung, ist theoretisch und praktisch, wirtschaftlich und kulturell viel wichtiger als die Existenz relativ konstanter Besitzpositionen, auf deren Funktionieren allein so lange alle analytische Aufmerksamkeit konzentriert war. Und in ihrer besondern Art sind beide viel charakteristischer für die Wirtschaft, die Kultur und die Resultate des Kapitalismus als irgend etwas von den Dingen, die im Kreislauf beobachtet werden können. [Both boom and declassification, is theoretically and practically, economically and culturally much more important than the existence of relatively stable ownership positions, in their functioning all analytical attention was focused. And in their particular kind are both much more characteristic for the economy, the culture and the results of capitalism than anything of the things, that can be observed in the circuit.] (Schumpeter 1997 [1911], p. 369, translation by the present author) Hanappi (1989, p. 50) explains that Schumpeter’s work Business Cycles (1939) considered all economic activities as actualizations of overlays between various cycles, which are of different duration. Furthermore, these cycles may also reflect major stages of economic periods, in case of Kondratieff cycles for instance. Schumpeter’s cycles are composed of two waves in each case. The two waves are of fractal nature in his business-cycle theory, because any cycle, regardless of duration, can be reconstructed selff similarly via these waves. The first wave or primary wave is characterized by a period of prosperity invoked by extraordinary innovative entrepreneurial activity (Kondratieff spring/prosperity

148

Institutions – generic heuristics

~15 years for instance). Then it is followed by a recession with a high number of adopters after the peak of the prosperity phase (Kondratieff summer/recession ~15 years for instance). Prices become unstable at this point and disturb the market. Increasing prices raise potential speculation, initializing a second slope (Kondratieff fall/depression ~15 years for instance) leading to the secondary wave, then overinvestments may lead to a bust of the speculative bubble where prices reach their real values again, and the recession becomes a depression (Kondratieff winter/recovery ~15 years for instance). Afterwards a new cycle may start at this ‘equilibrium’ turnaround, explains Hanappi (1989, p. 51). In a chart-like visualization these waves represent the characteristic MM style of a business cycle. It has to be noted that Schumpeter said a lot about the duration, composition and length of cycles, but he hardly spoke about their amplitudes. The duration of a cycle is dependent on the individual character of the innovation: ‘the structure of the industrial organism’. Every long wave/cycle meets a short cycle at ‘equilibrium’ points, so that the number of short cycles needs to be a multiple of the amount of long cycles. Schumpeter subsumed his theory in a three-cycle schema, visualized in Figure 8.1. There can be respectively three ‘Kitchin cycles’ of a 40-months duration in one Juglar cycle; six ‘Juglar cycles’ of a ten-year duration in each case in one ‘Kondratieff cycle’ of an approximately 60-year duration. As Hagemann (2008, p. 232) points out, it was not an arbitrary decision for Schumpeter to stick to a three-cycle schema. He was totally aware that there is probably an infinite multiplicity of cycles on different scales. But for pragmatic and didactic reasons Schumpeter used the terminology of this threecycle schema ‘as a convenient descriptive device’ (Hagemann 2008, p. 234, citing Schumpeter 1939). It is also mentioned that the three-cycle schema should show the interdependences of short- and long-term economic development, the evolutionary character of cyclical change. Schumpeter speaks

Juglar cycle (~10 years) Kitchin cycle (~40 months)

Kondratieff cycle (~60 years)

Figure 8.1 Illustration of Schumpeter’s long-wave three-cycle schema.

Schumpeter heuristics 149 therefore of interference as the major issue concerning the simultaneous presence of different cycles and not of a problem of different causation. However, Hagemann (2008, p. 234) also remarks that this issue was later resolved when it was empirically clear that there are just different investment categories working on the different cycles. Thus the Kitchin cycles refer to changes and fluctuations in inventories, the Juglar cycles represent the fluctuations of fixed capital investment, the Kondratieff cycles are growth cycles and cover the long waves with regards to basic capital goods for very basic innovations, according to Hagemann (2008, p. 234). As a fourth cyclical movement within this respect we may add the Kuznets cycle. Hagemann (ibid.) explains that Schumpeter had already heard about Kuznets’ findings and would have liked to integrate it. The Kuznets cycles are of 18–25 years duration invoked by fluctuations in construction investments. Of course Schumpeter never associated the specific cycles with a certain class of economic operations, but it is of course innovation that drives all their cyclical movement with regards to different scale. Schumpeter considered the intersections of these cycles as unusual economic phenomena of extraordinary intensity; especially when the intersection phases are prosperity- or depression-phases. The intersection points at Kondratieff cycles represent major economic turnarounds, then, which can be compared with the rise of groundbreaking major inventions. However, as shown in Table 8.1 the Kondratieff cycles also overlap themselves. They are interconnected with major inventions and consequentially serious institutional changes in society, due to the introduction of real novelties. These can be considered as powerful inventions capable of turning things upside down. The second industrial revolution was invoked by the invention of the steam machine leading to tremendous changes in society and culture. The manufacture of petrochemicals led to the fabrication of synthetic materials enabling new modes of production as well. The fourth long wave was shaped by inventions in atomic energy, computer technology and electronics. It was the time of the Cold War that characterized this wave in political terms. Finally the last big invention in the fifth long wave was the internet leading to accelerated globalization processes. We discuss the issue of information and communication technology in Chapter 14. Also within the fifth wave, we find contemporary R&D focusing on bioand nanotechnology, where we still do not know what we have to await. New findings influenced by the Human Genome Project will shape the genetic endowment of life in a new and for sure problematic way. Obviously we need to monitor these processes and engage in institutional change in the direction of the really big ethical and moral questions coming to us. Transhumanist projects entail very critical developments at the moment and are not scrutinized in an appropriate way. Otherwise the bio- and nanotechnologies will also deliver highly fruitful results for the whole medical sector for instance. Innovations like these change cultural, economic, social and political life dramatically. But remember these innovations would not be drastic without the work, hope and will of dedicated entrepreneurs, backing these horses. Their mostly lagged impact enforces new institutional developments.

150

Institutions – generic heuristics

Table 8.1 Long waves of economic growth cycles Long Important innovations waves

Prosperity

1.

1782–1802 1802–25

1825–36

1836–45

1845–66 1866–72 1892–1913 1914–29

1872–83 1929–37

1883–92 1938–48

1948–66

1973–82

1982–95

2. 3. 4. 5.

Industrial Revolution (division of labour, steam engine) Railroads, steel mechanization Electricity, automobiles, chemical industry Atomic Energy, computer, robots, electronics Information and communication technologies, biotechnologies

Recession Depression Recovery

1966–73

1995–

Source: Hagemann (2008, p. 236).

Hagemann (2008, p. 235) also discusses that the innovations linked to the Kondratieff cycles are never of a particular and concrete nature, but represent a family or critical mass of innovations in these critical points in time. Schumpeter (1939) investigated quite intensively the first three long waves according to Table 8.1. Dopfer (2012) conceives the simultaneity of different cycles as a major source for the evolutionary notion of change. Various types of models, particularly wave or cycle models, can be built on this basis. In a Kondratieff model, innovations may be viewed as the causal inception of an emergent dynamic the pattern of which can be described as a logistic curve. The problem arises when this causality principle is applied to a many particle problem. Here, linear causality does not wash. (Dopfer 2012, pp. 149–150) It is the ubiquitous evolutionary character of economic development that characterizes also the institutional difficulties arising in the global division of labour. Institutional structures like trade unions, health organizations (WTO, WHO, etc.) emerged and tried to shape global production and consumption in correspondence to different development levels of economies. Global institutional networks are still in their infancy concerning their balancing challenges. A good example is given by the semi-conductor industry; it is now well-known that electronics and semi-conductors are predominantly produced in south-east Asia. But the necessary resources are harvested in Africa. Low wages and cheap production conditions (factories, equipment, resources) let multinational corporations manufacture their products in southern Chinese provinces such as Guangdong. Such economic processes have to be considered as post-colonial exploitation6 insofar as we have to admit that the huge economic upswing of Western OECD countries (compare especially the fourth wave as well as the beginning of the fifth wave) was made possible only via serious postcolonial exploitation and the working man’s death in Africa andd south-east Asia.7

Schumpeter heuristics 151 Richard M. Goodwin has always explained that the Schumpeter cycles are models and not prediction tools, hence they will never fit perfectly. Nevertheless they are able to explain and have to be understood as a theoretical kit for endogenous development. ‘The Kondratieff will shape the Juglar and the Juglar will distort the Kondratieff’ (Goodwin 1990, p. 83) The different cycles have different causalities in real economic terms, but they do influence each other in recursive matters. Schumpeter did not have the methods to model these dependences in an adequate, i.e. non-linear, way. Goodwin (1990, pp. 83–84) shows how to do it with contemporary methods, via the elegance of a neat non-linear difference equation system. His model is able to visualize Kondratieffs and Juglars in one system. He rejected modelling the Kitchins, because ‘Innovations play no essential central role in the Kitchins’ (Goodwin 1990, p. 83). His simple abstract discrete-time model looks as follows: Xt+l = aXt - b(Yt - Zt )

(8.1)

Yt+l = bXt + a(y, - Zt )

(8.2)

Zt+l

= CXt - dyj + ez,

(8.3)

Goodwin does not deliver specific information about the parameter space, just that the system has to follow a positive, constant trend. He uses suitable parameters for them; c remains the control variable. He simulates the system for a 100-year timespan and compares it with the Schumpeter cycles. Results and illustrations show the same characteristic behaviour as theoretical investigations suggest and can be compared in Goodwin (1990, p. 84). At last Goodwin notes that the Schumpeter heuristics do not reveal a system to predict economic activities in the future or to use it as a speculation tool; moreover it just shows decent regularities within irregular metrics. The Schumpeterian business cycles represent his own vision, a model capable of explaining economic reality, but not of predicting it. It visualizes generic change in a very selff similar way. Business cycle theory helps us to understand generic institutional change in two ways. First, the economic dynamics of boom and bust influence directly institutional developments and cultural environments, still invoked by innovative entrepreneurship under uncertainty. In this case, economic activity triggers changes in the institutional domain. Second, the theory of business cycles, dealing with emergence, diffusion and dissipation of innovation, can be used to build a similar theory of institutional life-cycles. This problem is particularly challenged by Kurt Dopfer in his work on meso-dynamics, as discussed in Chapter 10. For now we will have a more detailed look into Schumpeter’s institutional concerns on credit and capital. There is no innovation without credit and investment.

152

Institutions – generic heuristics

Credit, institutions and capital Credit has a central role in the economy, as it is financing innovation and household consumption to a certain degree. Schumpeter already anticipated the importance of credit as an institution in his Theory of Economic Development (1997 [1911]). As outlined by Arena (2008) Schumpeter distinguished between the legal and the economic aspects of credit. Schumpeter provides an illuminating example of this when he argues that the legal aspects of the institution of credit (namely, the strict requirement for the borrower to repay the lender) must be distinguished from – but also determine – its economic aspects (namely, the implications of this requirement for the expectations and economic behaviour of agents). (Arena 2008, p. 72) After entrepreneurship it is the institution of credit and money which worried Schumpeter in his economic system of thought and which he addressed as the second important institution in economic development. ‘Banks, however, are not only firms. They also support the second fundamental institution to be found in market economies, namely money and credit’ (Arena 2008, p. 86). As we discuss in Chapter 17 in more detail, within the policy realms the economic institution of banking and the complexity of credit is note really very well understood in the economic discipline. This notion is also connected to the dominance of the ‘Quantity Theory of Money’, where banking is not conceived with appropriate dedication. Hagemann (2008, p. 229) considers credit as fundamental in Schumpeter’s triad of innovation, entrepreneur and credit. Credit is thereby understood as the means of innovation through the acquisition of purchasing power. Although in Schumpeter’s view the banker is not the trader but the producer of purchasing power, and credit creation is a necessary condition for the financing of innovations and thus development in competitive capitalism, the banking system is not the decisive producer of business cycles but plays a rather passive role. (Hagemann 2008, p. 234) Thus we find even in Schumpeter an endogenous approach to money, where the expansion of the monetary base by bankers in favour of entrepreneurial activity results in a short-term inflation. As Hagemann (2008, p. 234) articulates, this inflation is interpreted as a ‘tax on the mere managers engaged in routine activities’ by Schumpeter. The interest rate is then based on the ‘productivityenhancing effects of innovations’ and does not appear as a mere monetary phenomenon; it is the ‘product of economic development’ thereafter. ‘[P]ractically and analytically, a credit theory of money is possibly preferable to a monetary theory of credit’ (Schumpeter 1954, p. 717).

Schumpeter heuristics 153 Schumpeter associates trust and safety with the emergence of bank notes. Bank money, understood as transferable deposit, was not the great novelty in the late seventeenth and eighteenth century, but the new practices and conducts involved with it made up the novelty (compare also Ferguson 2009). [T]he note that was a goldsmith’s receipt for gold actually deposited was really nothing but a device for increasing safety and convenience in handling one’s money, and fitted in perfectly with older ideas. New, however, were the practices of which the bank note became the chief vehicle, and the importance it acquired in consequence. (Schumpeter 1954, p. 317) This safety and convenience created trust among people and merchants, by the introduction of a new institution, i.e. banking. Schumpeter’s interest in the novelty of issuing money is also connected with the rise of new analytic economic practices. He argues that in earlier times trade was always considered as perfect trade, that commodities were exchanged exactly, without any residue. The monetary system changed with the evolution of money to credit-money. ‘Credit’ operations of whatever shape or kind do affect the working of the monetary system; more important, they do affect the working of the capitalist engine – so much as to become an essential part of it without which the rest cannot be understood at all. This is what economists discovered in the seventeenth century and tried to work out in the eighteenth: it was then that capitalism was analytically discovered or, as we may also say, discovered or became analytically conscious of itself. (Schumpeter 1954, p. 318) Capitalism was thus founded analytically as economists started to investigate money as credit. The new possibilities, enabled by credit, changed the monetary system tremendously. The banker’s function is about money supply and money velocity in this new system. The bank becomes not only an intermediary, independent and impartial element within a trade, which entails a very powerful function, the issuing of bank notes and the allocation of credits. But the bank also gains new purchasing power by expanding the monetary base with regards to investment demands. Let us briefly consider Montesquieu’s separation of state power in executive, judicative and legislative forces. Modern central banks do reflect a fourth force in this separation. The credit is therefore the most influential and powerful tool of a bank, which on the one hand earns and necessitates trust, but on the other hand has to work as a national power-balancing instrument as well, in the case of last resort lenders such as central banks. The credit ‘is merely a method of using it [money] more efficiently (Schumpeter 1954, p. 319). At first glance it seems that credit-money also speeds up the velocity of cash flows, but this observation remains superficial. Credit creates additional money besides the purchasing power of savings. Still banks have to balance out

154

Institutions – generic heuristics

incoming and outgoing money, but the roots and paths of a specific credit are not uniquely traceable. A credit for person A cannot be traced back to a specific deposit of person B nowadays, because banks use customers’ deposits as a single pot for further transactions, e.g. credits. Hence banks are able to create money independently from certain, custom deposits, so they do not merely exchange (understood as multilateral bank relations) money anymore, they expand or restrict it, in terms of endogenous money demand. Additionally created money let the banking system look like a cash-flow accelerator. [I]t is clear and actually beyond dispute that what the banker does with money cannot be done with any other commodity – or, as some of us would prefer to say, with a commodity – for no other commodity’s quantity or velocity can be increased in this way. (Schumpeter 1954, p. 320) Here we may also find the most crucial link between the real and the monetary sector of the economy. Money is not a commodity anymore, only in the eyes of a theoretical metallist, as Schumpeter notes. The evolution of money also implies the evolution of the most dominant modern institutions. With the emergence of credit-money banks became more important than ever in the economy. Hanappi (2009, p. 4) explains that money as credit becomes a process, because its value gets continuously judged in different social and cultural environments. Credit is about the trustworthiness of a whole economic system, with the rise of banks this trustworthiness became institutionalized during the Middle Ages. The banks took over the role of a contractor between a debtor and a creditor just on a superficial layer. Money changed dramatically, from a commodity-based, feudal, metallist structure to a financial contract in continuous process, i.e. the credit. Within this specific development lies a very deep evolutionary process of economic institutions. Property and wealth were completely redefined. The interest rate, therefore, determines economic time and consequently constitutes asynchrony of the economic agents and their corresponding biological identity. Now the argument goes on by defining the timers of the economic process. Hanappi (2009, p. 5) explains that the feudal structures broke down in the Middle Ages, because power moved to the banks which grew out of networks of private households, compare for example the rise of the Medici in northern Italy. These households used their savings to finance other non-feudal groups, e.g. merchants. Therefore we may conclude that these households induced institutional change by allocating credit-money. The new economic world built upon these emerging institutions concerned with this new kind of money. Credit-money also invoked the rise of private, independent, economic agents, because for the first time they could engage in separate economic activities, free from feudal ‘slavery’. In consequence contemporary economic rulesetting as well as our system of law builds heavily on the grounds of these unique changes in economic evolution. Major institutional changes were induced and the transformation from feudal, rural structures to the political entities of

Schumpeter heuristics 155 city-states and finally nation states came slowly but steadily. Nation states understood as accumulation regimes are primarily interwoven with the idea of capital, as Hanappi (2009, p. 6) argues. Otherwise Arena and Festré (1996, p. 117) argue that banks cannot be characterized as pure contractors or intermediaries, because of informational asymmetries between all of the participating parties. The authors support the idea of Stiglitz and Weiss (1988) that banks appear as social accountants in the economy, instead of mere brokers. The consequential role of the bank is to substitute the asymmetries between firms and banks within an auction market. The Schumpeterian story tells us that these auctions characterize capitalist development, the evolution of business cycles and the evolution of institutions in a highly significant way insofar as we may suppose that Arena and Festré (1996) focus on the monetary and credit part of entrepreneurship, innovation and business cycles. They argue that mainstream economics as well as several other interpretations of the Schumpeterian concept considered the implications of capitalist development too narrowly by concentrating too much on factors of the real side of the economy, i.e. technology and structural change. The crucial point in their analysis faces Schumpeter’s break with the Walrasian general equilibrium system: ‘However, it is the finance side of Schumpeter’s writings that demonstrates his break with Walras, especially in light of the history of economic dynamics and of monetary theory’ (Arena and Festré 1996, p. 117). The monetary argument for capitalist development also shows that there are theoretical problems going beyond a single hypothetical auctioneer. The capitalist system has to be considered as a network of several heterogeneous auctioneers engaged in a market process, those are real persons fighting with uncertainty as well. Hence trust is dedicated to real people of flesh and blood. According to Schumpeter there are two spheres in economic development: first, the business sphere where commodities are traded and money is circulated through banks by providing credit; second, there is the sphere of the money market which enabled the development of stock markets. Money is not circulated anymore, i.e. idle money. Ad hoc created credits in the commodity sphere provide financial instruments for entrepreneurs; hence entrepreneurs always have to be debtors in a first instance. In this respect banks earn a serious and respective role in the economic process of innovation. Of course they are more or less involved in daily deposit business, nevertheless they decide on the specific volume of credits for uncertain economic activities. For that very reason it is impossible to explain innovation within a system of circular flow, because entrepreneurial activity is in need of money expansion; finally – regarding just the creation of extra money – it does not matter whether the specific credits come from other firms, banks or the government. This part of Schumpeterian economic thought has to be regarded as a purely dynamic one and we have to recognize that these dynamics are totally dependent on institutional structures, which represent the proper origins of money expansion. Here we find the locus of economic evolution. As a parallel modus operandi for economic dynamics Schumpeter suggests the steady growth model, which builds upon mere saving and investment without any money

156

Institutions – generic heuristics

expansion and credit. In this case we do not need any banks; it represents an economic schema of subsistence. The third case which is not treated here builds upon the idea of arbitrageurs, who trade on the basis of information asymmetries. Money expansion through credit involves a positive interest rate, which allows capitalists to increase their savings in the second sphere of economic development, i.e. the money market. This economic opportunity reflects a well-known practice today, since the money market spilled over during the last 30 years. In fact the problem is that capitalists do not focus on innovation anymore, because it is much easier to duplicate or to triple their capital via strategic financial investment in other merely financial structures in the money market, where the yields grow and grow till bubbles burst. It is also a major economic threat that this money is not circulated anymore within the real sector of the economy. ‘[O]n the surface . . . credit creation tends to lose its relation to innovation and . . . becomes an instrument for financing business in general’ (Arena and Festré 1996, p. 123, citing Schumpeter 1939: I, 159). Schumpeter synthesizes the two markets by arguing that the money market determines the short-run rate of interest and that there is no such thing as a long-term rate of interest just provided by industrial organization in the real economy. Short-term loans and long-term assets are of the same nature. Schumpeter insists that long-term assets are just trend values for short-term loans. Consequently, long-term assets prevail over short-term ones, where high risk gets amortized. Then banks also shape the long-term development of the economy, influencing technology, innovation and knowledge accumulation by determining the so-called trend-values. In conclusion Arena and Festré (1996, p. 126) note that Schumpeter introduced a circularity between industry and finance. This circularity makes his so-to-say monetary extension a serious competing theoretical body to orthodox monetary economics. Institutions and capital The classicists largely assumed that the institutional frame of capitalist societies stays constant; hence they took it for granted and exogenous, with some expectations. Mill argued that people may change institutional settings along rational projections, but the idea of institutional change from within remained a Marxian heritage. Schumpeter argues that the English classical economists envisaged institutional constraints just on the grounds of private property relations, which notably emerged with the rise of money and credit. The one and only considered institutional body was the medium-sized firm, understood as a private partnership. These partnerships then shaped free competition, remaining the only institutional assumption. Therefore competition was not understood as a market property, resulting from economic actions; it was rather taken for granted. In fact, during the classical period political economy was built on laissez-faire arguments. The state’s function was to protect the firms and to guarantee low taxes for good business, hence political economy was more or less made and controlled by the business class, by the owners of capital. And only these owners shaped institutional conditions, because capital involves power and nothing else.

Schumpeter heuristics 157 And, though for different reasons in different countries, this was so in actual practice not only as a matter of fact but also as a matter of practical necessity: no responsible administrator could have held then, and no responsible historian should hold now, that, social and economic conditions and the organs of public administration being what they were, any ambitious ventures in regulation and control could have issued in anything but failure. (Schumpeter 1954, p. 548) In Schumpeter’s eyes the management of a political economy is just about scientific expertise and this expertise needs to make analytical progress in order to justify fiscal intervention and public administration. Schumpeter explains that economists were simply too inexperienced and analytically too weak, that they could not interfere with the market without creating economic and political turmoil. This notion reflects on the one hand a very characteristic attitude of Schumpeter, regarding economic professionalism, and shows realistically that economists were not equipped with the necessary knowledge and experience to handle the new complexity of the economic process in that period on the other hand. As a logical consequence, laissez-faire was the only political program appearing on the horizon. The institutional setup of the state was in its infancy, in comparison to the economic challenges it should meet. In the eighteenth and nineteenth century statesmen were mostly landlords and capital owners, hence the incentives for increasing and improving economic knowledge for restrictive fiscal policies were not really that high. These circumstances certainly changed with the rise of the working class during the industrial revolution and the idea of the nation changed as well. The formerly concept of a mere bourgeois nation got disturbed, since the proletariat gained more power. The nation could no longer just serve the ends of landlords and capitalists; a nation’s population had to diversify its goals for the first time. The new categories of social classes invoked major institutional changes, slowly but steadily. Marx and Engels showed that the capitalist process built upon exploitation. Their economic analysis introduced heterogeneity and diversity into economics, whereby the English classical economists envisaged the economic agents in a single homogenous category. Schumpeter (1954, p. 552) argues that the conception of social classes also introduced a new economic analytical dimension, now also dealing with real public affairs, such as resource allocation and income distribution. In fact, this analytic turn brought political arguments into the economic realm and a new political economy was born. The class structure of a society constitutes along its distribution of capital and its productive methods in a first instance, but it deals with accumulation to a greater extent, especially with regimes of accumulation. This argument involves capital formation as an accumulation process, treated by Hanappi (2009, p. 6) for instance. Capital is here understood as an abstract algorithm guiding economic action; hence agents are driven by this accumulation process. This specific idea applies very well to the general theme of this work, because it deals with a generic principle of change. Hanappi suggests following sequence of capital sub-processes encapsulated in a loop.

158

Institutions – generic heuristics

Capital Algorithm by Hanappi (2009, p. 7): For each member of the set of currently possible visions do (‘vision loop’) { • Produce a vision of specific entrepreneurial activity • Check expected wage cost • Check expected interest on credit-money (vulgo ‘capital cost’) • Check expected effective demand • Compute expected growth rate of capital • Estimate the probability to achieve that growth rate } Choose the vision yielding the highest utility of a mean-variance utility function Check if the selected vision’s utility exceeds the expected utility of a supplier of credit-money If the lender’s utility is higher, then perform the chosen project, else become a supplier of credit money. This kind of algorithm shows capitalist performance within a Schumpeterian model of entrepreneurial innovation. Hanappi (1989) explains how capitalism developed in their characteristic stages, from merchant capitalism in northern Italy until industrial capitalism. He also proposes that we act within an integrated capitalism nowadays, because almost all human action is already integrated and incorporated into this very capital algorithm. In the end – in Hanappi (1989) – this stage is called ‘integrated capitalism’ – not only production units but every household, and every institution has become a private economic agent following the abstract algorithm of capital accumulation. Concepts like human capital and competence capital show that the higher degree of abstraction that money did arise to, enables and opens up an incredibly wide field of possible application. It is thus not surprising that in the history of economic thought a sharp turnaround took place: the mirror image of the real course of economic development observed in its contemporary state started to be taken as its actual origin. (Hanappi 2009, p. 7, original emphasis) Thus we are able to explain the capitalist process as a selff similar generic principle trying to envelope all human spheres. It is therefore of utmost importance to develop an institutional economics capable of dealing with this generic nature of capitalism from an evolutionary point of view. Otherwise economics could develop as an atomist science of private economic utility-maximizers for that very simple reason. Mainstream economics could also reshape the idea of prices. In a stringent orthodox economic concept ‘prices are exchange relations of quantities of commodities and not a monetary expression of the social value of a

Schumpeter heuristics 159 unit of a certain commodity’ (Hanappi 2009, p. 8, original emphasis). We may conclude then that this conception led to the Quantity Theory of Money, generally neglecting the role of money as credit and foremost as capital. The vision of money as a process is not incorporated in the quantity theory. Money remains exogenous in the orthodox model; consequently institutions are conceived as exogenous as well, because their development is neatly interwoven with the rise of new forms of money relations and new forms of money interpretations; of course also including new forms of credit and capital. An endogenous theory of money is of utmost importance nowadays: we need to understand how money endogenously mutates into new forms, covering not only the spheres of the market and the state but also of communities in group selection processes, as discussed in Chapter 7. Hanappi (2009, p. 8) indicates what went wrong with economics in his argument, starting with the dominant rise of microeconomic theory, which neglected money as a social relation in the form of credit. Within such a perspective it was not possible to develop a theory of technological progress and of institutional change. This would have been possible, as Hanappi (2009, p. 9) notes if economic agents had been treated as what they really are, ‘exploitation maximizing enterprises and not as mere traders’. Such a perspective opens a realistic picture of capitalism and suggests looking into the various forms of money and moreover into its evolutionary institutional process.

Technological change Another dominant theme in Schumpeter’s work is clearly about technological change and creative destruction. In this brief subchapter we elaborate the main characteristics of the concept of creative destruction and its influence on technological change and the evolution of institutions. Metcalfe (1998) gives a seminal introduction into the very idea of evolution in economics. His outstanding work is special in two ways. Metcalfe focuses on economics as a rival and competitive process which changes from within in Schumpeterian tradition and he explains why structural change is not stationary or gradual. Evolutionary processes are processes which explain the changing patterns in the relationships between entities. Creative destruction is an apt description of the genre, and what makes capitalism distinctive is the decentralized and distributed capacity for introducing new patterns of behaviour, whether they be technological, organisational or social, they are the fuel which drives economic change. (Metcalfe 1998, p. 3) Metcalfe also proposes that growth and economic change is fundamentally diverse and that technological impacts may trigger enormous and surprising growth rates, which then shape economic structure in new ways. He gives several examples regarding the rise of information technology in comparison to the motor industry sector in recent decades; the rise of genetic engineering as an

160

Institutions – generic heuristics

uncertain process regarding moral or ethical issues, but as a process which will certainly establish huge structural change. In fact, capitalism is a system provoking speciation along competition. Metcalfe explains how evolutionary mechanisms work in a socioeconomic context, by that he also emphasizes that ‘Economic variation is simply not random enough for the Darwinian process to work’ (Metcalfe 1998, p. 6). Hence it needs more than the Darwinian trajectory to grasp the nature of economic evolution, which is endogenously transformed by human beings. This notion is also a fundamental concern of Schumpeter which persists visibly in his whole career. It encompasses creativity and novelty. In the chapter on ontology we have already discussed the issue of novelty via the work of Witt (2009). In this work we have learned how complex and difficult it is to describe the concept of novelty or to describe idea from an ontological perspective. Here in this heuristic context we are more concerned with the collective strive for something novel and its coordination or non-coordination process. The individual acts of creativity on which its mechanisms of change depend are remarkable for their lack of co-ordination. Yet the consequences of this immense micro creativity depend deeply upon the strong co-ordination of the fruity of that creativity by market processes. The joining together of the uncoordinated striving for innovation with the subsequent market coordination of the resulting activities is for me the distinctive feature of the capitalist mode of change. (Metcalfe 1998, p. 6) The individual cognitive act of creativity is the tip of the iceberg; the whole process of innovation is involved with a variety of other factors: one of them is competition, which is a process of destruction. Innovations diffuse and create new patterns of behaviour, but they also trickle off old patterns. The relationship and dependency of technology and culture gets closer when new systems of thought or competitive relations are introduced along certain innovations. The differences in behaviour, the different patterns of habits and conduct govern the rhythm of economic evolution. This rhythm also tests new technologies for their practicability and degree of innovativeness. Metcalfe (1998) suggests in a Schumpeterian tradition that this continuous testing is a market process of trial and error, following an evolutionary logic, so innovation also remains an unpredictable bottom-up process. In this respect Metcalfe argues with Schumpeter as well as Hayek, that innovative contest is a competitive discovery process, shaping economic institutions. Hence equilibrium capitalism has to be a contradiction in terms. Different technologies set up a variety of industries, which are for themselves competitive. It is not only the number of firms making the industry competitive: ‘Thus an industry is not competitive simply by virtue of the number of firms it contains but because increasing numbers imply increasing scope for differential behaviour’ (Metcalfe 1998, p. 18 citing Brian J. Loasby). Metcalfe (1998) compares competition with contesting, as a fundamental evolutionary property. Struggles or contests motivate people to participate and to

Schumpeter heuristics 161 innovate in the economy and to master the game. Industries are perfect arenas for these evolutionary contests, where firms compete for success, in order to influence the rules. Dasgupta and Stiglitz (1980) argue that the high economic performance of advanced industrial nations stems from their continuous innovativeness. Innovations emerge where competition within industries is quite dense and where the contests are fiercely disputed. A difficult topic within Schumpeterian economics deals with the degree of competition, or the composition of liberalism and regulation within a social market economy. It is an issue that concerns the whole heuristic character of institutional change. Competition may favour innovativeness, but it also raises social costs. This trade-off influences economic debates on growth, technological change and welfare in a particularly fundamental way. Policies walk on this thin line. Empirical findings have shown that the mantra of perfect competition tips over. Dasgupta and Stiglitz (1980) also argue that the concentration of an industry is more the cause of innovation and not the other way around. Concentration has to be understood as endogenous in industrial organization. In order to understand technical progress the authors look into three different market structures and analyse their nature of inventive activity and potential for innovation. This kind of economic research, as well as the development of the neo-Schumpeterian doctrine by Nelson and Winter (1982), can be regarded as the rise of a new industrial organization literature, concentrating on structural change and economic behaviour. Here the degree of concentration and potential innovation depends on, as Dasgupta and Stiglitz (1980) write, ‘more basic ingredients’, such as the technology of research, demand conditions, the nature of the capital market and the legal structure. Furthermore the relationship of industrial concentration and innovation is not regarded as causal. In fact, industrial organization and technological progress depend on a complex set of institutional conditions. Microeconomic theory suggests looking into the decision-making of a single firm and aggregating it for a whole industry. However industrial organization is far more complex; there are several firms competing for market shares, their decision-making has to be considered as interrelated. Why is the study of technological change and industrial organization important for our concerns? The structure of an industry and its technological potentials influence the institutional setup of our society, feedback effects from innovations to institutional change have to be considered. Technologies create new modes of communication for instance, or new modes of transport. Firms have to react to cultural change and need to consider it in their expenditures on R&D. Dasgupta and Stiglitz (1980, p. 267) refer to risk-taking as a crucial issue concerning strategy formation in industries. R&D strategies reach between pure imitation of other firm strategies and pure risk-taking; specific R&D risks will depend tremendously on the cultural background. Therefore R&D expenditures can be either wasted due to duplication and imitation strategies or can be lost through exhaustive production efficiency when too much risk is taken. This spectrum opens the decision radius for the entrepreneur and the organization. Technical progress and aggregate output will depend on these decisions consequently. ‘What makes the analysis

162

Institutions – generic heuristics

all the more difficult is that each decision on the part of a firm has to be made within an industrial structure which is itself endogenous’ (Dasgupta and Stiglitz 1980, p. 267). Industries do not have a constant structure and they are not equal around the world. They are heterogeneous economic systems with a huge variety of different goals and duties. Together they create change in a continuous way by creative destruction, in a non-random as well as non-determinant way. Additionally progress does not necessarily mean something normatively good. Conclusively, expenditures in R&D do have a strong impact on society. For rather a long time, economists have thought that there cannot be too much investment in R&D, so the only threat to an innovative industry – from society’s point of view – was the rise of a monopoly or a cartel. Overinvestment in R&D can raise similar problems as underinvestment for technical progress. The analysis of competition in R&D brings in several advantages compared to the common analysis of product competition. Technical progress is not only dependent upon the invention and diffusion of a new product; it is mostly concerned with process innovation, which usually aims at reducing the costs of production input. Dasgupta’s and Stiglitz’s (1980) study focuses especially on competition in R&D for process innovation, that firms within an industry may gain comparative advantage. This comparative advantage generates technical progress within an industry, that firms gain novel knowledge on production processes in the long-run. These innovative firms consequently increase returns to scale per unit. Finally, building upon the work of Arrow (1962), three different market structures are investigated: the socially managed market; the pure monopolist; and the competitive market. Arrow’s (1962, p. 152) conclusion was that ‘the incentive to invent is less under monopolistic than under competitive conditions, but even in the latter case it will be less than is socially desirable.’ So Dasgupta and Stiglitz (1980) reconsidered Arrow’s conclusions. They introduced possible competition in R&D regarding the degree of expenditure and analysed the three cases again. In this outline, research strategies for process innovation play the major role in their new model. It appeared that entry conditions and barriers into the market do not play a crucial role as usually assumed in the literature on monopolistic competition and oligopoly markets. More than that, the authors have shown that higher competition does not lead to a higher degree of innovation for the whole industry, because: The point is that while the industry spends more on R&D as a consequence of increased competition, each firm spends less. The extra expenditure is essentially wasted in duplication. . . . We conclude that for the model at hand (unit) cost reduction is insufficient in a market economy whether or not there are barriers to entry; and consequently, market price for the product is higher than is socially desirable. (Dasgupta and Stiglitz 1980, p. 281) Obviously the monopolist does not have any problems with duplication in R&D. Nevertheless the authors acknowledge that ‘the speed and rapidity with which

Schumpeter heuristics 163 technological innovations take place’ are greater if there is free entry into R&D in the market economy. These findings all support the evolutionary trend in the economic theory of innovation and technological change, thinking more in systemic than merely functional terms. Innovation policies need social adjustments via regulation. Market economies building upon perfect competition do not deliver the expected innovation capacities for technological advances. Innovation systems combine the competitive discovery process of an industry with the knowledge and autonomy of states, regions, universities and of independent research institutions. Elsewhere Dosi (1982) emphasizes that the introduction of a new technological paradigm has to be considered as a discontinuity in the evolving economy. A technological paradigm is here generally compared with a scientific paradigm. Routinized economic change is induced along technological trajectories, defined by a certain technological paradigm of a long wave. Dosi argues that Schumpeterian entrepreneurs act during a paradigmatic shift. In consequence one cannot describe the innovative process within a onedirectional heuristic frame. More factors have to be included into the game, as also elaborated by Dasgupta and Stiglitz (1980). These more-or-less institutional factors change the scope of innovation theories. In mainstream economics there are two dominant models for technological change: the demand-pull model and the technology-push model. Dosi (1982, p. 147) ascribes disadvantages to both types, but his propensity goes for the latter. Demand-pull models of innovative change are problematic, because they work in a reactive way, where technologies become readily available. The market is the so-called prime mover of technological advances within this concept. Whereas technology-push models are conceived as causally determinant, here innovation has to happen along a strict path from science to technology and finally to the economy, in a rather autonomous process. Economic concepts, frames and heuristic devices differ mostly with regard to the same question – central control or emergent coordination. Here the issue at stake is technology and its related scientific knowledge. The question is if society is able to think whether innovation and technological change can (positive) be enforced or controlled as an autonomous vehicle – regarded as radical innovation – or if innovation is a mere emergent property of a market demand-side process? This aspect implies discussion whether society should (normative) foster radical innovation. Both questions cannot be answered in a straightforward way, because technologies – institutions, also – need a complex mix of both strategies. This mix is restricted to local situational conditions – i.e. singularities/discontinuities – on the one hand and global regularities/continuities, actualized as trajectories on the other hand. Dosi also proposes that each technological paradigm has its own innate concept of progress, so that the mode of innovation is an inbuilt property. This concept emerges out of specific technological and economic trade-offs, attributed with a certain direction of advance, i.e. the technological trajectory.

164

Institutions – generic heuristics The basic argument however maintains that there generally exist a possibility of knowing a priori (before the invention process takes place) the direction in which the market is ‘pulling’ the inventive activity of producers and furthermore that an important part of the ‘signalling process’ operates through movements in relative prices and quantities. . . . With respect to producers, this viewpoint implies that the ‘choice sets are given and the outcomes of any choice known’. (Dosi 1982, p. 149)

Thereby focus is given to the modelling perspective of a demand-pull theory; it simply imputes an a priori knowledge of the market. This point obviously contradicts Schumpeter’s perspective on innovation and technological change. The reactive interpretation of an innovative process does not fit into the idea of the entrepreneur. Otherwise one has to admit that the technology-push concept tightens potential emergence of innovation, because it works foremost within a one-directional frame. We may summarize that innovation models need to compete with the complexity of industrial organization, relative autonomy of technology, uncertainty of producers as well as demandside economic factors, such as consumer trends, needs and wants. Within such a frame it should be possible to trace back the transformational process of the economy. Dosi (1982) builds upon the idea of scientific paradigms and research programs, elaborated by Kuhn and Lakatos. We already discussed the epistemological issues of scientific progress in the introduction by referring to Hanappi (2003) and in Chapter 3 by referring to Dopfer (2005). The major idea is to take an analogy between science and technology as sets of certain epistemes with respective advance directions. The paradigm plays the most important role in both categories, by constituting the core where axioms are mapped and positive as well as negative heuristics are communicated. Therefore Dosi suggests the following definition for a technological paradigm. In broad analogy with the Kuhnian definition of a ‘scientific paradigm’, we shall define a ‘technological paradigm’ as ‘model’ and a ‘pattern’ of solution of selectedd technological problems, based on selectedd principles derived from natural sciences and on selectedd material technologies. (Dosi 1982, p. 477, original emphasis) Hence a paradigm serves as a generic heuristic advice for framing problems in general in this respect. A certain technological paradigm serves generic technological needs; Dosi refers to ‘transporting commodities and passengers, amplifying electrical signals’ (1982, p. 152), then the technological paradigm can become associated with a general purpose technology at the end of the day. However, a paradigm is perhaps the wrong terminology as was discussed in the introductory lines of this work. Dosi has in mind the notion of a grammar or a set of what we would call synthetic sentences. Then it would

Schumpeter heuristics 165 relate to the idea of a technological program in an evolutionary perspective. However, certain actualizations or to-be-called technological phenomena building upon a specific paradigm are then part of a technological trajectory; i.e. in terms of Dosi (1982, p. 477) the ‘pattern of “normal” problem solving activity (progress).’ The generic need for transportation was entirely solved by the invention of the internal combustion engine and a new technological paradigm was born. We may find manifold adequate solutions to the transportation problem, but the combustion engine remains the triggering innovation. Still an essential difference between science and technology lies in the composition of knowledge. Furthermore we have to mention the negligible difference between their cores and their belts, i.e. according to Dosi (1982, p. 478) comparable with the difference between problem-shifting and problem-solving. Trajectories shape the diffusion process of new paradigms, though they are still shaped by diffusion. This somehow typical economic paradox is representative for all opposing forces as well as feedback dynamics in economic processes. In the next few lines we will explain a hierarchical selection process where top-down and bottom-up forces are involved in the emergence of innovation. The issue of diffusion is rather easy to treat in this respect, but it is difficult to find out why given paradigms are selected and others not. A possible explanation is given by Dosi along the idea that economic, social, cultural and institutional factors select a certain paradigm, they serve as a selective device. Nevertheless these factors influence the spectrum of possible technological directions, i.e. the trajectory itself; after a specific selection of a core paradigm. Dosi suggests imagining a technological trajectory as a cylinder, where the boundaries are stated by the paradigm. Institutions form this cylinder and shape technological progress. In particular we may propose that markets alone are not able to form such a cylinder, because they just act ex ante on technological change. The author speaks of ‘bridging institutions’ which are needed to communicate knowledge between pure science, and applied R&D. This issue revisits competition, since competition among possible new alternative technologies builds up a new paradigm and a new trajectory. Consequently we are confronted with a two-stage selection mechanism. The above-discussed selection happens between science and technology levels. At the next level we have to consider a technology-production selection, where the markets jump in as selective devices ex post. The first selection mechanism sorts out the direction of mutation (selecting the technological paradigm) and the second mechanism sorts out possible mutations. Dosi (1982, p. 481) refers to the latter as a more Darwinian selection, which is also in tradition of a Schumpeterian process of trial and error. This subsection dealt with the institutional issues enabling Schumpeterian technological innovation. Institutions involve politico-economic processes which constitute frames for innovation (the boundaries of the cylinder), in sense of specific orders. If we consider institutions from a mere micro or macro perspective, then innovation will also remain in these domains; that means innovation will rely especially on private ownership or state-driven corporations. However with

166

Institutions – generic heuristics

generic institutionalism we want to vitalize the bottom-up notion of innovation. Modern entrepreneurs look different from Schumpeter’s conception and technology is not only processed by science and large R&D corporations. Innovation and technological change are also represented in small biotopes which are not visible at first glance. The process of social learning leads to such biotopes where ideas are born in smallness due to specific cultural patterns carried in the cylinders of distinction.

9

Bourdieu heuristics

Contradictions shape the evolution of economic institutions, as we have seen by discussing the heuristics of the patrons of early evolutionary economics, Veblen, Hayek and Schumpeter. These contradictions constitute the social practices of society and mark the distinction in the cultural patterns of life. Pierre Bourdieu (1930–2002) dedicated his scientific career to establish a dynamic socioeconomic framework capable of explaining the mechanisms generating and internalizing the distinction in the habitus of economic agents. These generative mechanisms indicate the social universe of big and small entrepreneurs, of conspicuous consumers, of workers, teachers, engineers and so on; they also deliver answers about change in these universes from a cultural perspective. Of course the places we have in mind are not necessarily of a geographical nature. Bourdieu heuristics provide evolutionary projections looking into the intersections between social, cultural and economic spaces, with emphasis on the dispositional character of social structures. The interdependent institutional location of a certain economic agent is understood as an emergent property from the cultural, the social and the economic spheres, with regards to its symbolic capital. Moreover this position is internalized within the body–mind nexus in the form of specific habitus. Institutional change is thereby characterized through the acquisition and reproduction of symbolic capital as an emergent property; it stands for the endogenous generation of power in society and is central to institutional change, therefore. In generic institutionalism we incorporate this aspect as a fourth pillar for the bottom-up generation of evolutionary economic programs. Bourdieu’s economic sociology concentrates on the habitus as mediation between structure and agency. Bourdieu (1974, p. 118) follows Whitehead’s Science and the Modern Worldd (2011 [1926]) and argues that the social forms of thought of a specific epoch express themselves via their artworks in the most complete and elementary way. Where Whitehead refers to the most concrete forms of literature in particular, to investigate the veiled principles of a generation, Bourdieu (1974) emphasizes that it is the consumption of cultural goods in general which codifies a certain habitus. Bourdieu refers continuously to Max Weber in this respect, indicating the relation between cultural consumption and the demarcation of social classes or fields. In Chapter 7 we discussed the notion

168

Institutions – generic heuristics

of group selection; Bourdieu (1974, 1982) delivers the most appropriate cultural theory of group selection in principle, because he designed the theory of habitus as a culturally evolving system. The affiliation and belonging to a certain group is never explicitly clear, it depends rather on the unconscious habitual patterns which are internalized via cultural consumption (Bourdieu 1974, p. 118). Within generic institutionalism it is interesting to note that Bourdieu heuristics follow also the affective and sensory patterns of concrete actions which are culturally transmitted in a very similar way as we have elaborated in Hayek heuristics. Whereas the latter focused more on the imitation and adaptation of rules of conduct as traditions, the former approach articulates the imitation and adaptation of cultural consumption via music, literature, artwork, sport and so on, as we elaborate in this subsection. We focus in both systems on the lines of demarcation – the principles of distinction – to investigate the relation between structure and agency as a communication-based system which underlies the rules of the game. ‘These rules dominate the interpersonal relations within the social universe of the artist and his recipients’ (Bourdieu 1974, p. 118, translated by the author). Furthermore we find commonalities with Veblen heuristics on the very same theoretical layer. On the one hand Veblen and Bourdieu developed both a sociology of symbolic forms, visible in their most prominent works (Veblen 2000 [1899]; Bourdieu 1974, 1982). Both authors elaborated an institutional theory entailing a very deep criticism towards capitalism which builds upon symbolic consumption and pecuniary interests. On the other hand Veblen’s habits of thought represent also cultural dispositions as manifest in Bourdieu’s habitus in comparison to other more behavioural interpretations. Similarities seem even more reasonable when we compare Dewey’s (1958 [1925]) writing on Experience and Nature, definitely influential for Veblen, with Bourdieu’s (1974, 1982) major theoretical streams. Dewey (1958 [1925], p. 21) criticizes a still prevailing philosophy drawing an arbitrary line between nature and experience, ‘They are things had before they are things cognized. . . . It accounts for the belief that nature is an indifferent, dead mechanism’. To this extent cognition was always supreme and separated from the vagueness of affects or emotions. The emphasis is therefore given to a mind–body nexus where insights can get drawn from experienced and concrete action, i.e. a theory of practice. Knowledge becomes naturalized and internalized in the agents’ practices and receives reason, therefore. Hence, unless there is breach of historic and natural continuity, cognitive experience must originate within that of a non-cognitive sort. And unless we start from knowing as a factor in action and undergoing we are inevitably committed to the intrusion of an extra-natural, if not a supernatural, agency and principle. (Dewey 1958 [1925], p. 23) The common thread within Veblen, Hayek, Bourdieu and even Schumpeter heuristics is given by the recognition that knowledge appears only as a factor of

Bourdieu heuristics 169 action. Within such an outline institutional thought reaches a dynamic foundation incorporated in this generic institutionalism. Knowledge is naturally and socially embedded. Learning becomes a matter of group selection and its formation in the mind–body nexus a communal process. Bourdieu’s specific emphasis uncovers that even the most distinguished individual action or reason carries this evolving knowledge through its habitus, its system of cultural dispositions. The crucial point – as also articulated in Dewey (1958 [1925]) – relates to the notion that this agency is by nature not determined, even if it structures a specific social space by cultural interaction. However Bourdieu was a strong opponent of the neoliberal ideology, which grew tremendously in the second half of the twentieth century. His critique on capitalism deals with the overemphasis of the individual, which did not result in more freedom for the individual, since power was assigned more and more to the aristocracy of finance. He expressed his critique in two collections of essays Contre-Feux 1 et 2 (Bourdieu 1998, 2001).1 As a counter project, Bourdieu (2001) emphasized the need for a social utopia for the European Union, in contrast to a mere financial individualistic utopia as was even pursued by New Labour. A critique on an overemphasis of finance-led capitalism is also apparent in all investigated heuristics, by Veblen, Hayek, Schumpeter and Bourdieu. All of them acknowledged that if finance concentrates in global monopolistic centres for too long, establishing a dominant position of power against labour and industrial capital, then the capitalist system faces deep trouble; of course a notion which was already apparent in Marx and Engels. Therefore European institutions need to install the concept of social partnership in a broader range if a stronger political integration is at stake. Since the stepwise resolution of the national states erodes the European social welfare program and nationalism may arise again in consequence. Bourdieu’s work always looks for an adequate way between an overemphasized focus on structure as well on agency. Social and economic scientists play a significant role in such transformation processes, because they shape the biotopes for new politico-economic concepts. Bourdieu belonged originally to the structuralist camp in sociology; hence his way of arguing was influenced by the work of Durkheim and Weber as well as Saussure. Nevertheless Bourdieu started to develop a theoretical strand between the lines, even if some critics regard his project as therefore too conflating and superficial. This project became recognized with the concept of habitus and his theory of practice. The habitus represents research located in anthropology, where he investigated cultural coherences in Algeria, mostly investigating the culture of the Berbers. Bourdieu elaborated the idea of the reflexive field in his studies. Field studies make science attractive, because the scientist becomes a part of the study, the field itself. In consequence the field reveals a morphological social instance, an evolving and highly modular complex adaptive system. A field emerges in a set of habitus. Bourdieu’s (1982) La Distinction: critique sociale du jugementt represents a theoretical universe about the interconnection between cultural dispositions and its relation to economic and social positions. The reader becomes the subject of the study itself,

170

Institutions – generic heuristics

one is invited to locate oneself in this universe. This is what habitus is about in general, it is about social practices, the logic of the social and how it is founded in daily life-style insofar as it is a theory of action and its location in social and economic spaces; therefore it is also a situational theory and not just a theory of cultural regularities. Bourdieu condensed this theory in a very compact way in his 1994 Raisons pratiques: sur la théorie de l’action. Here the focus lies on the emerging dynamics of habitus in society, how the habitus becomes a hub of social action and social living. The imprinting frame of habitus depends on acquired characteristics transmitted via the family and the education system, but on societal factors such as social class and economic status, too. Habitus is therefore a typically path-dependent concept, depending on cultural consumption patterns. So, as also Trigg (2001) notes, we can find several analogies in the work of Bourdieu and Veblen. Trigg shows that both authors work with a model of cumulative cultural inheritance, where Veblen uses a trickle-down model and Bourdieu concentrates on circular dynamics, i.e. a trickle-around model. Cultural inheritance works along historically accumulated institutions. Bourdieu (1994) delivers a perfect example by referring to comparisons between the old French aristocracy and the new French meritocratic bourgeoisie educated at the école nationale d’administration. This example is investigated in the next subsection. However Bourdieu’s Homo academicus (1984) also shows how science is built upon power networks and intellectual status as cultural capital. He shows how this cultural capital gets converted into symbolic capital in the odd world of academia. These power networks pretend what science has to be and what science does not have to be. Publishing cartels signalize scientific coalitions and confirm the so often criticized ivory tower of academia. Of course the current outline of European academic institutions fosters this picture and science remains a closed institutional self-enforcing, self-referencing and self-fulfilling setup.

Habitus and varieties of capital According to Mouzelis (2007, p. 9) we are confronted with three types of social structure: internalized dispositional structures (Bourdieu’s habitus), institutional structures (sets of interrelated norms/roles), relational or figurational structures (sets of interrelated actors). All structures entail features, some of which are and some of which are not manipulable by situated actors. From this perspective the externality of structures must be seen within a space-time matrix. Of course these types of structure do all interrelate in space and time, meaning in particular that they evolve in complex adaptive systems. Mouzelis clarifies that these different types enable and constrain different patterns of action in manipulable and less manipulable possibilities. It is true that Bourdieu focused more on

Bourdieu heuristics 171 the ‘quasi-unconscious’ dispositions shaping the actor’s possible actualizations by certain habitus, but it is also true that this system does not entail a deterministic logic. Although Bourdieu’s underemphasis of the rational-choice, voluntaristic aspects of human action make him portray actors as passive . . ., I do not think his notion of habitus is deterministic in the strict sense of the term . . . Bourdieu has repeatedly stressed the ‘polythetic’, flexible, pratical character of the habitus. This enables an actor to mobilize his/her stable set of dispositions in order to improvise, to play a game in a highly inventive manner (Bourdieu 1990: 55). (Mouzelis 2007, p. 15) The question which will be elaborated in the following by discussing the basic outlines of Bourdieu’s theory of habitus is about the external versus internal reflexivity of human action. In this regard Bourdieu clearly focused on the former. Mouzelis (2007, p. 12) argues that Bourdieu misconceived the variability of dispositions, insofar as some may perform quasi-unconsciously, but others may still be conscious and can get manipulated by their carrier. Mouzelis explains that Bourdieu thought that only in crisis situations the ‘internal’ reflexivity comes into play. A crisis situation is then a situation when these dispositions clash with a field’s position. Otherwise in normal situations actors mobilize their habitus in a non-reflexive manner. Mouzelis (2007, p. 12) criticizes this aspect of habitus and emphasizes that ‘actors are constantly confronted with both external and internal environments of action. Both internal and external environments create opportunities and limitations for situated subjects.’ In this respect we understand Bourdieu heuristics as a complementary fourth pillar in generic institutionalism to understand the underlying mechanisms of institutional change. In the previous chapters we have already elaborated the situational and interactive components of coordination and meta-stability as well as the power of creativity to spread something novel. Now we focus exactly on the stated internalized dispositional structures which govern additionally institutional processes. The theory of action, that I propose (with the term Habitus), finally says, that most of human actions have in its principle something completely diff ferent from simple intention, namely acquired dispositions, which are responsible to interpret action as goal oriented, but without starting from a purposeful goal-orientation.2 (Bourdieu 1982, p. 167) Habitus represents a generic principle of life-style creation and life-style maintenance among social groups. The habitus urges distinction, it looks for distinctive properties among people and consumption patterns. ‘Habitus are differentiated and differentiating. . . . The habitus are principles to generate distinct and for the

172

Institutions – generic heuristics

distinction serving practices’ (Bourdieu 1994, p. 21). These distinctive principles evolve to symbolic distinctive principles and create a certain language or grammar of distinction in society. The distinct grammars can be understood as abstract generative schemata, setting frames for the evolution of generic rules or institutions in its origin. The term Habitus has among others the function to explain stylistic unity that joins the practices and goods of a certain actor or a class of actors. . . . The habitus is the generative and unifying principle, that reinterprets the intrinsic and relational characteristics of a position into a unified lifestyle, that means into the consistent ensemble of people, goods and practices that an actor has selected. (Bourdieu 1994, p. 21) Bourdieu argues that the practices, the styles, its corresponding, work as distinctions between the symbolic systems. Hence his theory of distinction is not just a theory claiming distinction as the ultimate criterion for human action; meaning that all human action strives for distinction. Bourdieu (1994, p. 22) refers correspondingly to Veblen’s theory of conspicuous consumption, which already elaborated on this concern. The theory of distinction means moreover that nothing can ever be indifferent; existence as such is only possible through distinction. Furthermore there would not exist any system of morals or ethics if there were no claims, norms or institutions making the distinction visible. Within this picture it is also rather simple to explain why science cannot strive for pure or absolute knowledge or why there cannot be something like an disinterested observer. This issue of making a difference, taking cognizance of something implies that one is already part of the investigated subject, such as a specific social milieu for instance. This notion of archaic or generic distinction generates systems of classification and categorization, which are according to Bourdieu grounded on taste. There will never be any social structure without distinctive tastes. Distinction is only possible via action; hence theory as such has to be practice as well. Practice involves distinction. Bourdieu’s theory of practice suggests that action generates distinction. The idea of acquired dispositions is illustrated within a certain example in Bourdieu (1994). A player who deeply internalized the rules of a game is not forced to recall the purpose or the goal of his action explicitly; on the contrary, the player just recalls certain routines like procedures from a program. The process of internalization can be understood as habituation. Thus habitus projects an individual into a virtual social field or position in society, via its dispositions dependent on cultural, social, symbolic or economic practices. In this respect habitus represents a modus operandi according to Bourdieu (1982). Nevertheless it does not claim to explain rationality or rational behaviour, because it is a theory of social practices than of cognitive processes. Habitus is intrinsically a bridging concept; it tries to connect objectivism and subjectivism, by investigating social practices. These social practices depend

Bourdieu heuristics 173 on acquired dispositions. Conclusively social and organizational learning plays a very important role in such a theory. Bourdieu emphasizes social habitus as the driving force for human action. Moreover he investigates routines in socioeconomic life and endows a social theory where the individual is defined by breaking out from society within distinctive life-styles, instead of defining society via a representative individual or defining the individual merely via its social structure. Perhaps the main difference between Veblen’s and Bourdieu’s social system of thought lies in the causality of the inheritance of tastes. Veblen’s trickle-down model, in which tastes transmit from the upper class through to the middle and working class stratums. For Bourdieu, however, there is rather a ‘trickle round’ of tastes, with upper class tastes drawing at times from popular working class tastes and also transmitting to the less sophisticated middle class. Instead of one-directional flow of tastes the transmission is circular (Trigg 2001, pp. 106–107) Bourdieu’s approach of cultural transformation articulates a circular logic between social classes or fields. Veblen works within a mono-causal top-down logic. Veblen’s direction of inheritance begins in the upper class, goes through the middle class and ends in the working class where the process ends until a new set of habits is generated in the upper class. In Bourdieu’s model inheritance is made of circular flows – each class influences its neighbour. Both scholars have in common that they work with a cumulative process of social and cultural practices, with the evolution of tastes. As we will see later these inherited dispositions can correlate with positions in the social space representing classes or virtual social fields, distinguished by economic capital or profession. Furthermore Bourdieu insisted that habitus is more than simple intentional behaviour. Habitus display generic rules of being and doing, hence they have the generative power to structure institutions in their early forms, because they bear conflicts. It is the institution’s nature to arise from contradictions. A certain habitus colonizes a virtual social field of economic agents through their composition of cultural and economic capital, as Bourdieu (1994, p. 13) outlines. Within this concept one can deal with four major quadrants of capital compositions which are stylized through the amount of cultural, economic and overall capital. These quadrants host various virtual social fields dependent on their habitus, their social practices. The more a virtual field moves away from the centre of all fields the more difficult it is for an individual to enter a different virtual field or to exit its own, thus the fields open up only certain paths for social mobility. We propose to understand these virtual social fields as social spaces one can inhabit. These social spaces are different from social classes.3 We consider an agent’s entry into the education system as a selective process dependent on the agent’s habitus. Bourdieu describes this selection mechanism along the idea of a Maxwell Daemon.

174

Institutions – generic heuristics [I]t (the daemon) divides, . . ., the owners of inherited cultural capital from the non-owners. The differences of competence cannot be separated from the social differences, which are conditioned on the inherited capital, thus it [the selection process] will contribute to the actual social differences. (Bourdieu 1994, p. 36)

In society specific habitus are heavily influenced by the education system, they transmit and transform acquired characteristics. Educational institutions select students or pupils with certain cultural capital. The point is that the educational institution itself builds the structure for the selection process, because it also evolved due to a specific habitus over generations. Bourdieu (1994, p. 39) illustrates this process within following example. The aristocracy was the major class in France in former centuries, even if the aristocracy mostly disappeared in the twentieth century it reproduced itself within a kind of meritocracy. The aristocracy has transformed itself, but its habitus still remained the same. Bourdieu calls the new aristocracy the educational aristocracy or educational noblesse in France. The new aristocracy evolved through their social practices, but created new institutional frames. Hence one can argue that the new aristocracy inherited its cultural capital and its habitus from the old one. Then carriers of the new cultural capital had to build new structures/institutions to guarantee the former lifestyles, in order to hold the social position in the long run. Once this is managed the cycle can go on and on and seemingly public institutions are used for the interest of a certain social field. The aristocracy could not follow their social practices anymore, since its institutional raison d’être was abolished. Accordingly it had to establish a new structure which reproduces the specific habitus to stay in its path. It is proposed that the first common goal of a virtual social field aims at stability to store and secure its social practices as a kind of repertoire. This theory of social practice allows us to observe different practices over time and their evolution. The core of this theory lies in the structural environment that a certain social practice or habitus inhabits. The new aristocracy had to build a new structure – an education system for a closed or gated society. In particular, higher education programs, private universities or private colleges for instance, are very difficult to enter, which makes them also very powerful. Not only codified knowledge can be learned, but mostly a specific life-style is informed, depending on the social field. These life-styles are like business cards for an education institution. The educational system is the hub for cultural transformation. Of course the education system entails a huge feedback effect, since graduates profit from the institution’s status, but the institution will profit from promising alumni as well. Nevertheless once an education program is individually finished, it is impossible to neglect the acquired, semiskilled and quasiunconscious dispositions. The education system assigns people certain habitus, acting as blueprints for certain social fields. Therefore education is not only the proxy for knowledge; it is the proxy for all sorts of capital, life-styles and for specific virtual fields. In the case that the field hosts a kind of new aristocracy as mentioned before, it is surely interested in strict borders rather than openness in

Bourdieu heuristics 175 the education system. This kind of defensive management also represents an evolutionary instinct, protecting one’s hegemony. However the more open an institutional system, the better is its capability to distribute knowledge over space and time. Cultural dispositions versus economic positions Educational institutions, such as schools, universities or specific teaching or research departments maintain certain social practices. Educational institutions provide basic knowledge to foster human capital and capabilities, nevertheless they are not able to distribute knowledge quite equally. A stable and open education system can be the only starting point for the modern knowledge society. In order to foster better education and knowledge systems we need to understand their social dynamics. Therefore we need to observe flows in society between different virtual social fields as the driving forces for cultural transformation. Bourdieu’s schema (1994, p. 19) of the ‘space of social positions and lifestyles’ offers a stylized map for social and cultural spaces. This schema was originally developed in Bourdieu (1982, pp. 212–213), but we work with a version developed in Bourdieu (1994). The schema of cultural dispositions and economic positions builds upon data collected from France from the 1950s to the 1970s. If we want to deal with the aspect of knowledge accumulation in society we should take a closer look into dominant social practices. Bourdieu (1994, p. 19) illustrates four major quadrants of social space, associated with the composition of economic, cultural and overall capital. The overall capital or the whole volume of capital represents all forms of capital that can be assigned to an individual or a virtual social field. This emergent overall property represents the symbolic value of an individual’s spectrum of capitals, which represents a relative indicator for power relations within the field. Figure 9.1 sketches positions (economic) and dispositions (cultural) in a diagram. The interesting point of this diagram concerns the distances between the groups. These distances emerge out of cultural regularities, such as playing the piano or going fishing, and regulate entry and exit between groups. The cultural dispositions are habituated indicators of certain social fields. It makes a difference if one is interested in soccer or not, but the difference itself will change according to the field’s cultural perspective. The social practices indicate an agent’s status as a representation of the amount of economic capital one spends on social practice, but the main difference in comparison to mainstream concepts of Homo œconomicus is that cultural capital serves as a proxy for overall symbolic status. Attendance at an avant-garde theatre session necessitates a lot of cultural capital, in order to even know where and when it happens. Therefore a historical accumulation of experience is necessary to attend and foremost enjoy it. The amount of necessary overall capital may be the same as compared with sailing for instance, but the composition of the varieties of capital makes the difference. It is proposed, as Bourdieu (1998, p. 21) concludes, that movements between these quadrants are

176

Institutions – generic heuristics

path-dependent due to education. This very basic model shows the multidimensionality and complexity of dispositions and positions. The entry card towards specific social fields and consequently the acquisition of other cultural dispositions or habitus is based on domain-specific knowledge, because different milieus follow distinct habitus. It is further proposed that this kind of knowledge is of a social nature and can only be accessed through specific education and through specific institutions of knowledge and education. Such institutions also include social networks, which may act as knowledge carriers, which are distinguishable along their composition or focus on certain varieties of capital. One of Bourdieu’s major concerns was to criticize economic imperialism. Neoclassical economics managed to invade all domains of the social and cultural sciences. As a consequence methodological individualism became an interdisciplinary doctrine. The main problem of economic imperialism stems from the fact that any behaviour will be evaluated as for economic capital and that economic capital gets the only pivotal reference for all social and cultural processes. Bourdieu’s model is grounded primarily on cultural capital and the corresponding evolution of economic and social distinction. In this subsection we will briefly discuss the nature of Bourdieu’s variety of capitals. In this concept a significant role is given by symbolic capital, which has to be considered as an emergent property dependent on specific compositions of the other forms of capital. One of the critical essences of capital is, in general, that capital needs time, it has to be accumulated by work. Additionally, capitalism is in its nature Overall Capital +

A R T I S T S

ACADEMIC LECTURERS

piano whiskey

chess

E horse riding N champagne T R E P R hunting E N E U R S Cultural Capital –

bridge

golf tennis

MANAGERS PRIVATE INDUSTRY

avantgarde

sailing

HIGH SCHOOL TEACHERS

climbing

MANAGERS PUBLIC SERVICE swimming

guitar operettes

Cultural Capital + Economic Capital –

TECHNICIANS

PRIMARY SCHOOL TEACHERS

Economic Capital +

COMMERCE EMPLOYEES

OFFICE EMPLOYEES

fishing beer soccer

WORKERS

C R A F T S M E N

pétanque sparkling wine

F A R M E R S

FARMWORKERS

Overall Capital –

Figure 9.1 Bourdieu’s social space (source: reconstructed from Bourdieu 1994, p. 19).

Bourdieu heuristics 177 not a gambling process, where sudden profits emerge. Entrepreneurs or artists are not successful because they are lucky. They have invested a lot of time in their interests. We may classify forms of capital according to Bourdieu (1992, p. 49) thus. Economic capital is institutionalized within property rights and is convertible to money. Cultural capital can be transformed into economic capital under certain conditions and gets primarily institutionalized within academic titles. Social capital is dependent on social relations and social responsibilities, hence it can also be converted into economic capital and it becomes institutionalized within ‘aristocratic’ titles. Cultural capital Cultural Capital can be defined as the accumulated stock of knowledge about the products of artistic and intellectual traditions, which is learned through educational training and – crucially for Bourdieu – also through social upbringing. In a powerful explanation of how inequality in the social structure is reproduced in the education system . . . the key role of cultural capital acquired outside of education is used to explain the superior performance of children from privileged backgrounds. (Trigg 2001, pp. 104–105) Bourdieu (1992) goes beyond this rather general assumption of cultural capital. He introduced three different types of cultural capital, i.e. incorporated, objectified and institutionalized. The first one deals with durable dispositions of an individual, in particular it means that it is bound to the body and is internalized. Culture and education represents capital which has to be learned cumulatively, it is internalized step-by-step and needs a lot of time. This incorporated cultural capital becomes habitus, because it becomes a fixed component of the individual. Bourdieu (1992, p. 52) adds in this respect that havingg becomes being. Cultural capital cannot be owned as a kind of property with regard to physical property. It is part of being, nobody can take it away. In this respect it is the most difficult form of capital to be traded. Carriers of economic and social capital have a hard time seeking cultural capital externalized from their carriers. Due to these conditions it is also the only form of capital which is bound to biological individuality. Nevertheless it can be transmitted implicitly by cultural inheritance and social learning, as an invisible process. In contrast objectified cultural capital is comparable with codified knowledge and appears in form of cultural goods, such as books, pictures, songs and so on. This form of cultural capital is explicitly transferable into economic capital, but only with regard to property rights. The knowledge to consume a book, a picture or a song – to enjoy and develop distinguished taste – deals again with incorporated cultural capital. Institutionalized cultural capital emerges in academic or scholarly titles. This procedure makes incorporated cultural capital suddenly visible and explicit along objectification. It gets institutionalized within a culturally self-transforming system of

178

Institutions – generic heuristics

institutions. Academic titles make a difference between the cultural capital of autodidacts and people who are formally educated. It is extremely difficult to give evidence for accumulated incorporated cultural capital for autodidacts. Norms and institutions legitimate acquired knowledge within straight rulesets. These titles reflect institutionalized power, which produces obviously and repeatedly problems within large-scale social cooperation. Social capital Bourdieu (1992) refers to social capital as the resources originated and associated with being part of certain groups. Social capital is therefore always associated with a social network of actors. These actors form relations which can be more or less institutionalized (compare also Putnam 1993, 2000). Bourdieu (1992) discusses also the ‘principle of social effects’ and ‘social creditability’ in correspondence with social capital. Social relations are otherwise not comparable with economic properties, because a social relation has a vaguer, but still recognizable characteristic. The profits which may be gained from the participation in a group are the basis for the solidarity that enables these profits. Accumulation of social capital is not possible without bilateral or multilateral solidarity. In order to sustain and reproduce social capital continuously, durable networking is the most important factor at all. Networking is time consuming and cost intensive, so that we may conclude that economic capital is tremendously involved in the process of social capital accumulation, again dependent on the type of social capital. Participation in certain events or the mere maintenance of a social network involves high costs. Additionally, gains from social capital have higher lags than gains from economic capital. This notion stems from the fact that social capital gains are naturally groupbased gains, so they are not purely assignable to sole individuals, such as economic or cultural capital. These gains are of emergent nature, they are characterized as network resources. However these network resources can be easily manipulated by strategic social actions. Network resources are critical hubs within the power game. Wherever social capital may emerge there is also exploitation and corruption, hence innate conflict. This is a very important notion of Bourdieu’s concept, that social capital emerges where power plays a significant symbolic role. Nevertheless the study of social capital and social theory has changed a lot in recent decades. Bourdieu’s notion of social capital has tremendously lost in significance. Scholars such as Granovetter, Coleman and Putnam made social capital very popular, because they made it more accessible in empiric and quantitative dimensions. The dark side of social capital can be found in rational choice theory and neoclassical economics. The concept has somehow developed into an individualistic measure of an actor’s social gains; it got yet another variable to maximize. Rational-choice advocates such as Gary Becker rendered social capital as a target variable in the usual suspects of mathematical economic modelling: it became a silent particle in an individual’s utility function. Certainly, Bourdieu imagined something

Bourdieu heuristics 179 different. A critical role was also played the Washington consensus in this respect. Fine (2001) shows how social capital got misused by the World Bank research programs and how it got indoctrinated into a generation of young researchers. Nowadays neoclassical economists use social capital as a black box externality, which needs to be optimized. According to Fine several examples indicate how a social, historic and intrinsically critical concept like social capital got misused by neoclassical economics over the years and moreover how Bourdieu also contributed to this misuse. Fine elaborates that Bourdieu introduced the concept of capital into several disciplines, though he always insisted on prevention against economic reductionism. Capital was always considered as an economic resource, as a means to production. Then capital becomes a pivotal controversial and critical subject, because it lends power due its productive flavour. Bourdieu introduced a variety of capitals to avoid economic reductionism and semiological reductionism, i.e. reduction to social exchange or communication, as it is understood in pure structuralism for instance, compare Bourdieu (1992, p. 56). What has happened is that there are two camps now depending on two different kinds of reductionism; one camp reducing everything to economic capital and one camp reducing everything to social capital. Of course the most attractive issues of Bourdieu provided by cultural and symbolic capital vanished from the discourse. Fine notes ironically in conclusion: It is surely tempting to conclude, in gentle irony, that ‘social capital’ is itself a form of social capital, and of the other types of capital, in the sense of Bourdieu. It has created a ‘field’ of endeavour and a ‘habitus’ for its participants, the social capitalist. (Fine 2001, pp. 63–64) Emergent symbols It seems that Bourdieu’s (1992) concept of capital transformation and convertibility is quite ambiguous. Of course the transformation issue drifts easily into economic or semiological reductionism, but Bourdieu tried to solve this problem along the idea that any act of transformation from cultural, to social or to economic and vice versa necessitates transformation work. The degree of transformation work depends on institutional setups, which may hinder or facilitate certain transformation processes. However the critical issue is that transformation work is needed in contrast to the concept of transaction costs, as he critically notes: ‘The relation of exchange loses its monetary character, what can be exemplified by the personal design and styling of a certain gift’ (Bourdieu 1992, p. 57). Transformation work exemplifies an alternative concept in contrast to the New Institutionalism concept of the transaction costs, because it cannot be measured in mere monetary terms. It involves time, attention, courtesy, concern, worry and so on; it involves empathic criteria or affects; which may

180

Institutions – generic heuristics

already be of an institutional nature (i.e. explicitly confirmed) or of merely a personal and emotional nature. Of course the varieties of capital are always connected with economic capital, which certainly serves as a hub, but the act of transformation needs symbolic additives and cannot be directly managed in monetary terms: they are differently coded. Therefore symbolic capital represents a kind of pivotal transformation capital, which manifests in power relations, honour and other symbolic characteristics of status. Its nature remains emergent, because it cannot be reproduced directly. Symbolic capital emerges as a necessary additive for the accomplishment of a transformation process between two sorts of capital, which may be of an economic, cultural or social nature. Hence the idea of transaction costs remains yet another example for economic reductionism. Institutional relations are reduced to economic costs; consequentially new institutional economists insist that cultural or social expressions (all institutional variants) are 100 per cent convertible into economic capital or simple money. If that were the case, concepts like power or trust would lose tremendous significance. Emergent and symbolic additives are then denied for the transformation of one sort of capital into another. This is not what institutionalism is about. Institutionalism has to deal especially with these emergent and symbolic characteristics between two or three different subsystems of society, where translation and transformation necessitates accumulated work and dedication.

Theory of practice: co-evolution of habitus and the field Bourdieu’s social philosophy builds upon a praxeological approach. He established a theory between objectivism and subjectivism. In this subsection we will discuss major nuances of his theory of practice alongside Schwingel (1995). First of all, a theory of practice struggles with the dichotomy of objectivism and subjectivism. Initializing an overcoming of such a huge theoretical antagonism entails also critical problems for science at all, in this case especially for sociology as outlined by Mouzelis (1995, 2007). However Bourdieu elaborated in a similar way on a theory of practice as articulated in the work of American pragmatism, as already discussed in Chapter 6. A theory of practice needs to be critical and reflected, because it necessitates a so-called tentative objectivism, as it is understood in the tradition of critical realism or critical naturalism. This tentative objectivism needs a subjectivist entanglement of the primal experiences of the social actors, to break a mere objectivist epistemological conception. Thus insight and cognition encompasses objectivist as well subjectivist epistemological claims and are considered as complementary instead of supplementary, though the bounds of them demand continuous critical assessment in theory evaluation. Schwingel (1995, p. 41) complements this with the notion that the epistemologies deal on the one hand with ‘the illusion of immediate insight’ (subjectivist) and with ‘the illusion of absolute knowledge’ (objectivist). Bourdieu treats this problem in a very interesting and creative way by looking into a praxeological claim.

Bourdieu heuristics 181 The praxeological claim focuses on the inner logic of practical cognition and insight, which is basically not reducible to any mere theoretical form. However a theory of practice suggests analysing and specifying exactly this inner logic of social practice. Schwingel (1995) argues that the subjectivist as well as objectivist epistemology in pure form entails scholastic fallacies, which establish a misleading ‘epistemocentrism’ and additionally carry a feigned intellectualism. Such a dualistic picture involves serious misconceptions and fuels an intellectual arrogance, i.e. confusing the perspective of the actor with the spectator. Scientists and theoreticians of any discipline are all actors in their specific field and can never be spectator or observer in its absolute sense. In consequence the praxeological approach fits perfectly with the idea of a generic institutionalism. It builds upon empirical foundations (axioms) from a naturalistic perspective (Chapter 3), and conceives knowledge as evolving in and from social practice (Chapter 6 and 7). Conclusively the aspect of time plays a crucial role in this attempt. Practical time is irreversible, i.e. evolutionary or historical time, modelling time or logical time is reversible in principle. Theoretical time is perhaps too fixed on model or logical time, thereby still dominated by mere analytical continuity in time; meaning in particular that it does not account for discrete events. Bourdieu’s instrument to compete with the issue of time is his conceptualization of the habitus as a generative schema for social practices and its dialectics within the field. Habitus represents an evolutionary account of the generation of symbolic forms in certain social practices. It suggests a theory of practical insight of the social world, hence a praxeological epistemology, again neatly connected to the already discussed evolutionary pragmatism. Both theories build upon historical and irreversible time, where trial and error plays a dominant role (compare also Boyer 2008, p. 356). Bourdieu’s theory of practice, with his focus on habitus and varieties of capital is, according to Schwingel (1995), varying theory (eidos), ethics (ethos) and aesthetics (taste). This interplay constitutes the social sense appearing as habitus in a dimension of historical or even evolutionary time, a sense assigning sociocultural orientation to the actor within and across the fields. Therefore the habitus performs as a basic guide for an actor but does not determine the actions. Hence Bourdieu uses habitus not only as a social sense, but also as a kind of instinct and a socialization of the body, because it is partly innate, but reproduced within socialization. Thereby Bourdieu establishes a genetic structuralism. ‘Not only the objectified, external social structures have a genesis, from which the actual condition of a structure has to get understood. But also the habitus of the actors, their social body, is structured psychogenetically’ (Schwingel 1995, p. 77, translated by the author). According to Schwingel (ibid.), we may speak of a theory of sociogenesis, where the habitus acts as a dialectical modus operandi with the field. This sociogenesis represents a genetic or (to be called) evolutionary structuralism. Sociogenesis actualizes habitus in social practices and cultural dispositions. It involves a process of circular or spiral reproduction and transformation in consequence. This genetic notion of habitus refers to the permanent incorporation of acquired dispositions. As Bourdieu has

182

Institutions – generic heuristics

outlined, the genetic outline of habitus stands in contrast to a mere essentialist mode of sociological thought. Thereby the habitus follows intrinsically a generic evolutionary principle, insofar as it is . . . powerfully generative . . . is a principle of invention, which, produced by history, is relatively independent of history: dispositions are lasting, something that leads to all sorts of effects of hyteresis (delay, discrepancy, . . .) (Boyer 2008, p. 362 citing Bourdieu’s Questions de Sociologie 1980) Boyer (2008, p. 348) discusses Bourdieu’s theory in a different perspective with regards to the co-evolution of habitus and the field. Boyer reconsiders it as a potential foundation for régulation theory. In particular he stresses the notion that Bourdieu’s theory got misinterpreted within the heterodox approaches of economics, because it was not received deeply enough. Most interpretations regarded Bourdieu’s conception of capital as a mere reduction to the economic sphere in a neoclassical way, where Boyer (2008, p. 353) shows that it is rather the opposite. Each field contributes to the accumulation process, to the modes of régulation. The abstract form of accumulation differs thereby according to the occupied positions in each field and not just with reference to economic capital, where a certain network of domination emerges due to its institutional context. Habitus and the field are conceived as a co-evolutionary process. Here we also find the main difference between new institutional economics and a generic institutionalism. As we already elaborated both approaches consider that agents are able to convert the different forms of capital from one sphere to another, but the former regards this process as automatic with reference to transaction costs. This interpretation suggests that any form of capital can be converted in monetary terms by economic capital. However, as Bourdieu articulated, this process involves transformation work, which can not be explicitly converted in monetary terms, but necessitates symbolic forms of capital. Boyer (2008, pp. 352–353) corrects this outline in different terms but within the same logic of a praxeological theory. The co-evolution of habitus and the field creates power relations in consequence and they are different across the fields but follow the same logic of institutional change. The social practices constitute the state and the market in a complementary way, however the agents within occupy different positions and are therefore not equally equipped with power. As Boyer rightly argues this co-evolution of conflicting habitus in a field represents institutional sources for the transformation of the system: ‘although a superficial reading suggests the inevitability of social reproduction, a full analysis brings out factors of change and transformation’ (Boyer 2008, p. 361). This point is essential in Bourdieu’s theory, the various fields do not only reproduce, moreover the dialectic nature with the different habitus allows for deep change in society and economy, since habitus is not only ‘acquired but also powerfully generative’, i.e. the aspect of sociogenesis. Obviously certain actors within a field have the power to ‘impose “the speed of transformation . . . The use of temporal differentiations is one of the principal sources of the power” ’ (Boyer 2008, p. 364). In

Bourdieu heuristics 183 consequence the power relations in a field represent also the sources for entrepreneurship in a Schumpeterian way. The Schumpeterian entrepreneur creatively destroys the composition of power relations within a certain field leading to major changes across the fields, arts, literature, housing, industrial organization, etc. As we have already noted in Chapter 8 this initialization or activation of a powerful leading economic agent leads to innovation activities reordering the fields in a transformative way, speaking with Bourdieu. However, institutional economics within a generic evolutionary outline aims to investigate exactly this desynchronization between habitus and the field, the momentum where economic things receive new meaning for the participating actors and power gets redistributed. Institutionalists focus on the creative and destructive sources and consequences of power redistributions in the economy and society. The Schumpeterian entrepreneur may be active in various fields therefore, meaning in particular that also social movements with certain new ideas even emerging out of resistance have to be considered as entrepreneurial activities reshaping the entire institutional landscape. Such transformations grow endogenously with regard to the actual accumulation regime and may well result in crisis as a necessary ingredient of capitalist production, speaking with the regulationist school. The field represents an institutional form in régulation theory then. Boyer (2008, p. 373) discusses the fields as evolving to institutional forms which then represent an intermediary stage in the construction of modes of régulation finally. The two approaches generally show the co-evolution of habitus and the field (Bourdieu) and the co-evolution of actors’ strategies and institutional forms (régulation theory). . . . The analyses of régulation theory are constructed in such a way that they can deliver results only on what goes on at the meso economic level. The major indicator of a co-evolution between institutions and individual behaviours is seen in what happens when institutions are brought in from other spheres in an attempt to replicate a mode of régulation. . . . In very general terms, the result is that individual behaviour and the new institutions become desynchronized, which tends to prove that the malleability of habitus is a long way from being governed by a simple system of incentives carried by the institutions. This is how things work in the real world, as opposed to the theoretical world. (Boyer 2008, p. 374) Two important aspects are raised in this quotation which are essential in generic institutionalism. The first relates to the import and export of institutional setups across cultural environments. As Fine (2001) pointed out, the institutional export of the neoliberal doctrine along the lines of the Washington consensus led to serious conflicts in the international context of the economy. Such an exporting or colonization of ideas in an imperial way disturbs the constituents of a society which are grounded in certain habitus. Of course it leads to desynchronization and potential crisis not only for the economy but also for the life-styles of people

184

Institutions – generic heuristics

with far-reaching sociopsychological consequences. The second aspect relates to the meso economic level of analysis, which Boyer (2008) considers as the home of research in the régulation school. This notion brings the different approaches in the economic analysis of institutional change together within a greater ensemble as we outline in Chapter 10. Within such a level of analysis we may collect all the discussed heuristics and open the agenda for further synthesis. ‘Critics take the term “habitus” and régulation literally, forgetting that both projects aim to examine the conditions under which change is possible’ (Boyer 2008, p. 375). Examination of these conditions and the consequences of institutional change makes both attempts evolutionary by nature, since they rely on naturalistic foundations, given by habitus for instance. It is this naturalization of knowledge which interests the evolutionary institutional economist in this respect, transforming economy and society from within and thereby indicating the ubiquitous reality of crisis. Certainly institutional change is primarily shaped by the education system. The school and the university carry a great extent of the naturalization of knowledge and indicate the most significant nexus between education and employment (Boyer 2008, pp. 380–382). Obviously changes in the education system relate to the most controversial political topics today, since their effects are only visible in the long run insofar as it is not surprising that politics keeps the topic aside and leaves social and economic reproduction as it is. As discussed above, the symbolic capital of an agent is a dependent but emergent property of the habitus, the internalized dispositions. The symbolic accumulates individually due to co-evolution of habitus and the field and expresses the relation power of an individual in the network of domination. Hence the education system provides a highly significant input for the formation of the symbolic and conclusively becomes a ‘guarantor of modes of regulation’ (Boyer 2008, p. 390). Boyer discusses the role of the symbolic in an abstract recursive principle of continuous change and crisis. Accordingly the symbolic informs the mode of régulation of society resulting in a specific macroeconomic regime, informing the formulation of rules and institutional formations which then inform the so-called ‘base rules’ shaping the elementary economic forms of organizations as well as actors within the division of labour. The symbolic has come to be seen as a determining factor in the light of transformations observed over the last two decades, particularly in the domain of the legitimation of economic policies. Social mediations are somehow legitimized by the symbolic: it crowns the macroeconomic regime. A contrario, it would appear that the severest crises are those that affect the symbolic order itself, and this has led to régulation theory renewing its understanding of the different levels and types of crisis. (Boyer 2008, pp. 390–391) This aspect confirms our prior discussion of naturalistic generic heuristics of institutional change, that the affective order represents the key characteristic for evolutionary transformation in economy and society. It is not the rational

Bourdieu heuristics 185 order which serves the ground for transformations in power relations, the game of rationality is rather played upon the affective internalizations of cultural dispositions and economic positions resulting into a specific tension in symbolic compromises and conflicts. Boyer delivered an excellent synthesis of Bourdieu’s system of thought and institutional approaches in economics, especially the régulation school. This essay serves as an exemplary and unique attempt in institutional economics, because it provides a comprehensive picture of endogenous change on the grounds of habitus and modes of régulation. It is surprising that the regulationist approach stands so close in the tradition of the evolutionary agenda in economics. Furthermore Boyer (2008, p. 391) refers explicitly to the formulation of rules in an evolutionary process leading to the formation of ‘base rules’ of organization. To the extent that we outline in Chapter 10, it is not far away from the synthesis proposed by Dopfer and Potts (2008) regarding the evolution of generic rules in micro–meso– macro trajectories. The co-evolution of habitus and the field can be regarded as a fruitful complementary extension to the heuristics developed by Veblen, Hayek and Schumpeter. Of course at first glance one might not anticipate any correlations within their theories, but all elaborated concepts entail a central critique of the notion of rationality and general equilibrium in economics, by focusing on a naturalization of evolving knowledge. We may here call on Veblen and his argument that the hedonistic philosophy which underpins economic theory leads to crediting agents – atoms without inertia and ‘lightning calculators’ – with a ‘passive and substantially inert and immutably given . . . nature’. . . . Last, and most important, it is a strictly atomistic and discontinuistt (or instantaneist) view of the social world that provides the basis for the model of perfect competition or the perfect market. This typically Cartesian philosophy simply excludes history altogether. Just as, by locating the principle of action in explicit intentions and in reasons (or, more simply, as Friedrich Hayek has it, in psychology), the philosophy of consciousness of economic orthodoxy excludes the history of agents, . . ., so the philosophy of the economic order inherent in the notion of ‘market’ evokes very directly the physical world as described by Descartes (Bourdieu 2005, pp. 220–221) This quotation shows not only the familiarity and general agreement of Bourdieu with Veblen’s work, but also that Bourdieu has apparently not read Hayek very deeply. On the one hand their criticism of Descartes is of the same nature and explicitly harsh, and on the other hand Hayek considered the historicity of economic agents as central for potential affective imitation and adaption of economic behaviour via group selection processes; of course with focus on the spontaneous character of an affective order. In this respect it does not matter that Bourdieu, Hayek and Schumpeter would have obviously never become friends,

186

Institutions – generic heuristics

but there is significant convergence in their institutional philosophies to investigate further potential synthesis in a complementary way for the benefit of a generic institutionalism. Moreover as we have discussed extensively in Chapter 7, Hayek anticipated a different kind of market order, in a non-atomistic manner, an order where the community of morals plays the distinguished role, of course in a highly naïve manner. We may reconsider the aspect of community as the third essential principle (Ostrom 2005b) of public governance in the following. Focus is thereby given to another interpretation of social practices from Bourdieu’s system of sociological thought.

Communities of practice Communities of practice surround a new spirit within theories of social and organizational learning. Though Bourdieu has not directly influenced this stream, his theory of practice can be regarded as a visionary pointing to this direction. Nevertheless some contradictions emerge by regarding communities of practice within the idea of habitus, as illustrated by Mutch (2003) for instance. Communities act as specific knowledge clusters, where knowledge is passed on through community-based practices. The concept is in its broadest sense comparable to the idea of group selection, because both build on the notion of tacit knowledge. Knowledge becomes an innate property of practices, as it is imagined within habitus. The theory of communities of practice also engages in knowledge management consequently. The critique, established by Mutch (2003), emphasizes the causal dependencies between habitus and practices. Bourdieu’s habitus serves as a structuring device for interacting practices, whereas the communities of practice literature suggests that habitus is an emerging property of interacting practices. Mutch proposed as for empirical studies that experimentees changed their habitus instead of reproducing them in a new field, by acquiring new practices. It is therefore suggested that communities of practice may overrule certain habitus. Tacit knowledge is grounded in knowledge and skills acquired through membership of a particular social group. It includes the taken-for-granted and embodied competence of habitus. . . . Bourdieu’s notion of habitus is not just about embodied forms of practice, but modes of thought that are unconsciously acquired, that are resistant to change and transferable between diff ferent contexts. The communities of practice literature, by contrast, focuses on changes brought about through practice itself. (Mutch 2003, p. 388 citing Delamont and Atkinson 2001 in the portion in italics) The critique follows an often-made argument that Bourdieu’s theory of practice is structurally frozen, leaving no place for human agency as already discussed. The following thought experiment is proposed to clarify the issue of practices versus habitus. Let us reconsider Kuhn’s 1962 notion of the scientific process

Bourdieu heuristics 187 again. Habitus plays the role of the scientific core, because it structures an individual’s dispositional axioms as well as the axioms of a whole community in a quasi-unconscious way. Social practices surround the protective belt, protecting the embodied habitus from different social codes. Development in the core can be considered as reproduction of habitus and development of the belt can be regarded as change in practices, which are attracted through either the core itself – the habitus – other habitual paradigms or as Harker (1984, p. 121) notes: ‘specific historical circumstances’. Actors have to change their practices due to multimembership in various communities, which then lead to changes in the greater structuring process within the process of habitual reproduction. Habitual reproduction is not a mere circular process; it is at most a spiral process, because time (history) and space (geography) always interfere with the socalled photocopies of certain habitus. Therefore reproduction implies change, since individuals will need to adapt their behaviour due to new communitybased, i.e. in consequence historical or geographical, circumstances. Hence actors are never theoretically locked in a specific structure, because time alone may change or shift their habitual reproduction. Such a systemic view, as it is incorporated in Bourdieu’s theory deals with frequent changes along multimembership on the one hand and with major paradigmatic changes concerning core habitus on the other. Bourdieu’s theory suggests change in human agency as well as in social structure. The core and the protective belt necessitate and condition each other simultaneously. Communities of practice have to be considered as an extension to investigate the variety and flexibility of changes in the protective belt of certain habitus. Such integration may lead to new approaches within education policy as well. Bourdieu always emphasized the rigidity of the education system, where cultural capital is reproduced in toorigid structured paths. This notion reflects that cultural capital works similarly to economic capital. ‘Just as our dominant economic institutions are structured to favour those who already possess economic capital, so our educational institutions are structured to favour those who already possess cultural capital, defined according to the criteria of the dominant hegemony’ (Harker 1984, p. 118). These paths need to be opened in various ways. The current status of European education policy shows major lacks in several matters, but foremost the linkage between secondary and tertiary education policy needs extensive reconsideration. The European economy always profited from its highly skilled labour force and could consequently compete rather well. With globalization these advantages tend to break apart, even more when education budgets are shortened more and more. But budgets alone will not do the job. Education is considered as a system of cultural inheritance, therefore we may conclude that schools, universities, in fact the whole education system works along certain habitus. Changes within these habitus in order to compete or just to adapt to new economic, technological or political circumstances happen rather slowly, conclusively. Nevertheless it does not mean that efforts in such directions are useless or futile. Education policy has to get reformed with strong emphasis on the role and situation of pupils. It is

188

Institutions – generic heuristics

argued that we care too less about the decision-making of young pupils in secondary education and their possible engagement in tertiary courses of education. The decisions follow either complete random processes or are made too restrictively on grounds of a non-reflected personal habitus. Pupils do not gain enough time and the necessary support from third parties (e.g. universities) to think about education profiles in more detail. The theory of habitus can be applied very well to such field work within schools. It raises the question of how a habitus influences education decisions and how it can positively help to build up more profiled internal models of oneself. Habitus offers a great variety of possible individual choices, if it is understood and reflected within internal model-building. Pupils obviously reflect too little on their habitus and make education decisions dependent on exogenous factors, such as trends and media. The theory of communities of practice lets us investigate how pupils follow certain communities, how they change their practices and ask further if these practices are still part of their own habitus. It is further argued that knowledge accumulation should be an integrated part of habituation, of the reproduction of habitus. Once an education strategy leaves the core of one’s own paradigm it should be reconsidered. In that respect, communities of practice play a dominant role, because they influence youth most, such as the diversity of club engagements. This aspect invites Ostrom’s (2010) emphasis on polycentric governance, especially with regards to education. This note on polycentric education criticizes the still-dominant picture of schools as factories. Students are not just idle boxes sitting in a factory line being filled with screws and other components that make them think and produce creatively in the long run. The factory image is an entirely inappropriate analogy for education. If students do not actively coproduce their learning in the classroom and at home, they cannot learn. (Ostrom 2010, p. 112) This is something essential we can learn from Bourdieu’s theory, that a rigid factory style of education reproduces ever the same social structures, where students will necessarily need to rebel and shift into crisis mode. It is, as Ostrom articulates implicitly, totally misleading if the education system does not follow an evolutionary principle of creative variation. A polycentric view of metropolitan governance can change this picture via the installation of effective local community-based institutions instead of a single-best design. A generic evolutionary education system circumvents problems with a high potential of desynchronization between habitus and the field as the source for crisis, since polycentric community governance allows solving problems where the actual authorities know the habitus in the community and encourage proper bestpractice solutions in an appropriate way. Clashes and even crises in an individual’s early years can be prevented if the social sense is activated in real collective-action problems such as metropolitan education. Ostrom (2010,

Bourdieu heuristics 189 p. 113) fosters such an approach and articulates, that ‘The presence of large numbers of potential producers of urban goods and services in a metropolitan area allows elected officials more effective choice of producers.’ Participation in communities of practice enhances social learning in the local environment, an aspect which is on the top of the agenda of a generic institutionalism, because it reduces opportunistic behaviour. These are all institutional components of yet another pillar in favour of bottom-up evolutionary economic programs.

10 Synthesizing heuristics with generic rules

Institutional reality is multifaceted and involves a variety of aspects across domains. In this Part II on generic institutionalism we elaborated on central generic heuristics of social learning in evolutionary economic bottom-up programs. Convergence in these heuristics is given through the naturalization of knowledge, which also links to Part I on the naturalistic foundations of a generic evolutionary ontology in economics. In this section we discuss the outlines of an appropriate synthesis of the prior elaborated categories, because finally there is a need to program these semantic considerations in synthetic rules and actual formalized bottom-up models to guide policy programs. We have elaborated (1) on the Veblenian habits of thought and its cumulative causation leading to institutional change; (2) on the Hayekian rules of conduct and the potential of spontaneous naturalistic order; (3) on the Schumpeterian entrepreneur initializing innovation processes; and (4) on Bourdieu’s habitus and its co-evolution within the various fields of social life. All these approaches carry a systemic convergence emphasizing a deeper order of embodied knowledge, properly speaking of an affective order where cultural evolution operates. It is the mind–body nexus which leads to the dissemination of knowledge – still constrained by power relations in networks of domination – and not the complete rational order of general equilibrium, where we just find a vacuum of power. The endogenous and immanent potential of harmony as well as conflict shapes the evolution of knowledge via social learning, carrying the economy over time and space. Within a modular conception of the evolving economy we may observe activity of all four of these heuristics (and necessarily more than them) simultaneously on different scales, but how can we translate them in a proper synthesis. As concluded in Part I it is the interrelation of onto- and phylogenesis in the generic institutionalization of knowledge, meaning in particular that there is always knowledge about certain habits of thought, about the sensory aspects of imitation and adaptation, the entrepreneurial creative vision as well as the habitus and the field which is transmitted and maintained in a quasi-unconscious way. We suggest referring to the category of a rule as a synthetic formulation of an idea, where this idea is of bimodal nature, providing information on the cultural aspects of social learning. This outline builds on the generic evolutionary framework provided in compressed form in Dopfer and Potts (2008). The authors have created a unique

Synthesizing heuristics with generic rules 191 universe of evolutionary economics, encouraging implicitly the idea of evolutionary economic programs, implemented in a bottom-up way in economy and society.

The generic-rule based approach The generic rule-based approach builds upon the generic naturalistic ontology elaborated in Chapter 3, with specific regard to the conceptualization of evolutionary realism. In consequence we may restate according to Dopfer (2005, p. 6) that classical science aimed to reveal the universality of change in nomological laws; marking the major difference to a generic outline of change. The heuristic projections we have previously discussed follow exactly this strategy, aware of the ubiquity and diversity of change on different scales, they follow the route of generic rules indicating the continuity of change by nature. Dopfer (ibid.) notes that these generic rules denote the body of theories based on non-classical ideas of change, which became popular in the nineteenth and twentieth centuries. The approach has been challenged by the advent of evolutionary biology in the first half of the 19th century. The ontological premise of an immutable universe broke down in the face of the theoretical proposition that the observed variety could not be reduced to any typical average but was itself a consequence of continuous change. The classical assumptions were replaced by those of heterogeneity and mutability or, in the parlance of evolutionary biology, by extant variety and continual variation. (Dopfer 2005, p. 6) Hence the generic character of change invites multiplicity of actualizations. It involves the principle of particularity as well as ubiquity, but still entails specific rule-guided production or destruction patterns, with similar characteristics. Generic patterns may have common origins, but on an operant level the actualizations look different. The crucial point refers to different, distinct and diverse actualizations generating ever new generic rules in the long-run. In general we follow Hodgson’s (2004a, 2006) heuristic vision of an evolutionary institutional economics in tradition of the old institutionalism inspired by Veblen, but vitalized by the institutional thought of Hayek, Schumpeter and Bourdieu. The Schumpeter heuristics are conceived as the rule to innovate or create, whereas the others capture the rule to imitate and adapt. Obviously the complexity of the latter is by far more complicated than the former. Two very basic role categories of economic agents appear conclusively: rule-makers (leaders) and rule-users (followers). Such a rule-based micro economic theory of heterogeneous Homo sapiens œconomicus is developed in Dopfer (2004). Rule-making and ruleusing constitute generic economic features, like innovation and stability. But these rules are not free-floating in a virtual space, they are part of a greater ensemble of synthetic units, i.e. carriers, operations and trajectories. First of all we need to

192

Institutions – generic heuristics

distinguish between an operant and a generic level of economic change. Currently neoclassical economics focuses just on the operant level of analysis. ‘A rule is defined as the idea that organizes actions or resources into operations’ (Dopfer and Potts 2008, p. 6). We understand the rule as embodied internalized knowledge of potential operations in subject terms and as a class of rules to organize operations in object terms. Both rule categories, of generic and operant nature, follow necessarily the entropy law, where the generic level entails rules and their actualizations in carriers (conceived as the actual naturalization) and the operant level entails operations on the ground of the generic rules. ‘Accordingly, we distinguish between generic entropy (rule actualization) and operant entropy (ongoing operations)’ (ibid.) The generic conception of economic evolution refers to the social communication of generic rules then, whereas in biology we would refer to genetic rules which are replicated. Economic evolution is then understood as coordination and change in generic rules, relating to operations on resources and transactions. Dopfer and Potts (2008, p. 8) offer a taxonomy of generic rules – illustrated in Table 10.1 – indicating the potential spread or diffusion of rules from the subjective to the objective domain and vice versa, shaping the evolving knowledge base of the economy via reconstitutive downward causation. Hence we want to highlight the multidimensional character of generic rules, indicating and investigating the evolving interdependencies between the cognitive, behavioural, socioeconomic and technical aspects of institutional change and its effects on the real economic activity. A rule-based approach of institutional change works with a heterogeneous set of agents, equipped with different cognitive and behavioural rules. The generic rules are internalized in the body–mind nexus, insofar as we may conceive the Veblenian habits of thoughts and Bourdieu’s habitus as central dispositional heuristics in the behavioural domain of subject rules; indicating that behaviour is a complex phenomenon and not an autonomous conditioned reaction system. These generic rules are central because they communicate between the cognitive and the social generic rule domain, between subject and object rules. They build the inner core of generic rule evolution, whereas the Schumpeter heuristics form the outer limits of the creative initial cognitive act of a pre-analytical vision Table 10.1 Generic rule taxonomy Generic rules Subject cognitive

Object behavioural

social

technical

e.g. mental models e.g. behavioural e.g. organization of e.g. machines, and schemata heuristics, algorithms enterprise or market instruments and and norms techniques Source: Dopfer and Potts (2008, p. 8).

Synthesizing heuristics with generic rules 193 (cognitive subject rule) for a new set of technical object rules. The Hayek heuristics are inherently concerned with the neural–cognitive apparatus (cognitive subject rules) and the social organization of the market (social object rules), as an emergent property of cognitive subject rules internalized in a population of carriers. Of course one cannot separate them sharply, but the generic heuristics operate in the core universes of rule domains. Hayek’s consideration of the naturalization of knowledge points directly to a synthesis between cognitive and social rules, his epistemology indicates this notion at best. The Veblen–Bourdieu modularization operates on the inner core of behavioural or even habitual/ dispositional subject rules and social rules of organization, also appropriate to their epistemological and methodological positions. It is essentially the pragmatist and post-structural consideration which lies at the heart of these generic rule actualizations in a population of carriers. According to Table 10.1, these rules span a rule matrix called [CBST] by the authors. The classification of these rules in subject and object can get expanded by the introduction of rule orders, formulated within an order vector [0 1 2] – constitutional, operational and mechanism rules (compare Table 10.2). The Cartesian product of [CBST] × [0 1 2] expresses the generic state of the economic system, also expressed by the coordination of its knowledge base. Generally spoken evolutionary economics seeks to investigate changes in this matrix and the interconnection between its rows and columns. The co-evolution and synchronization between subject and object rules is crucial for a sustainable development of the economy, as we have especially accounted in the Bourdieu heuristics between habitus and the field. Conclusively it is of the utmost importance which hierarchical level of order is affected. This framework offers a synthetic interpretation of previously elaborated semantic heuristics of institutional change on several layers, articulating distinct categories of change. Economic evolution is basically shaped by coordination and change of first order rules, since goods and services are produced along these rules or resources are exploited by these means. Nevertheless evolutionary economics proposes expanding the realm of investigated rules into the dynamics of lower-order constitutive rules as well as higher-order mechanism rules insofar as we are able to argue that first-order rules are contingent on changes in loweror higher-order. Consequently such a three-order approach allows for a full Table 10.2 Order of rules 0th order constitutive rules

Social, legal, political, cultural, and other constituent rules that underpin generic rules for economic operations.

1st order operational rules

Generic rules originated, adopted and retained by carriers for operations.

2nd order mechanism rules

Rules for changing rules. The origination, adoption and retention of rules about origination, adoption and retention.

Source: Dopfer and Potts (2008, p. 9).

194

Institutions – generic heuristics

endogenous analysis of the economic system. The rule taxonomy provides a comprehensive categorization of what is and what may happen in an economy, but it needs active economic agents, or rule carriers, who internalize and embody these rules with their individually acquired dispositions in dependence on the social structures they operate in. Carriers transmit, maintain and operationalize generic rules, according to Dopfer and Potts (2008). An economic rule is empty and worthless to investigate without specifying its carriers. This notion brings in the population and speciation approach of evolutionary thought, which is open to variety, diversity and heterogeneity of acting carriers. The internalization of a generic rule appears either in a subject (individual carrier) or object carrier (institutions or organization). Within this outline we are able to conduct evolutionary economic programs with an onto- as well as phylogenetic perspective, synthesizing the developmental with the evolutionary. It is worthwhile to note that rules can be operationalized by a multitude of subject and object carriers. Rules can be adopted by human economic agents, but are also carried by a specific social object (institution or organization) or technical object (machine or other technical rule). Then the object transforms a certain generic rule knowledge by its distinct incorporation. For instance the authors add that capital stock and physical commodities are economic object carriers. In principle all sorts of carriers use rules to perform transformations and transactions, but for a more detailed explanation of rule carriers compare Dopfer and Potts (2008, p. 11). The fourth major unit is given by the trajectory, which assigns the diffusion of an incorporated rule to other carriers. Basically A trajectory is the process unit of change, . . . In evolutionary economics, a trajectory is also a path from one state of order to another, but this process results in generic structural change in the rules, populations and associations that compose the economy. (Dopfer and Potts 2008, p. 11) An evolutionary trajectory is composed of the following three-phase transitional process. Phase 1: Origination of a novel rule Phase 2: Adoption of that rule into a population of carriers Phase 3: Retention of that rule in a population of carriers (Dopfer and Potts 2008, p. 12) Such a trajectory refers to the endogenous change and transformation of the economy and society within a long wave. Therefore ‘A trajectory is the process by which a novel rule is originated, adopted and retained in a carrier population’ (Dopfer and Potts 2008, p. 12). The origins of a novel rule can be manifold as elaborated within the previously elaborated heuristics, convergence is given by the disturbance or desynchronization of an accumulation regime, which becomes visible in dedicated habits, dispositions, affects, habitus and of course visions.

Synthesizing heuristics with generic rules 195 The dialectics with the co-evolving social structure and natural environment set the notes and rhythm. For our concerns we focus on the meso trajectory as the basic dynamic institutional process of economic evolution. A meso unit is ‘a population of carriers of a rule and the trajectory or process by which the population emerges as successive adoption of a generic rule’ (Dopfer and Potts 2008, p. 45). Then the meso unit consists of a generic rule, a population of micro agents and represents the result of a corresponding set of micro trajectories. This process is called a meso trajectory. The macroeconomic structure of the economy is composed of the coordination of all meso units. The meso level within evolutionary economic programs lies at the heart of institutional economics, where we focus on innovation, maintenance, sustainability of and resistance to rules. Emergence and accumulation of a meso unit means that it can potentially affect the rule structure of the macro economy.

The meso level of evolutionary economic programs The concept of meso grounds on the idea to bridge micro- with macroeconomics. It is basically argued that traditional aggregation methods, from micro to macro levels in the economy, ignore the processes leading to aggregation. It is therefore a project of generic institutionalism to investigate converging heuristics and synthetic rules explaining aggregation as an endogenous bottom-up process. Mainstream economics does not currently provide adequate frameworks or tools to compete with this issue. Aggregation is usually understood as a straightforward causal functionalism, hence it is by definition impossible to integrate the idea of emergence within the used instruments. Concepts such as the general equilibrium framework and the representative agent cut off the complexity of aggregation with regards to process and structure components of change. Consequently the idea of meso originated in the heterodox realm of economics, first as a fundamental critique indicating the lacks of traditional aggregation heuristics. It turned out that evolutionary economics offers shelter for the meso project, because it emphasizes the evolution of series of disequilibria in comparison to steady states between multi-equilibria. Emergence and maintenance of novel rules supply two different, still interwoven, perspectives of the concept of meso, which shall be outlined in the following. The Schumpeterian idea of innovation is one, but not the only, gateway to thinking in terms of meso. The innovation perspective focuses more on emergence and diffusion than on specific structuring issues of meso coherences. The Schumpeterian theme is especially considered by Kurt Dopfer, who showed in several publications that meso provides generic principles of economic and therefore institutional change. A more detailed sequence of the phases within a major trajectory is given in the following, with special emphasis on the Schumpeterian terminology. I

Origination Sub-phase 1: creation of novel idea, i.e. invention Sub-phase 2: search, discovery and recognition process, microscopic selection

Institutions – generic heuristics

196 II

Adoption Sub-phase 3: first adoption, i.e. innovation, chaotic environment, bifurcation, uncertain outcome Sub-phase 4: macroscopic adoption of ‘seed’, selective environment, path-dependence III Retention Sub-phase 5: retention of adopted ‘seed’, meta-stability of actualization process Sub-phase 6: existing regime as breeding ground for novel potential(s), link to phase I. (Dopfer 2012, p. 148) Dopfer considers Schumpeter’s system of economic thought as the origin of generic meso economic analysis. Otherwise we can truly argue that all the discussed heuristics focus centrally on this dimension of economic change. Even Bourdieu’s co-evolutionary system of habitus and the field emphasizes exactly generic change in the meso sphere of economy and society, as we may revisit the following: ‘Paradoxically, the theory of fields found in Bourdieu’s sociology, is in the final analysis, a theory at the meso level, while the ultimate aim of regulation theory is to propose an analysis of macroeconomic systems’ (Boyer 2011, p. 350). In the very first detailed conceptualization of the micro–meso–macro framework, Dopferr et al. (2004) consider the economy as a complex rule-based system contained in the meso. Each meso unit consists of a rule and its population of actualizations. Micro refers to the individual carriers of rules and the systems they organize, and macro consists of the population structure of systems of meso. Micro structure is between the elements of the meso and macro structure is between meso elements. (Dopfer et al. 2004, p. 263) This quotation can be treated as a definition of the meso and its relationships to the micro and macro. Meso works as a missing link in aggregation processes between micro and macro, which constitutes it as a crucial theoretical figure for a generic institutionalism. Now it is widely acknowledged that institutions are engaged in the core processes of aggregation. Dopferr et al. (2004) provide a theory of endogenous economic change along a Darwinian metaphor, a meso trajectory that consists of three generic phases: origination, diffusion and retention. The first phase of such a trajectory is regarded as a micro–meso process, where new knowledge is introduced into the economy via a Schumpeterian entrepreneur, potentially across the fields. This new knowledge provides the base for the second phase where early adopters take it over and create new rules, or new meso units. This phase represents innovative activity which emerges out of invention. The theoretical fine-tuning concentrates here on the possibility that an

Synthesizing heuristics with generic rules 197 innovation may only occur on the grounds of creativity. Therefore it cannot be taken for granted that newly introduced knowledge will be adopted immediately. The third phase considers a meso–macro process where an innovation is maintained in the economy which results in a new coordination of the macro structure, now the rules are changed. Within this concept, meso is regarded as innovative power striving for new rule settings in the economy. Dopferr et al. (2004, p. 265) especially claim that the mantra of ‘algebracism’ in neoclassical economic theory may never compete analytically with the problem of aggregation, because it is pinned within concepts like general equilibrium or the representative agent. Aggregation remains the summing up of units from micro to macro and decomposing from macro to micro, then. Of course, the instruments and tools in operant aggregation analysis have advanced tremendously in recent decades, nevertheless the issue of real bottom-up processes goes beyond this traditional logic. The meso framework provided by Dopfer and co-authors tries to develop instruments, which are able to challenge with this complexity. Knowledge is considered as a rule-structure, where ‘rule structures are bundles of rules that bear complementary relationships with each other and these can be analyzed in a range of ways using network theory. The rules that matter for understanding economic systems are those that are generic’ (Dopferr et al. 2004, p. 266). Generic rules are treated as emergent rules, gathered from a network of rules. The emergence of a generic rule determines the rise of a new basin of syntax and grammar – the initial bottom-up programming process – where specific aggregated structures may evolve necessarily for the accomplishing step of innovative aggregation. The meso operates as a pivotal synthetic lens, where micro perspectives focus on the complex structure of rules that constitute rule systems such as institutions and organizations. Macro perspectives focus on the complex structure of rule-populations such as industries, the society or even the whole economy. When we observe change in the meso, by which we mean a change in generic rules, i.e. in the knowledge base, and/or in their respective populations, we can then analytically focus on both the micro and macro aspects of this process. . . . The economic system is built upon meso; micro and macro are two perspectives that reveal the structural aspects of the changes in the meso populations that constitute the elementary units of the economic system. (Dopfer et al. 2004, p. 267) Then a generic meso trajectory, building upon origination (emergence), diffusion (adoption and adaptation) and retention (maintenance), actually introduces and retains a novel rule in the economy. Meso 1 – origination: The first phase deals with Schumpeterian entrepreneurs introducing new knowledge into the system. Origination deals with the creative act of inventing, that means in particular that an idea is generated in form of a micro rule. Dopferr et al. (2004, p. 274) emphasize that this rule carrier is not

198

Institutions – generic heuristics

necessarily a supplier. It is important to note that origination merely involves an active agent, acting in uncertainty. Additionally the invention may be of economic, but also of social, cultural or political nature. A new rule requires new institutional coherences in order to diffuse: the monopolistic character of a micro rule determines only this first phase of the whole trajectory. The critical point of phase one is that variety occurs and order gets disturbed via a novel naturalization and internalization of knowledge, again even affects, dispositions and asocial practices are integral part of this knowledge category. Meso 2 – adoption, adaptation and diffusion: The second phase is concerned with adaptations of this new rule in various local environments. The authors claim that exploration, differentiation and integration restructures the division of knowledge now. The monopoly of the micro rule carrier is disturbed through early adopters and competition plays a significant role. Hence in the new environment leaders and their followers establish the diffusion process and new conduct begins to circulate within society, across the fields. From the macro perspective this phase initializes growth of variety, leading to de- and recoordination of the whole system. We may compare this phase with the Schumpeterian notion of creative destruction, which leads to a new structuring according to the frequency of the diffusion process (Hayek heuristics of knowledge distribution), the rhythm of imitation and adoption between leaders and followers. Meso 3 – retention, maintenance and replication: The final phase of a meso trajectory establishes retention of the emerging rule as an ongoing process in the economic system. ‘This is achieved through maintenance in the micro and replication in the macro and in both cases refers to a meta-stable distribution of normalized or institutionalized activities’ (Dopferr et al. 2004, p. 275). Emerging knowledge structures are institutionalized and consequently normalized to a certain degree, still this structuring remains meta-stable, so it refers to relative stability in the micro sphere of the economy. From the macro perspective we may note that this phase involves an ordered state, where new orders break off and disseminate. Furthermore such a state offers a flourishing ecosystem for the origination of new meso trajectories. Therefore we conclude that mesotrajectories attract the rise of novelties on the basis of their meta-stability. The meso is the pivotal anchor point for change and offers correspondingly starting points in both directions, micro and macro. Thus meso not only provides an abstract lens for innovative processes, moreover it synthesizes patterns and heuristics of behaviour and conduct, which are not already established in fixed institutional settings. Therefore the meso sphere integrates norms, rules and the establishment of final institutions. Meso concentrates on generic rules, which crystallize the process itself, providing the economy with a new programming language for a new generation of evolutionary economic programs. Rules represent an ongoing inferential procedure involving continuous interplay between induction and deduction, resulting in an abductive format, according to Dopfer (2005), as already conceived with reference to American pragmatism. Then ‘generic’ addresses the heart of all change. Generic refers to a layer of change that

Synthesizing heuristics with generic rules 199 is providing variety and diversity in language, semantics and grammar of systems for further synthesis. It serves as a template for change stimulating a spectrum of potential actualizations, resulting from harmony or conflict with regard to the actual power relations across the fields. At the heart of the concept lies the ruleguided agent. In contrast to Homo œconomicus, the rule-guided agent acts on ground of social patterns, where the most abstract ones are of generic nature, with reference to the spectrum of generic heuristics already elaborated. However Dopfer and Potts (2008) have also already received decisive critique regarding their General Theory of Economic Evolution. The most elaborated critique stems from Runde (2009). The author reviews on the one hand the general ontological attempt incorporated in evolutionary realism, and the heuristic or analytical concept of meso and generic rules on the other hand. We refer to the latter in the following. Runde argues basically that the theoretical considerations of Dopfer (2005) and Dopfer and Potts (2008) entail major contradictions. A perfect example gives the definition of generic rules. Runde (2009, p. 370) explains that the definition of generic rules is not general after all, because it does not incorporate genetic rules insofar as generic rules do not involve biological evolutionary processes, but they should by definition: they should encompass all bimodal matter-energy relations. A further lacking is situated in the taxonomy of rules, as illustrated in Table 10.1. Once individuals enhance their cognitive capabilities and build up new mental models, they may adapt a social rule. Are internal models really individual, since they are re-evaluated continuously in social contexts? This issue is critical, since agents are otherwise not only defined or guided by social rules. Maybe the classification involved some misunderstandings, that these rules do not co-evolve. Another issue lies in Runde’s (2009) argument that Dopfer and Potts (2008) use the term rule or idea already in inflationary matters. Runde means in particular that the concept loses a lot of power if the terminology is set too broadly. As a consequence the framework also loses didactic power, so that scholarly peers cannot follow anymore. D&P would have been on far safer ground had they stuck rigorously to a more conception of rules, and presented what they call ‘ideas’ as generally accepted ‘types’ along with an account of how these may condition how people interact with the physical or social objects concerned. Proceeding in this way would have facilitated a far more natural and accessible account in which (1) the product ideas of innovators could be called product ideas, (2) the new products that flow from these ideas could be called new products, and where (3) the transformed and newly emergent practices that flow from the adoption of these new products, when they become institutionalized, develop normative counterparts that are reproduced in and through those practices, and which we might want to call rules. (Runde 2009, p. 377) This quotation summarizes Runde’s critique quite adequately. It also shows that the main problem lies in the use of the novel synthesizing language. The concept

200

Institutions – generic heuristics

of rules in the micro–meso–macro framework is promising and well-elaborated, but it needs more detailed classification and specification. In a reply to that critique Dopfer and Potts (2010) remark that most of it builds upon the different approaches, the two parties follow. Runde (2009) follows a social ontology framework, manifested in critical realism. Dopfer and Potts (2010) add that this concept misses that cognitive individual development, the establishment of subject rules, is necessary to treat agents in a heterogeneous and diverse way, breaking with the representative agent. Then these subject rules co-evolve with object rules, conditioning each other. In conclusion, the major debate grounds on different ontological positions, whether social rules constitute all economic instances or if the co-evolution of subject and object rules represents a dialectic reshaping of economic reality, as followed by Bourdieu for instance. The authors conclude in respect of Runde’s (2009) proposal to substitute some rule categories with the notion of ‘type’ or just ‘idea’. Ontologically, social rules are like technical rules, in that they are both an idea. There is no reason to split them at the theoretical level and call one (social) ‘rules’ and the others ‘types’. We think our generic language is actually better because it captures how what exists from the ontological perspective is also what matters from the perspective of evolutionary economic analysis. (Dopfer and Potts 2010, p. 412) In fact there are issues in the ontological as well as in the heuristic domain, that cannot be simplified sufficiently to more conventional terms. They bear a complex, abstract, but still generic interpretation. In conclusion, Dopfer and Potts (2008) provide a new language capable of further synthesis of already established heuristics. Now, it is already the time to use this language and to form new synthetic sentences for convincing bottom-up models of evolutionary economic programs. It is essentially the ontological and heuristic notation of a rule which cross-fertilizes generic evolutionary research beyond the sciences and humanities. A brief reference to Hughes (2011) indicates this transdisciplinary potential from the perspective of post-structural philosophy, as already hinted in Bourdieu heuristics. It is interesting to note that Gilles Deleuze’s philosophy stands very close to the evolutionary economic agenda, especially with regard to the generic rule-based approach. We find a lot of commonalities and convergence in the terminology and system of thought in Deleuze’s (2010 [1968]) Difference and Repetition, as also indicated in Bösel and Wäckerle (2013). However this philosophical masterpiece of nomad thought is anything but easily decomposable, once one begins to understand it as a post-structural detective novel, as Hughes (2011, p. 16) outlines: ‘In the case of Difference and Repetition the story is rather bland: it is the story of the genesis of representation.’ The genesis of representation is a dominant topic in this book, as we have discussed in Part I on naturalism and in Part II with reference to American pragmatism, perhaps foremost visible in the work of Peirce and in Bourdieu’s work on the co-evolution of

Synthesizing heuristics with generic rules 201 habitus and the field which generates actualized and internalized representations. We just want to mention two dominant streams in this system of thought, which confirm the convergence with a generic institutionalism, building upon a synthesis of the previously elaborated generic heuristics. Of course an explicit and detailed survey for a more powerful synthesis cannot be given here in this context; this is left to a different story elsewhere. We look into the difference between the generic and the operant level in Dopfer and Potts (2008). Hughes (2011, p. 128) specifies that Deleuze (2010 [1968]) distinguishes between the virtual and the actual level in this regard. Particularly in the chapter on ‘Ideas and the synthesis of difference’ Deleuze (2010 [1968], p. 214) develops an evolutionary ontology where the virtual is represented in a fragmented world of incorporated ideas. It would be a mistake to confuse the ‘actual’ with the unindividuated evanescent materiality with which everything began. The incompossible events which affected the latent subject were sub-representative, fragmented and dissolved objects. They were objects as they appear to the body or the will to power. The actual which follows from the virtual, however, is no longer fragmented. It is individuated. It is circumscribed within the limits of a quality and an extensity. . . . The movement of ‘actualization’ or ‘differenciation’ is the movement from the virtual object or ‘the object in the Idea’ to the actual, represented object. It does not go back to the sub-representative object. (Hughes 2011, p. 128) This interpretation of Deleuze’s work retells the story that Dopfer and Potts (2008) narrate with the evolutionary micro–meso–macro trajectories oscillating between the generic and the operant, but 40 years before in a philosophical context. Where Deleuze shows that there is difference between what he calls differentiation in the virtual and differenciation in the actual1 – there is difference in differentiation. Dopfer and Potts (2008) show that there is a need for a new mode of economic thinking when we turn to an evolutionary ontology, because then we need to investigate the process dynamics between the generic and the operant as well as the dynamics within the domain of generic rules, which is completely left out in neoclassical economics. On the generic level we have then a virtual object or ‘the object in the Idea’ which governs the generic rule set, because it is carried by subjects and objects and therefore naturalized. Through this short note we immediately see that Runde’s (2009) critique misses the point when talking about types instead of rules. Ideas are sensed problems and actualizations are necessarily solutions in pragmatist sense. Moreover ideas are rules, when we follow Deleuze (2010 [1968]), in this respect. The faculty of thinking is a faculty of rules . . ., we can characterize the categories in slightly phenomenological way as the rules for the constitution of any possible object of experience. . . . Thought may not operate according

202

Institutions – generic heuristics to an already given rule. It does however ‘invent its own rules’. From this point of view we will see that the Idea still has a fundamental relationship to the constitution of objects. Its systematic function is nothing other than to produce rules for the constitution of objects in the absence of any preexisting rule. (Hughes 2011, p. 132, original emphasis)

Deleuze (2010 [1968], p. 214) suggests a three-phase metamorphosis of spirit from imagination to memory to the faculty of thought, where in this last phase creation gets actualized, ‘like the child, spirit no longer knows rules or preestablished values’ (Hughes 2011, p. 132).2 In this three-phase process we identify the power of rule invention and the emergence of novelty in a Schumpeterian vision, as Dopfer and Potts (2008) have adopted in their framework. Objects are defined as assemblages of a quality, an extensity and a duration, which is constituted by differenciation. This definition helps us additionally for our understanding of an institution in its multitude character. But this institution is defined only through its actuality at the moment, insofar as we need to add another aspect surrounded by the virtuality of the Idea and here the rules come into play. Deleuze would argue that one half of the institution is actual and the other virtual, achieving integrity through, in his words, different/ciation. ‘Actualization is the process in which the virtual Idea or the ‘object in the Idea (l’objet en Idée)’ meets up with the actual object. Differentiation differenciates an object thus determining its quality, extensity and duration’ (Hughes 2011, p. 142). The actualization appears only of particular ideas, and not of the virtual as a whole thereafter, a point articulated in several passages in Dopfer and Potts (2008). The Deleuzeian interpretation of the faculty of thought considers it as the faculty of rules, but Hughes (2011, p. 144) explains in a slightly different way as Kant’s faculty of thought. Ideas in Deleuze are subject to a genesis, meaning a dynamic and not static notion of given categories in particular. Thought itself is a ‘product of progressive development’ and reaches this point only through a ‘failed synthesis of recognition’, hinting explicitly at the evolutionary moment in this philosophy. The idea represents ‘precisely the set of rules determines the content and the detail of real experience. . . . They are the virtual [generic] relations of actual experience’ (Hughes 2011, p. 144, brackets added). For Deleuze the ‘object’ is defined as the intersection of quality and extensity (in the biological metaphor quality will be called ‘species’ and extensity will be called ‘parts’). The actualization [operationalization] of Ideas is what determines the actual quality and extensity of the thing, and the two parts of the Idea correspond directly to the two aspects [previously elaborated with the virtual/generic and actual/operant] of the object. . . . Virtual [generic] relations [rules] determine actual [operant] qualities [rule population]. Virtual [generic] singularities [ideas] determine actual [operant] extensities [carrier rule]. (Hughes 2011, p. 145, brackets added)

Synthesizing heuristics with generic rules 203 . . . where quality refers to a contracted quantity as a sort of a synthesis of quantity, otherwise a relation could not determine the quality, emphasizing again the bimodal nature of rules as already elaborated. This synthesis is governed by generic rules, and converts the synthesis from the passive to the active of the carrier, because it ‘produces quality by contracting sensations’ (Hughes 2011, p. 146). And we find ourselves in an already articulated affective order which allows for novelty creation in a complex state of the system. The major point with regards to evolutionary economic programs refers to the meso level of change, where this affective order is made possible, not in micro and not in macro. We have already referred to the meso as a process and structure component of evolutionary economic change, assigning potential to innovation, but meso has also a very deep stabilizing component which is articulated in the following.

A simple logic of meso On the other hand meso deals with maintenance or stabilization processes, finally unifying elements to a consistent meta-stable whole. Elsner (2007, 2010), Elsner and Heinrich (2009) illustrate the criteria to be considered for the process of meso as group formation or general stabilization in the economy. With reference to ‘meso as an intermediate position on a quantifiable scale’, compare Dopfer and Potts (2010, p. 411), Elsner (2010) focuses on its stabilizing function in socioeconomic dilemma, emphasizing the evolution of cooperation. Elsner (2007) shows that in order to compete with non-cooperative games in the longrun critical masses are afforded (compare also Schelling 1978). An emerging critical mass then represents a meso sized group of agents which have overcome the coordination problem. Thereby Elsner (2007) uses a prisoner dilemma logic to determine necessary sizes of carrier groups for emerging institutions, able to stabilize a situation by transforming co-evolving action into social structure. ‘Also, as has been argued, the rule emerges from an interrelation between the past history of interactions and the future. In sum, the rule’s emergence depends on two critical interdependencies, i.e. interests/expectations and past/future’ (Elsner 2007, p. 15, original emphasis). Agents are modelled with specific expectations, so they may adapt their behaviour considering contingent trust. Hence agents will choose with whom they play or engage in future encounters. Generally the suggested approach elaborates on the meso as a ‘specified and formalized problem which agents have to solve both individually and collectively through the very process of institutional (or structural) emergence’ (Elsner 2010, p. 447). In consequence we enter seemingly the domain of formalized synthetic rules to implement evolutionary economic programs from the bottom-up with focus on the meso-level. Elsner provides and evolutionary framework ‘in order to explore the co-evolution of (1) a complex incentive structure, (2) experienced expectations, indicative (in varying degrees) of (3) the group size, and (4) the institution as such (as both quest and outcome of the individuals’ effort)’ (Elsner 2010, p. 447). The model presented in

204

Institutions – generic heuristics

Chapter 13 works upon a similar logic, though with a different treatment of trust, as will be shown. Elsner’s and Heinrich’s (2009) model consists of a network topology, where agents begin to connect in small groups, starting with total connectivity. In a matching process partners are selected following a prisoner dilemma logic, the connectivity loses degree, because agents only engage in contingent, trusted relations. Conclusively the group size increases, but overall connectivity decreases. This evolutionary process generates meso sized groups finally, which emerge in a meta-stable state disconnected from the whole population. Thus the emerging institution is treated here as a concrete fixed set of agents, in contrast to a generic vehicle. The focus first lies on the informal institutional emergence of a group-size which then gets concretized in light of a fixed public body. However the target values, which are emergent properties, are the minimum critical mass and the maximum relevant cooperating group. These two values deliver lower and upper bounds for possible institutional emergence under cooperation, depending on evolving trust along heterogeneous reputation chains. Furthermore it is important to note that agents are equipped with some knowledge before the process starts. Institutions do not emerge out of nothing or without any past history. Agents have social knowledge about learning, reputation and monitoring, hence these factors have to be considered as initial values. Elsner and Heinrich (2009) start with a single-shot analysis of the prisoner dilemma to explain how structure emerges along a specific population size, in its most simple form. In this single-shot, groups may emerge only in dependence on their incentive structure, which is on the one hand inbuilt in the game and on the other hand influenced by the reputation rules, hosting the partner selection. Hence the payoff matrix determines possible rewards and consequently the agent’s incentive to cooperate or to defect. According to a neutrally-stable strategy, i.e. TFT (tit-for-tat), population sizes and critical masses (minima and maxima) can be calculated, resulting in an area of cooperation (compare Elsner and Heinrich 2009, pp. 844–846). Nevertheless an institution relies on the habituation of agents and will not therefore emerge if agents act as short-run maximizers. The institution will have to be a ‘semi-conscious’ phenomenon, and may be so as long as expectations of conformity with it are met, supported, e.g., by a favourable numerical result of inequality (5a), and the incentive structure and importance of expectations of a common future (to meet again) remain unchanged. Therefore institutional emergence has to follow a broader and long-run rationality. (Elsner and Heinrich 2009, p. 18, original emphasis) This long-run rationality is of an adaptive character and deals with past encounters and possible future engagements. Additionally agents gain benefit from the institution, ‘to escape repeated frustration from common defection, to learn and to increase knowledge’ (Elsner and Heinrich 2009, p. 18). Accordingly agents

Synthesizing heuristics with generic rules 205 do not gather in institutions just for fun. The relevant incentive structure is not hidden in the payoff-structure and is therefore a necessary additional assumption of the model. It is then also dependent on the ‘expected probability to meet a cooperative agent’, which the authors announce as ‘contingent trust’. The critical values become the size of the memory of an agent and its monitoring capabilities, since agents will meet randomly. The monitoring initializes certain reputation chains, where agents store previous encounters such that an agent can gain further knowledge about monitored partners as well as the partners of these partners. This process builds up the reputation chain, that an agent may gather information about third parties to improve her expectations. The emergent process involves heterogeneous search process of all agents potentially capable of building a cooperative group. These criteria necessitate the actual partner selection process, which sorts out neighbourhoods, i.e. potential meso sized groups. The additional features are already well acknowledged in social network analysis, where the specific clustering of agents in neighbourhoods plays a dominant role. In such neighbourhoods or clusters we are engaged with synergetic effects providing net externalities to the whole group. The discussion on social indicators or parameters, as well as network gains that realistically effect a meso sized group is definitely a major challenge for evolutionary economics. Finally Elsner and Heinrich (2009) explain potential gains of this attempt for the discussion on varieties of capitalism. The authors show, by referring to trust polls, that smaller countries do reflect greater general trust. In conclusion the framework of the generic-rule based approach working on the meso level of evolutionary economic change can become better informed with such simulation experiments, since emergence is not an issue which cannot get modelled anymore with the rise of bottom-up modelling techniques such as agent-based modelling and endogenous social network theory. In order to bridge to Part III it is worthwhile to note that the established prototypic synthesis of previously elaborated generic heuristics enacts as a semantic template for the concrete actualization in simulation experiments, on the ground of multi-agent bottom-up modelling, an aspect also recognized by post-structural philosophy, which already informs itself via new narrative modes of formalized story-telling in complex simulation of society. This outline is briefly discussed in Chapter 12 with reference to DeLanda (2011). It is indeed in line with the current Zeitgeist of scientific culture that such convergence is not anymore hidden, but visible in publications across the fields, a point where seemingly diametric discourses suddenly meet. A more than interesting phenomenon of social learning and cultural evolution.

11 Remarks and reflections on Part II

The generic rule-based approach offers a prototype synthesis for the previously elaborated generic heuristics. We may identify the Veblen–Bourdieu heuristic frontier within the core between cognitive, habitual and social generic rules, reconsidering Table 10.1. This institutional module articulates the cultural dispositional system as cumulatively evolving in durable social structures, allowing for different cognitive modes for economic operations. With reference to Table 10.2 this module works primarily on the affective order in relation to first order constitutive and second order operational rules, but it also delivers insights on the second order mechanism rules. Veblen’s institutionalism highlights the mechanisms of the great transformational processes and not just of social reproduction. He followed the Darwinian trajectory and elaborated on the cultural evolution with regard to cumulative causation. Thereby Veblen emphasized the mechanisms between the instinct of workmanship and habit, transitioning the consumption patterns of a whole society. Bourdieu’s sociogenesis regarding the co-evolution of habitus and the field delves also into all three orders of rules, since it projects a heuristic device where evolutionary change is initialized when specific habitus enter different fields, leading to a dissonant clash of the social sense. Boyer (2008) exemplified this issue with a reconsideration of Bourdieu’s theory in the régulation school, where institutions are at the core of scientific investigation. He argues that it is the desynchronization of habitus and the field leading to evolutionary transition and endogenous crisis. Otherwise we may also speak of a Hayek–Schumpeter institutional module, because their evolutionary systems of thought necessitate each other in complementary ways. Schumpeter heuristics work especially on the cognitive subject rules and the innovative potential for technical object rules, as technical objects carry the novel idea within them. Hayek heuristics narrate an excellent story about the genesis of generic rules in the affective order in general. The spontaneity of this order with regard to the cognitive domain of a single carrier highlights the potentials of a moral community (Hodgson 2012), indicating the evolution of social object rules. We can also speak of a Veblen–Schumpeter institutional module as exemplified in the following. Veblen analyzed this process on the basis of his concept of circular and cumulative causation. Schumpeter criticized Veblen’s work on the grounds

Remarks and reflections on Part III 207 that it was non-theoretical and sociological. But there is a deeper reason for this, rooted in his view of causality. Unlike Veblen, he outlines a linear causality principle: ‘We speak of cause and effect only in the case of an irreversible causal relationship. . . . In contrast, we do not speak of cause and effect in those instances where we have a reciprocal relationship between two facts. We consider as a cause of an economic phenomenon only its explanatory principle (Erklärungsprinzip), that is to say, that aspect that allows us to comprehend the nature (Wesen) of the cause.’ (Schumpeter 1912/1926) (Dopfer 2012, p. 149) Then the aspect of routinization can be understood as a stream of habituation under the umbrella of a rule-based approach. A particularity of the term routine is that it refers, at least literally, to a completed process of routinization, or what Veblen called ‘habituation’. Human individuals are carriers of cognitive rules that allow them (if routinized) to perform operations in the ‘internal environment’ of the brain, and of behavioral rules that allow them (if routinized) to perform operations in the ‘external environment’ of social contexts. (Dopfer 2012, p. 149) However the most essential issue of these generic heuristics lies in the naturalization of knowledge, which spans the common thread of generic institutionalism and assigns potential to an affective order. Hayek recognized that we can cope appropriately with coordination and change in an economy only if we deal with generic knowledge. By exploring the ‘market as a discovery process’, he contributed to the Austrian standard model, and demonstrated how rent-seeking agents and arbitrageurs operate, but he also pioneered a progressive variant of Austrian economics, bringing into theoretic focus the grand theme of generic knowledge growth. Hayek recognized that there was not only an invisible hand at the operant level, which coordinated the activities of the butcher and brewer who exchanged commodities and money, but also at the generic level, where knowledge was divided and needed to be re-coordinated. His departure point was the two first chapters of Smith’s Wealth of Nations. Hayek recognized the significance of the distinction between operant and generic, and, dealing with the latter, he went beyond Smith’s concept of the division of labor (Dopfer 2012, p. 152) It is this aspect of generic knowledge evolution through social learning which connects the mind–body nexus and makes it a unique phenomenon in biological evolution. Through the habitual and affective mechanisms of this social learning we generate a meso level of the economy and society in a bottom-up way.

208

Institutions – generic heuristics

Resulting practices refer always to specific rule populations. Their recombination makes a cultural, social, economic or political entrepreneur successful. The value added opens new spaces waiting to get filled. Nevertheless the resistance to an established rule-set also leads to innovation, since the diffusion can reach new group sizes and platforms of change (Elsner 2010). However, it is remarkable that far less attention is devoted to the idea that the institutions which promote order and co-ordination also facilitate the transformation of the system through innovation and the development of knowledge. . . . A balance is thereby struck between the existing and the emergent (Metcalfe 2008, p. 136) Indeed, as outlined in previous chapters, it is this notion of institutional evolution which makes us wonder, the balance between the existing and the emergent. As Foster and Metcalfe (2012) emphasize it is the experimentation with rulebundles, in the spirit of Dopferr et al. (2004) and Dopfer and Potts (2008), which assigns the movement of the entrepreneur across the fields. Therefore it is necessary to investigate the rule-sets of institutional change in order to understand the accumulation of different economic regimes, because they are shaping the power relations in society. Innovation is not possible in a power vacuum, indicating that there is difference in differentiation, Hughes (2011) elaborating on Deleuze (2010 [1968]). These two different/ciation modes on the generic and operant level of economic change enable institutions as knowledge repositories (Hodgson 2008b, p. 29). Social learning is not possible without recognizing the institution as an object in the many ideas, it actualizes itself in this recognition, or as Veblen anticipated it with regards to the community of knowledge. Veblen took up and developed the notion that social groups and institutions carry accumulated knowledge and experiences from the past. Accordingly, Veblen argued that the social complex of interacting individual habits constituted a social stock of largely intangible knowledge that could not be associated with individuals severally. . . ., Veblen (1921: 28) argued consistently that production depended on a ‘joint stock of knowledge derived from past experience’ that itself could not become an individually owned commodity, because it involved the practices of the whole industrial community. (Hodgson 2008b, p. 29) Elsewhere Hodgson (2012, p. 161) also admits that ‘Habits themselves are conditional and rule-like’. We can speak of institutions as knowledge repositories emerging within a meso process of rule correspondence and synchronization. Institutions entail therefore the role of witnesses of a time period and host different sets of discourses when we speak with post-structuralism. Accordingly it is important for the institutional economist to monitor the access to these

Remarks and reflections on Part II 209 knowledge repositories, because they influence the power relations in the socalled knowledge-based economy (Jessop 2008, p. 342). Open access to communities of knowledge is a principle which is still in development, but essential for the future of the information-driven capitalism of knowledge commodification. The issue of communication power is discussed in Chapter 14 within a network perspective of the information society, indicating a significant transition in capitalism. The current flagship example is given by the open-source community, which allows users to use software free and developing in a bottom-up way, a significant idea for the implementation of evolutionary economic programs. Science may work very well in a similar way. Knowledge appears in structure and process components. Structural knowledge is dedicated to carrier media, such as ‘books, hard disks or human brains’ (Hanappi 2008a, p. 2). Then knowledge as a process component develops along the different use of these media. The evolution of knowledge is then characterized by the interactions of structure and process, where institutions as knowledge repositories may also emerge. Since this institutional knowledge is not codified in a specific external medium, it is a repository of the meso level, between structure and process. A new structural component may otherwise not guarantee a growth in knowledge, because as Hanappi (2008a, p. 4) outlines ‘It might well be the case that the new structure implies deleting an existing one and in this case relative quality of the two changes becomes crucial for the net effect.’ Thereby we also face critical problems in knowledge development, since we act under bounded rationality and nested cognition. Despite these symmetries at the extreme points of analytical abstraction – pure (spatial) structure, pure process (in time) – what actually is going on in reality is characterized by asymmetry: An ever growing mass of knowledge structure is getting more and more opposed to the abilities of the human species – still far away from being a conscious agent – to convert it into useful knowledge development. (Hanappi 2008a, p. 6) The aspect of useful knowledge development entails of course a very deep normative question, which should worry the organization of research and science in general. What seems to be missing on the structural side is the development of synthetic links between overspecialized knowledge areas. Though there certainly exist synergetic reserves of cross-disciplinary research . . ., the established academic career profiles and fears of sudden human capital loss if new areas devaluate old ones hinder researchers to bridge gaps between disciplines. Further pointless specialisation in many sub-disciplines is carried on despite the much more prosperous expected gains from synthetic efforts. (Hanappi 2008a, p. 7, original emphasis)

210

Institutions – generic heuristics

Of course with a generic institutionalism we want to emphasize exactly the synthetic establishment of synergies across the structural fields. This notion necessitates a point which Hanappi addresses elsewhere (2008b) with regard to the concept of choice. Since choice is based on prior established knowledge, we can only hope that the concept of choice does not simply follow a stochastic stream: on the contrary it depends on the evolution of rule-sets (Hanappi 2008b). This issue was already addressed within the discussion of the faculty of thought and rules in Deleuze (2010 [1968]), where we concluded that it is of course not just stochastic, but governed by the invention of new rules. This is also the point where social learning becomes crucial, because novelty is strictly dependent on social experience, on the nested reasoning structure of an institution (Kawamura 2009; Aoki 2010). It involves a variety of discourses that shared imagination (Dopfer 2004) or shared beliefs (Aoki 2001, p. 10). Generic institutionalism offers a template to translate between these various discourses in order to generate synthetic links. Aoki’s (2001, 2007) institutionalism is characterized through the static analysis of equilibria in game theoretic settings with reference to actual real-life examples. However Aoki (2001, 2007) had already decided to make use of the evolutionary language, part of the semantic notations we have elaborated previously. A main problem, from the perspective of generic institutionalism, in this framework deals with the use of Hayek heuristics. In fact, Aoki develops most of his concepts from the Hayekian notion of spontaneous order. However, he misconceives that the conventional order in static game theoretic settings, elaborated in Aoki (2001) for instance, is something different to the catallaxy that Hayek had in mind. We already discussed this notion briefly in Chapter 7 with additional reference to Young (1998), who follows the same Hayekian interpretation. It is worthwhile to mention that this interpretation of Hayek is too short, if it is not explicitly referred to the methodological difference between the projected heuristics and the actual models, as articulated in Witt (2008c) for instance: a challenge leading us also to Part III.

Part III

Complexity – methodological considerations

This page intentionally left blank

12 From semantic to synthetic programming

The route from semantic to synthetic programming cannot be compared with a nice relaxed Sunday walk. The theoretical and methodological issues implied are of a complex nature, but the major obstacles seem to get pulled away within social learning across the scientific fields. In principle we consider that as a scientist we develop different sets of languages which need to be synthesized from time to time. We follow Hanappi (2008a) and compare the following language structures or ‘knowledge languages’ (compare Table 12.1) in order to synthesize the semantic programs already elaborated in novel ways. In this chapter we elaborate preparation work for future bottom-up models of evolutionary economic programs, where an exemplary agent-based simulation of institutional change is given in Chapter 13. Table 12.1 refers to three types of language structures, prose or plain text, mathematics and algorithmic formulation and of course as Hanappi (2008a, p. 13) mentions ‘Further ones, e.g. music, could easily be added.’ We refer to the previously elaborated difference between knowledge structure and process, but also between the existence of both components in reality and the description of these two components in reality, which we consider broadly as semantics. Indeed the development of both – reality and its image – is only possible due to the interplay between these two levels. The evolution of structure that takes place in time and space thus could be characterized as being driven by the interaction of three types of elements: entities in human societies (H),

Table 12.1 Language structures Level

Prose

Mathematics

Algorithms

0 1 2 3 4

Bits Words Sentences Texts Sets of texts

Bits Variables Equations Equation systems Sets of systems

Bits Objects Statements Programs Sets of programs

Source: Hanappi (2008a, p. 13).

214

Complexity – methodological considerations elements of the stock of knowledge (K) and elements of the physical environment of both (E) (Hanappi 2008a, p. 13)

Evolutionary change of knowledge is characterized by interactions within these entities as we have already articulated in Chapter 10, in terminology of the generic rule-based approach and the micro–meso–macro framework. A first circuit of interaction typically considers H as perceiving E (by using K), interpreting these perceptions as model realizations (again by using K) and finally changing K (again by using K) by updating existing models – hence the name circuit. Updating typically consists of adding, modifying and forgetting. All sets overlap to some extent. (Hanappi 2008a, p. 14) Hanappi (2008a, p. 14) interprets the mode of how internal models are built and continuously matched with reality by using and extending the existing stock of knowledge. This procedure informs us not only of the grounds of knowledge evolution, but also, and more significantly in this Part III, of the way we may formulize algorithms to model the updating of the knowledge stock of artificial agents. The process component of an agent is reflected by past, present and future time, where we argue that ‘It is possible to choose past, present and future close enough to each other to have the same element in all three appearances of the set’ (Hanappi 2008a, p. 14). Of course the exactly opposite (or negation) is true at the same time, namely that ‘There is always a choice of long enough time frames, which implies emergence and exit of elements’ (ibid.). For this reason we need to explain additionally the content of the specified levels of language structures in Table 12.1. The ‘level 1’ elements are pronounced in the sets of H, E and K, characterized by a certain constant existence with regard to the former anticipation of knowledge process. Then links are provided by ‘level 2’ elements constituting a prototype grammar already capable for the generation of other ‘level 1’ elements. The first dynamic models in econometrics capture this representative notion in the analytical closure system of mathematics. Nevertheless in the long-run (the latter anticipation of knowledge process) ‘level 2’ elements are under evolutionary pressure, since emergence and exit operates just as on ‘level 1’ elements. With regard to the analytical domain of econometrics for instance, these variables are kept constant with respect to changes in ‘level 1’ elements, since this type of grammar does not account for openness. In consequence they describe only prior changes. Thus Hanappi (2008a, p. 14, brackets added) outlines ‘they are constants, which represent their opposite, namely the change of the content behind the name [typecast] of a level 1 element.’ It is the notion of the variable which stands behind this anticipation. Here we find a first contradiction of the actual (in this form analytic) representation and its aim of representation (semantic level), communicated via an invariant or constant variable. ‘Level 3’ elements emerge if we consider that the nodes in ‘level 2’ elements have more

From semantic to synthetic programming 215 than just one connection. ‘With the introduction of this level a great number of difficult questions emerge: What are useful borders of such an element?’ (Hanappi 2008a, p. 15). The borders of this element are endogenous by nature, but when we refer to econometrics again, we see that the interaction of exogenous variables (analytically modelled as such ‘level 3’ elements) does not lead necessarily to any significant insight, since the representation loses totally the actual goal of fitting. ‘Is there a critical mass of core links and nodes that characterizes a level 3 element?’ (ibid.). In fact, the neoclassical approach to economics does not deliver any answer to this question, because the systemic characteristics of the semantic narrative (a text) are not represented anymore with regard to the necessary closure of the mathematical system of equations. We would not criticize this issue if explanations were given that such a system of equations does not even represent the neoclassical semantics, still not speaking about reality. Finally a ‘level 4’ element represents the knowledge structure at best, constituted via sets of ‘level 3’ elements. Feedback loops within these levels of language structures are given by major transitions in information and communication services, perfectly visible in the information and communication technology (ICT) revolution. Feedbacks from new technological innovations structure the semantics in a new way therefore. This aspect is certainly lacking in the institutional approach of Aoki (2001, 2007) and peers. Although the mathematics have evolved to game theoretic notations, they are still trapped in static narratives of perfect analytical closure. Nevertheless as Aoki outlines, he emphasizes the deep difference between institutionalized structure and process, as given by the ‘synchronic structure of institutional linkage’ (Aoki 2001, p. 207) and the ‘diachronic linkages of institutions’ (p. 245). Thereby Aoki commits to the evolutionary agenda of institutional change. The basic research agenda of this book may be set forth as two problems: the synchronic problem, whereby the goal is to understand the complexity and diversity of overall institutional arrangements across the economics as an instance of multiple equilibria of some kind, d and the diachronic problem, whereby the goal is to understand the mechanism of institutional evolution/ change in a framework consistent with an equilibrium view of institutions, but allowing for the possibility of the emergence of novelty. (Aoki 2001, pp. 2–3, original emphasis) Certainly the comparative institutionalism of Aoki narrates similar and perhaps even familiar generic semantics of institutional change as we have emphasized in the previous chapters. Anyway when it comes to the actual ‘translation’ of the elaborated semantics into models generic institutionalism follows a different strategy. Referring to Table 12.1 Aoki translates the prose into gametheoretic mathematics, i.e. equation systems with multiple equilibria: ‘One of the great advantages of this equilibrium-based approach to institutions is that it becomes analytically tractable to deal endogenously with types of institutions that may emerge across different domains as well as possible interlinkages

216

Complexity – methodological considerations

among institutions’ (Aoki 2001, p. 207). Aoki argues along the general neoclassical thesis, that analytical tractability has highest priority. However, we argue that such a treatment of institutional change is neither evolutionary nor does it allow for emergence, since the game-theoretic equilibrium approach does not account for rule-based endogenous change. An analytical mathematical system has to be closed in order to stay consistent. This notion contradicts the very idea of endogenous change which demands at least sufficient openness. For this reason we translate the semantics directly into algorithmic formulations (of course necessarily using mathematics), where sufficient openness is given if the institutional game is played by heterogeneous agents in iterated time stamps. Asynchronous updating even allows for the development of diverse rules for agent behaviour as well as decision making, because agents are equipped with a memory, which is not feasible in a mere analytical system of mathematical closure. The equilibrium approach case analysis of even the most sophisticated one-shot games is misleading the very notion of evolutionary institutional change. However, it is not said that both approaches find adequate compromises for more appropriate models in the future: such a collective endeavour is highly appreciated, since the semantics in both discourses are seemingly of the same nature. In this part we emphasize the power of complexity science and evolution approached computationally in respect of synthetic programming. We confront the problem in round-based, iterative, bottom-up, dynamic narratives of evolutionary institutional change. It is possible to translate the semantic heuristics in synthetic programs with fewer cuts than in analytical closure systems. In this respect it is necessary to explain sufficiently the obvious simplifications and document the synthetic programming in a comprehensive way for further replication or synthesis. Still synthetic programs are also mere models of semantics of representations of reality. However, the ICT and computer revolution also led to the possibility of representing the prose semantics within a new representation schema of algorithmic formulations. The instruments and tools given by programming allow for a closer representation on the one hand and for the use of mathematics just as a helping hand to formalize algorithms, rules, procedures and routines of actual programs. This aspect leads economics to a new synthetic revolution which can be expressed in the implementation of evolutionary economic programs as suggested in generic institutionalism. Therefore we refer to ‘the emergence of synthetic reason’ in the social and economic sciences following DeLanda (2011). Here surprises are on the agenda in small-scale computational experiments in contrast to additive dynamic systems of mathematical closure, where basically ‘nothing is produced over and above what is already there’ (DeLanda 2011, p. 1). The main problem of emergence relates to the difference between absolute and relative emergence. Of course there is no ground for absolute emergence in our world, but there is necessarily a kind of relative emergence where ‘something emerges that was not in the interacting entities acting as causes’ (DeLanda 2011, p. 2).

From semantic to synthetic programmingg 217 This led some philosophers to the erroneous conclusion that emergent effects could not be explained, or what amounts to the same thing, that an effect is emergent only for as long as a law from which it can be deduced has not yet been found. . . . This first wave of ‘emergentist’ philosophers were not mystical thinkers but quite the opposite: they wanted to use the concept of emergence to eliminate from biology mystifying entities like a ‘life force’ or the ‘élan vital.’ But their positions toward explanation gave their views an inevitable mystical tone: emergent properties, they said, must be accepted with an attitude of intellectual resignation, that is, they must be treated as brute facts toward which the only honest stance is one of natural piety. (DeLanda 2011, p. 2) DeLanda refers in this respect to the emergentist philosophy of George Henry Lewes (late nineteenth century) and Samuel Alexander (early twentieth century). As he critically announces, this attempt led to misconceptions about the very concept of emergence and evolution moreover. The first notion of emergence as ‘so long emergent till it can be deduced a new law’ as well as the second notion of ‘emergence as a brute fact which needs to be accepted with intellectual resignation’ confirms the basic stance of neoclassical economics and promotes a mystification of emergence, which is undoubtedly not necessary. Emergence drives evolutionary change in biological as well as socio–cultural–economic contexts and is subject of scientific inquiry. Of course it is clear that technological change made the investigation of emergent effects in computer experiments possible as recently as at the end of the twentieth century. ‘The early emergentists dismissed this idea because they could not imagine anything more complex than a linear clockwork mechanism’ (DeLanda 2011, p. 2). Synthetic reason emerges if we distinguish between properties and capacities of an entity. The capacities (generic) may never get actualized (operant) and are therefore not perceived as an emergent category per se. Otherwise the property is by nature emergent, because it emerges from the interactions of the component parts. The properties of a component are always actual and therefore operant, the capacities may well remain potential. However when a capacity becomes actual we speak of an event and not of a different state. The capacity to affect something is contingent on the existence of other things, therefore; these things need to have the capacity to be affected in consequence. DeLanda (2011) argues that we can specify properties without reference to third party, but ‘capacities to affect must always be thought in relation to capacities to be affected’ (DeLanda 2011, p. 4). In conclusion capacities depend on properties and properties entail emergence. Furthermore tendencies are of the same nature as capacities but are finite, which capacities must not be. We speak then of a structure of ‘the structure of the space of possibilities as defined by the entity’s tendencies and capacities’. The point that interests us in this context is that the spatial structure of this space can be of continuous nature and therefore mathematically conquered and others are of discrete (no specific spatial order) nature which cannot be

218

Complexity – methodological considerations

mathematically conquered. The latter demands an imposition of a certain arrangement (DeLanda 2011, p. 5). Accordingly it is of utmost importance to think about this specific arrangement, because it imposes an order of the spatial structure of the space of possibilities. This arrangement needs to be matched further with the different mechanism of emergence which can be applied. The potential mechanisms range from simple ones of finite cellular automata, to classifier systems, genetic algorithms, neural nets and multi-agent systems finally. All these mechanisms work differently with reference to the imposed topology, the spatial structure, which can be a lattice or a network, for instance. Agents can move or cannot move. These are the questions of synthetic reason, which makes emergence in complex adaptive systems explainable. Simulations are partly responsible for the restoration of the legitimacy of the concept of emergence because they can stage interactions between virtual entities from which properties, tendencies, and capacities actually emerge. Since this emergence is reproducible in many computers it can be probed and studied by different scientists as if it were a laboratory phenomenon. . . . And philosophy can be the mechanism through which these insights can be synthesized into an emergent materialist world view that finally does justice to the creative powers of matter and energy. (DeLanda 2011, p. 6) This aspect is not something new to the evolutionary computational economist, but it processes a message which is still hidden within the discourses. The message of course related to the future interaction between philosophers, economists, sociologists and computational scientists. The economic science can improve very well if we translate the generic evolutionary semantics with the help of mathematical methods into synthetic simulations. Economics is then not anymore understood as a field of applied mathematics, but as an experimental social science. A unique example is given in the evolutionary microeconomics by Potts (2000) with a focus on graph theory and genetic search algorithms inspired by Holland. Several approaches (micro and macro) already follow this outline within evolutionary economics and the literature is growing rapidly. Still from an evolutionary institutional perspective we need to focus on the simulation of meso structure and process, where current attempts are still rare. Prototype simulations in this direction are given by Elsner and Heinrich (2009) for instance, as well as the agent-based simulation illustrated in Chapter 13. This notion defines the scientific adventure within a generic institutionalism to sustain the ontological demands (Part I), to translate the generic heuristics (Part II) into appropriate simulations of evolutionary economics programs; a journey which has just begun.

Computation in generic institutionalism Methodology refers to more than a simple set of methods, moreover it represents the scientific investigation of used methods and their appropriateness for certain

From semantic to synthetic programmingg 219 domains. Methodology involves discussion on methods and their assumptions. Assumptions form the pre-analytical elements of methods, they guide methods in certain directions. In this book, investigations on ontological and heuristic stances aimed at finding realistic assumptions about institutional evolution. Questions were raised about economic reality, about the economic process itself and the variety of possible treatments of these processes. Models translate the images we collect about reality. Methodological considerations of institutional change invite new methods, to bring economics back to its semantics. Several methodological sets emerge in such discussion, such as bounded rationality, social learning and heterogeneity. Recent tendencies in economic thought invite a complexity approach regarding methodology, an approach concentrating on the interaction between economic structure and process components instead of augured aggregated outcomes. Complexity science focuses in general on the level between chaos and order, as Kauffman (1993) explained. Organized complexity in the realm of the social sciences deals with interacting heterogeneous agents evolving in adaptive systems. Hence complexity brings the notion of time and history into a system theoretic picture of evolving society. Herbert Simon admitted that complexity does not necessary mean complicatedness, that complexity even follows a pragmatic perspective of life, because it focuses on locally interdepending phenomena. Roughly by a complex system I mean one made up of a large number of parts that interact in a nonsimple way. In such systems, the whole is more than the sum of its parts, not in an ultimate metaphysical sense, but in the important pragmatic sense that, given the properties of the parts and the laws of interaction, it is not a trivial matter to infer the properties of the whole. In the face of complexity, an in-principle reductionist may be at the same time a pragmatic holist. (Simon 1962, p. 468) A central issue concerning complexity, emphasized by Simon in this central article, is about the hierarchy of systems. He also ascribes that hierarchy needs to be used in more complex relations than accomplished in formal organization theory as following. Etymologically, the word ‘hierarchy’ has had a narrower meaning than I am giving it here. The term has generally been used to refer to a complex system in which each of the subsystems is subordinated by an authority relation to the system it belongs to. (Ibid.) Dependencies among subsystems build up abstract and foremost non-linear hierarchies, these dependencies represent the power relations of a complex system. Simon has investigated the hierarchy of complex systems under the umbrella of

220

Complexity – methodological considerations

decomposability to show that ‘complexity, correctly viewed, is only a mask for simplicity; to find pattern hidden in apparent chaos’ (Simon 1996, p. 1). Simon’s science of the artificial is about the affectedness of systemic components to each other and stands therefore closely to the previously elaborated synthetic reason discussed by DeLanda (2011). Simon (1996) elaborates on the spatial structure or the topology of socioeconomic associations. He speaks therefore of economics as a science of the artificial and not of a natural science, which makes the difference between synthesis and analysis. The main difference is given by the normative nature of the economic and social sciences, since natural science ‘only’ needs to look into description. Thereby we need to mention that the naturalization of knowledge which builds the cornerstone of generic institutionalism from an ontological and heuristic perspective does not imply that economics becomes a natural science, which should hopefully already be clear at this point. Simon develops his system of thought in ontogenetic categories surrounding the concepts of modularity and decomposability. The aim of a science of complexity is to decompose complex interrelations into meaningful modules (compare also Callebaut 2005; Marengo et al. 2005). This is where computational socioeconomic simulation heads up, looking for the bounds of near-decomposability. Perfect decomposability of a complex system into isolated and perfectly optimizing modules appears as a misleading challenge and commits to atomism again. We learn to understand the economic system by simulating it. Therefore we also understand computational simulation as an empirical inquiry as Newell and Simon (1975) originally articulated in their Turing award lecture. In this respect we find a methodological core for evolutionary institutional economics within computer science in contrary to mathematics. Referring to Simon (1996, p. 22) the symbol system within computer system is far more close to the economic semantics we are talking about as the language structure of analytical closure in mathematics (Hanappi 2008a). Since the computer is a machine its symbol system is also physically or even naturally embedded, we are using it as a device, whereas mathematics is taught as it is just abstract and disembodied. ‘Symbol systems are called “physical” to remind the reader that they exist in real-world devices, fabricated of glass and metal (computers) or flesh and blood (brains)’ (Simon 1996, p. 22). This notion also explains why Simon focused so much on aspects such as memory and remembering as well as storage and learning, because they are at the heart of problem solving, the investigation of neardecomposability. The science of complexity ever tried to examine satisfactory solutions to this problem, but always under different interpretations and foremost mechanisms. After Norbert Wiener (1961 [1948]) and Ludwig v. Bertalanffy (2001 [1968]), complexity scientists delved into cybernetics and system theory to discover and interpret emergence in complex systems and the scope in different conceptions is bigger as Simon (1996, p. 169) explains. Today we go beyond the cybernetic system theoretic model which also dominated Veblen’s cumulative causation. We also go beyond the social fabric matrix and general input–output analysis, but we still do not have a common methodology. We build a massive account of computational experiments, uncountable and

From semantic to synthetic programmingg 221 opaque, unable to recognize what is significant and what not. The computationally working economists and sociologists know this problem very well, nevertheless they keep on implementing simulation after simulation, in hope that somebody will synthesize these results and explain their significance. The simulations achieved in this attempt of generic institutionalism make no exception, they are also not capable of synthesizing the real significant core yet. However they already deliver results which the neoclassical formal apparatus cannot replicate and that is the interesting point. Holland explains that we have a remarkable limited mathematical formal apparatus to examine emergent phenomena. Most of the mathematics, even if it addresses non-linearity, are ‘built upon assumptions of linearity and additivity’ (Holland 1998, p. 232). He outlines that the one and only constructive formal area to deal with nonlinearity is the implementation and application of computational models simulations, but there is hardly any theoretical guidance or common thread how this methodology can get learned sufficiently. It is this insight which moved scholars such as Stephen Wolfram to define, explain and instruct into this new kind of science. For Wolfram (2002), a quest resulted into a unique opus magnum in the history of science. Experience from traditional science might suggest that standard mathematical analysis should provide the appropriate basis for any such framework. But as we saw in the previous chapters, such analysis tends to be useful only when the overall behaviour one is studying is fairly simple. . . . If traditional science was our only guide, then at this point we would probably be quite stuck. But my purpose in this book is precisely to develop a new kind of science that allows progress to be made in such cases. And in many respects the single most important idea that underlies this new science is the notion of computation. (Wolfram 2002, p. 637) Where Wolfram refers to cellular automata only, Miller and Page (2007) provide a more coherent picture of computational models and give an even more comprehensive guideline to experiment with such models, especially useful for the social and economic scientist. Models act as guides (Holland 1998, p. 241), models act as maps (Miller and Page 2007, p. 36) and fortunately we also obtain step-by-step more and more guides and instructions for modelling in a computational bottom-up way. We are dependent on models even in institutional economics, since we need to find a way to transmit the institutional method, carried in generic institutionalism for instance, in a comprehensive and accessible way. Many would argue that the computational approach represents exactly the opposite, but that is not true. Models represent synthesized semantics and can transport the message in a more adequate way, we argue that this adequate way builds upon a computational rule-based approach. The notion of a rule fits perfectly the computational approach, since we find rules everywhere in programs, associated with declared objects. This aspect has

222

Complexity – methodological considerations

also affected Elinor Ostrom as articulated in a recent article by Ostrom and Basurto (2011). The emphasis of this article lies in the provision of satisfactory tools to study institutional change. However the article appeared in a special issue on the evolution of institutions in the Journal of Institutional Economics where we want to highlight additionally two other essays, Beinhocker (2011) and Morgan and Olsen (2011), and stress briefly a synthesis or broad signal of convergence thereafter. Ostrom and Basurto (2011) develop a rule taxonomy with regard to boundary, choice, position, information, aggregation, payoff and scope rules. Thereby they extend the elaborated institutional analysis and development framework in Ostrom (2005a), where focus is given mainly to the community. It is interesting to note that the authors refer explicitly to the evolutionary nature of these rule sets and give reference – especially important for the elaboration of generic institutionalism – to Hodgson (2004a) and Dopferr et al. (2004). Ostrom and Basurto (2011) recognize the importance of the rule-based approach and articulate, referring to Dopferr et al. (2004), that the economic system can be viewed as a population of rules, a structure of rules and a process of rules, which we already illustrated in Chapter 10. Moreover they compare the meso level of economic change with the ‘collective choice arena’ in their established institutional analysis and development framework. Otherwise they outline in conclusion to ‘study how rule evolved in multiple cases and then to use agent-based modelling to explore diverse initial conditions and change over time’ (Ostrom and Basurto 2011, p. 337). Similarly Morgan and Olsen (2011) offer a rule-based approach to extend and improve the framework of the old American institutionalism (Chapter 6 here). They speak of a fluidity of rules, of their necessarily practical dimension. As we already elaborated, rules need carriers to perform or to resist them, otherwise rules remain empty husks. This practical dimension is of dynamic evolutionary nature. In consequence as the authors argue regularities are not comparable with rule-following, since resistance to rules invokes also regular behaviour and allows for the emergence of novel rule-sets or even institutions. Finally Beinhocker approaches evolution radically in a complete computational way and states that Information theory and related theories of computation are well suited to this task as they cut across both evolution and self-organization. As we will discuss, current evolutionary theory view evolution as a computational process – an algorithmic search through a combinatorial space of possibilities. (Beinhocker 2011, p. 394) Therefore evolution is essentially considered as an information process across the domains. Building upon prior work (Beinhocker 2007) the author attempts to synthesize and integrate current themes in evolutionary economics by the use of computational science. Such a synthesis of course deals with the two interrelated systematics of evolution, i.e. onto- and phylogenesis. As outlined by Simon

From semantic to synthetic programmingg 223 (1996, p. 212) ‘ontogeny recapitulates phylogeny’, Beinhocker (2011) considers information theory and computational science in general as the host for a proper synthesis between the developmental and the evolutionary. Beinhocker outlines further that there have not yet been any serious attempts to apply the evolution as computation approach to the realm of institutional economics. But we need to admit that there are several approaches building upon the work of Simon and especially Turing, compare for instance the computational economics of Velupillai et al. (2011). Otherwise Mirowski (2007, 2010) highlights the importance of using the computational approach not for another general theory of the mind, criticizing the neoclassical treatment of the economic agent as a simple information processor. Instead Mirowski (2007) suggests using computational techniques for the synthetic programming of modular algorithms explaining institutional and organizational evolution in tradition of von Neumann’s generic computational theory of automata. Since economic agents act under incomplete knowledge they are obliged to improve nested reasoning structures under bounded cognition – institutions in the sense of (Kawamura 2009) – via social learning. The outer bounds of a Turing machine’s computational complexity signalize the limits of human rationality as well as cognition, leading us necessarily to an ‘economics of bandwidth’, where institutions are considered as template information structures for the exploitation and expansion of bandwidth, i.e. ‘available or consumed communication resources’ (Wikipedia) for information flow per unit of time, as articulated in Schwarz and Wäckerle (2012). These reflections characterize the synthetic inner core of a generic institutionalism, because the approach can sustain the ontological and heuristic demands previously elaborated. Evolutionary processes are understood as algorithmic processes and evolution is classified as an algorithm thereafter. Evolution refers to a ‘particular form of search algorithms’ among others (Beinhocker 2011, p. 400). This aspect reconfirms the idea of generic institutionalism as a development kit for the bottom-up implementation of evolutionary economics programs. Evolution as a search algorithm is looking for fit designs in different design spaces by using the method of ‘deductive tinkering’. The most interesting point with reference to the rule-based approach concerns the emphasis on the ‘reader/builder’ terminology in contrast to the previously objected perspective of the replicator. This aspect is comparable to the notion of rule user/maker (Dopfer 2004), where rule using entails the potential of rule resistance. In conclusion Beinhocker (2011, pp. 418–419) synthesizes the evolution as computation approach with the evolutionary realism approached in Dopfer and Potts (2004), referring to ontological synergy in particular. Moreover Beinhocker (2011) conceives the computational approach as a basic foundation for further synthesis in evolutionary economics. As this brief elaboration indicates, synthesis is possible along a generic rulebased approach. With an eye on the computational category of a rule – as especially articulated in Ostrom and Basurto (2011) and Beinhocker (2011) – generic institutionalism stands on strong shoulders for future research perspectives. A rule-based synthesis seeks using computational bottom-up models for the study

224

Complexity – methodological considerations

of institutional change at the end of the day, introduced, illustrated and visualized in a variety of evolutionary economic programs.

Agents, grids and networks The basic ingredients of a computational socioeconomic model are agents, grids and networks. Agents are heterogeneously distributed within a certain topology, for instance a grid, they associate each other as nodes in a linked network, not necessarily in complete form. We follow a bottom-up logic leading to an evolving complex adaptive system. Miller and Page provide an overview of the central potentials of a bottom-up approach in contrast to the traditional top-down logic, as illustrated in Table 12.2, a detailed analysis of these difference is given by Miller and Page (2007, p. 79). Complexity and evolution serve as hosts for several methods in various scientific domains. The issue of institutional change needs methods and tools capable of performing social simulation. Social simulation is regarded as an attempt to simulate processes of interacting agents, which rely on rules of thumb. The logic builds upon the idea of bottom-up instead of top-down change and concentrates on endogenous effects. The social system transforms itself from within the simulation. Social simulation depends very much on the used topology, which serves as the major agglomeration externality. Typical agent-based models rely on a spatial grid interpreted as a geographical space, where agents are able to move around freely. Such grids are mostly wrapped at their ends to form a torus, so agents may move infinitely around. These ‘models in which the environment represents geographical space are called spatially explicit’ (Gilbert 2008, p. 6). A network topology is considered as a mere social space where the agents are engaged in pairwise connections, links. The former space is exogenously given and is heterogeneous by nature, since agents are randomly distributed and accumulate their knowledge due to the interaction of agents in their local environment. The latter space is of a social nature and is represented by graphs, hence distance plays a more abstract role and is not a physical barrier anymore. Generally such techniques can be applied to all social sciences, in Table 12.2 Modelling potential of the bottom-up approach Traditional tools

Agent-based objects

Precise Little process Timeless Optimizing Static 1,2, or c agents Vacuous Homogenous

Flexible Process oriented Timely Adaptive Dynamic 1,2, . . ., N agents Spacey/networked Heterogeneous

Source: Miller and Page (2007, p. 79).

From semantic to synthetic programmingg 225 economics we speak of agent-based computational economics when social simulation methods are applied for the simulation of dynamics of interactive agents from a complex economic system’s perspective. These agents usually interact according to some underlying game-theoretic logic or apply to some evolutionary replication dynamics. Therefore interaction may follow a more pairwise strategic interaction approach, where adaption and imitation receives priority regarding certain relatively successful behaviours, sustained through rules of thumb over time. In both cases (grid and network) local phenomena and local developments are decisive for the further evolution of the whole system. Agent-based models refer to experimental techniques among formal methods. In consequence simulation runs represent always laboratory experiments. This is also a notion emphasized by Gilbert (2008, p. 2), speaking of models as computer programs. Programs (in the form of endogenously evolving artificial agents) interact with each other in artificial societies. If we reconsider Dopfer’s (2004) emphasis on the economic agent as a rule-maker and rule-user, we may imagine a software program as such a rule-guided agent. The point is that the agents are of a heterogeneous nature and consequently develop different conduct and behaviour patterns over time and space, but still following the same rules of thumb. The software program works within algorithmic bounds and follows the idea of bounded rationality to a certain extent, if properties like learning or adaptation are implemented. As a consequence agent-based computational economics may be compared with real-life computer games, where gamers guide and govern their avatars. ‘Such games can be very close to computational modelling, although in order to make them fun, they often have fancier graphics and less social theory in them than do agent-based models’ (Gilbert 2008, p. 2). This notion invites the very experimental idea to conduct computer experiments where software agents as well as real human agents interact, but not just as a strict Turing tournament. Computer games become experiments for real-world situations. Experiments play a dominant role in all the sciences; nevertheless they are quite cost-intensive in the social sciences. Computer experiments have the huge advantage that they can be easily accomplished even on a common desktop computer nowadays. Simulations are built upon models; these models try to establish formal environments established to map a certain extent of reality. There are several methods to implement models in the social sciences. A further advantage of agent-based models according to Gilbert deals with information and communication processes between the agents. These processes indicate the endogenous character of simulations, since they represent social learning. Information flows and communication systems within an agent-based architecture influence the transformational process of the whole system. Gilbert ascribes following characteristics to agents within an agent-based model. •

Perception: They can perceive their environment, possibly including the presence of other agents in their vicinity. In programming terms, this means that agents have some means of determining what objects and agents are located in their neighbourhood.

Complexity – methodological considerations

226 •

Performance: They have a set of behaviors that they are capable of performing. Often, these include the following: • • •

• •

Motion: They can move within a space (the environment). Communication: They can send messages to and receive messages from other agents. Action: They can interact with the environment, for example, picking up ‘food’.

Memory: They have a memory, which records their perceptions of their previous states and actions. Policy: They have a set of rules, heuristics, or strategies that determines, given their present situation and their history, what behaviors they will now carry out. (Gilbert 2008, pp. 21–22)

Most of these characteristics have already been discussed in the generic heuristic Part II forming essential features of generic institutional change. Otherwise social network analysis denotes analysis on a specific topology of agent-based systems, but his topology provides incredible characteristics. A network can be formalized along relational algebra, resulting into a mapping best illustrated in an nxn matrix. This matrix indicates a graph, which can be either directed or undirected. So why should we use graphs for social network analysis? First, graph theory provides a vocabulary which can be used to label and denote many social structural properties. This vocabulary also gives us a set of primitive concepts that allows us to refer quite precisely to these properties. Second, graph theory gives us mathematical operations and ideas with which many of these properties can be quantified and measured. (Wassermann and Faust 1994, p. 93) The possibility of using mathematical operators on these structures makes social network analysis a perfect extension for agent-based computational economics. The crucial point is that it is relying on a mathematical structure which ‘stresses the importance of relations rather than the atomization of reductionism or the determinism of ideas, technology, or material conditions’ (Mark Granovetter in the foreword of Wassermann and Faust 1994). Relational data expresses the intensity and durability of social relations; hence it is perfectly suitable for institutional analysis. Networks consist of nodes and edges, where the latter indicate the weight of a relation between two nodes. These weights usually determine the structure of the network and its evolution, if it is a dynamic model. In dynamic social network models, networks change from within, nodes create new links and dismiss old ones due to rules of thumb. Dynamic models cluster process and structural components of evolving networks, such as the degree of centrality, as Scott (2000) emphasizes. Within dynamic network analysis it is also possible to analyse the development of cliques and its relatedness to other cliques leading to

From semantic to synthetic programmingg 227 the notion of community detection. In consequence group selection within and between groups is a natural feature of this kind of synthetic programming. Social networks appear in different topologies and evolve in various forms. The evolution of social networks deals with ‘scale-freeness’ (Barabási 2003), ‘nestedness’ (Csermely 2009), ‘small-worldness’ (Watts 2004) and ‘random’ network structures as originally investigated by Paul Erdös and Alfréd Rényi in 1959. Network formation itself recently received increasing attention in the economic community; research in this area created a huge variety of practical approaches for the formation of networks, with exogenous as well as endogenous properties. For a detailed survey of models of network formation compare Jackson (2005). Possibilities are manifold and combinations seem to be infinitely, even evolutionary gametheoretic techniques can be applied on graphs (Nowak 2006, p. 123). Evolutionary game theory may benefit tremendously from synthesis with social network analysis, because it relaxes the traditionally strict and sometimes misleading population approach and introduces localities along pairwise stability and other characteristics. Network analysis allows us to investigate the spread of ideas and technologies as well as the dissemination of knowledge and its maintenance. According a synthesis of agent-based modelling and social network analysis allows a deeper investigation of generic heuristics within computational experiments. We consider it as the most appropriate tool to analyse the notion of trust and power relations, because it offers powerful techniques to investigate relatedness and betweenness over time and space as well as the emergence of durable social structures. The notion of power can be investigated along so-called structural holes (compare Goyal and Vega-Redondo 2007). We speak broadly of emergent power when actors with high degree of social capital are able to fill structural holes better than others. Connections facilitate timely access to important information – on trade opportunities, job vacancies, project deadlines, and novel ideas for research. In some important instances – e.g. trade opportunities – the payoffs an individual entity gets in a network will clearly depend on his relative importance in bridging gaps in the network between others. The potential benefits from bridging different parts of a network were important in the early work of Granovetter and are central to the notion of structural holes developed by Burt. In recent years, a number of empirical studies have also shown that individuals or organisations who bridge ‘structural holes’ in networks gain significant payoff advantages. (Goyal and Vega-Redondo 2007, p. 461) These results are also confirmed by Csermely (2009) who addresses especially the modularization of networks. With a focus on community detection he and his peers (the LINK group in Budapest) develop new concepts about key players on evolving networks in a Schumpeterian tradition. Of crucial interest, in this respect, are the properties of weak links in evolving networks. Granovetter (1983) published a classic paper on the strength of weak ties, which builds a cornerstone for the growing theoretical universe of network theory. However,

228

Complexity – methodological considerations

Csermely (2009) developed this notion much further and considered weak links as the crucial elements on any network between organic life forms, from protein networks to the internet. They are called weak, because if they break the whole network may collapse, hence they can be regarded as system-relevant. Networks changing over time and in clustered neighbourhoods face so-called topological phase transitions (Csermely 2009, p. 80): these evolutionary transitions appear when major weak links break down. Phase transitions can be regarded as processes of creative destruction, because after such a transition the system can never be the same as before. Within such a transitional phase the system is exposed with heavy stress and it needs all its power to regenerate and restructure itself; i.e. it needs to build new weak links again to bridge the clusters over the whole system. Economic crises are thus such phase transition processes within a perspective of weak links in evolving networks.

13 An agent-based model of institutional change

In the proposed model, institutional leaders govern emerging institutions and are engaged in relative power games with other institutions on a network. The incorporation of capitalism into economic life is rendered along trust relations between agents and power relations between institutional leaders. The evolution of societal trust and relative leader power is modelled in a two-topology modularization (micro and meso) of iterated bottom-up games. Furthermore, institutions may protect themselves from defective intruders via the establishment of enforced rules. These structures govern cooperation between and within institutionalized groups. Once trust relations are established between committing institutional members and the leader, the leader protects the members from potential invasion, for a sustained cooperative environment, i.e. a formal welfare institution. During this very process, a specific leader gains power by accumulating institutional member fees. The trustworthiness of institutional members equips the leader with capital to maintain the institution on the bottom-level topology and with a surplus of relative institutional power on the top-level topology. The relative power represents a structuration process of institutional linkages, resulting in institutional hierarchies. Leadership power allows competing with other institutional leaders within an abstract game, hence there is no assumption made on the specific purposes of these conflicts. Focus is set on the strategy evolution (through cooperation or defection) on the network, influencing the distribution of institutional power and societal trust. Leaders are involved in two major tasks, on the one hand protecting agents against possible defecting invaders, and interacting with other leaders on the other hand. The model deals particularly with the emergence and exit of organized institutions/institutionalized organizations in an artificial political economy, grounding on trust interactions between individual agents on the micro-level. Second, it encompasses a simulation of power interactions among evolved institutions on a network layer, i.e. the institutional environment. The idea is to start with a micro setup within an abstract geographical space. Agents populate this space and interact with each other locally. The interaction is based on a prisoner dilemma logic, i.e. in every time-step agents play the prisoner dilemma game with their von Neumann neighbours. Agents can either cooperate or defect, but they are endowed with cognitive rules (a crude memory of events in the recent

230

Complexity – methodological considerations

past, and a decision mechanism using this memory) which feed their individual decisions. In the course of the simulation agents accumulate different memories, and thus naturally evolve into a heterogeneous set of individual decision makers. Behavioural rules include free-riding (defection), informal cooperation, formal membership within an institution and leadership. Leaders consider an additional set of behavioural rules which is explained below with regards to the top-level institutional topology. The set of social rules is given by the interaction within the von Neumann neighbourhood and the blueprints for building, maintaining and exiting an institution. Technical rules refer to the geography and movement on the specified torus (bottom-level topology), resulting in an evolving social possibility space of interactions when institutions emerge and exit. The implementation of the model builds upon a prior version articulated in Radax et al. (2009b). Repeated cooperation between agents builds up societal trust which in turn influences the emergence or exit of institutionalized organizations. It is important to distinguish between institution-building proper, which by itself just constitutes part of the ‘rules of the game’, of the simulation, and its structuring as some special form of organizational arrangement with some members of this organization enforcing compliance to the rule set. The special form, the realization of an institution, needs to be modelled explicitly by some agents taking over the role of enforcers, the role of executive power. Executive power is needed for three tasks: (1) it guarantees internal stability (compliance to the organizational rules), (2) it warrants security from external threats; and (3) it enables the interaction with other institutional leaders. The organizational apparatus necessary to exert executive power needs to be financed by tribute payments of its members to their ruling executive in this prototype. The mechanism of institution building only represents a small – but essential – subset of the highly complicated processes observed historically. It is just a first approximation to the emergence of institutional authority within a set of agents. With a similar (and consistent) logic the model proposed also takes care of the possibility of the break-up of institutions. In that respect it concentrates on the internal discrepancies, which may lead to the exit of institutions. The institutional setup of the model is linked together with the micro setting through feedback loops and policy variables. First of all, institutional leaders are involved in iterated hawk–dove games on a top-level social network. The hawk– dove game involves one evolutionary stable strategy: a mixed strategy where players play hawk with probability q and dove with probability (1−q). Leaders play either hawk or dove strategy connected in a network of power relations, representing the set of behavioural rules for leaders. Links between institutions are weighted with a specific force, which influences the stability and fragility of the network. Since institutional leaders can decide on their linkages with regards to a satisfaction measure of their local network, we can also speak of a set of social rules in the toplevel module. Advances of this top-level concern a process of endogenous differentiation, since institutions are led either by intimidating hawks, which are more isolated on the network, or retreating doves, which build up very dense and stable networks, i.e. dove communities. The model also features feedback mechanisms

An agent-based model of institutional change 231 between those two layers with regards to policy variables, especially overruling the leader-influence, i.e. the power or authority radius of leaders, in consequence institutions grow with different sizes. Relative power relations are measured relatively to the richest (most powerful) leader in the game. In consequence we investigate operational power in institutional interactions. This relative power is integrated in the institutional setup to influence the link evolution along force-updating. The micro-setup generally refers to the groundwork of Sanchez-Pages and Straub (2006, 2010), as well as various improvements implemented in Radax et al. (2009a, 2009b). The institutional-setup is influenced by the literature on endogenous network formation; especially by Tomassini et al. (2006), Luthi et al. (2009) and Tomassini et al. (2010).

Agent setup The micro part of the model is based on an analytical one-shot model on the emergence of institutions in closed form (compare Sanchez-Pages and Straub 2006, 2010). Here homogeneous agents are matched randomly to play a game of prisoner dilemma. As usual, each of the two agents participating in the prisoner dilemma (PD) has the choice between the two strategic actions of cooperation (C) and defection (D). Since the game is played simultaneously and communication is prohibited, a priori the two players are not aware of their respective opponent’s choice of action. If both players cooperate, they both achieve a payoff R (reward), if they both choose to defect they end up with a payoff P (punishment). Finally, if one agent cooperates and the other defects the cooperator receives a payoff S (sucker’s payoff) f and the defector receives T (temptation). Payoffs satisfy T > R > P > S and 2R > T + S (as requirement for iterated games). In the Sanchez-Pages and Straub (2010) model, within a state of absence of an institution, agents achieve the cooperative outcome (C,C) with probability α([0, 1] and arrive at mutual defection (D,D) with probability 1−α.1 The parameter α represents the level of trust for the whole society and is exogenously given. However, agents have the option to establish an institution that enforces cooperation between its members. To this end they must choose a leader to whom they can delegate the work of enforcing cooperation. The leader may not participate in the PD game but may set a fee that all agents willing to join the institution have to pay. Games between members of the institution always reach the cooperative outcome. Games between a member of the institution and an outsider, however, are not under institutional supervision and are treated like games in the state of nature. For convenience, the former case (enforced cooperation) is labelled ‘formal games’ and the latter, as well as games between two institution-less agents, ‘informal games’. With this basic setup, Sanchez-Pages and Straub (2010) go on to analyse equilibrium solutions on the number of agents within the institution, optimal fees and threats of secession. While their approach is instructive with respect to a number of issues, it considers only the case of one institution versus no institution. Furthermore, their model is static and regards only one time period. In our opinion, a dynamic approach is truly more appropriate to translate the

232

Complexity – methodological considerations

semantics of emergence and exit of such coalitions between individual agents. Since an analytical model of this dynamic version would hardly be tractable mathematically, we resort to the method of agent-based computational modelling (ABM). The version of the presented model is implemented in Netlogo, an open source, platform-independent software development kit for agent-based simulations, running in the Java Runtime Environment. In the model, the world is represented in a two-dimensional grid on which the agents can move around freely. Borders are wrapped around so that the matrix topographically looks like a torus. If an agent happens to meet other agents within the corresponding von Neumann neighbourhood the agent plays a game of PD with each of them. If a cluster of at least three agents evolves, these agents may decide to become sedentary, choose a leader and build an institution. Members of institutions are able to leave the institution in each time-step, the leader of an institution is allowed to set a new fee in each period. Initialization At the start of a simulation run, nA agents are distributed randomly across the grid. The random numbers are drawn from a pseudo-random number generator following a uniform distribution. Each agent is endowed with a memory of size m. In this memory the agent stores the opponents’ choices of the last m informal games. We define informal games as games played between, first, two agents who are not members of an institution, second, an agent who is member of an institution and an agent who is not or, third, two agents who are members of diff ferent institutions. In short, informal games are those games which are not supervised by the same institution. On the other hand, games played by two agents, who are members of the same institution, i.e. those games where the cooperative outcome is enforced, are labelled formal games. We define the share of cooperative actions stored in an agent’s memory as his personal value for (. If we assume, for instance, each agent to have a memory of the last ten informal encounters, i.e. m = 10, then (=0.6 is equivalent to the case that in any six out of the last ten informal encounters the agent’s opponents cooperated. The size of memory thus represents an assumption on the flexibility of an agent to adjust to new experiences. In this way, we are able to endogenize the evolution of trust α according to those new experiences of an agent. If, for instance, an agent meets a lot of agents who cooperate over time and space, the personal (i.e. the agent’s trust in the abstract society, rises and the agent will be more likely to cooperate with others in the future. Since we state that only informal games are memorized, we assume that enforced cooperation within an institution does not influence an agent’s personal level of trust. Obviously, at the initialization of a simulation run, no games have been played and therefore no actions are stored in the agents’ memories. Since the initial memory shall represent the agent’s past, it would be a quite artificial assumption, that all agents have the same (non-equilibrium) value of alpha at the start. Hence we initialize each agent by assigning an individual alpha value, which is normally distributed over the population. With this starting value,

An agent-based model of institutional change 233 we construct a random history of encounters for each agent, i.e. a hypothetical history of events that correspond to the given value of initial personal (0. In contrast to the perfectly homogeneous agents in Sanchez-Pages and Straub (2010), the agents in this model are heterogeneous with regard to their location and their personal history of events as well as trust level within the simulated world. The current version of the model employs asynchronous updating for the agents, which means that every agent takes actions all in one go, before the next agent is activated. This notion reflects a more realistic assumption than synchronous updating, which introduces game phases for specific agents’ actions during each round. The latter method was shown to be very problematic by Huberman and Glance (1993), who examined that some simulation outcomes could only be reached because the agents were activated in a specific non-random order and used synchronous updating.2 At the beginning of each time-step, the activation order of every agent is shuffled randomly. Then every agent is activated and takes all actions before the next agent is activated. The following subsection describes the actions every agent may take during this specific agent’s round. Movement The agent moves randomly to an unoccupied site within her immediate von Neumann neighbourhood. Playing the PD Leaving institutions aside for a while, the next step lets each agent play a game of PD against each of the von Neumann neighbours in random order. In informal games, each agent plays a mixed strategy of cooperation with probability α and defection with probability 1 − (. As stated above, the parameter ( evolves endogenously for each agent. This setup stands in contrast to the Sanchez-Pages and Straub (2010) model. While the latter only considers cases of mutual cooperation or mutual defection, our model allows also for the asymmetric cases of (D,C) and (C,D) as well. Building an institution A cluster of at least three agents connected through the von Neumannneighbourhoods may decide whether to build an institution. An institution guarantees enforced cooperation between its members at the cost of a membership fee. The process of institution formation proceeds in four steps. (1) Each agent within the cluster calculates if the agent is willing to pay for participation in the future institution. (2) Each agent willing to join the institution proposes a fee the agent would collect from the members of the institution in the case that the agent became the leader. (3) The agent proposing the lowest fee is appointed as the leader. (4) Each agent aside from the leader decides whether to effectively participate in the institution under the designated leader and the proposed fee. If after

234

Complexity – methodological considerations

these four steps, a connected set of members and the leader of size >2 remains, then this connected set becomes an institution. Step 1: Decision of participation At first, each of the agents in the cluster calculates if the agent pays to participate in the future institution by comparing the personal potential informal payoff (rogue status) with the potential formal payoff (member status) as a member of the institution. We assume that agent i estimates the potential profit of an informal encounter in time-step t as: lTL

= ai[aiR + (1- ai )S] + (1- a i )[aiT + (1- ai )P] * nlo

(13.1)

where the superscript I stands for informal payoff as compared to formal payoff (within an institution) and nlo stands for the number of local opponents (neighbours), remembered from the previous turn. Hence the agent has at least a shorttime realistic assumption on possible multiple encounters in the future. This would be the simplest version of an expectation for an institution-less agent (called a rogue).3 The payoff for a formal game is then given as:

n[

=

R(l-ldi,L)

(13.2)

with l determining the leader-influence. Thus, for the member state we expect an overall payoff: n;~

= kt,in[i - rp + (nlr n[ * n!,J = [kt.i R(1-ldt ,i,L) - rp] + (nlr * n!,i)

(13.3)

with nlrr as the number of rogues in the local von Neumann neighbourhood. This expectation method also regards possible games with informal neighbours. Further, the calculation takes into account the number of neighbours k within the institution with whom the agent would be guaranteed to cooperate, which gains even more weight with the introduction of heterogeneous institution sizes, through the integration with the institutional setup: where the evolution of institutional size is endogenized, then. Additionally, it is assumed that the quality of enforcement of cooperation decreases with the agent’s distance di,L to the leader. The distance to the leader is measured as the Euclidian distance that traverses only members of the institution, each of who is a von Neumann neighbour of the former. The leaderinfluence parameter lE[0, 1] is exogenously given and serves as a weight for the loss in quality of enforcement; within the top-level institutional game the leaderinfluence gets endogenized as well. Finally the fee φ for participating in the institution gets deducted. Since the institution has not yet come into existence, distance to the leader cannot be determined. For the sake of simplicity it is assumed that each agent believes to become the leader, so that di,L = 0 during this step of institution formation. The fee φ is given by

An agent-based model of institutional change 235 c rp=s -1

(13.4)

where c denotes the cost accruing to the leader from enforcing cooperation and s is the size of the institution, i.e. the number of members including the leader. It is assumed that the leader need not pay the fee. Since at this moment it is not clear to the agents how large the institution will in fact be (see below), they use as an estimate the size of the cluster they are part of. Finally, the cost of enforcing cooperation is given as a proxy by

c(d,s) = dFs

(13.5)

_

where d represents the average Euclidian distance of the leader to all members of the institution. Obviously, the chosen cost function is just one of many possible alternatives, but it serves as a first reasonable and parsimonious approach. Once again, since the leader is not known at the moment, each agent assumes to become the leader of the institution in order to calculate the Euclidian distance to the other agents. Each agent in the cluster evaluates the benefits of participating in the institution now and compares the informal payoff πiI with the memberstatus payoff π Mi. Only if the latter exceeds or equals the former, the agent is willing to participate in the institution. Step 2: Proposing a fee In the next step, each agent willing to participate in the institution proposes a fee. It is assumed that an agent estimates the fee proposal such that the sum of collected fees would equal the cost of being the leader, i.e. we assume that leaders do not factor in a profit margin or formally (s -l)rp = c(d ,s)

(13.6)

Please note that in contrast to Sanchez-Pages and Straub (2010), in our model leaders are allowed to play the PD game. This choice was guided only by the comparable ease of implementation. Step 3: Appointing a leader Next, the agent proposing the lowest fee is appointed as the leader. If more than one leader proposes the lowest fee, one of them is appointed randomly. Step 4: Final evaluation Finally, each agent aside from the leader compares the informal payoff with the member-status payoff given the designated leader and the proposed fee. The institution is only formed when all cluster-members agree to form the institution after reevaluating the distance to the ‘to-be’ leader once it is announced. Only if after this

236

Complexity – methodological considerations

final evaluation a connected set of at least three agents (including the leader) remains, an institution emerges. All agents participating in an institution become sedentary and remain so until they eventually leave the institution or the latter breaks apart. Every agent may only find, join or leave an institution t once per round. Joining an already existing institution If an agent is located in the von Neumann neighbourhood of a member of an institution, the former may choose to join the institution as well. Again, this agent compares the informal payoff with the expected payoff from joining the institution. If the member-status payoff is larger than or equal to the informal payoff, the agent joins the institution. Leaving an institution (re-evaluating membership) In each time-step, every member of an institution re-evaluates the gains from participating in the institution. If due to changed circumstances (changing neighbourhood for instance), the member-status payoff no longer exceeds or at least equals the informal payoff, the agent chooses to leave the institution. All members no longer connected to the leader are forced to leave the institution as well. If the size of an institution falls beneath three members, it ceases to exist. Re-evaluating the fee In every period, each leader of an institution re-evaluates the fee collected from the members of the institution. If the sum of fees collected in the previous period is smaller than the cost accrued for enforcing cooperation, the leader suffers a loss. In this case, the leader raises the fee such that the collected fees would equal the cost in the current period.

Institutional setup Basically, the institutional setup follows the logic presented in Tomassini et al. (2010). In this paper the authors investigate the evolution of mutual trust and cooperation in a hawk–dove game, also known as the game of chicken, on a network topology. Tomassini et al. (2010) look into the specific effect of network topologies on the evolution of cooperation. The hawk–dove game has two Nash-equilibria in one-shot in pure strategies. Both equilibria are represented through the symmetric mixed strategies. Nevertheless the only evolutionary stable strategy within repeated games is the mixed strategy of playing hawk with probability q and playing dove with probability (1 − q). Recent research concentrated on the evolution of cooperation under certain conditions within these games. Several examples in the literature have shown that cooperation is sustainable in the PD under certain conditions and in the HD if certain topologies are specified.

An agent-based model of institutional change 237 The payoff order in a hawk–dove game looks as following: T > R > S > P. The sucker’s payoff and punishment are transposed in comparison to the prisoner dilemma insofar as mutual defection delivers the worst individual outcome (hawk–hawk), in contrast to the prisoner dilemma where individual defection delivers the best. The authors explain that several social situations, especially social conflicts follow a hawk–dove logic. They compare it with ‘situations in which “parading”, “retreating” or “escalating” are common’ (Tomassini et al. 2010, p. 51). Maynard-Smith (1982) introduced the game into evolutionary game theory by observing ritual fights among animals and the replication of patterns of behaviour or mere strategies. The Cuban missile crisis can be regarded as a highly precarious example in human relations for the hawk–dove game. We may follow that for our interests the hawk–dove game represents social situations where power relations play a very important role. Players intimidate (defect) or retreat (cooperate). The network topology plays a dominant role and allows for ‘pairwise interactions that are dynamically weighted according to mutual satisfaction’ (Tomassini et al. 2010, p. 53). Agent properties In our model the institutional players in this top-level game are all leaders of institutions, they have already experienced a process of institution-building, hence their decisions are contingent on encounters with institutional members on the micro level. Thus we may locate this kind of contingent structuration process on the meso level of socioeconomic evolution. The institutional leaders are equipped with local knowledge according to their actual neighbourhood on the institutional network, all neighbours which are directly linked to them. Furthermore they adapt their strategies through imitation rules according to a specific local replication rule, which is explained below. Leaders may also cut off relations with others, if they feel highly intimidated by them or their power exceeds them tremendously. Network properties The network is represented along a directed graph. Every node has potential inand out-links. We use the same terminology as suggested by Tomasssini et al. (2010) (compare Figure 13.1).

fij j

i fji

Figure 13.1 Directed graph (source: reconstructed from Tomassini et al. 2010).

238

Complexity – methodological considerations

Figure 13.1 represents a directed relationship between node i and node j. The links are weighted with a corresponding force, fijj between node i and node j. This force (0 < fij < 1) indicates the relation between these two nodes, in the model of Tomassini et al. (2010). The authors explain that the idea has its origin in the socalled Hebb rule, which tries to model potentiation/depotentiation among neurons in neural networks. The forces indirectly store the history of the power relation between two specific nodes.Thus it does not represent a memory as in the micro-setup of the model, because it is not a cognitive property of the individual; though it is somehow a social memory stored in the link. Leaders cannot access this past knowledge on their own individual will; they gain this knowledge (force in time-step t − 1) at the moment (time-step t) of the actual encounter. Furthermore, agents are individually satisfied with their own ‘situation’. Every leader i has a network property si, which is weighted according to the specific local neighbourhood. The satisfaction of a leader i is defined as: Si

=

LjeV;!ij

k

(13.7)

i

where Vi represents the neighbourhood of leader i and 0 < si < 1. Tomassini et al. (2010, p. 55) explain that this kind of satisfaction reports ‘the average willingness of a player to maintain the current relationships in the player’s neighbourhood’. Dynamics The original model of Tomassini et al. (2010) works with a constant population of about 1000 agents, which are initialized on a random graph with a mean degree of ten. Simulations are performed numerically, where the whole population is processed in one run. Players are initialized as hawks or doves, each with a 50 per cent probability and links are also initially weighted with a 50 per cent force. The speed of force updating is principally regulated by a temperature or frequency parameter. It determines the speed of reorganization between institutional links, i.e. the frequency of institutional link evolution. If the temperature is rather high, let us assume above 50 per cent, the network reorganizes very quickly. A leader is elected when an institution emerges, corresponding to the micro part of the model. Hence in our model leaders are initialized as hawks or doves again with 50 per cent probability once they achieved an institution in the micro game. Micro and meso games evolve simultaneously, consequently institutional leaders start either to intimidate other institutions or to retreat and build cooperative communities. New leaders emerge isolated from the network; thus we have to connect them randomly with other institutions at a given connection probability. In our model they build up a bilateral (in- and out-link) connection with every institution at this probability – following a random graph logic. Usually

An agent-based model of institutional change 239 this connection probability is set rather low, otherwise institutions would be too highly interconnected from the start – also resulting in higher computational calculation intensity. Otherwise if an institution becomes isolated during the simulation, it reconnects just with one other random institution and creates links (in and out) with a 50 per cent force. Rewiring follows the exactly logic of the original model. If an institutional leader is connected with at least one other, the leaders start to update the strategy according to the replicator rule. Additionally the institutional leaders may also break up a connection with a specific agent if the leader is not satisfied anymore. The updating of links will be described later, but at first we focus on the local replicator rule. Tomassini et al. (2010) use a rather novel approach for strategy replication. Usually the payoffs are accumulated and if the average payoff of a random drawn neighbour is higher than the individual one, the agent imitates the strategy in the next round. Luthi et al. (2009) highlight that this payoff schema does not work well for degree-inhomogeneous networks (as our network is), where agents have different numbers of neighbours with different degrees of connectivity. However since the model is not invariant to changes (affine transformations) in the payoff matrix anymore, we face a major problem. Hence the authors claim a new updating rule. The probability pi to change a strategy is a function of the payoff difference and looks as following, in general form:

J

p,

~.[1)-1)1~ 1~ i"": n[

TI-TI

rr',,,,,

if H i -TI; > 0 otherwise

(13.8)

where x,~ax and x~n represent the maximum and minimum payoffs a player x can get. These two values refer usually either to the accumulated or the average payoff. For our concerns, we use this new payoff invariant schema elaborated by Luthi et al. (2009, p. 216). The authors explain: ‘Thus, we propose here a third definition for a player’s payoff that retains the advantages of the accumulated and average payoff definitions without their drawbacks.’ Now agents are aware of the worst case scenario, i.e. their minimum payoff. In the hawk–dove game this is the punishment payoff (P ( ), thus the agent only needs to switch strategy towards cooperation, to gain a slightly better outcome, i.e. (S). S Luthi et al. (2009, p. 218) summarize: ‘Intuitively, it can be viewed as the difference between the payoff an individual collects and the minimum payoff it would get by playing it safe.’ Therefore the new benchmark is defined by:

::fi:: = Z)'rii -

lr y )

(13.9)

jE~'

where πγ denotes the above suggested payoff-strategy of ‘playing safe’, hence heading up for the sucker’s payoff. Then we may rewrite the local replicator rule as follows:

240

Complexity – methodological considerations

p,

~

(J f ·D-:r;I ~1 :;(';... -n;.,)-k,(n,.m" -n,,,) TI -TI

n[

ifHi -TI i > 0 (13.10) otherwise

k denotes the connectivity degree of an agent (which is in our case represented by the sum of outgoing and ingoing links in the personal neighbourhood). Furthermore, for the hawk–dove game we can insert the payoff-values for the maximum and minimum payoff a player can receive:

p;=rp

TI) -TI ki(T-S)-k;(P-S) ifHi-TI:>O 0 otherwlse

(II-II } ; J { =

(13.11)

n[

The updating rule regards only the neighbourhood of a certain player for replication, where a benchmark neighbour is randomly drawn for each turn within the neighbourhood of institutional leaders. The dynamics of the model depend additionally on the logic of link evolution or the rewiring part of the model. Institutional leaders break up a certain connection, if a leader is not satisfied with the ‘situation’ anymore. Hence a random number (r) between 0 and 1 is drawn and compared with the calculated satisfaction. If r ≥ si, the leader disconnects with neighbour links, dependent on the specific forces. A neighbour j is randomly chosen with probability proportional to 1 − fij. For every neighbour j a specific random value between 0 and 1 is compared with the force between i and j. If the random number exceeds the force between them, following conditions are activated: first, the link is chosen to dismiss dependent on the exogenous frequency (speed of link evolution); second if this condition triggers, the neighbour j has to admit to the cancelling procedure; thus in order to dismiss a link a bilateral mutual decision is necessary. The neighbour may refuse the decision according to following probability: If a random number between 0 and 1 exceeds 1;i - fii 2 then the link disconnects. Therefore it is preferable for agent i to break up a connection with a specific and not a random neighbour j if the leader contributes little to i’s payoff over time. Further j is included in the decision process, so that leader j may object to the ‘decision’, if appreciated by leader i; i.e. if fji is significantly higher in comparison to fij. Now if a connection is cut, a new link is initialized (in and out). For this reason i searches the neighbourhood for a trustee k with a high force. Then k searches k’s neighbourhood to choose someone with a high force as well and recommend this leader node to i. If they are not already connected, links between them (in and out) are established. If they are already connected, the process is repeated till somebody is found, otherwise i gets isolated; then this leader i will be reconnected with a random agent from the whole population of institutional leaders. All new links are initialized with a 50 per cent force. Finally, forces are generally updated according to following rule:

An agent-based model of institutional change 241 n ii -nu fij(t + 1) = fij(t) + k;(n - n max

(13.12)

) min

__

πijj is the payoff of i when interacting with j and πijj is the payoff earned by i playing with j, if j plays the other strategy. The denominator represents the maximum and minimum payoffs in a single encounter, we may rewrite for the hawk–dove game: fij(t+I)=J;/t)+ nU-nij n;'i) (nlr

(13.13)

At last we have to add that fij(t + 1) will be reset to 0 if it is negative and to 1 if it exceeds 1. Updates are performed in both directions (in- and out-links).

Feedbacks between micro and meso layer Tomassini et al. (2010) test whether cooperative communities would be disturbed if a highly connected node switches from cooperation to defection suddenly. Experiments have shown that cooperation remained stable. That means in particular that doves built up dense neighbourhoods, where cooperation is propagated very fast. In fact hawks got no chance to interrupt their well-connected neighbourhoods. We implement random hawk-invasion along a policy variable with initial start-up hawk-bonus overruling the leader-influence. This policy variable promotes the emergence of hawk leaders and is implemented as continuous random invasion of hawks; creating feedbacks in an endogenous way. Remember equation (13.3):

ni;; = [k',iR(1-ld(,i.L) - cp] + (nlr * n;'i)

(13.3)

Members expect their member-state payoff in dependence on their neighbours and the associated policing influence of their leaders (l). l Now we transform (13.3) into (13.14): n;~

= [k,,;R(l-1 * (1- HB) * d uL ) - cp] + (nlr * n!,J

(13.14)

HB represents the policy variable articulated as an initial hawk-bonus. 0 < HB < 1 is assumed, hence HB works as a discount-factor on the leader-influence (l). l The critical point of this feedback mechanism on leader-influence is that the perspective of the members have to be considered, who may leave the institution or stay, according to π t,iM. If the leader-influence gets discounted, with HB = 0.3 for instance, then the leader-influence parameter will decrease at 70 per cent from the perspective of the member. This option benefits the leader, because the corresponding institution can grow and more member fees can get accumulated. A small leader-influence increases the power radius, as described in the micro setup. Leader-influence always appears from the perspective of the member, to remain or leave the

242

Complexity – methodological considerations

institution. In consequence a decreasing leader-influence means easier policing for the leader, since it is perceived from the member status. Neutral feedbacks on the leader-influence are implemented along the connectivity degree of leaders. Highly interconnected institutional leaders are getting popular and new members join more easily. A degree-bonus DB; 0 < DB < 1 is also introduced as a second policy variable, resulting in equation (13.15): n;~

= [k{,iR(1-1 * (1- HB) * (1- DB) * dti.L) - rp] + (nlr * n:,i)

(13.15)

Institutional leaders who have more connections than the median degree of the whole population receive the degree-bonus. In principle dove as well as hawk leaders have the same chances to receive DB. If a hawk achieves a high degree of connectivity, both policy variables will trigger. These feedback mechanisms lead to the emergence of heterogeneously sized institutions with an endogenous leader-influence. Feedbacks from the micro to the institutional level work along the relative power relations. As described previously power emerges as symbolic surplus from the micro-leader perspective. Previously earned payment fees enhance the leader’s relative power on the top-level institutional module. Hence power (Ω) is absolutely measured by the sum of member fees plus regular payoffs (all rewards) per round minus policing costs for the associated institution; also shown for leader i in equation (13.16): Qi =

[kl,i *R +kl,i *rp]-c

(13.16)

_

with c = d √s as shown in equation (13.5). The following improvements have to be added for equation (13.16). Operational power relations are implemented as symbolic proxies. Every institutional leader (i) is equipped with relative power in comparison to the most powerful leader (p ( ). OJ i

=Qi Qp

(13.17)

The relative power of the most powerful leader (p ( ) is 1 conclusively, this leader is the reference leader for the whole population of institutional leaders. Relative power leads to a growing institution and vice versa. At the moment the power of a leader is only slightly affected by the institution’s size, by the policing fee. As a more realistic assumption and as a higher emphasis on heterogeneous size, we introduce a discount factor on costs (0 < λ < 1), which virtually increases the leader’s payoff per size of the institution. Qi =

[kr.i * R +kr,i *rp]-c*(I -A)

(13.18)

In particular, leaders gain more relative power if their institution grows. Policing costs are still paid for real as equation (13.5) urges, but their symbolic effect on

An agent-based model of institutional change 243 power is reworked now. Furthermore, fees have to be adapted symbolically in our power equation, because they are of a different scale in comparison to the rewards. Fees are 100 times lower than rewards in absolute terms at the moment; hence they have 100 times lower weight on power than rewards and definitely need a reworking, in symbolic terms. Again, members still pay the real fee, but the relative symbolic power received by leaders gains a fee multiplicator of factor 100, in order to establish balanced weights on power. Rewards and fees need comparable scale; otherwise the leaders’ incentives to gain power are only reward-dependent, which seems rather unrealistic. Now leaders’ incentives depend on rewards (leaders still play PD) as well as on gathered fees at comparable scale. This rework leads to following equation: Qi

= [k,,i *R+k,,i *1P*100]-c*(l-;t)

(13.19)

Once all leaders are equipped with symbolic power, emerging on the micro level of the model, we can easily compare them. Comparisons are computed via the relative power function (13.17). Forces are initialized and dismissed dependent on previous encounters between leaders and overall satisfaction. The aim is to include relative power into the process of link evolution, i.e. force updating. Powerful leaders like to connect with other powerful institutional leaders, less powerful leaders like to engage with powerful leaders, but powerful leaders dislike engaging with less powerful leaders. Therefore we introduce a discounting factor for the weighted forces between institutional leaders, influencing the link evolution with other leaders. Forces are weighted with the power weight respectively, then. A neighbour’s relative power is compared with the leader’s relative power. The relative power ratio between leader (i) and (j ( ) can be rewritten from equation (13.13): .[;,(t+l) =

0,

:;

0,

(*Ul,j(t)+

k~(T-7r;))

(13.20)

If a leader rewires, the new force between them is initialized with the relative power weight and the previously discussed 50 per cent initial weight: OJ·

.[;jO

= _ I * 0, 5 OJi

(13.21)

What happens with a leader’s power if an institution dissolves? First of all, the leader loses the corresponding relative power, becoming either a rogue or an institutional member. But of course the leader does not lose the accumulated payoffs. Since the agent was temporarily a leader, it has earned more than rogues or members, because payoffs are still referring to the historical memory of past encounters. If the past leader experiences an option to re-enter the institutional game, the stored accumulated payoffs boost its relative power, in comparison to another new leader who was previously a rogue, for instance.

244

Complexity – methodological considerations

Data and results Results from simulation-driven data are sensitive towards starting parameters. In this model we reduce the parameter space to a small tractable set as given in Table 13.1. In Radax et al. (2009b) we analyse the baseline-micro case of the model. Simulation runs have shown that the model generates complex scenarios with emergent properties. In consequence the data analysis begins with these baseline scenarios, which host quite stable and controllable settings. Such a complex framework of multiple interactive agents, playing iterated prisoner dilemma and hawk–dove on two layers depends very sensitively on the values of the payoff matrix. As it is described above the values are framed according to the usual conditions: for PD: T > R > P > S with 2R > T + S and for HD: T > R > S > P. Though these conditions enable well-behaving dynamics, the dynamics differ a lot when it comes to emergence and exit of institutions. The payoff values influence the average level of societal trust and the link evolution along the weighted force/ relative power between institutional leaders. Therefore they also influence the overall stability of institutional regimes. The used payoff values are given in Table 13.2 and 13.3, also satisfying the nondegeneracy condition.4 The initial idea of the model is to show how institutions emerge, transform, interact and exit – i.e. institutional change – in a formalized operational agentbased model. We articulate the evolution of institutions in this model via the evolution of average societal trust and average power relations. Then we focus on the stability, fragility and durability of institutional regimes, i.e. institutional cycles. The actual data analysis is conducted in a qualitative and descriptive way with regards to the time series according to variables shown in Table 13.4. The significant triggers for institutional change within the baseline case (only micro setup) – are mem (memory size of agents), α0 (initial trust) and l Table 13.1 Parameters for simulation experiments Agent

Policy feedback

Institutions

• • • •

• hawk-bonus • degree-bonus

• • • • •

payoff matrix memory size initial level of alpha leader influence

payoff matrix initial population share (hawk–dove) connection probability force-initialization frequency

Table 13.2 Payoff matrix for the micro games (prisoner dilemma)

Cooperate Defect

Cooperate

Defect

4, 4 5, 0

0, 5 2, 2

An agent-based model of institutional change 245 Table 13.3 Payoff matrix for the institutional games (hawk–dove)

Cooperate Defect

Cooperate

Defect

4, 4 5, 2

2, 5 1, 1

Table 13.4 Target variables for simulation experiments Institutional leader properties

Institution properties

Hawk–dove ratio, relative power, satisfaction, connectivity degree

Durability of institutions, amount of institutions, size of institutions

(leader-influence). The analysis is expanded to the institutional layer afterwards, emphasizing the role of the policy variables HB and DB. We show qualitative change in dependent variables via changes in independent variables via sample runs. The following data analysis grounds on simulation runs within a 50 × 50 grid and a 25 per cent population density, i.e. 625 agents distributed over 2500 patches. Baseline-case results and major system dynamics Smoothing memory Generally we conclude that the memory size has a strong smoothing effect on the overall evolution of societal trust. Figure 13.2 illustrates these results, the larger the memory size the straighter and smoother the path-dependent development of societal trust. Correspondingly, we are confronted with more stable environments according to a larger memory size per agent. The more and faster agents forget or ignore past encounters the higher will be the volatility in societal trust as well as in other aggregated values. For a more detailed revision of experiments with the memory size in the baseline-case consider Radax et al. (2009b). Initialization of trust The initial level of trust is also a critical factor for simulation runs. It shapes the evolution of cooperation and thereby the level of societal trust in this artificial society. Total mistrust is represented by α = 0 and total trust (pure cooperation) is represented by α = 1. Simulation runs converge never towards total mistrust, because institutions are always an option to act as protective social structures against defection. Simulation runs show that the population of agents converges either towards a non-organized state without durable institutions or towards a specific level of trust within a ‘frozen’ status of institutions, in the long run. It is

246 0.3

Complexity – methodological considerations Memory size 10

Memory size 20

Memory size 50

Memory size 100

0.25 0.2 0.15 0.1 0.05 0 0.3 0.25 0.2 0.15 0.1 0.05 0 0

1000

2000

3000

4000

5000 0

1000

2000

3000

4000

5000

Figure 13.2 Evolution of average societal trust with different memory sizes.

interesting to observe that very high starting values for overall trust converge to rather low ones in the long run. A reasonable argument involves that the high initial level does not motivate agents to build up institutions, until the amount of freeriders increases and agents build up institutions very fast leading to freeze the system with a rather low level of trust. This process represents a ‘single wave of institutional change’, where institutions are built rather late but fast and do not break anymore. The other case involves a ‘double wave of institutional change’. Low initial trust motivates agents to build up institutions very early, to protect them via enforced corporation. Then agents learn sequentially the benefits of cooperation from past encounters with institutional members and rogues. The history of past encounters highlights the strong ‘social learning effect’. When trust reaches a critical upper-bound level, institutions break down, since they are not demanded anymore. In such a case institutions are still built continuously but are not durable. Leader-influence and basic system dynamics The leader-influence is the most critical starting parameter within this model. In the baseline-case we investigate different initial values between l = 0.1 and l = 0.25. These initial values lead to very volatile and different system dynamics. The dynamics can be generally classified into three scenarios: ‘institutional freeze’, a ‘world without durable institutions’ and a ‘world of durable institutional cycles’ where institutional regimes boom and bust in an alternating way. Figure 13.3 visualizes these scenarios by indicating the evolution of average institutional durability, dependent on varying leader-influence. The experiment was conducted with an initial level of trust α0 = 0.3 and a memory size of 20. The average durability of institutions can be considered as a stylized measure of institutional stability and innovation, representing periods of institutional boom and bust.

An agent-based model of institutional change 247 150 Leader-influence 0.1 0.2 0.25

100

50

0 0

1000

2000

3000

4000

5000

Figure 13.3 Average institutional durability in the baseline case.

Scenario 1 – Institutional freeze In scenario 1, institutional leaders are equipped with a very high influence factor (e.g. l = 0.1), in consequence they are able to enforce larger institutions. We observe that institutions emerge in early periods and are stable over time. In this case rogues enter institutions quite fast, since the costs for free-riding are higher than expected payoffs in the short-run. Consequentially we follow that several institutions emerge together in an early phase of the simulation and ‘freeze within a static status’. With regard to Figure 13.3 institutional durability accumulates constantly leading to a linear curve, since institutions do not break apart because of a high degree of leader-influence. Therefore scenario 1 indicates that in a highly defective world, agents look out for institutions, in order to gain enforced protection. Scenario 1 represents a case where the high leader-influence covers up the initially high degree of defective uncertainty resulting into a run on institutions. Scenario 2 – A world without durable institutions Institutional leaders are equipped with a lower influence factor (e.g. l = 0.25) and face problems in enforcing institutions of a greater size. Institutions do not reach a critical size which pay off for the leader and break apart immediately. The scenario results in the flat curve of institutional durability in Figure 13.3. Furthermore institutions emerge only in very short-term pulses and are not durable, because leaders are not able to enforce larger institutions due to too high policing costs. Scenario 3 – Institutional cycles The third scenario is representative for evolving complex adaptive systems, where institutional durability ‘dances’ on the edge between chaos and order, involved in very volatile dynamics. Such a scenario appears if the initial values of trust and leader-influence are balanced (e.g. α0 = 0.3 and l = 0.25). The

248

Complexity – methodological considerations

dynamics indicate boom and bust cycles of institutional regimes in the medium and long run; compare Figure 13.3. The durability of institutions alternates in cycles shaping the general level of societal trust. The artificial society is influenced by phases of cooperation (where the number of institutions decreases) and phases of defection (where the number of institutions increases). Nevertheless this type case converges also to a static state in the long run (>3000 periods). Scenario 3 reflects the idea of institutions as ‘social learning vehicles’. Agents are able to learn how to cooperate via institutional cycles over time. In the shortrun agents tend to take refuge in institutions due to the low rate of 30 per cent initial trust. Accordingly we observe an institutional boom in the first 1000 periods (compare Figure 13.3). Since societal trust rises tremendously institutional members take the opportunity of leaving their institution, resulting in a down-turn of institutional durability. In consequence free-riders are able to exploit the situation cumulatively leading to another boom of institutions after 1500 periods. The dynamics repeat with lower volatility until societal trust reaches a critical, where institutions emerge only in short pulses. Otherwise this scenario may also converge to a static state of frozen institutions (scenario 1) in the long run. This is the case when cooperation without durable institutions are too costly in the long run, or when defection is still more profitable. Central to this experiment is the notion that the formal institutional apparatus works as a ‘social learning vehicle’ of cooperation, where the learning curve delivers institutional cycles. Sensitivity analysis of the two-topology simulation The introduction of institutional-leader games leads to an increasing variety in the system dynamics due to feedback mechanisms with the bottom-level topology. The endogenous network formation of institutions delivers diversity in institutional sizes especially, concerning the durability and size of institutions. We focus on the heterogeneity between institutions and the strategy evolution on the institutional-leader network with different settings for the two policy variables (HB, DB). The evolution of societal trust enables institutional emergence and exit, but the target variables switch to the diversity of institutions and its power relations in the following. We start simulations with initial parameters as given in Table 13.5. The analysis of the computed data set is then separated in institutional leader and institution properties. On grounds of the results from the baseline case we stop simulations after 5000 periods as an adequate time horizon. With regard to Table 13.5 Initial parameter settings for the two-topology simulation experiments Population density Number of agents Initial level of trust Memory size

25% 625 30% cooperators 20

Hawk–dove initial ratio Conn probability Force initialization Frequency

50% 1% 50% 10%

An agent-based model of institutional change 249 the link evolution and force-updating we set the connection probability as well as frequency rather low, to smooth the social learning on the network between leaders. In the following experiments we investigate dynamics around scenario 3 of the baseline case within the two-topology setup. We elaborate particularly on the spectrum of institutional variety in institutional cycles. We conduct experiments in order to explore the parameter space with initial leader-influence (l = 0.2; l = 0.225; l = 0.2) and the two policy variables (hawk- and degree-bonus) with critical values between 10 per cent and 70 per cent. Institutional leader properties The effects of the policy variables are visualized along the evolution of average relative power and the satisfaction of leaders on the network. These characteristics emphasize the heterogeneity among institutional leaders and their strategy evolution, indicating the network evolution in general. However we are only able to investigate the dynamics of the institutional module if we are confronted with a rather steady process on the bottom-level. Figure 13.4 illustrates this steady character via a visualization of societal trust deviation. The bottom-level topology thus provides a balanced bottom-up evolving basin, where institutional linkages are not permanently destroyed through bottom-level endogenous entry and exit of institutions. With reference to Figure 13.4 we observe deviation levels between 10 per cent and 20 per cent. This is very good to know because it provides a stable but still oscillating process for a further analysis of evolving institutional networks. The bottom-level topology enables variety on the institutional layer allowing an investigation of the relative power among institutional leaders.

0.20 l
0.2; HB
0.1; DB
0.3 0.18 0.16 0.14 0.12 0.10 l
0.225; HB
0.1; DB
0.1

l
0.2; HB
0.3; DB
0.3

0.20 l
0.25; HB
0.2; DB
0.5 0.18 0.16 0.14 0.12 0.10 0 1000 2000 3000 4000 5000

l
0.25; HB
0.2; DB
0.7

l
0.225; HB
0.1; DB
0.7

0

1000

2000

Figure 13.4 Deviation of societal trust in the two-topology model.

3000 4000 5000

Complexity – methodological considerations

250

With regards to institutional leaders, doves build up very fast and tight networks as also indicated in Tomassini et al. (2010). The dove population of leaders creates cooperative communities with short network paths to others sustaining their mutual interests successfully. Relative power within dove communities is quite equally distributed leading to stability between the cliques. They benefit essentially form the connectivity policy variable (DB). A higher degree of connectivity leads endogenously to a steadily growing leaderinfluence, enabling larger institutions for institutional doves. Otherwise hawks, repeatedly intimidating their neighbours on the institutional network, profit from the start-up bonus policy variable, basically introduced to test the robustness of institutional dove communities. Institutional hawks seek to govern large institutions individually from a network perspective, with growing institutional size they gain more and more relative power capable of controlling the network evolution from within. Thereby they provoke highly aggressive environments and restrict the diffusion of social learning via intimidation. Institutional hawks disturb the institutional environment frequently thereafter. A policy focus on connectivity results into a stable institutional network (equally distributed relative power) but with rather slowly growing institutions. The policy focus on individual hawk institutions leads to high growth rates but obviously less stable networks. Societal trust within the bottom-level topology benefits from the former policy case. Figure 13.5 illustrates the development of one of the key dependent variables for the link evolution, structuring the topology of the network. The evolution of l
0.2; HB
0.1; DB
0.3

l
0.2; HB
0.3; DB
0.3

l
0.225; HB
0.1; DB
0.1

l
0.225; HB
0.1; DB
0.7

l
0.25; HB
0.2; DB
0.5

l
0.25; HB
0.2; DB
0.7

1 0.8 0.6 0.4 0.2 0

1 0.8 0.6 0.4 0.2 0 0

1000

2000

3000

4000 5000 0

1000

Figure 13.5 Evolution of average leader satisfaction.

2000

3000

4000 5000

An agent-based model of institutional change 251 average leader satisfaction confirms results from the previous target variables. In the upper row we have two cases with an initial leader-influence of l = 0.2, in the middle row with l = 0,225 and in bottom row with l = 0.25. The policy for institutional hawks (HB) is varied between 10 per cent and 30 per cent, whereas the policy variable on connectivity (DB) between 10 per cent and 70 per cent. If the latter is kept very low, average leader satisfaction decreases over time, signalling a greater amount of institutional hawks and leading to unstable institutional networks, especially in the cases with (l = 0.2; HB = 0.1; DB = 0.3) and (l = 0.225; HB = 0.1; DB = 0.1). Otherwise with an emphasis on connectivity policy we observe that even with initially aggressive environments stable institutional networks may evolve between a greater amount of institutional doves, indicated foremost in the two bottom row cases. The average satisfaction of institutional leaders is decisive for a stable environment of institutional networks. Higher HB promotes institutional start-ups with hawks in a very sensitive way, where variation between 10 per cent and 20 per cent reflects strong effects on average leader satisfaction, but with higher DB the satisfaction may recover in the long run. The outlier in this ensemble is given by the case of (l = 0.2; HB = 0.3; DB = 0.3) in the upper right diagram of Figure 13.5. HB is initially very high (30 per cent) referring to an aggressive and unstable environment in the short run that cannot sustain the institutional hawks anymore, since they require a critical amount of doves to exploit. In consequence institutional doves crowd out the hawks once the critical instability is overcome leading to a steady and stable network evolution with a very high rate of average satisfaction. The point of this experiment is truly driven by the policy mix between HB and DB shaping the leader-influence endogenously. If we start the simulation with a too-high degree of HB, seeking for high institutional growth rates in a greedy way, the institutional network becomes unstable since leader satisfaction is generally too low. Of course a higher policy rate of DB leads to very slow institutional growth rates. Nevertheless it establishes a steady process within a stable institutional environment, allowing the presence of a few institutional hawks thereafter. The same observation can be taken from the perspective of relative power in network evolution. Figure 13.6 illustrates the evolution of relative power in the same six cases. Operational power is measured relatively to the most powerful leader in the population. If relative power falls below 50 per cent, then each institutional leader is equipped with half of the power on average, in comparison to the most powerful one. The more relative power decreases on average the more skewed will be the distribution of power among leaders inasfar as the simulation generates institutional networks with a few very powerful leaders and a lot of leaders with low relative power in comparison to the most powerful one. Such a distribution is considered as a power law in the literature, compare Barabási and Albert (1999) for instance. In the presented cases (compare Figure 13.6) we find such a power law distribution. Average relative power falls below 30 per cent in the long run, indicating that about 70–80 per cent of institutional leaders possess 20 per cent of operational power in comparison to the other 20–30 per cent. Relative power develops

252

Complexity – methodological considerations

1 l
0.2; HB
0.1; DB
0.3

l
0.2; HB
0.3; DB
0.3

0.8 0.6 0.4 0.2 0 l
0.225; HB
0.1; DB
0.1

l
0.225; HB
0.1; DB
0.7

1 l
0.25; HB
0.2; DB
0.5

l
0.25; HB
0.2; DB
0.7

0.8 0.6 0.4 0.2 0 0

1000

2000

3000

4000 5000

0

1000

2000

3000 4000 5000

Figure 13.6 Evolution of average relative power.

therefore into a steady power law distribution across the institutional network. Correspondingly we find a spread between 10–35 per cent in the deviation of relative power, confirming the steadiness over such a long period of time-steps. A higher volatility in the deviation of relative power would suggest high fluctuations in emergence and exit of institutions in pulses. However the discussed cases show the opposite, a steady development of institutional cycles. Hence the results are consistent with the prior discussed experiments on institutional-leader satisfaction. Finally experiments with emphasis on the network topology show that institutional connectivity is strongly dependent on the evolution of relative power. In presence of stable institutional dove communities (bottom row cases) the connectivity is highly skewed, since institutional doves build up tight/dense groups with just a few connections. Institutional hawks act as network hubs and are highly connected in order to exploit efficiently. In cases without such stable institutional dove communities the connectivity degree is evolving in random ways, because emergence and exit is rather frequent for the rewiring between institutional leaders. Institution properties Simulation experiments with regard to institutional (structural) properties focus on the variety of different institutional regimes as well as variety in institutional

An agent-based model of institutional change 253 forms. The former issue connects to the durability of institutions over time, which we already observed in the baseline case scenario, and the latter to the size and role models (hawks and doves) of institutions. Due to the endogenization of leader-influence simulation experiments deliver increasing variety in institutional forms. The amount of institutions varies between 40 and 100 institutions with reference to the six exemplary cases discussed. Some sample runs have even shown that the evolution of institutional cycles goes beyond the investigated time horizon of 5000 periods. Figure 13.7 illustrates a steady evolutionary process of institutional change with different convergence scenarios dependent on the policy mixes of HB and DB. In general institutions persist over 500 to 2000 periods on average, indicating the span of institutional cycles in this two-topology model. A policy focus on institutional connectivity leads to more durable networks in the long run. Obviously institutional cycles are smoothed out on average with regard to the linkage between the two layers of institutional change. Even though we started with two very simple baseline models, one in closed form for the bottom-level topology (Sanchez-Pages and Straub 2010) and one already in open algorithmic form for the top-level topology (Tomassini et al. 2006, 2010) we still can confirm the basic conclusions but can go far beyond within the integrated bottom-up multi-agent approach. Observations on institutional variety are possible, just as the deviation of institutional durability indicates in Figure 13.8.

5,000 l
0.2; HB
0.1; DB
0.3 4,000

l
0.2; HB
0.3; DB
0.3

3,000 2,000 1,000 0 l
0.225; HB
0.1; DB
0.1

l
0.225; HB
0.1; DB
0.7

5,000 l
0.25; HB
0.2; DB
0.5 4,000

l
0.25; HB
0.2; DB
0.7

3,000 2,000 1,000 0

0

1000

2000

3000

4000 5000

0

1000

2000

3000 4000 5000

Figure 13.7 Average institutional durability in the two-topology model.

Complexity – methodological considerations

254

2,000 l
0.2; HB
0.1; DB
0.3

l
0.2; HB
0.3; DB
0.3

1,500 1,000 500 0 l
0.225; HB
0.1; DB
0.1

l
0.225; HB
0.1; DB
0.7

2,000 l
0.25; HB
0.2; DB
0.5

l
0.25; HB
0.2; DB
0.7

1,500 1,000 500 0

0

1000

2000

3000 4000 5000

0

1000

2000

3000

4000 5000

Figure 13.8 Deviation of institutional durability in the two-topology model.

Institutions emerge and exit in various forms, still shaping a picture of steady institutional cycles, i.e. basic institutional stability. The last figure presented here, 13.9, illustrates the evolution of institutional size. It turns out that institutions do not only matter in principle but also in size, a result highlighted also in Elsner and Heinrich (2009). In our case, institutions contain 3–15 members on average with endogenized leader-influence. Diversity in size is influenced along the connectivity policy variable endogenously overruling the leader-influence and thereby generating an evolving heterogeneous set of institutions. In the presence of a mixed balance in the population share of institutional hawks and doves we observe tremendous deviation of institutional size, represented in the bottom row cases of Figure 13.9. Size is critical for the stability of the evolving institutional network. Stable institutional communities between doves even sustain the evolution of mutual trust in the long run, bringing it on a slow but steady growth path. Institutional hawk networks are less durable over time: repeated intimidation results in high growth rates (concerning growth in institutional size) but systemic vulnerability. This vulnerability, stemming from the evolution of relative power, affects the impact on social learning within the whole agent population in a crucial manner. It leads sequentially to mistrust via exaggerated free-riding. In consequence institutional evolution depends on the durability of small but densely interconnected institutions between dove leaders, cumulatively increasing societal trust in the long run. The rather new insight expressed through this

An agent-based model of institutional change 255 40

l
0.2; HB
0.1; DB
0.3

l
0.2; HB
0.3; DB
0.3

30

Average Deviation

20 10 0

40

l
0.225; HB
0.1; DB
0.1

l
0.225; HB
0.1; DB
0.7

l
0.25; HB
0.2; DB
0.5

l
0.25; HB
0.2; DB
0.7

30 20 10 0

0

1000

2000

3000

4000 5000 0

1000

2000

3000

4000 5000

Figure 13.9 Average size of institutions and deviation from it in the two-topology model.

agent-based model of institutional change concerns the critical turning points and the cyclic dynamics of institutional regimes as already mentioned. Such critical turning points are reached when mutual trust is at least above the mean of the agent population following a decrease in demand for operational institutions. This co-evolutionary process leads to institutional cycles of endogenous emergence and exit thereafter, emphasizing the contingent character of the meso level of socioeconomic change in structure and process. Social learning is modularly dependent on the strategy choices of institutional leaders, i.e. finally the durability and size of institutions on the network. Agents manage to sustain cooperation in the long run in cyclical movements even in this highly uncomfortable setting of iterated non-cooperative bottom-up games. Thus we can show that institutional networks evolve endogenously with feedback loops between a bottom- and a top-level network. Since free-riding is an inherent property of the non-cooperative game on the bottom-level topology the artificial society will never remain in a status of total trust and will therefore provoke the emergence of institutions necessarily, an aspect which we already discussed in the Hayek heuristics. Hypotheses of and assumptions on institutionless or -free socioeconomic spaces can be rejected conclusively if we follow the bottom-up evolutionary logic elaborated in the previous chapters. Moreover institutions evolve in disequilibrium dynamics leading to institutional cycles shaping societal trust in an endogenous way.

256

Complexity – methodological considerations

Still the model works currently just on the operant level of institutional change, meaning in particular that the generic rule set of agents remains unaffected during simulation runs. Further improvements can be implemented if agents receive the potential to vary behavioural and social rules in an endogenous regulation framework for instance. At the moment we need to consider trust and power relations in a mere operational context; also implying that it is still a long way to realizing computational bottom-up models representing the very core of synthesized generic institutional heuristics. However the model has also shown that the algorithmic modular approach delivers fascinating results resulting in a variety of evolutionary economic programs, which cannot be reproduced in closed analytical form. In the following chapter we elaborate more on the notion of power, especially on its difference in operant and generic institutional networks.

14 Power within networks

Networks represent the spaces of economic (inter)actions, which transform along emergence and exit of institutional forms. Connections between institutions link between social practices and enforce social learning across the whole population, as we have explored in the previously presented agent-based model of institutional change. But these networks are not constant over time, they are intrinsically different from our geographical space, which is rather fixed. Socioeconomic networks constitute systems which are entities for themselves in other systems of higher hierarchy, i.e. ‘system-element duality’ (compare Potts 2000, p. 68). Potts (2000, p. 69) articulates a ‘hyperstructure’ as a system of systems and ‘combines the notions of emergence and hierarchy into a single construct.’ The important point is that Potts (2000) follows already the notion of synthetic programming by using the language structure of algorithms instead of closed form mathematics, as discussed in Chapter 12. Potts (2000, p. 116) defines the ‘hetero economicus’ as the ‘algorithmic man’ and adopts thereby the idea of evolution as computation. Hyperstructures are formalized with graph theory to in his evolutionary microeconomic theory. They represent the complex universe of economic interactions, spaces where heterogeneous agents are engaged in a ‘circular flow from knowledge to capital’ (Potts 2000, p. 119). Capital is conceived as the by-product of knowledge evolution in this context, feeding then back again as another source for novelty; reaching transitional states of super-criticality. Conclusively the complexity and evolution of a hyperstructure is strictly dependent on the weak connections between the hierarchical systems and their corresponding knowledge repositories, i.e. their institutions. Potts (2000, p. 149) outlines according to Herbert Simon that it is therefore necessary to decompose the hyperstructure in order to understand the systematics of its weak connectivity. This is an aspect which feeds back several times in this presented work. Potts (2000) defines a hyperstructure in a similar way as Csermely (2009, p. 33) discusses a modular nested network or as Callebaut (2005) elaborates on the ubiquity of modularity in systems. Nestedness and modularity are central evolutionary concepts and the better we understand the central role of weak links between hierarchical network modules the more we will understand about the characteristics of phase transitions, or super-critical states. In the model presented in Chapter 13 we have seen that without a steady process in the evolution

258

Complexity – methodological considerations

of societal trust on the micro level there is no stable basin for dynamics between institutions on the meso level. Feedback between systemic layers appear in both directions driving the evolution of the system over time. Potts (2000) focuses on the interrelation of knowledge and capital with regard to technological evolution by emphasizing the generic network character of economic hyperstructures. Currently we have only investigated the interconnection between trust and power relations of institutions on an operant network. The aspect of power is crucial for institutional change, but we need to look more deeply into power in generic networks. In the previous model we have looked into power relations from a merely operational context, building upon accumulated payoffs. Power relations were sketched on an operational network, keeping the knowledge base of the economic agents as well as institutional leaders constant. However power is not just an operational category of domination and coercion. For the evolution of institutional economic systems it is even more important to look into the generic category of power. We argue in particular that Michel Foucault’s concept of power delivered such a focus on generic instead of operant power. Foucault even envisaged his concept of Dispositiff (Foucault 1978) as a generic network of discourses – also articulated as an ‘historical a priori’ knowledge structure (archive) in terms of Foucault (1981, pp. 183–191) – a space of evolving power in general. We may argue that Foucault developed the Dispositiff as a nested hyperstructure of institutional interconnectedness. Before we derive a first synthetic conceptualization, however, we discuss briefly some essential concepts of power for a generic institutionalism.

Power in the context of generic networks Herrmann-Pillath (2004) emphasizes power as a significant capacity for the evolution of complex adaptive systems. Power is here understood as a unifying concept in a naturalistic foundation of the social sciences. Herrmann-Pillath focuses on three different roles of power, as a ‘transdisciplinary bridging concept’, as ‘potential for creative adaptation’ and ‘as a communication medium’. First of all, a naturalistic foundation heads up the linkage of the fields of biology, psychology, economics and the social sciences in general. Evolution and complexity play a major role in this attempt, because power is understood as an endogenous generic category. Power may serve as a linking device for a common understanding of evolution for several scientific disciplines. HerrmannPillath clarifies the role of traditional core concepts in the sciences and their potential for transdisciplinarity. Most of these concepts failed to prevail on a transdisciplinary level, due to reductionism. Methodological individualism as the core concept of economics failed, because it focused on mere subjective utility. Fitness on the other side could serve as a bridging concept between genotypic and phenotypic change, but is difficult to transport to the utility domain. Herrmann-Pillath connects utility and fitness with the concept of power. Therefore power is on the one hand used in terms of fitness, with regards to activity and performance, on the other hand it is articulated with the social, relational and

Power within networks 259 productive character of power. In general we refer to fitness power in terms of its evolutionary phylogenetic character with a group selection argument and of its developmental ontogenetic character in terms of nested modularity and decomposability. Then power refers to intergroup as well as to between-group relations in complex systems; this possibility integrates the micro (utility) and the macro (fitness/population) perspective again and power gains productive status in a bridging concept. Herrmann-Pillath (2004) links creative adaptation to the institutional character of power. Where Herrmann-Pillath tries to treat power in a Foucaultian sense, it is not really clear how this shall be tied with the aspect of novelty creation in the first place without discussing the normative implications, such as Sen (1999a) emphasizes. Creative adaptation links to the institutional character of power at its best. However the co-evolutionary process between agency and social structure creates structural holes where power emerges. The coevolutionary process between agency and social structure creates structural holes where power emerges. The standard economic emphasis on atomistic subjectivity prevents its theoretical corpus from developing a concept of power, since it does not allow for problem centred approaches, as critically emphasized by Herrmann-Pillath (2004). Herrmann-Pillath (2004, pp. 12–16.) focuses on Amartya Sen’s socioeconomic framework where adaptation plays a major role (Sen 1999a, pp. 35–86). Sen (1999a, pp. 70–86) discusses the difference between the functionings and the capabilities of economic actors, where the former represents objectives of successful action and the latter deals with institutional and individual prerequisites for successful action. Individual problems are solved in a pragmatist fashion through knowledge as a human capability in contrast to choice, where complete information is necessary. Such a welfare approach hints at a more adaptationist direction. Sen does not need to locate full instrumental knowledge in the individual, because a part of this may be stored in the functionings as historically evolved structural determinants of human action. The capability concept is open with regard to the actual realization of different functionings, and because capabilities include different states of knowledge which may be determined via certain functionings. (Herrmann-Pillath 2004, p. 15) In such a picture the human being is not instrumentalized towards a mere calculation machine anymore and it advocates the notion of adaptation along specific environments. For an explicit discussion of Sen’s legacy for an evolutionary approach to welfare, consider Binder (2010). Recent elaborations of Amartya Sen on a democracy in practice are discussed in Chapter 18 in this present work. The capability approach invites the idea of complexity, since local knowledge overrules rational choice. However, Herrmann-Pillath (2004) also claims that Sen’s approach misses a systemic equivalent to utility, therefore he proposes power for this position. Power is understood as the capacity of an individual to

260

Complexity – methodological considerations

act on an environment and to adapt to an environment, linking functionings and capabilities. Such action introduces a new set of productive force relations finally, primarily when it changes the constraints of the environment itself, via an act of Schumpeterian creativity. Thus the actor–network system transforms and reproduces itself in a complex adaptive way by the evolution of power. Power understood as a complex communication process involves additional features, like strategy formation and signalling. Herrmann-Pillath (2004, p. 27) admits that communication merges the concept of operational and generic power. Force relations within a social network are interpreted as communication signals or expressions within communication. Within this outline the author highlights the important role of ‘signal selection’, which may contribute to the idea of power as a transdisciplinary bridging concept as well. Signal selection governs influence and manipulation of communication on power networks; i.e. control over the environment. Signals may be of a visible or invisible nature, hence violence and domination also represent a kind of signalling, a coercive and visible one. Body language and specific basal cultural forms of signalling represent invisible signals. Bluffing, ignorance, arrogance, pride and many other strategic and emotional signals – tactics and affects – also count as invisible signals. Signal selection deals with the appropriateness and applicability of specific signals for specific environments in specific groups or communities. Actors select signals which seem authentic, credible and adaptive to the environment. This process involves a strong learning component, since signalling evolves in institutional contexts. ‘Meaning’ becomes an emergent and synthetic component of power within a complex evolving system. This notion of signalling brings us back to the discussion on group selection and the role of symbolic markers in Chapter 7. Symbolic markers render groups together and distinguish them from others, working as signalling traits for power. Hence the communication processes around power crystallize groups, institutions or even cultures. In conclusion we may propose signal selection as an appropriate feature of cultural evolution in contrast to natural selection. At the end of the day language re-conquers its essential role in the production of power relations and the emergence, durability and exit of institutions. Power in the context of generic networks evolves as a capacity and not as a property. Referring again to DeLanda (2011, p. 2), we argue that synthetic reason emerges if we distinguish sufficiently between capacities and properties. The concept of power demands such synthetic reason, because of its productive forces of subjectivitization. The complexity of power relations disciplines subjects due to the corresponding institutional forms (compare Foucault 2005 [1994], p. 240). Foucault investigates power in different discourses in order to understand how a human being becomes a subject. Power as well as knowledge is incorporated or embodied and gets expressed or activated through certain social practices. This is the idea of a generic concept of power, dependent on an institutional context of shared knowledge. In operational terms we speak of power as equity, something we can possess; this is the way power was analysed traditionally. Foucault’s interpretation of power follows the generic notion in the

Power within networks 261 same way as Bourdieu understands capital as a generic property, embodied in socioeconomics agents and activated along social practices. Anyway, power is anticipated as a nested network capacity, in contrast to an individualistic property. Foucault explains what power is not. It is not a group of institutions and mechanisms which ensures the subservience of the population of a given state. It is not a general system of domination exerted by one group over another. Analysis should not at the outset assume an overall unity of domination, whether this be seen as the law, or the sovereignty of a state, or any other single principle. The possibility of power is not conditional upon and ‘ should not be sought in the primary existence of a single point, in a unique source of sovereignty from which secondary and descendent forms would emanate ’ (1984, p. 93). He also clarifies what power is; it should be understood ‘ as the multiplicity of force relations immanent in the sphere in which they operate and which constitute their own organization . . .’ (1984, p. 92; my italics). Rather than a central point of sovereignty, power is ‘ the moving substrate of force relations which, by virtue of their inequality, constantly engender states of power, but the latter are always local and unstable’ (p. 93). Power is omnipresent, not because of any central authority, unlike Orwell’s 1984 or Huxley’s Brave New World, d but: ‘ . . . because it is produced from one moment to the next, at every point, or rather in every relation from one point to another. Power is everywhere, not because it embraces everywhere, but because it comes from everywhere.’ (Ibid.) (Fox 2002, pp. 858–859) Power is an immanent property of institutional relations by nature. Its relations are by virtue unequal, which leads to process variety and structural heterogeneity within economic institutions. Furthermore, this inequality creates spontaneous states of power, leading to unstable transitional phases in the local as well as in the global context. Interestingly this explanation by Foucault on power is somehow similar to Hayek’s conception of naturalized and dispersed knowledge; emphasizing the aspect of its capacity rather than its property. Perhaps this aspect has driven Lukes (2005 [1974]) to consider Foucault’s view on power as ultra-radical. When Lukes explains his doubts on Foucault’s ultra-radicalism he first refers to the proposed interconnection between power and knowledge. In the first place he strikingly proposed that there is a deep and intimate connection between power and knowledge, viewing these mechanisms in relation to the various applied social scientific disciplines that, so he argued, render them effective: their effectiveness, in his view, largely derives from the shaping impact on people of expert’s knowledge claims. Secondly, his overall aim was to produce a ‘micro-physics of power’. In explaining this

262

Complexity – methodological considerations idea, he wrote that ‘in thinking of the mechanisms of power, I am thinking rather of its capillary forms of existence, the point where power reaches into the very grain of individuals, touches their bodies, and inserts itself into their very actions and attitudes, their discourses, learning processes, and everyday lives’ (Foucault 1980a: 39) (Lukes 2005 [1974], pp. 88–89)

Power refers to the various forms provoking and enforcing domination in institutional contexts and not in particular in certain political actions or even policies. Power is successful only if it hides its mechanisms, thereby it can be repressive and productive simultaneously. ‘The idea, in its non-overstated and nonexaggerated form, is simply this: those subject to it must be rendered susceptible to its effects’ (Lukes 2005 [1974], p. 91). The productive form of power is connected to its potential of creative destruction in a very simple Schumpeterian sense, it provokes and forms knowledge and it connects discourses insofar as, if we understand power in this context of generic networks, it becomes an essential category of generic institutionalism, because it produces the socioeconomic subjects, a notion not yet articulated explicitly. In this respect we may also regard institutions as very basic governmentalities, as technologies of the self (Lukes 2005 [1974], p. 97). When the generic sense of power is used in relation to social life, it refers to the capacities of social agents and to its exercise ‘causing an observable sequence of events’ (Lukes 2005 [1974], p. 70). Power as a capacity drives social learning on generic institutional networks and reshapes the economic knowledge base thereafter. When Lukes refers to the domination aspect of power he follows a similar stream of thought as articulated by Bourdieu. Bourdieu’s abundant ethnographic studies of various ‘fields’ of social life are richly illustrative of aspects of power as domination that I have sought to emphasize: above all, the ways in which its effectiveness is enhanced by being disguised or rendered invisible, by ‘naturalization’, where what is conventional and position- or class-based appears to the actors as natural and objective, and by ‘misrecognition’ of its sources and modes of operation. (Lukes 2005 [1974], p. 141) Bourdieu’s social fields also represent generic networks or nested hyperstructures insofar as generic networks are shaped by evolved domination principles limiting the access to knowledge and technology. In conclusion the power to resist in front of coercive or unjustifiable domination depends tremendously on the potential channels of communication power. Obviously knowledge and technology monopolies will try their best to repress the diffusion of novel rules and the resistance to outdated rules, by that monopolies (economic and political) just need to monitor and control the weak links in the modular structure of generic networks.

Power within networks 263

Communication power in the information society Information and communication structures are central to the evolution of power relations in generic networks. They shape the institutional landscape and influence the process of social learning in the economy. Castells (2009) investigates the theoretical realm where technology, communication and power converge. In this unique study Castells follows the post-structural philosophy of power in Foucault but looks also into its legitimization by referring to the political philosophy of Habermas. ‘Thus, institutional stability is predicated on the capacity to articulate different interests and values in the democratic process via communication networks (Habermas, 1989)’ (Castells 2009, p. 12). Castells (2009) looks particularly into the public sphere and its potential to intervene in relationships of domination, shaping the distribution of knowledge. He stresses also an evolutionary process from state power to community power, or even to globalized network power with reference to the greatest innovation in information and communication technologies. As we already elaborated (Chapter 10), social learning and the diffusion of information depends primarily on an emerging affective order in a given community and secondary on cognitive rationalization among the involved agents. The establishment of shared meaning necessitates communicative actions and the implementation of networks. Networks are such communication structures capable of hosting evolutionary economic programs, but also give space for re-programming or even the creation of novel programs in a bottom-up way. From an ontological perspective agents learn only if they communicate, whereas the diffusion of information may not necessarily trigger social learning. In social and organizational networks, social actors, fostering their values and interests, and in interaction with other social actors, are at the origin of the creation and programming of networks. . . . Yet, once set and programmed, networks follow the instructions inscribed in their operating system, and become capable of self-configuration within the parameters of their assigned goals and procedures. (Castells 2009, p. 20) Castells (2009) makes a very clear and radical point on the naturalization of knowledge in networks and argues that they embody a set of interests and values, speaking implicitly of affective orders where bottom-up programming happens. Cooperation across networks is possible only if the codes and programmes are translated. In this context we speak clearly of translation (de- and re-codification) of discourses between and within institutional forms. The internet contributes tremendously to the socioeconomic transformation in the information society, since translation of discourses, i.e. synthesis of generic rules, represents one of its central capacities. Evolving technology challenges the prevalent generic rules of economy and society, thereby enabling new modes of institutional programming. The full flavour of the network society allows institutional programming

Complexity – methodological considerations

264

in a bottom-up fashion on a global scale. This transitional phase influences the ways we communicate as well as retrieve and process information in such large effects that crisis will always wait around the corner. Bottom-up institutions are going global in digital networks, breaking out of state boundaries but also revolting against the global order (Castells 2010 [1997], p. 303). Obviously we do not just face new boundaries and scopes of institutional forms but also new boundaries between human and machine life (Schwarz and Wäckerle 2012). The fascinating characteristics of digital communication networks with regard to its bottom-up power have far-reaching consequences, not all of them positive in nature at first glance. Castells specifies central and pretty much alerting institutional problems with regards to the media in this context. • • • • •

widespread commercialization of the media in most of the world; globalization and concentration of media business through conglomeration and networking; the segmentation, customization, and diversification of media markets, with emphasis on the cultural identification of the audience; the formation of multimedia business groups that reach out to all forms of communication, including, of course the Internet; and increasing the business convergence between telecommunication companies, computer companies, Internet companies, and media companies. (Castells 2009, p. 56)

The sources for concentration can be traced back to the structure of networks. If communication networks are densely nested, clustered and interconnected via weak links, the domination aspect of power is activated in a multilayered way across different media modules. In consequence mass communication evolves to mass-self communication, a famous phenomenon in current social media such as Facebook but also in financial electronic networks (Schwarz and Wäckerle 2012), when bots and algorithms individualize finance, creating new selves with new technology. Otherwise the interconnectedness in information structures and communication networks leads also to synergy in economic processes, where production merges instead of property (Castells 2009, p. 83). The modern political economy is heavily influenced by these synergetic processes, leading to new standards in production modes, new forms of capitalism. Finance capitalism has already overtaken the industrial capitalism in the developed countries and the new communication structures are not innocent in this context. The information society reaches another institutional agenda when capitalism is driven by its most abstract form, i.e. the information. Information capitalism is already present and the global data miners tweak the future institutional landscape on the net. The information oligopolies and content providers of today control the bandwidth for retrieving and processing information for economic operations, in industry as well as in finance. The economy is strictly dependent on the international supply of bandwidth

Power within networks 265 (Schwarz and Wäckerle 2012), making it a rare infrastructure for stable institutional networks. Thereby these oligopolies still learn to deal with their accumulating capacity of economic and political power. Communication structures of the information society are significantly sensible to bad news and that’s what modern politics don’t need to learn anymore. The rise of bio-politics (Foucault 2004 [1974]) understood as the intervention in population politics and economics, makes the neoliberal state to an apparatus seeking to control and program the subjective self. Obviously this task is much easier with a concentration of the media across the communication networks. However Castells (2009) emphasizes especially this emotional and affective role of communication networks in institutional programming. Internal models or mental images are shared increasingly through immediate communication channels and real-time diffusion of events. Events are not just getting stored in the memory, they are getting incorporated in the body moreover (Bösel and Wäckerle 2013) and reflected in neural patterns and social practices. In all cases, these images originate from a body event or from an event that is perceived as relating to the body. . . . Networks of associations of images, ideas, and feelings that become connected over time constitute neural patterns that structure emotions, feelings and consciousness. (Castells 2009, p. 138) The disposition system of affects informs us about the order of things, the generic network of knowledge and power relations – disposing means in particular order or assemblage (DeLanda 2006). ‘The disposition system induces enthusiasm and organizes behaviour to achieve the goals of the enthusiastic subject in a given environment’ (Castells 2009, p. 147). As a second channel between emotion, cognition and politics Castells elaborates on the surveillance system, creating fear and anxiety in presence of electronic communication technology. ‘Enthusiastic citizens follow the party line, while anxious citizens take a closer look at their options’ (Castells 2009, p. 147). In this context we deal with two very archaic human motivational and affective systems evolved over thousands of years. Of course laboratory experiments can show that both enthusiasm and anxiety enforce social learning in dependence on critical thresholds (Castells 2009, p. 148). Social learning becomes an ultimate criterion for the framing of the institutional landscape and thereby for the evolution of the political economy with regards to its knowledge base and its power relations. The story of communication power introduces us into the realism of institutional programming. It informs us about the possibilities of concentrated media using the politics of scandal to program institutional relations top-down in the same way as modern social movements re-program society from the bottom-up trying to resist against a global order of control. As articulated in the introduction of this present work, the nature of evolutionary economic programs is manifold and needs effective monitoring and intervention by the various moral communities (Hodgson 2012) thereafter.

266

Complexity – methodological considerations Power is multidimensional and is constructed around networks programmed in each domain of human activity according to the interests and values of empowered actors. But all networks of power exercise their power by influencing the human mind predominantly (but not solely) through multimedia networks of mass communication. Thus, communication networks are the fundamental networks of power-making in society. (Castells 2009, p. 426)

If we consider such a power network nested in a multitude of modular networks, then we reach the highly strategic and competitive level of evolving institutional networks addressed in the agent-based model of Chapter 13. It is the coalitions and oppositions across power networks then, generating the capacities of the state and the international state system at the end of the day, because the evolution of power demands a steady process environment providing the communication infrastructure; i.e. bandwidth in the information society.

15 Remarks and reflections on Part III

In Part II on generic heuristics we discussed the cornerstones of evolutionary economic programs with regards to their institutional frames and general semantics. In this Part III we moved on and elaborated on the trajectories from semantic to synthetic programming. Algorithms provide an ideal language structure for synthetic reasoning in a formalized way. Following Beinhocker (2011) we regard evolution as computation in general, as a unique set of search and sort algorithms. Evolutionary economic programs can be implemented with regard to the generic rule-based approach (Dopfer and Potts 2008) in a bottom-up way, a proposition of Part II developed further in Chapter 12. As many scholars have emphasized the rule-based approach with emphasis on the meso level as structure and process component offers a rich semantic as well as synthetic programming environment for formalized socioeconomic narratives. Institutions evolve in a modular way and shape recursively structure and process for social learning. Generic institutionalism refers to a bottom-up methodology to model elaborated heuristics. Models are not constructed for the purpose of prognosis or prediction but for the knowledge transfer of dynamic ideas and concepts insofar as we follow a pedagogic and didactic modelling strategy and believe that models entail dynamic visions of economic conceptions. These visions are encapsulated in generic evolutionary economic programs of institutional change and wait for simulation experiments. Computer experiments make generic institutionalism to an empirical discipline with focus on experience in a pragmatist logic. The agent-based model presented delivers such dynamic visions of institutional change and explores complexity to the model’s limits. The two topologies indicate the modular, contingent and endogenously evolving interdependencies between institutional networks and their members. Still this model provides only knowledge about the evolution of organized and formal institutions acting on operant networks. Nevertheless the model delivers basic insights on the durability, stability and fragility of institutional networks dependent on steady environments of social learning. Emergence and exit of bottom-up evolving institutions is pushed in several directions in this computational frame. However, the most interesting results are given by the co-evolution of trust and power relations and its effects on institutional leader’s strategy formation and institutional size. This institutional variety highlights the endogenous instability of too-fast accumulating institutions given in a path-dependent environment of institutional

268

Complexity – methodological considerations

leaders on an endogenously evolving dynamic social network. Quickly growing and foremost isolated institutions are extremely fragile and are therefore not appropriate and secure as knowledge repositories. Simulation runs have also shown how institutional leaders may distribute their operational power and evolve in densely connected institutional communities, guaranteeing a stable environment for social learning. Such institutional communities may guarantee easy protection – in particular because of its modular and distributed topology – of invading free-riders. Moreover those are the social structures which are able to fulfil the role of societal knowledge repositories, because they remain stable over time but still adapt to the environment. Further improvements of such a family of agent-based models of institutional change will focus on the generic change of rule-sets and power relations as capacities. Following this stream of thought we want to articulate bottom-up models of institutional change as productive environments generating power. Again we refer to the post-structural philosophy of DeLanda (2006, 2011) who anticipates the emergence of synthetic reason as a realistic potential to craft models of evolving assemblages. Thereby we are able to teach and instruct on the nature of socioeconomic complexities and evolving institutional networks via computational experiments, potentially running on every computer in the world and not just on high-class simulations clusters. Assemblages are considered as disposition systems feeding back the essentials of the generic heuristics. If we consider institutional networks as assemblages we focus on the affective order of emerging power on generic networks. Michel Foucault’s genealogies about the technologies of the self reach a new momentum if we regard them along the idea of communication networks (Castells 2009). We experience a self-transformation of capitalism with a focus on information and bandwidth (Schwarz and Wäckerle 2012). Still we do not know exactly how knowledge gets commoditized in future institutions. Currently it seems that the state is still playing a larger role in relation to the initial movement towards the growing (fictitious) commodification of knowledge than it is in mobilizing possible counter-tendencies thereto. But we can certainly discern conflicting tendencies within state action as a whole and in contrasting emphases in action depending on whether the development of a knowledge-based economy in a given economic, political, and/or socio-cultural space is producing more winners or more losers. (Jessop 2008, p. 342) The communities of practice gain attention in this knowledge-driven environment of generic power. Knowledge is perceived as an ecosystem for itself, where new institutional community-based forms, such as open source and open access, face tremendous difficulties to crowd out prevalent top-down logic. Problems surrounding knowledge as a common-pool resource mark the research frontier concerning the de- and re-programming of semantic as well as synthetic institutional networks, since a great extent of global information and communication structure is already controlled and even sometimes dominated by artificial intelligences. Thus it is suggested to learn how to program.

Part IV

Policy realms

This page intentionally left blank

16 Institutions, technology and nature

Evolutionary institutional economics addresses usually demand-side economic policies via Veblenian institutional heuristics and production-side economic policies via Schumpeterian institutional heuristics. This notion mediates the impression that institutional and evolutionary economics are two distinct scientific disciplines (compare Nelson and Nelson 2002, p. 266 for instance). In generic institutionalism it is argued that synthesis can be established seemingly in a problem-centred perspective. Serious attempts to integrate the Schumpeterian and Veblenian system of thought are rather rare in the discipline, the most visible work in such a direction can be found in Hodgson (1997) and more recently in Dopfer (2012). Hodgson focuses on the use and expression of evolutionary, especially Darwinian, theory in Schumpeter as well as in Veblen. Dopfer makes a crucial point for further synthesis of the work of Schumpeter, Hayek and Veblen with respect to policy-oriented issues. The different terminologies of institutions are central to the drifts between them but offer also templates for appropriate synthesis in new evolutionary economic programs. In this context we emphasize that it may be advantageous to sort out synthetic ideas and statements by looking into a concrete and actual economic problem through the lenses of Schumpeter and Veblen. The problem at hand concerns the economic exploitation of nature and possible paths out of this lock-in situation. Within the frontier of sustainability research we are dependent on advances in sustainable consumption as well as production insofar as institutional changes are provoked in consumption and production rules, thereby synthesizing generic heuristics elaborated in Part II.

From circular cumulative causation to evolutionary socioecological economic policy Why is an evolutionary position important in institutional economics? Evolutionary theory informs us about the interconnectedness between and within lifeforms and their adaptation to developing environments. Margulis (1998) argues that the planetary environment is able to maintain a stable disequilibrium path of homeostasis (a steady temperature), because it builds upon proprioception in similar ways as the human body. Proprioception is a medical term and addresses the ‘perception

272

Policy realms

of movement and spatial orientation arising from stimuli inside the body’ (Margulis 1998, p. 113). It is a complex adaptive alerting system compound of nerves. Its systemic feature is to sense the self and to feed back the status and orientation of the whole bodily system. Margulis (1998, p. 114) stresses the idea that even the planetary environment is capable of proprioception via its symbiotic and cooperative relationships between species. She highlights the symbiotic capacities of evolution in contrast to the competitive ones, as followed by the neo-Darwinian or Modern synthesis (compare Chapters 3 and 4). Margulis (ibid.) notes interestingly that human beings have learned to augment and continue to adopt the capability of proprioception for our own survival. Within a generic institutionalism we may argue that the evolution of institutional forms helps to sense our selves individually as well as collectively – habitus as the social sense in Chapter 9, the generic character of an affective order in Chapter 10 – and even to develop technologies of the self – Foucault and Castells on power in generic networks in Chapter 14. Institutions communicate and archive knowledge as repositories (Hodgson 2008b) and exhibit systemic features comparable to social or naturalistic proprioception. In simple terms institutions take roles as socioeconomic signalization systems. It depends on the installed programs (Chapter 14) whether we can perceive the signals or not. An often-articulated reason for this incapability is rendered in the notion of institutions just as socioeconomic instruments, compare Sen’s (2010) critique on nomological institutionalism. Obviously such a harsh interpretation of instrumentality blurs the communication channels between and within institutional networks/discourses and creates collective insensitivity instead of awareness. A second argument Margulis (1998) brings forward refers to the misconception that the planetary environment is often understood as a planning superorganism created by evolution. The planetary environment manages to establish and maintain homeostasis; maybe we can learn something from this perspective. On the one hand we need to be happy that sustainability has already reached such a popular status in modern research, but on the other hand it often remains just in fashionable rhetoric. The issue that humans cannot be responsible for caring about the symbiotic planet, because the symbiotic planet cares for us has to be addressed. Consequently the issue of sustainability is at the last resort an issue for our own survival. It is obvious that the planetary environment as a gigantic network of lifeforms will continue to survive any ‘attacks’ by humans in the long run. To me, the human move to take responsibility for the living Earth is laughable – the rhetoric of the powerless. The planet takes care of us, not we of it. Our self-inflated moral imperative to guide a wayward Earth or heal our sick planet is evidence for our immense capacity of self-delusion. Rather, we need to protect us from ourselves. (Margulis 1998, p. 115) Such a remark is essential in this respect, in order to retain our ability of critical reason. Additionally it is an invitation to research the exploitation of nature as a

Institutions, technology and nature 273 feedback phenomenon for exploiting ourselves by using the concept of entropy. Entropy delivers the key to understand systemic signalling via production and consumption institutions. Evolutionary institutional economics builds upon a rich history of economic thought in this direction, as the seminal works of Gunnar Myrdal, William Kapp and Nicolas Georgescu-Roegen show for instance. Berger and Elsner (2008) raise the issue that the conceptualization of institutional economic change, shaped by cumulative causation of habits of thought, was not a mere American phenomenon. Myrdal (2009 [1944], Appendix 3) emphasizes the circular notion of cumulative causation by a fundamental critique of the equilibrium concept in the social and economic sciences. The notion of equilibrium, for instance, has been in all our reasoning for centuries. Actually it is present in most research of the present day, even when it is not formally introduced. In most social research we have restricted our utilization of the equilibrium notion to that simple and static variant of it, the stable equilibrium. . . . We propose the utilization of other equilibrium notions besides the simplest one. For dynamic analysis of the process of change in social relations, it is highly desirable that we disengage our minds from the stable equilibrium scheme of thinking. . . . The most important need is to give place in our hypothetical explanatory scheme to a rational recognition of the cumulation of forces. (Myrdal 2009 [1944], p. 1065, original emphasis) Myrdal emphasizes that the idea of a stable equilibrium is totally misleading in the social sciences. In contrast he promotes the concept of cumulative forces. The major difference between Veblen’s conception of cumulative causation and Myrdal’s circular cumulative causation lies in the order of events. Veblen’s institutional change builds upon a sequence of evolving economic institutions, invoked by habits of thought, whereas Myrdal introduces feedback loops into the concept, fostering the circular aspect of cumulative institutional change. The circular expression of cumulative causation can be neatly connected with the opensystem approach in economics, more or less advocated by Kapp and Georgescu-Roegen, as Berger and Elsner (2008) argue. If a system, whether economic or ecological, is perceived as open, it is on the one hand automatically connected with other systems and on the other hand it is also driven by selfenforcing mechanisms, so-called feedback loops. Generally feedback mechanisms exist in any naturalistic system, but they are far more complex (discontinuous and non-linear) than the usual economic anticipation of returns to scale. Nevertheless the cumulative effects of institutional change via habits of thought also return at specific scales to the economy (downward and upward causation). But the feedback process can be hardly decoded in a strict causal way. Myrdal analysed, for instance, the role of institutions in traditional societies and showed that the ‘economic factor’, e.g. foreign investment, does not

274

Policy realms necessarily gain dominance over the ‘institutional factor’ and does not necessarily lead to better development. Thus, as a real type and applicable research hypothesis, CCC captures central characteristics of socio-economic processes. (Berger and Elsner 2008, p. 83)

Cumulative causal causation (CCC) receives a deeper economic significance, if it is especially considered within an open-system approach (OSA). OSA means generally that systems import low entropy and export high entropy, hence everything is connected via a huge and tremendously complex trade network of energy; this is the thermodynamic explanation. The classic role of the economy is to reallocate resources and redistribute social costs of productive processes. Nevertheless contemporary economies produce waste and dirt in an increasingly exaggerated manner – consider Veblen’s concept of conspicuous consumption. If we keep on considering growth as an economic necessity within a closedsystem approach, waste will not become less. Ecological as well as social consequences have increased tremendously since the first industrial revolution. The entropy law suggests that entropy has to grow continuously in the universe (closed, isolated system), till it reaches a maximum threshold, where matter gets disordered and complexity runs zero. In the contrary, open, biological systems work differently, because their complexity increases steadily. The explanation for growing complexity in the biological realm lies in its open-system character. The biological ability to balance the entropy level via a self-regulating mechanism of consumption and production is compatible with the entropy law. Georgescu-Roegen (1971) follows that biological life speeds up the entropic degradation of the whole system, because it is fed by low entropy. Institutions let us steer in the opposite direction, if we consider economic production as an entropic process, emitting irrecoverable waste, i.e. high entropy. Increasing emission of entropy leads to a faster collapse of our productive means and modes. Hence as a consequence environmental and ecological economics needs more attention and a better integration into a bigger picture of evolutionary economics. However in such a case evolutionary economics needs to open its eyes and focus on systemic components of institutional and societal change in general. Berger and Elsner (2008) criticize the weaknesses of the pathdependence concept in contrast to an open-system approach. In particular they argue that we may lose the big picture or the long run perspective if we concentrate too much on path-dependency. Many approaches [in evolutionary economics] focus on phenomena only within the logic of the ‘market’ economy, such as the evolution of markets and market structures, the evolution of firms and their strategies, or the diff fusion and adaption of technology. Phenomena like systemic social costs, asymmetric power distribution, vested interests, and socio-ecological degradation fall outside the attention of many approaches. The conception of path-dependence tends to divert interest in causal relations towards

Institutions, technology and nature 275 focussing just on short-run random events. . . . For instance, OSA and CCC consider that it is an institutionalized practice to hold prices low mainly by shifting costs on the socio-ecological subsystems in conjunction with manipulative advertising, generating systemic wasteful consumption patterns that make for path-dependent sales and ‘growth’. (Berger and Elsner 2008, p. 89, brackets added) The authors articulate the importance of open systems. If we continuously make short-run business benefits on the basis of socioecological externalizations, we will end up with social and ecological catastrophes. This may not happen in a few years, but centuries are the units to think in. The point is that evolutionary institutional economics understood within a generic institutionalism may help out in such policy aspects, if long-run consequences are taken seriously.

Institutions and sustainable development Steppacher (2008) generally follows the ideas of Georgescu-Roegen and Veblen, by highlighting sustainable development of economic systems. His approach focuses on the concept of property, property as the ‘core institution of capitalism’. Steppacher (2008, p. 336) argues that it is the difference between property and possession which is not treated or not respected in mainstream economic literature. Property enables legal creditability. It becomes institutionalized via legal rules and the law in the economic system; i.e. the Veblenian story of a property-based economy. This specific feature of property drives economic growth, because it provides individual (mortgages for instance) as well as social (natural monopolies: money, energy, electricity, . . .) security for transactions. On the contrary, possession just points to the physical/material component of property, i.e. the entropic story of Georgescu-Roegen (1971). Lending a bike to a friend, let the borrower occupy it materially, but the lender will still own it as a legal property, if there is some sort of contract. Steppacher (2008) investigates property affecting economic development in a social and ecological aspect. One characteristic condition for a developed economy is a stable currency, though a nation’s currency is extremely dependent on the system of property rights. Money is, as Steppacher rightly argues, a derivate of property and not of possession. The accumulation of money and its stabilization needs a well-functioning legal system, which should at least secure properties although, as economists, we still have to envisage the consequences of introducing legal property systems into possession-based regimes. Every property system works on grounds of a culture, because the cultural environment teaches how to operationalize generic rules. Steppacher discusses John Stuart Mill’s story about the introduction of a legal property system in India by the British Empire in the nineteenth century. The Indian economy went out of control and people could not fulfil the regulations ad hoc, that the British Empire had in mind. A specific problem was that Indian peasants could not understand the quite modern institution of credit relations, because they were confronted with huge cultural gaps.

276

Policy realms

Nevertheless the question of sustainability, with respect to social and ecological costs, remains an institutional question, hosted by the legal system. The sustainable future is dependent on the political willingness to internalize social and ecological costs via an adequate legal framework. Concerning this issue, Hayek (1973) once said that we made a big mistake during capitalist development and corresponding globalization, we simply failed to reform our international system of law or we simply have not introduced any convenient international system of law beyond mere bilateral trade contracts. Instead, the OECD countries were keen on introducing hundreds of different international organizations, all living in parallel worlds, without any real legal potential to scrutinize recurring problems. Most of them are governed by pecuniary interests, so that we are in need of new legal standards for the globalized world. Relative resource prices say nothing about ecological scarcity: they only represent actual supply and demand situations of economic agents, with, at best, some short-term anticipation of changing relative scarcities and their economic meaning. The same is true for costs involved in politically imposed pollution control. These costs say nothing about the severity of ecological conditions. (Steppacher 2008, p. 338) Furthermore in order to engage in sustainable development, we may need to reconsider our economic priorities. Following Georgescu-Roegen’s (1971) issue of entropy, we need to realize that with mineral resources we are able to harvest or refine high rates of energy but also at high costs of entropy. On the contrary, biotic or renewable resources cannot be harvested or refined for such high rates of energy, but are not increasing entropy to such degrees as their mineral counterpart. Steppacher (2008) argues that it is the property imperative of exponential growth that requires minerals and that consequently empowers ecological degradation; in this respect it may be promising to dismantle the vague vision of green growth, finally. Additionally renewable resources are exposed to the rhythm of the biosphere, indicating that they are not available on demand. These issues are at the heart of a sustainable conception of economic production and consumption. Another important lesson from Georgescu-Roegen (1971) is again related to the entropic aspect of the economy and its ecological footprints. The economic process is an irreversible process by nature. It is involved with the irreversible transformation of energy into work. Therefore ecological consequences made on behalf of capitalistic interests cannot be undone in the future. The economy remains within the thermodynamics of matter and energy.

Evolution and the environment Environmental and evolutionary economics developed more or less in parallel streams, as argued by Van den Bergh (2007). Both disciplines fed ideas from biology. Van den Bergh shows in several articles that the disciplines share a

Institutions, technology and nature 277 common characteristic of all biological systems, i.e. diversity. Standard economic theory focuses on efficiency instead of diversity, which is incorporated in the mechanistic–industrial doctrine. There are also two related dichotomies appearing in these respects, namely growth versus development. High economic growth rates are not sustainable with mineral resources in the long run. Thereby a focus on economic development in a more systemic manner is invited. A second level is that of natural resources and ecosystems which are subject to biological evolution – notably mechanisms like selection and sorting (Vbra and Gould 1986) – should be considered seriously in as far as they affect the structure, morphology and functions of resources exploited by human beings, as well as life-support systems upon which environmental stability and human life depend. (Van den Bergh and Gowdy 2000, p. 37) Van den Bergh and Gowdy aim for an integration of the evolutionary approach into environmental economics by focusing on evolutionary dynamics of resources. They argue that environmental economics was shaped too long just by the analysis of sustainable development or by defining sustainability. In order to study the co-evolution of economic and natural systems, the authors invoke following definition of evolution. Evolution can be characterized as disequilibrium and qualitative (structural) change that is irreversible and unpredictable, can be gradual and radical, and is based on micro-level diversity (variation) and selection, as well as macrolevel trends and shocks (‘large-scale accidents’). (Van den Bergh and Gowdy 2000, p. 38) Following this trend the authors are also looking for a greater picture of evolution – understood as a real phenomenon – integrating in a sequential as well as co-evolving way physical, chemical, biological, cultural and economic phenomena. Van den Bergh and Gowdy highlight the importance of the theory of punctuated equilibria, the advantage of sorting compared to selection as well as co-evolution. These concepts all belong to the universe of macroevolution and of developmental-system approaches (compare Gould 2002 and Oyama 2000 for instance). Furthermore it seems unavoidable to accept that there is no optimal state of the economy in environmental economics. In consequence we have to reconsider our economic priorities – as Steppacher (2008) also argued – concerning on the one hand the irreversibility of damage we are dealing to society and on the other hand concerning technological lock-ins of industries dependent on mineral resources. A potential institutional approach focuses on models of long-run historical change and environmental degradation, as Van den Bergh and Gowdy (2000) suggest. Such a model works with threshold values rather than with traditional marginal values, because marginality does not fit in the realm of biodiversity. Otherwise researchers in climatology deal also with

278

Policy realms

long-run studies and long-run effects of certain consumption patterns in the economy. But for most, it is the issue of technological change that worries environmental economists at similar levels to evolutionary economists. The lock-in of non-optimal technologies creates environmental and other social costs. Examples are car-based transport and fossil-fuel based energy generation. Stringent environmental regulation may have positive innovative effects on environmental performance of firms through technological inventions and innovations. (Van den Bergh and Gowdy 2000, p. 48) In this respect the authors also refer to possible first-mover advantages of firms introducing novel green technology to the markets in a Schumpeterian way, due to new stringent environmental regulations. Institutional guidelines could enhance new ecological trends reducing environmental degradation in the long run. Environmental regulations can force European industries to shift towards ecological production. Knowledge of novel technologies may be a second advantage to compete in R&D. As Van den Bergh and Gowdy (2000, p. 48) argue, the ecological project is dependent on economic policy to ‘unlock nonoptimal technologies’, in the sense of changing a technological paradigm towards a new technological trajectory – compare the discussion on Dosi (1982) in Chapter 8 and the more general revision of meso trajectories in Chapter 10. Moreover it will be necessary to understand the long-run evolution of socioeconomic systems, comparable to the agenda of the American institutionalists. In this respect Van den Bergh and Gowdy (2000) highlight the concepts of resilience – understood as a specific type of ecological stability, equivalent to sustainability and biodiversity – as a necessary focus for ecosystem management as well as to reconsider ecological consequences of technological change. In particular policies will focus on synthesis between economic, biological, social as well as geographical diversity in same categories, because ‘Evolution implies a focus on complementarity rather than substitution’ (Van den Bergh and Gowdy 2000, p. 52–53). The new-institutional economic solution for environmental problems is based on the introduction of eco-certificates to the market to internalize environmental costs. This concept motivates firms with high profit rates to buy out certificates and the terminology of ‘green-washing’ becomes urgent. The certificates will sequentially punish small and medium enterprises, which cannot afford to buy certificates and otherwise have to reduce R&D in promising future technologies. The market internalization solution fails on every level. Economic policy has to look into different streams of institutional creative adaptation. Environmental issues need global institutional networks, as is also argued in Hanappi et al. (2009), in order to introduce appropriate policy goals. However first steps via Kyoto 1997 and Copenhagen 2009 indicate that there is still a lot of work to do. These conferences reflect a first awakening of global governance structures beyond UN ambitions, which have to be regarded as political-economic

Institutions, technology and nature 279 necessities for our future. Van den Bergh et al. (2006) take a similar step according to evolutionary policy design. First of all they argue that public policy from an evolutionary perspective needs to influence the selection environment and the effectiveness of specific innovations. Since climate change is a global phenomenon, the selective environment is global as well. Global institutional networks are demand to evaluate specific technological advances on their adaptiveness, regarding ecological consequences as well as economic effectiveness in contrary to efficiency. An evolutionary-inspired policy needs to imply and promote a diversity at all ranges. It is crucial for evolutionary policy-makers to balance between diversity and selection, so as to prevent a system ending up in either deadlock or inefficiency. Here it is important to balance the cost of diversity in the short term against the benefits of diversity in the longer term. This trade-off can never be made on the basis of full information, but relies on expert estimation of chances, barriers and opportunities. (Van den Bergh et al. 2006, p. 63) In this context we have to highlight two important things. First, an evolutionary theory integrated in a policy environment will not produce and does not even claim to aim an optimal solution. Evolutionary policy has to build on a trial-anderror logic, a logic similar to the ideas of the American pragmatists, pragmatism is an inevitable way to go for environmental policy. Second, selection has to be considered as a local search path; hence we should use the terminology of sorting instead of selection. Selection produces at most local optima, which can be related within a hierarchical modular context. Evolutionary selection, understood in a generic naturalistic way, has to be regarded as a differential measure. Following this line of research Safarzynska and Van den Bergh (2012) develop an evolutionary model indicating potential ways out of lock-in with regard to energy technologies. With reference to consumption practices in archaic group selection environments, Safarzynska (2013) concentrates on the co-evolution of culture and environment, showing how resource conservation evolves with climate variability. Interestingly it turns out that climate change enhances cooperation in the long run in this model. Otherwise from an institutional perspective proper investigations in the evolution of consumption rules are significantly important as highlighted by Witt (2011) for instance. Witt elaborates on potential transitions towards sustainable consumption in this respect. In conclusion a successful turn towards a sustainable path of economic development can be implemented only via a clever institutional mix of sustainable consumer and producer rules, crucial to this issue remains the symbolic and generic value of prevalent production and consumption patterns.

17 Evolution of credit rules

Credit crunches and liquidity traps are highly complex economic phenomena, because their origin and nature lies in systemic characteristics concerning the evolving economy and not only the financial markets. Moreover the provision and control of credit-money sustains the financial as well as the goods market by connecting them both; thereby it guarantees a continuity of economic operations. In the evolution of money we consider the innovation of banks as a significant institutional process in capitalist development capable of providing exactly this continuity (compare for instance Schumpeter 1954, pp. 276–335 or Ferguson 2009). The complex logic of this process represents a very interesting but difficult economic topic, especially from the perspective of the actors. Uncertain economic actors incorporate roles of agenda setters and agenda receivers. In this chapter we focus on the complexity of credit-money to arrive at new standards for modelling the banking-macro nexus from bottom-up. Of course such an endeavour needs to address a diversity of economic thought and theoretical foundations of modelling strategies. The endogenous instability of capitalist production has reached a new climax with the autonomous financialization of all economic realms during the twentieth century. Minsky (2008 [1986]) communicated this climax in such a pointed way, that for the first time a greater audience within the economic discipline recognized the importance of institutional factors for (in)stability of the economy. His cleverly positioned question ‘Why is our economy so unstable?’ (Minsky 2009 [1986], p. 109) was always associated with a set of ‘non-sense questions’ in the economic canon. Within this context Minsky pointed out that any satisfactory theory needs to recognize endogenous instability as a problem. Today we can argue that such theories concerned with phenomena such as ‘self-criticality’ or ‘phase-transition’ need to incorporate the notion of entropy or more generally of evolution then. This is probably something which Minsky could have learned as a graduate student of Schumpeter in Harvard (compare Knell 2012, p. 5). Minsky (2008 [1986], pp. 279–282) considers the banks as the endogenous destabilizers in the monetary circuit. In his Financial Instability Hypothesis (1992), Minsky concretizes this perspective along an integration of Schumpeterian and Keynesian economics. Knell (2012, p. 3) points out that ‘His main contribution was to link financial market fragility and speculative investment finance’. Obviously the

Evolution of credit-rules 281 instability within the banking-macro nexus deals with the dynamic change in bankers’ and investors’ behaviour, since in good times they are lured to take more risk. In consequence it is necessary to elaborate on these bottom-up foundations. Banks institutionalize credit-regimes via their lending capabilities. Hence the evolution of lending standards represents crucial significance for the contingent development of the economy’s disequilibrium path, a notion highlighting the institutional nature of the monetary circuit in Schumpeterian creditdriven innovation and more generally in the endogenous demand for money in Keynesian terms. Schumpeter rejected the Quantity Theory of Money as well as Keynes. This notion makes them theoretical allies for institutional arguments in the monetary circuit. We elaborate on this topic in the next section of this chapter, by giving insights from a history of economic thought perspective, discussing a credit-centred perspective of money. Still, the textbook model of monetary economics works with a different theoretical heritage of economic thought, in particular the Quantity Theory of Money. We outline the history of economic thought with special respect to the theory of money in order to show the origins and fundamental differences between topdown and bottom-up approaches to the banking-macro nexus, as generic institutionalism suggests in general. Furthermore we elaborate on current attempts within these two approaches seeking for a proper understanding of the origin and management of crisis in capitalism. As the study of both modelling systems shows, significance is given to the bank as a central organ in the institutional intermediation of money. But we observe that the current models lack appropriate bottom-up foundations of the banking system as a systemic institutional carrier of credit rules. Following the methodological premises and perspectives of top-down and bottom-up approaches it is undoubtedly clear that such challenges may only be met by the latter. However, within the realms of agent-based modelling and endogenous dynamic network theory we identify an absence of theoretical standards about the involved bottom-up process. We consider the institutional process of bank lending as essential for the banking-macro nexus and provide a theoretical framework to analyse the evolution of generic credit rules. This framework may provide a standard for further bottom-up models of the banking-macro nexus, building upon Chapter 10. The application of the generic rule-based approach (Dopfer and Potts 2008) to the credit realm may serve as a blueprint for individual and social learning in local artificial neighbourhoods between firms, households and banks, shaping the monetary circuit. In this outline the bank is considered as a rule-guided actor under bounded rationality (Simon 1991) and nested cognition (Kawamura 2009). The subject characteristics (cognition, habit of thought, behaviour) of credit rulesets are understood as micro-foundations for bank lending with regard to risk perception and financing needs, for instance. Otherwise we consider their coevolution with object characteristics (market and organizational rules, technical rules) of credit-rule sets as constitutive for the bottom-up institutionalization of credit regimes. Thus object credit rules deal with competitive pressure, alternative financing and short- and long-term interest rates, cost of funds or the

282

Policy realms

balance sheet constraint, for instance. This co-evolutionary bottom-up foundation of credit rules and evolving lending standards is empirically grounded with the Bank Lending Survey of the European Central Bank.

The complexity of credit-money: a history of economic thought perspective Monetary theory deals with the relation between money supply and demand. Money is defined through its functions as a medium of exchange, store of value and unit of account. The first two functions deal with money as a means of payment – as an exchange medium – and the circumstances that money can be hold for future consumption or investment, a store of value. Money represents a unit of account when it emerges in balance sheets, which involves all commercial operations. Furthermore money is pragmatically defined along its statistical properties for monetary policy. Here we deal with money aggregates (Bofinger 2001, p. 5): M1 (currency in circulation), M2 (M1 + bank deposits), M3 (M2 + repurchase agreements + market funds + debt securities), which serve as operative aggregation measures for the central banks. The most essential and rivalling problem in monetary theory deals with the explanation of money demand. In the history of economic thought three basic attempts were made to articulate the demand for money. These were the Quantity Theory of Money; the Cambridge or Keynesian approach; and the Inventory or Transactions approach. Here we concentrate on the differences between the first two (for the latter’s original elaboration compare Baumol 1952 and Tobin 1956). All of them are related to the equation of exchange, first stated by Irving Fisher. The Quantity Theory reached its popular status in Friedman (1956) with the introduction of an additional basic relation, between money-to-hold and wealth. In general the Quantity Theory proposes ceteris paribus. a substantial and direct proportional relation between a quantitative money supply and the price level of the economy in the long run. The Cambridge approach emphasizes that money is not immediately spent for goods, but certain ratios of income are held or invested according to one’s liquidity preference. Keynes thus introduced sociopsychological constants (‘propensities’ towards certain economic actions) on a macroeconomic level, which allowed him to replace the strict proportionality of the quantity theory of money by a more flexible framework – at least for short-run dynamics. Conclusively, following Bofinger (2001, p. 20), the quantity theory shows that ‘demand for money is a demand for real balances and depends proportionately on real GDP. Its main assumption is a stable velocity of money. Keynesian approaches explain the role of the interest rate as a determinant of money demand’. The Keynesian model introduces a speculative motive towards the theory of money demand. Keynes (2008 [1936], p. 126) highlights the incentive to buy interest-bearing assets (bonds) instead of consuming goods and services. In this way he reinforces the role of the interest rate within M2 and broader aggregates. Otherwise Hicks claimed that money needs to have a marginal utility as all other goods and services, ‘People do choose to have money rather than other

Evolution of credit-rules 283 things, and therefore, in the relevant sense, money must have a marginal utility’ (Hicks 1935, p. 3). Hicks argued that whenever there is a choice to make between alternatives that can be expressed in quantitative terms, we shall apply the concept of marginal utility as for other commodities. Finally Friedman’s (1956) restatement of the Quantity Theory of Money meets these claims for a marginal theory of money and introduces the argument of individual wealth of utility-maximizers as the decisive determinant for money demand. Thereby he considers money as a commodity as all other goods and services. Today money is still considered within this mere quantity picture, mostly captured within Hicks’ (1980) modern IS-LM model (compare Blanchard 2000 or other macroeconomic textbooks). Modern quantitative approaches in monetary economics by new-classicals or new-Keynesians work usually with the mechanics of the Quantity Theory of Money, providing the prototypes for the central banks. An overview to the theoretical and modelling foundations of current top-down approaches in monetary economics is given in the following sections. The assumption that money is a commodity represents a key assumption within the standard model of money supply. This claim is scrutinized from several perspectives within the discipline, for instance from post-Keynesian as well as from Schumpeterian economists. Schumpeter (1954, pp. 317–322) rejected the application of a demand and supply apparatus for a value theory of money, because money does not represent a commodity in his terms. Schumpeter associates trust and security with the emergence of bank notes. Bank money, understood as transferable deposit, was not the great novelty in the late seventeenth and eighteenth century, but the new practices and conducts involved with it made up the novelty (compare also Ferguson 2009). It is the credit form of money that rearranged its institutional features and functions. Credit-money constitutes a socioeconomic institution, capable of creating and destroying money. Taking Schumpeter’s arguments seriously, money cannot be understood simply as an object yielding marginal utility. In Schumpeter’s 1970 Das Wesen des Geldes, published posthumously, he refers to the sociological role of money as a unit of account. Schumpeter considers the ‘carriers of the social accounting process’ as the households, the firms, the banks and the central bank insofar as we consider the evolution of credit rules as an evolving social accounting system within the banking-macro nexus. Banks create and destroy money endogenously from a demand and supply perspective, where the borders between demand and supply get vaguer and vaguer. Regarding the perspective of the Quantity Theory of Money, it is suggested to regard money as exogenous only. Post-Keynesian – compare Lavoie (1984) or Fontana (2003) – and institutional perspectives – compare Ferguson (2009) or Hall (2008) – suppose a more systemic, historical and therefore evolutionary approach to the theory of money and credit, which addresses the complexity of money in flow. This scepticism also originates from the exaggerated use of the general equilibrium framework, the efficient market hypothesis, the representative agent and the rational expectations approach in monetary theory and policy.

284

Policy realms

Following Schumpeter this is immediately clear since any innovation will need the disequilibriating force of a more or less daring credit. A general equilibrium framework – where the state of all markets is simultaneously determined by the set of exogenously given preference orders of all market participants – leaves no room for singular, credit-supported novelty. The missing property describing social and technical innovation (including the role of credit) from an empirical point of view leaves behind the most essential characteristics of industrialized economies in the last 300 years. These innovated advances observed in products, production processes and socioeconomic relationships (again including credit) are the core of what is considered to be economic progress. Crisis is just the mirror image of progressive innovation, it thus represents an innate property of capitalist development. All economic operations are executed under uncertainty, as also Keynes (2008 [1936]) emphasized in a Knightian tradition. Time is irreversible. For Keynes to overcome the poverty of equilibrium analysis in the face of the Great Depression, the introduction of independent sociopsychological constants made errors of investors possible – but just on a short-run aggregate level. The challenge for an evolutionary generic synthesis is to go beyond (or better, to go underneath) such an aggregate consideration of error-driven, evolutionary credit dynamics; i.e. to provide theoretical as well as empirical arguments for the aggregate level of structural macro analysis. ‘The basic fact underpinning is that all money is credit. Money is the expression of an accounting relation of liability and asset, created as one agent extends credit to another, who assumes a debt’ (Bezemer 2009, p. 2). Credit-money represents a socioeconomic institution highlighting the bank in economic analysis as a central socioeconomic structure. The bank’s central role is accompanied by an increase in its economic and political power; moreover its decisions and actions may carry crucial ramifications for the whole economy. Banks need to be considered as crucial institutions today, since they may act as endogenous destabilizers by challenging the monetary authorities (compare Minsky 2008 [1986], p. 279). Minsky announced the game between central banks and banks unfair, because ‘The profit-seeking bankers almost always win their game with the authorities, but, in winning, the banking community destabilizes the economy; the true losers are those who are hurt by unemployment and inflation’ (2008 [1986], p. 279). But how did the institutional innovation of credit change the bank’s position? Schumpeter’s (1954, pp. 317–322) interest in the novelty of issuing money is connected with the rise of new analytical economic practices. He argues that in earlier times, trade was always considered as perfect trade, that commodities were exchanged exactly, without any residue. The monetary system has changed with the evolution of money to credit-money. The new possibilities, enabled by credit, changed the monetary system tremendously. The credit system represents therefore one of the most influential and powerful institutional networks in the global political economy. Arena and Festré (1996, p. 117) argue that banks cannot be characterized as pure contractors or intermediaries, because of informational asymmetries between all the participating parties. The authors support the idea of Stiglitz and

Evolution of credit-rules 285 Weiss (1988) that banks appear as social accountants in the economy, instead of mere brokers. The consequential role of the bank is to synchronize informational asymmetries between firms, households and banks. The Schumpeterian story tells us that these functions characterize capitalist development, the evolution of business cycles and the evolution of institutions in a very dominant way insofar as Arena and Festré (1996) focus on the monetary aspect of entrepreneurship, innovation and business cycles. They also argue that neoclassical economics considered the implications of capitalist development too narrowly by concentrating too much on factors of the real side of the economy, i.e. technology and structural change. The crucial point in their analysis faces Schumpeter’s break with the Walrasian general equilibrium system. ‘However, it is the finance side of Schumpeter’s writings that demonstrates his break with Walras, especially in light of the history of economic dynamics and of monetary theory’ (Arena and Festré 1996, p. 117). Banks are capable of creating money independently from certain, custom deposits. In consequence they do not merely exchange (understood as bilateral bank relations) money anymore, they expand or restrict it depending on its demand. Here we may also find the most crucial link between the real and the monetary sector of the economy. Money is not a mere commodity, only in the eyes of a theoretical metallist, as Schumpeter (1954) notes. The evolution of money also implies the evolution of the most dominant modern economic institutions. Hanappi (2009, p. 4) explains that money as credit becomes a process, because its value is continuously judged along different social and cultural environments. Credit is about the trustworthiness of an economic system; with the rise of banks this trustworthiness was institutionalized during the Middle Ages. Money changed dramatically, from a commodity-based, feudal, metallist structure to a financial social contract. Within this specific development lies a very deep evolutionary process of economic institutionalization, indicating that property and wealth were completely redefined. Though the banks’ essential socioeconomic task has not changed over hundreds of years, they still evolve tremendously, regarding the ever-increasing diversity of products and banking methods. Credit is the most essential feature for investments in future projects. Companies, private as well as public households have to rely on creditability. Every economic step means a certain trade of trust versus money. Various but still similar manifestations of banks, money and credit have evolved in economic history (compare Ferguson 2009 and Hanappi 2009). Therefore banking underlies an evolutionary speciation process, where different lineages of credit rules have evolved in history. These lineages emerged in certain periods of economic evolution: the introduction of banknotes, the innovation of credit, the establishment of central banks, but also the rather new development of micro-credits in and macro-credits for developing countries. Otherwise post-Keynesianism suggests that money supply is endogenously determined by its demand for bank credits by other banks, firms and private households. Fontana (2003) explains that there are basically two major approaches to the theory of endogenous money, the accommodationist and the

286

Policy realms

structuralist approach. Credit-money refers to the flow of money and balance sheets refer to the stock of money. The starting point of the analysis within the accommodationist approach is that supply for credit-money is infinitely elastic. Accommodationists argue principally in the tradition of Keynes, Kaldor and Robinson, as Fontana (2003) elaborates. Money is explained via the demand of entrepreneurs or investors. This notion is coined through Keynes’ position, that money plays a part of its own. Then money needs to be considered as a social relation of credit, where accommodationists argue along the idea of a social convention. In consequence it expresses the value of a contract, rather than the value of a commodity, which in fact seizes a fundamental economic difference. Fontana (2003, p. 296) argues that the accommodationist approach to endogenous money considers the real economic production of commodities as a time intense process, where money supply needs to be explained by a sequential analysis of the production process. ‘The supply of bank credit originates in the firms’ need to finance production costs’ (Fontana 2003, p. 296). Conclusively banks are considered as institutions in the business of selling credit, hence they are price-makers in terms of interest and quantity-takers in terms of the amount of credit-money which is demanded by firms. Thereby banks accommodate the demand for additional funds, whereas the central bank accommodates the demand for reserves of banks. Post-Keynesian structuralists criticize the accommodationist approach regarding its assumption on an infinite elasticity of credit supply, primarily. Further distinctions deal on the one hand with the liquidity preference of central banks, banks, firms and households and on the other hand with the role of private households in credit relations. Advocates of the structuralist approach argue that the behaviour of private households on capital markets has changed fundamentally in the last decades. Today money supply also depends on the demand for bank credits by households. The overall money supply is then influenced by a three pillar system in an endogenous way: liquidity preference of all participating parties; household demand for credit; and firm demand for credit. One of the central claims relates to the archaic relationship between lenders and borrowers, which depends foremost on preferred liquidity. In this picture households gain equal importance within the monetary circuit. Of course there are several interpretations of the monetary circuit in French, Italian or Canadian tradition. A common strategy of post-Keynesian theory and modelling concerns the concept of stock-flow consistency, as outlined in Godley and Lavoie (2012, p. 21): This sounds very much like Minskyan economics, and indeed it is, as Roe explicitly refers to the work of Minsky on financial fragility, showing that a stock-flow consistent framework is certainly an ideal method to analyse the merits and the possible consequences of Minsky’s financial fragility hypothesis. However monetary circuit theory was not only considered by Keynesians, as we already have shown the Schumpeterian system of thought follows the same

Evolution of credit-rules 287 outline. Bertocco (2007) as well as Knell (2012) shows how one can connect Schumpeterian and Keynesian economics, best shown in the work of Minsky (2008 [1986], 1992). Of course this aspect deals with the influence of the Austrian as well as the German historical school on Schumpeter’s vision of economics. Elsewhere Steele (2001) discusses the main differences between Hayekian and Keynesian economics with an emphasis on their theory of money (compare Chapter 7). We can also argue that the circuitist approach is something which brings them together, of course the conclusions and implications with regards to economic policy are perfectly diametric. The Quantity Theory of Money represents an economic doctrine which is rejected by economists with an institutional focus. This emphasis brings heterodox economists from several schools together and may also function for potential synthesis in generic institutionalism. It is interesting to note that proponents of the Quantity Theory of Money still emphasize the top-down modelling approach, whereas proponents of the Cambridge school of an endogenous theory of money in more general focus bottom-up modelling approaches, even post-Keynesians emphasize change in such a direction.

Modelling approaches in monetary economics with respect to the credit channel The history of economic thought perspective has shown that monetary economics is a highly contested terrain, including a variety of heuristic projections on the banking-macro nexus. But it has also shown that the bank and, moreover, the institutional nature of credit-money need to move into the centre of economic analysis. Both aspects are addressed within current top-down and bottom-up approaches, from different angles with different implications, where the former follows the top-down approach, the latter addresses already early bottom-up foundations of the banking-macro nexus. Top-down approaches evolved from the Quantity Theory of Money Central banks are in the focus of economic attention as agenda setters today. They increasingly fulfil and represent powerful roles within global political economy. The economic power of nation states has decreased in recent decades, since financial complexity has grown to immense extents. In consequence financial intermediation needs to be investigated more extensively, since in times of non-growth or recovery the interconnectedness between systemic institutions is crucial for real economic activity. The impact of monetary policy on the economy is investigated along the monetary policy transmission mechanism. Central banks argue that the policy rate manifests itself in wages, prices and output along four major transmission channels (compare Mishkin 1996): the interest rate channel; the credit channel; the exchange rate channel; and the wealth channel. In general the interest rate channel represents the quantity theory of money in its purest sense, because cost-of-capital is influenced by the central

288

Policy realms

bank’s leverage on short-term interest rates. Nowadays it is well known that arguments relying just on this perspective may not be satisfactory for the greater picture, as also admitted by Bernanke and Gertler (1995). The credit channel works through the external finance premium representing the difference between firms’ internal and external costs for capital, consequential for investment operations. This channel also involves the goods and the labour markets, since households and firms have to rely on the provision of credits. Wage and price formation follow therefore a more complex evolution, because more stakeholders are involved in general. The exchange rate channel is dependent on currency fluctuations and respectively on the degree of openness of the economy. The wealth channel is related to movements within the stock market and its asset price fluctuations. Bernanke and Gertler (1995, pp. 28–29) conceive the credit channel as an enhancement mechanism of standard monetary transmission and identify two components of it: the balance sheet channel and the bank lending channel, where the latter accounts that ‘monetary policy affects bank loan supply, which in turn affects aggregate economic activity’ as considered by Diamond and Rajan (2006, p. 31). In this section we basically concentrate on the bank lending channel. However, in the neoclassical picture it is not quite well articulated how the game between central banks and commercial banks is played, referring again to Minsky (2008 [1986]). It seems that banks are not considered as a source for crisis or instability, furthermore there is not much talking about the origins of crisis in this literature, but rather more on the consequences as well as the potential fighting of it via monetary policy. The central bank acts as a hero in this outline. In times of a crisis this game becomes crucial, because less liquid financial institutions will have trouble refinancing. Diamond and Rajan (2006) make specific adjustments to the bank lending channel, by arguing that banks may find different forms of financing once reserve requirements are eliminated. Nevertheless there is evidence that monetary policy affects particularly the liquidity of banks with worse balance sheets and foremost small banks with initial low liquidity. Obviously these effects are seriously affecting overall bank liquidity and consequently real economic activity in times of crisis or even recession. Diamond and Rajan focus on demand deposits as a crucial factor, with emphasis on capital flights or even bank runs in times of crisis insofar as money and money-to-hold represent a complex and critical phenomenon with far-reaching consequences, as also Kiyotaki and Moore (2012) argue. Monetary economics and corresponding DSGE (Dynamic Stochastic General Equilibrium) models work mostly with frictionless markets (compare Christiano et al. 2005 or Smets and Wouters 2007). By focusing on the transmission mechanism of conventional monetary policy, they are unable to capture financial market disruptions. For that reason, recent studies tried to conduct a theory and implement models with financial frictions in order to discuss the reaction of unconventional monetary policy, i.e. credit policy. Gertler and Kiyotaki (2010, p. 566) identify three different credit policy options, also operated by the Federal Reserve Bank during the crisis: (1) discount window lending to banks secured

Evolution of credit-rules 289 by private credit, i.e. liquidity facilities, (2) lend directly in relatively high grade credit markets, i.e. lending facilities, (3) direct assistance to large financial institutions (TARP), i.e. equity injections. In such a perspective frictions need to be addressed seriously, as also indicated by Gertler and Karadi (2011). The authors stress the problem, that any deterioration in the balance sheets of financial intermediaries disrupts the flow of funds between lenders and borrowers. This process leads to a symptomatic rise in various credit spreads as well as a significant tightening of lending standards, as described by Gertler and Karadi (2011, p. 20). Therefore a tightening raises the costs for borrowing and enhances the downturn on the real side of the economy, which reduces asset values throughout. Consequentially an expansion of central bank credit might offset a disruption of private financial intermediation, as articulated by the contributions of Bernanke et al. (1999) with a focus on the financial accelerator, or Christiano et al. (2010) with a focus on risk shocks. However, these contributions, even if they are established currently at the hard core of modern monetary macroeconomics, do not spend much time on the rather ‘new’ endogeneity of risk, which reflects the ultimate reason for a more macroprudential regulation policy. Brunnermeier and Sannikov (2012) explain that securitization and derivative contracts might lead to a better sharing or hedging of exogenous risk, though these vehicles also increase endogenous systemic risk, which can be addressed as one source for the subprime crisis, insofar as the authors build on recent research on the agency and information sharing problem between financial intermediaries (compare Brunnermeier and Sannikov 2011; Gorton 2009). The main conclusions of Brunnermeier and Sannikov (2012) can be summarized to: (1) the system reaction to shocks is highly nonlinear, (2) in a ‘normal regime’ only unusually large shocks are much more amplified, in a ‘crisis regime’ even small shocks get amplified – leading to significant endogenous risk, (3) system reaction to shocks is asymmetric and (4) increased volatility in the crisis regime affects the expert’s precautionary motive, also called volatility paradox. The argument casts more light on the reality central bankers increasingly need to face. Financial intermediation involves a tremendously complex process, especially the various aspects within the credit channel of monetary transmission. Furthermore if we concentrate more on the European situation, apparent solutions from US monetary economists are not easily treatable. For instance Eurozone countries, such as Greece, Italy, Portugal, Ireland and Spain face an even more difficult situation, since they are not able to issue riskless government debt as the US is capable of – the standard procedure by the FED as illustrated by most of the authors mentioned above. With regard to this issue, other political and institutional dimensions need to be highlighted as well. Moreover contagion effects are even more complex, when we are not able to speak of an Optimal Currency Area, as it is the case with the Eurozone, insofar as monetary unions face crucial problems if the real side of the economy is not structurally synchronized. Such premises also demand political and fiscal integration, as many experts argue (compare De Grauwe 2009). Otherwise the top-down approach in

290

Policy realms

theory and modelling of the most prominent new-Keynesian macroeconomists and US central bankers also faces significant limits, since modern DSGE systems are not capable of including the emergence of discrete events. Crisis is always conceived as an exogenous phenomenon, meaning also that DSGE systems are not prepared for the modern globalized economy. Cumulative causation and interdependency indicates the contemporary problems of our economy. Others such as Mittnik and Semmler (2012) emphasize the notion of regime change within the banking-macro nexus. Different regimes face different systemic vulnerabilities, triggered by a variety of endogenous shocks. We are confident that the occurrence of regime changes can be investigated efficiently via bottom-up approaches. Bottom-up approaches evolved from the Cambridge and Schumpeterian monetary system of thought Interbanking is the central issue of financial intermediation, nevertheless we still have not acquired much knowledge on the structure of interbank and firm–bank networks. Here the distribution of institutional power plays a significant role; consider the aspect of shadow banking in, for instance, Pozsarr et al. (2012). This notion – especially the aspect of interconnectedness, contagion and systemic risk – is more and more investigated via bottom-up approaches, for reasons we show in the following. DSGE systems do not feature evolutionary system characteristics such as adaptation/adoption, selection and retention, which shape the structuring processes of financial intermediation by the nature of the approach. The essence of population thinking as well as the developmental aspect of evolution (Callebaut and Rasskin-Gutman 2005) opens a variety of qualitative and quantitative aspects for an extensive research of this domain, such as institutional and organizational learning, niche construction and emergence. Hitherto top-down approaches worked along the general equilibrium framework, where representative agents resemble the average of economic actors within a homogenous population of financial and non-financial firms. Empirical investigations, such as Schweitzerr et al. (2009) and De Masi et al. (2011), show that the degree of heterogeneity and consequential complexity is much higher as assumed in DSGE systems. The theory of networks provides substantial support for such empirical observations of firm–bank and interbanking networks. Network theory as stream of the science of complexity has grown tremendously in recent decades. Nowadays, network scientists apply findings, especially from biological and social networks, in the economic domain, compare Barabási (2003) or Csermely (2009). The substantial advantage of network theory lies in the potential identification of weak links via clustering methods. Additionally network theory allows computing degree distributions of networks indicating weights for systemic interconnectedness. Financial orders evolve in a nested way within top-level and bottom-level networks. Those can be visualized with the tools of network theory, as scholars such as Schweitzerr et al. (2009) have already shown. The authors highlight the interconnection of financial institutions as nodes and the strongest

Evolution of credit-rules 291 existing relations among them as weighted and directed links. The saturation of links stands for the weight between two nodes, the thicker a link the more important it is. Schweitzerr et al. argue that the global banking sector is highly interdependent, which makes the structure highly vulnerable for breakdowns of important nodes and weak links, as we have seen with the insolvency of Lehman Brother in 2008. The global financial network inhabits a serious degree of systemic risk. Certainly spillovers to the real economic sector have far-reaching socioeconomic and political consequences during breakdowns of institutional networks of financial intermediaries – triggered by liquidity traps for instance. There is no doubt that studying the interconnectedness within banks, between banks and firms is highly promising to analyse the structural composition of the banking-macro nexus. Furthermore we may also highlight the process component of changes within this structure, the evolutionary component. De Masi et al. (2011) investigate debt–credit relations between Japanese firms and banks with a network theory approach. The authors have shown that the topology of the credit network is significant for its stability, fragility and vulnerability. They indicate crucial bank and firm nodes/links for the stabilization of the system on the whole. In the presence of autocatalytic processes, even a small amount of individual heterogeneity invalidates any description of the behavior of the system in terms of its ‘average’ element: the real world is controlled as much by the tails of distributions as by means or averages. We need to free ourselves from average thinking (De Masi et al. 2011, p. 210) This paper signalizes the importance of new statistical techniques engaged via network theory, but emphasizes also that self-organization, autocatalytic processes and selection pressures are highly non-linear phenomena which go beyond the analytical scope of standard methods. Obviously intellectual exchange and dialogue between different economic approaches needs to be intensified. Network theory, agent-based modelling and computational socioeconomic simulation play key roles in this theoretical discourse; compare Delli Gatti et al. (2009) for business fluctuations due to bankruptcy chains, Battiston et al. (2009) for systemic risk in evolving networks, Thurner (2011) on systemic risk and the leverage cycle, Cincotti et al. (2010) for an implemented simulator for the European banking-macro link, Stiglitz and Gallegati (2011) for a critique on the representative agent approach in monetary economics and a proposal for heterogeneous interacting agents, or more generally Delli Gatti et al. (2010) for a proposal towards an agent-based macroeconomics. Recently also postKeynesian economists turned successfully to agent-based modelling, as shown by Seppecher (2012) for instance. First highly interesting synthesizing attempts between Schumpeterian and Keynesian approaches are given by Dosi et al. (2010) for instance.

292

Policy realms

Apparently such new attempts need increasing attention within new models and simulations as well as in empirical research. However we outline that these attempts do not follow a common research methodology with regards to a common rule taxonomy of cognitive, behavioural, social and technical rules. This issue indicates a critical problem for further standardization in bottom-up models of the banking-macro nexus. Heterogeneity is often assumed and associated with a stochastic element, but there is not much time spent on the cognitive, motivational, social and technical origins of the modelled diversity of actions. Additionally the agents mostly move and decide as if they were particles, in particular they are not modelled with an information and communication structure as suggested in a generic institutionalism. This notion may be a side problem at the moment, but it remains essential to model the interactions in a sufficiently realistic way. Since agent-based modelling experiences its advantage from the implementation of locally bounded knowledge we argue for an exploitation and standardization of mentioned capacities of the approach. Furthermore we can be confident that proper bottom-up foundations lead to a more elaborate synthesis between the current heterodox approaches in the institutional realm. Agents learn only through interaction and communication processes; it is the aspect of social learning and bottom-up implementation of evolutionary economic programs which makes the approach unique and sustainable. In particular explanations are quite thin on the underlying mechanisms between individual and social learning. We argue that this aspect is essential for the analysis of the banking-macro nexus, since crisis is an institutional bottom-up evolving phenomenon. For that reason we build on the previously derived evolutionary synthesis of generic rules (compare Chapter 10) and articulate a first proxy for theoretical bottom-up foundations as an application of generic institutionalism in the monetary realm.

Evolutionary rule-based bottom-up foundations for the banking-macro nexus The history of economic thought was always shaped by grand theories in the humanities and natural sciences. First attempts at an appropriate theory of money were established in the early twentieth century, where economics also made its major turn towards a subjective marginal theory of value. Economic theory was constructed as a so-called hard science, building upon classical physics, especially on Newtonian mechanics. This legacy of classical mechanical thinking still dominates the theoretical grounds of the discipline and needs a significant turn towards a naturalistic generic ontology as articulated in Part I. If money is conceived just as a commodity we are able to apply the general equilibrium framework for money markets and consider a marginal theory of its value. This point clarifies the Quantity Theory of Money, that there is a specific amount of money supply which brings the economy back into equilibrium via a trickle-down process initiated by the central bank. Modern monetary economics and DSGE simulations are constructed with this classical-mechanic top-down logic. The central problem of top-down approaches concerns its closed system

Evolution of credit-rules 293 perspective. However, economies are interconnected and open to other subsystems of society and culture. The openness of the economy is shaped by the evolution of institutions and communication structures. Modern crises diffuse endogenously like a virus on a network and the interconnectedness of the economy drives the velocity of the diffusion process. These characteristics make traditional monetary policy (controlling money supply via interest rate targeting) a highly speculative game from a classical-mechanic and mere top-down perspective. However, early evolutionary economists such as Veblen, Hayek and Schumpeter have recognized that economists may learn a lot by looking into the theory of evolution. The Schumpeterian and Cambridge approach to the theory of money invites evolutionary ideas concerning especially the institutional dimension of credit-driven endogenous economic change. Then the focus switches to social learning, diffusion and transmission of values within the banking-macro nexus. Uncertainty and innovation drive this self-transformation process from the bottom up – thereby trust and power gain more importance for economic operations and foremost for economic policies. The notion of credit inhibits investment and consumption opportunities for economic actors, which make the system disequilibriating and vulnerable to critical mass processes. For that reason evolutionary bottom-up logic serves as a theoretical basin to investigate interconnectedness, contagion and systemic risk in firm–bank networks for instance. Monetary policy is then perceived as a cumulative feedback process, where money demand and supply trickle around. The credit channel represents not only an underestimated complex of economic evolution, but foremost a less investigated object of economic inquiry. In fact economists do not know much about the complex evolution of credit-money. Integrating attempts in the theory of money along an institutional approach are already given, for instance, by Steele (2001) between Keynesian and Hayekian concepts or by Minsky (2008 [1986], 1992) and Bertocco (2007) between Keynesian and Schumpeterian concepts. We follow Steele (2001) and argue that heterodox perspectives, which seem to be diametric, are closer together than expected at first glance. Synthesis of a plurality of economic schools of thought provides new insights for bottom-up foundations in economic theory in general and especially for the theory of money, credit and banking. Monetary rules are usually associated with the central bank’s authority controlling the mechanics of credit expansion and contraction. The central bank’s major goal is to guarantee price and financial market stability thereafter. Today most central banks follow pre-determined Taylor rules, for instance, instead of discretionary policy to sustain their goals. We may refer to these rules as technical rules. Within this section we want to point out, first, that technical rules are part of a greater ensemble within the channels of monetary policy transmission and, second, we identify dependencies with other types of monetary rules and integrate them in a generic rule taxonomy for credit evolution, building upon Dopfer and Potts (2008) as discussed in Chapter 10. The credit channel of the monetary transmission mechanism can be conceived as a black box within

294

Policy realms

current modelling approaches. We argue that this notion needs to be treated with more significance, since monetary stability relies on the complex flow of creditmoney and its institutionalization processes in credit regimes. A unified rulebased approach within the realm of evolutionary institutional economics builds the bottom-line of this proposed endeavour and may give new fruitful perspectives for future research in monetary economics. Such an approach to the theory of credit-money works with a heterogeneous set of agents, equipped with different cognitive and behavioural rules. Agents learn to adapt modes of borrowing and lending by imitating successful strategies via social learning, according to credit-related criteria of relative fitness (financial needs) and group selection/community detection (alternative financing) (compare first attempts to the latter in Bargigli and Gallegati 2012). This approach is significantly different from the standard DSGE framework. We want to emphasize that systemic properties such as irreversibility, heterogeneity, path dependence, diversity and emerging complexity have to be taken into account in future models of the banking-macro nexus. For the realm of credit-money, we are concerned with specific monetary rule populations critical to path-dependent processes on the macro level, i.e. the investigation of the banking-macro nexus. From a theoretical perspective a monetary meso unit consists of a credit-rule population. The variety within the population of credit-carriers is given by first order generic rules. We suggest a prototype set of generic credit rules in accordance to qualitative empirical studies of bank lending. Hence focus is given to the banking sector as a population of financial intermediary rule carriers. However this first experimental endeavour may easily serve as a schema for interconnections in credit-rule populations. In order to analyse the composition of a creditrule population we use findings from the publicly available Bank Lending Survey (BLS) operationalized by the European Central Bank (ECB). The questionnaire gathers periodically qualitative data on the setting of lending standards and the demand for loans by households and enterprises. The BLS indicates the important role of the credit channel as an impact stream for monetary policy. Otherwise the BLS also shows that the credit channel delivers new insights into the complex multilateral relations of lending, borrowing and monetary policy. The BLS was launched 2003 by the ECB. It encompasses a questionnaire on bank loan supply and demand within the euro area. About 90 to 110 banks respond on the survey each quarter, according to de Bondt et al. (2010). The BLS is a qualitative survey and documents backward and forward looking (three months in both cases) of changes and expectations in a bank’s standard setting for credit as well as in the demand for loans. The questions exhibit five possible choices for the setting of a credit standard: (1) tightened considerably, (2) tightened somewhat, (3) remained basically unchanged, (4) eased somewhat and (5) eased considerably. Banking still represents a black box to economists today, insofar as the BLS may serve as a template for modelling and crafting synthetic narratives of credit rules. The BLS indicates a variety of potential credit reactions, which the banks are anticipating. Again from a generic perspective, we are able to investigate the

Evolution of credit-rules 295 significance and correlation of different signalling systems for credit operations between banks and their customers, and among them. Thus the BLS can be regarded as a proxy transcript for individual and social learning mechanisms of credit rules. However, the BLS deals with qualitative and, foremost, anonymous data, which means in particular that the sources do not have any incentive to deliver accurate and reliable responses, which serves as the major critique from monetary economists. General concerns and theoretical foundations of the BLS are provided by Berg et al. (2005). The authors elaborate on the empirical nexus between monetary transmission, credit and business cycles, highlighting the interconnectedness within monetary transmission. Lending cycles occur due to different activations and rhythms of credit-rule domains. Berg et al. argue that these cycles serve as proxies for business cycles. Therefore the investigation of credit rules casts more light on the versatile structure of credit expansion and contraction in the balance sheets of banks, households, SMEs and large enterprises. Furthermore the authors also highlight the potential gains from this subjective study of credit standards. ECB studies such as Berg et al. (2005), Maddaloni and Peydró (2010) or de Bondt et al. (2010) serve as first reference points for such an empirical endeavour. The BLS concentrates especially on demand and supply of bank loans for enterprises and households. De Bondt et al. (2010, p. 8) further argue that ‘cycles in bank lending standards are important in explaining aggregate economic activity.’ In particular the authors conclude that expected net tightening of credit standards leads loan growth to enterprises by four quarters and to households by one quarter on average. These and other significant systemic characteristics on the credit system can be further reevaluated and incorporated into a bank-lending rule taxonomy. The rule taxonomy provides a systemic prototype for agent-based macroeconomic models of the banking-macro nexus. Credit demand and supply raises a complex network of rule-makers and rule-users (Dopfer 2004) in a non-exclusive way. The significant message for modelling purposes is to leave sequentially the realm of technical rules in order to bring in cognitive, behavioural and social aspects for monetary analysis. Concerning the taxonomy of Dopfer and Potts (2008), elaborated in Chapter 10, the BLS looks generally into the domain of cognitive, behavioural and social rules, which cover the organization of the credit market as well as the diffusion of financial norms and competitive pressures.

Table 17.1 A prototype taxonomy for bank-lending rules Cognitive

Behavioural

Social

• costs related to bank’s • expectations regarding • bank’s ability to access capital position general economic activity market financing • risk on collateral demanded • industry or firm-specific • competition from other outlook • bank’s margin on loans banks, non-banks and market financing • non-interest rate charges • size of the loan or credit

296

Policy realms

De Bondt et al. (2010, p. 20) oppose the versatile factors of the BLS for changes of a credit standard for rule-makers and rule-users, within the credit categories of corporate lending (group 1); SME, short- and long-term rates (group 2); loans for house purchase, consumer credit and other loans to households (group 3). For credit supply, the BLS shows that group 1 is primarily affected by cost of funds and balance sheet constraints; group 2 by competitive pressures and risk perception; and group 3 by all three of them. For credit demand, group 1 is affected by financing needs and group 2 is affected by alternative sources of finance and group 3 by all two of them. Maddaloni and Peydró (2010) look into the empirical relation between central bank policies (final sets of technical rules) on credit-setting from the BLS perspective, especially into the different effects of lending for short-term and long-term rates. Thus we sketch a first proxy for a monetary rule taxonomy for factors of bank-lending rules operating on the tightening and easing of credit standards in Table 17.1. Furthermore we are able to develop a first rule taxonomy for demand-for-loan rules with respect to the questionnaire of the BLS, given in Table 17.2. With the help of the rule-based approach we can recognize that the realm of behavioural rules (especially the trending of agents) is unfortunately not covered within questions for the demand for loans in the BLS. However those rule taxonomies, as articulated in Tables 17.1 and 17.2, may serve as basic heuristics for the bottomup dynamics in artificial credit market modules of agent-based macroeconomic models, such as discussed previously. For the actual implementation of credit rules in computational models we may refer to a similar terminology for an agent’s algorithms as given in the following: If [industry or firm-specific outlook] then [eased somewhat] over the past three months (1st order behavioural subject credit standard rule) If [debt restructuring] then [expect increase considerably] in the next three months (1st order cognitive subject demand loan rule) If [loans from other banks] then [expect decrease somewhat] in the next three months (1st order social object demand loan rule)

Table 17.2 A prototype taxonomy for demand-for-loan rules Cognitive

Social

• fixed investment; inventories and working capital; debt restructuring; • internal financing; issuance of debt securities or equity

• merger/acquisitions and corporate restructuring; • loans from other banks or non-banks

Evolution of credit-rules 297 Moreover a deeper analysis of the BLS, which is not given in this more general context, allows for the identification of proper rule trajectories for bank lending and demand-for-loans referring to individual as well as social learning mechanisms for empirical calibration in actual agent-based models. The different rule factors are operant for either rule-makers or rule-users and operant on the credit rules from tightening to easing of credit from the BLS spectrum; i.e. money contraction and expansion. Tightening and expanding credit is then considered in subject rules of bounded rationality (Simon 1991) and nested cognition (Kawamura 2009), consider also Noteboom (2009) for the cognitive aspects of the investment decision of the firm. These organizational aspects of bank lending highlight the ontological category of a rule from a computational perspective then, whereas the specific structure of the bank’s network (Schweitzer et al. 2009; De Masi et al. 2011) covers the social object dimension with regards to the evolving environment of credit rules. Identifying factors and rules which are operant on several levels of perception is suggested; for instance, risk perception will have interdependent relations in the realm of cognitive rules as well as in the realm of social rules, since risk is a matter of individual assessment, social and cultural transmission. Furthermore computational bottom-up simulation provides tools to develop algorithms to integrate downward and upward causation in particular between behavioural and social credit rules. A proper evolutionary theory of credit rules looks into the co-evolution of these rule-sets. Such an empirical investigation may guide the future architecture for a new family of evolutionary monetary economic models. A credit-focused rule-based approach is conceived as a proper methodological standardization for bottom-up foundations within further models of the banking-macro nexus. Specific methods, techniques and workarounds for models, simulations and estimations are discussed extensively in economic theory. However novel conceptions, ideas or schemata are often left out of the discussion. This notion represents the major focus of this chapter as a second application of generic institutionalism in policy realms. It provides thereby a common thread for thinking about monetary economics from a bottom-up and therefore evolutionary perspective. Top-down and bottom-up approaches in economic modelling have distinct agendas, which go beyond the mere technical aspects. Their agendas are related to specific heuristics of how the economy is working and how we should conduct monetary policy, insofar as they are primarily related to certain trends in the history of economic thought, broadly the ‘Quantity Theory of Money’ or the ‘Cambridge Approach’. It is either the focus on money supply and the price level or the focus on money demand and motives or propensities of economic agents. Obviously a credit-centred rule-based approach suggests further integration of the Schumpeterian aspect of credit-driven innovation with the post-Keynesian framework, as developed by Godley and Lavoie (2012) for instance. Schumpeter never published a concise theory of money and finance comparable to the Keynesian approach. Minsky – as a graduate student of Schumpeter – took the opportunity to bring these grand scholars closer together along the businesscycle aspects of investment and credit in the Keynesian General Theory and the

298

Policy realms

Schumpeterian Theory of Economic Developmentt (compare Knell 2012). We may consider Minsky’s (1992) Financial Instability Hypothesis as the first announcement to study the systemic problems within the banking-macro nexus within such frames, representing a core issue for future enhancements in monetary economics. However Minsky’s legacy remains still in the realm of classical mechanics, although he emphasized vehemently the inherent disequilibriating forces of the capitalist economy in a Schumpeterian tradition. As elaborated in this chapter, the standard neoclassical methods of analysis – with their origin in classical mechanics – are not sufficient to grasp the versatile properties of endogenous change in complex economic systems. In contrast the evolutionary institutional approach hints exactly at this aspect. Today we are not obliged to discuss the potential of computational methods (Chapter 12) using evolutionary methods in an appropriate bottom-up way for economic analysis. In particular, formal computational methods can synthesize insights from the technical and instrumental knowledge of monetary transmission – object rules – with heterogeneity and diversity in cognition and behaviour. They are able to capture the diffusion of rules along social learning in credit relations – focusing on the feedbacks between subject and object rules. These notions highlight the characteristics of proper bottom-up foundations, insofar as the category of a ‘rule’ enables also an appropriate scientific medium in order to craft more realistic models of monetary transmission. Again we may refer to Herbert Simon when discussing how rules and heuristics serve as an empirical category for novel microfoundations (Simon 1997). In this respect there is no doubt that the evolutionary institutional economic agenda – with its emphasis on synthesizing empirical studies and formal modelling may contribute substantially to the realm of monetary economics.

18 Democracy in practice

This last chapter focuses on the practical anchor of generic institutionalism, finally. In order to define democracy or to identify proxies for its definition we consider it preliminary as an evolving web of political economic institutions, capable of actual people-driven governance. Democratic governance has a long and very rich history and its institutions evolved in manifold ways. Its cultural memory goes back to ancient Athens with first democracies in Greek city-states ( (poleis ) with 2000–4000 people on average. Today the Republic of India is the world’s most populous democracy with over 1.2 billion people. Still the basic idea of democracy has not changed from a formal perspective over 2000 years; nonetheless the concept of an institution changed a lot over this period of time. Nowadays democratic institutions are also influenced and partly governed by informal institutional rule systems, adding complexity day by day. For this reason a brief outline of the evolution of democratic institutions and models of democracy is given in the first section of this chapter with regard to Held (1996). However we are able to witness that political theory and democracy as such has changed tremendously under the dominance of a free-market philosophy. One of the first economists who realized these circumstances and dared to write explicitly on this issue was J.A. Schumpeter. In his famous book Capitalism, Socialism and Democracy he pointed out that democracy has evolved to a ‘political method’ (Schumpeter 2005 [1942]). The rules of the game have changed, politicians trade with votes like brokers with oil. Furthermore the notion of ideal democracy, influenced by the concept of equilibrium and developed within a closed-system approach is criticized. The line of argumentation focuses on a discussion of Amartya Sen’s recent exploration on the The Idea of Justice (2010). He distinguishes fundamentally between two streams of institutional thought: transcendentall and comparative institutionalism. It is argued that such a differentiation within political philosophy/economy is crucial to the idea of democracy and its consequential institutional development for the future. The former kind of institutionalism invites a static equilibrium concept of democracy – ideal democracy. In contrast we elaborate on an evolutionary institutional economic picture, emphasizing the vital and vivid character of a democracy in practice.

300

Policy realms

A brief history of democratic models The following section sketches a brief history of democratic thought and models of democracy, discusses their institutional focus and their place in history. Classical variants of democracy share a common idea about the process dynamics of democratic governance, the political exchange in public in order to extract a general will. One of the major turning points in democratic evolution – and so the argument – happened with the rise of modern branches of democracy. They have emerged basically with a new understanding of democracy in the twentieth century. Scholars such as Max Weber and J.A. Schumpeter provided a more competitive, but also more realistic view of democracy in comparison to the notion of ideal democracy encapsulated in classical models. Obviously Marxism played a crucial role within this turn – the option of a direct democracy appeared. It was the analysis of class conflicts between owners of capital and the working class which made economic or capitalist facts public. Those were facts like the principal–agent relationship and its political consequences, if such asymmetries also shape governance. The political power of capitalists and the bourgeoisie has decreased in consequence and democratic competition between parties has grown, slowly but with recognition. Additionally and with more effect the interpretation of mechanisms of democratic institutions has changed dramatically. Schumpeter (2005 [1942]) pointed out that democracy as such does not represent the public will, but the public will is the product of the political method called democracy. Therefore the institutional understanding of democracy has changed towards a battle for votes between different interest groups. Otherwise, some decades before, Max Weber (2005 [1871]) emphasized that the vast social and economic diversities in society will not get solved if the capitalists steer the socalled public will. Following Held (1996, p. 12) we are able to differentiate between classic and modern branches of democracy, as visualized in Figure 18.1. Classic models consider the people as a single entity with one common preference, emphasizing a specific societal umbrella, insofar as focus was given to issues of protection, law and the very idea of a state. Classic democracy has its origin in ancient Athens, explained at its best in writings of Aristotle (384–322 BC) or Plato (437–347 BC). The polis represented the origin of democratic thought, whereas the agora was a public place within the polis where democracy came to practice. Not all citizens could participate in the democratic process, indicating that its institutional framework was in its infancy. In the following we refer to the institutional framework of Kleistenes, who formalized a constitution of Athens in 507 BC (compare Held 1996, p. 22). Only adult men over the age of 20 were allowed to be part of the citizenry, representing the so-called assembly of the demos. Then a council of 500 sovereign men was chosen by the ten tribes of Athens. The higher institutional body was a committee of 50 council members, made up by rotation. Athens was also represented by a president of the committee, who held office only for one day. The city-state was characterized along a highly exclusive society.

Democracy in practice 301 The classical polis was marked by unity, solidarity, participation and a highly restricted citizenship. The state reached deeply into the lives of its citizens, but embraced only a small proportion of the population. . . . Ancient democracy was a democracy of the patriarchs; (Held 1996, p. 23) However it was understood as a collective challenge, where an individual was seen as citizen primarily. It shows also that ancient democracy was not considered particularly as a liberal system, rather as a democracy in its purest meaning. This was probably the greatest institutional innovation besides the notion of equality of rights, since public life received greater value than private. Aristotle’s writings in The Politics indicate the radical novelty of democracy in its institutional features, i.e. deciding collectively by vote on all public affairs within the assembly: ‘The assembly met over forty times a year and had a quorum of 6000 people’ (Held 1996, p. 21). Critical concerns regarding this model were especially addressed by Plato, who was in favour of a small class of experts governing the city-state. In The Republic he asserts that equality between men represents the fundamental institutional criterion for a democracy, but the only possible ruling class needs to be represented by a bureaucratic centre. This centre should be driven by the expertise of philosophers, for Plato the guardians of society. However it is clear that ancient Athens broke down, because it lacked such bureaucratic efficiency. The economy as well as the military was loosely organized and failed due to an early attempt of direct political self-organization. In principle the Athenian model characterizes a generic institutional rule-set sustaining self-governing order. Otherwise from an agency perspective we may

Republicanism (two chief variants)

Developmental republicanism

Protective republicanism

Direct democracy

Liberal (representative) democracy (two chief variants) Protective democracy

Developmental democracy

Competitive elitist democracy

Twentieth-century models

Classic models

Classical democracy

Pluralism

Legal democracy

Theoretical variants Patterns of influence

Figure 18.1 A variety of democratic models (source: Held 1996, p. 5).

Participatory democracy

302

Policy realms

ascribe the birth of Homo politicus to this era. We need to move forward more than 1000 years in history to identify major novelties in the institutional evolution of democracy. The next fundamental milestone among democratic variants has appeared with the idea of republicanism in the era of Italian renaissance. Political entities like city-republics developed especially in medieval northern Italy, inspired by the republican thought of Marsilius of Padua (1275–1342) and Niccolo Machiavelli (1469–1527) among many others. Homo politicus needed to wait a long time for her comeback. During the Renaissance absolutist autocracies in continental Europe slowly began to fall apart. The strong bond between aristocracy and Christian clerics seemed to get disturbed. With regard to Held (1996, p. 45) we can identify two major streams of republicanism that we discuss briefly: developmental and protective republicanism. The former follows the institutional strand of direct democracy in the Greek polis, whereas the latter is closer to the political system of ancient Rome. As Held (1996, p. 45) notes there is obviously a great stream of cross-fertilization between these two conceptualizations, but the developmental strand focuses more on the ‘intrinsic value of political participation for the enhancement of decision-making and the development of the citizenry’ and the protective institutional frame emphasizes to a greater extent the ‘instrumental value of political participation for the protection of citizen’s objectives and interests’. Marsilius of Padua can be associated with the former institutional outline, where political participation becomes a means of self-fulfilment, a condition for the development of civic life. Instead Machiavelli tinkered generally with the notion of system vulnerability with regard to corruption of a particular leading group. Obviously these concerns deal with the dominance of aristocrats and the consequential mistrust towards any ruler or group of rulers. A crucial point within the developmental stream of thought, argued by Marsilius of Padua, introduces the idea that government is unending, that it needs continuous development by the involvement of all citizens. Then government may succeed if it operates for the common benefit with a unitary concept of coercive power, still acknowledging that conflicts are inevitable. Otherwise Machiavelli elaborated more on the conditions of independence, self-rule and glorious endeavour as outcomes of civic involvement. In short, he looked to a protective balance of power between the citizenry and the state (compare Held 1996, pp. 50–51). Regime transitions occur if power is unequally distributed and if a specific stand is not protected anymore from the state. Hence, Machiavelli emphasized in The Discourses that cycles of regime changes are inevitable, since political balances will not hold in the long run, marking the origin of his famous statement: ‘And from this there was, stage by stage, a return to anarchy, by way of transitions. . . . This, then, is the cycle though all commonwealths pass, whether they govern themselves or are governed.’ (The Discourses, in Held 1996, p. 51). This disastrous conclusion is pretty similar to Plato’s critique, discussed above, that monarchy tends to decay into tyranny, aristocracy into oligarchy and democracy into anarchy, turning back to monarchy again. In Machiavelli’s terms tyranny remains a necessity to sustain liberty, therefore the protective concept of republicanism needs to install a powerful leader capable of

Democracy in practice 303 creating and defending the law (compare Held 1996, p. 54). This institutional picture of democracy – realized as well in rather small Italian city communities – conceives a mixed constitution and government, where aristocracy, monarchy and citizen participation are all involved. In eighteenth-century France, Jean-Jacques Rousseau (1712–1778) articulated a new perspective on republicanism, nevertheless still standing between ancient and modern thought. The epoch was dominated by rivalries between absolutists and progressive forces. In summary, Rousseau tried to revive the idea of assembly politics by the installation of public forums for democratic dialogue within the communities, which were the place of political life in Rousseau’s time. However, the slow rise in complexity of economic operations and interactions over Europe forced democrats to think in bigger spheres, which somehow scrutinized the concept of mere city-democracy. In order to make a democracy work on a national level, the vision of democracy needed to change as well. Rousseau’s vision of democracy was bounded to communities, nevertheless he was one of the first who expressed the striving for social justice within the whole nation. For that reason he referred to the state of nature as an emerging social contract. It is the era of the social contractt that made democracy a macro issue, finally. In the state of nature all humans were equalm but a variety of new institutions needed to develop to overcome the problems emerging from property and possession as well as natural disasters and common miseries, as elaborated by Held (1996, p. 57), therefore ‘people joined together to create through a “social contract” – a new basis of understanding and agreement, “perhaps never formally stated . . . everywhere tacitly admitted and recognized” ’. Rousseau made clear in The Social Contract that the public administration was thus formed and articulated as the republic or the body politic instead of the previously emphasized category of a city. Rousseau’s liberal republicanism was truly a radical outline in this respect. From a theoretical point of view the conception of ideal democracy appeared here, where society and democracy were articulated by an integration of government and the people. Hence the state was not separated from the citizens anymore, they were connected along the so-called general will. The general will is considered as the ‘publicly generated conception of the common good’ (Held 1996, p. 59), which the citizens create and are also bound to its direction. Therefore Rousseau also needed to consider that the general will might not be shared by all citizens and a majority rule needed to be implemented in order to reach decisions. In his writings on Emile, (compare Held 1996, p. 61), he claimed the role of education within a democratic institutional corpus. Education asserts democracy the necessity of critical thinking and recognition of other opinions, i.e. a focus on discursive elements. Furthermore Rousseau has addressed the need for a separation of power within the state in tradition of Montesquieu, who died 20 years prior to Rousseau. So legislative tasks should be operated by the people and the government should execute the people’s laws, similar to Machiavelli’s formulation in The Prince. Rousseau’s republican notion of the social contract was not the only blueprint for a contractarian system of thought in political theory and economics. Nowadays we refer broadly to

304

Policy realms

contractarian theory as the search for an ideal or supreme contract or distribution among equal citizens or agents. Apparently contractarian thought was also articulated in the United Kingdom, 100 years before Rousseau. Thomas Hobbes (1588–1679) and John Locke (1632–1704) emphasized contractarian political philosophy within the notion of liberal democracy. Even in the context of liberal democracy we may distinguish between a protective and an adaptive model (compare Held 1996, p. 70). As within republicanism, the former conception highlights the need for institutions in order to protect the citizens’ liberty. Whereas the latter concentrates on institutional development for political participation as the central mechanism of democracy. In Leviathan (1651) Hobbes focuses on power and sovereignty within the state, power establishes protection for the self-interested individual. Hobbes also articulates the idea of a state of nature upon which natural law and a natural allocation of power evolves. We need to admit that this metaphor implies the existence of an institution-less social space, i.e. a space without politics. Within the natural competition of laws an order emerges which Hobbes denotes as a liberal order. This emerging social contract reflects a supreme order of ideal democracy in particular. Locke argues basically along the same schema, but he elaborates more on the role of the state within the natural order and on the role of critical rationality. If the people follow the notion of rational expectations and the state guarantees a protection in before the law, they will achieve liberty. In consequence the parliament represents the legislative institution of law creation and the state – at that period it was the monarch – and executes them, following a constitutional monarchy with some parliamentary elements. Finally Jeremy Bentham (1748–1832) and James Mill (1773–1836) elaborated on utilitarian philosophy and brought it to political economy. Bentham’s and Mill’s influence on the social and economic sciences was tremendous. We may carefully argue that it was the utilitarian system of thought which separated economics from political theory or which made political science to an economic discipline and not the other way around; as was originally the case in classical political economy. It was the first conception of democracy where the argument of optimization comes into play. For Bentham and Mill the contractarian notions of former democratic thinkers were just fictions. The aim was clear in defining the real mechanisms of political decision making. Nevertheless democracy also developed to a good extent along utilitarian thinking, since the stringent focus on anonymous voting was not elaborated before. The arguments goes that only a system of anonymous voting can guarantee free political competition. Now elections have gained massive importance, although only male citizens were allowed to participate. Within free markets economic competition regulates social life in the most efficient way, insofar as the state just represents a referee for economic competition from now on. Laissez-faire economics opened the way for a new category of civil liberty in front of still-ruling aristocrats, however it also made the original notion of the Greek polis disappear finally. Mill’s son John Stuart Mill (1806–73) played also an intriguing role in order to defend the utilitarian argument for a liberal democracy. But Mill junior made some critical remarks on

Democracy in practice 305 the sole protective concept and introduced the idea of a representative democracy, where an adaptive evolution of the system can be achieved via active participation. Political participation leads always to the problem of information and education, which was well recognized by John Stuart Mill. He discussed the burning problems of democracy, where it came to questions such as how much bureaucratic administration is necessary, how much parties should represent the citizens and does bureaucracy undermine innovation and creative political design? Furthermore he underlined the importance of a constitution codifying explicitly the right of citizens to vote and separating the state’s power into executive, judicative and legislative organs. Still the major outline of political economy was based upon free competition and the laissez-faire doctrine. In the nineteenth century absolutist regimes were attacked massively over Europe, most dramatically during the 1848 revolutions. Alliances across working and middle classes demanded in consequence the fall of absolutism. We may articulate within such a line of arguments that monarchies in Europe were crowded out, which induced a vacuum of power relations. Hence, new ideas spread quickly. The concept and idea of a people’s general will, of a clear equilibrium outcome of political participation began to erode. Marx and Engels were also prominent for their articulation of direct democracy. Democratic models emphasizing the illusion of liberty and equal rights for all were attacked by critical realism – attacking the contractarian system. Additionally the concept of laissez-faire politics and free competition as the guardians of a liberal democracy were heavily criticized by Marx and Engels – attacking the utilitarian system. As an alternative model for democracy the idea of direct democracy was introduced. Marx was the first political economist who was effectively disenchanted by the liberal doctrine, referring to the extreme socioeconomic inequalities in society. Exploitation by capitalists also meant exploitation by the ruling (governing) class and could not lead to any welfare regime. By defining the individual through its social relations and its economic position within the production system, Marx and Engels made the reality of social relations explicit. Of course this also indicated that something went wrong in the articulation of democratic models, because democracy stood in contradiction to capitalist production in a Marxist’s perspective. The state may only defend the interests of the public, if there are no social classes anymore. How Marx and Engels conceived the alternative is well known today. Important aspects for this elaboration relate to the notion of direct democracy, implicit socioeconomic contradictions in capitalism and the articulation of political economy as a productive system of value creation; society and economy can never be neutral to value. These are also the points which Max Weber and Joseph Alois Schumpeter discussed principally with reference to Marx and Engels. In the early twentieth century all social classes slowly earned the right to vote and democracy received real ‘micro foundations’. In particular the battle for votes was opened for distinct groups of interest. Weber and Schumpeter opened the theoretical discussion for new models of democracy. Democracy evolved to a political method, cutting off its structure for the first time. Therefore politics

306

Policy realms

was, first, seen as a market with a principal-agent (representative-voter) structure. These elitist approaches wanted to install expert systems as bureaucratic, technical governments in fear of tyrannical encroachments on the nation states. Schumpeter wanted to avoid hegemonial spirals, as Plato and also Machiavelli feared, and introduced the idea of a leadership democracy governed by experts to the greater extent. It is somewhat interesting to note that their visions of the political economy have extreme similarity with the economic and political system of the big post-industrial continental blocs today. The United States and the European Union have a rather fixed economic system with central players on the production and banking side. Democracy is administrated quite centrally and influenced heavily by these large players. The political agenda is shaped by the search and distribution of resources and the economy gets planned more and more from top-down. Small- and medium-sized enterprises face huge difficulties in their early years and many of them go bankrupt or are absorbed by the oligopolists. The fact is that democracy looks pretty similar today as they have anticipated with their realist (often also denoted as pessimistic) view of political economy. Weber and Schumpeter tried to circumvent both the contractarian and the utilitarian perspective by promoting the technocratic/bureaucratic vision of expert-driven governance. At this point of argumentation we may summarize that the classical models of democracy (except the Marxian view) are all founded on either the contractarian or the utilitarian system of thought. The briefly introduced models of democracy form the building blocks of institutional evolution in political economy, they can also be regarded as the generic foundations of democracy. These foundations inhabit a common characteristic which Sen (2010) denotes as transcendental institutionalism. A transcendental view of democracy focuses on the search for supreme or ideal premises for democratic governance, in short. This notion, which crystallized in more detail in twentiethcentury political philosophy, is strongly connected to a major paradigm in economics, where the driving theoretical forces also search for an ideal state, i.e. an optimal allocation of resources. Hence it is argued that there is a tight connection between contractarian and utilitarian models of democracy and economic models in general. This connection relates to the concept of equilibrium which finds its origin in classical Newtonian physics. Unfortunately all involved theoretical streams of political economy have not moved beyond the first law of thermodynamics yet; be it trading of votes, goods or ideas all remained within a closed system approach.

Transcendental institutionalism and ideal democracy To my knowledge, Sen (2010) offers the essential book trying to develop modern concepts for democratic change with the help of institutional theory at the moment. Thereby he criticizes substantially the outline of analytical political philosophy by John Rawls, especially his Theory of Justice (1971). It is not surprising that Sen titled his book The Idea of Justice, indicating that it is quite

Democracy in practice 307 ambitious to derive a complete theory of just and, moreover, ideal institutions, but the propagation of an idea for the developmentt of such just institutions seems more realistic. Sen needs to be understood as the major attack on transcendental institutionalism, an array of equilibrium institutionalism. However John Rawls’ theory of justice truly is a masterpiece within political philosophy, subsuming all contractarian models of political theory discussed above within one analytical framework. This reflects also the major emphasis of Sen’s critique; that contractarian theory troubled too much with the endeavour towards a supreme ideal social contract. Thereby Sen tries to develop an alternative perspective of comparative institutionalism going beyond contractarian and utilitarian systems of thought. For now we look into the basic ingredients of Sen’s attack on equilibrium, closed-system, transcendental political economy. Reasoning drives democracy, it constitutes political economy. Arguments may indicate just solutions or may undermine unjust solutions for social practices in public life. But what is reasoning in public spheres, can there be any objectivity in reasoning, are there true reasons? Obviously there is a necessity to reason within a democracy as the rich European history of democratic thought indicates. Therefore ‘the pursuit of reason is the way to address difficult problems of good behaviour and the challenges of constructing a just society’ (Sen 2010, pp. 36–37). Amartya Sen argues that this basic argument of democratic life was not merely an invention of Western European philosophy. Sen clarifies that for instance Akbar, the mogul of India in the sixteenth century, claimed religious tolerance and equidistance to the state, a vision of secularity, whereas at the same time in Europe the Inquisition reached its peak. Through such examples Sen wants to indicate that the generic foundations or claims of democracy, as we elaborated above, have not merely emerged in Europe and in a broader sense that not everything seems at it is traditionally assumed. The Indians have articulated a series of profound ideas to reach levels of social justice, among them Akbar’s argument that the ‘ “the path of reason” or “the rule of the intellect” (rahi aql) must be the basic determinant of good and just behaviour as well as of an acceptable framework of legal duties and entitlements’ (Sen 2010, p. 39). However reasoning also means that we recognize our emotions and affects as driving forces or intuitions, hence if we are moved strongly by our emotions, there is good reason to think about their origin, insofar as we may address that there is a strong but complex connection between emotion and reason. This is a point which was truly neglected in the European tradition for centuries. With René Descartes body and mind were strongly separated and a dualistic perception of the world was introduced. This notion is not much criticized in Europe, still it is a crucial point for the development of democratic theory, since reasoning is split from emotions, affects and the body. The Indians were aware of this close connection and asserted it as a pillar for exercising philosophy. The major European critics of the so-called rational constructivism, elaborated in its origin by Decsartes, were the Scottish moral philosophers David Hume and Adam Smith. Both asserted to the moral sentiments of human beings a central role for political economic action as well as for exercising philosophy.

308

Policy realms

We are able to associate the contractarian as well as the utilitarian system of thought with closed-system thinking in its central positions. Therefore Sen argues that reason and emotion are complementary categories. In consequence reasoning has obvious limits facing objectivity. ‘The question that remains, however, is this: why should we accept that reason has to be the ultimate arbitrator of ethical beliefs?’ (Sen 2010, p. 39). Pure objective reasoning remains in the closed-system approach, without any affects or emotions there will never be any entropy or any power. Sen argues rightly that sometimes a very dubious procedure could end up yielding a more correct answer than extreme rigorous reasoning. In contrast Rawlsian political philosophy suggests to derive a normative definition of objectivity, an ‘objectivity of justice as fairness’ (compare Sen 2010, p. 42). Currently, there is a lot of discussion on the relation between the Rawlsian system of political thought and Habermas’ (1981) Theory of Communicative Action. Again in this respect, Sen highlights that both perspectives remain within a transcendental institutionalism, although Habermas focuses more on the argument for objectivity which relies on open, informed and public discussion. Thereby Habermas tries to solve the issue of ideal democracy with the metaphor of an ideal space of discourse. Hence the problem is also circumvented in his line of argument. To summarize, Rawls intends to find a ‘procedure independent identification of what would convince people who are “reasonable” persons and who would find some political conviction to be “reasonable” as well’ (Sen 2010, p. 43). Habermas emphasized apparently the procedural strategy, however Sen outlines that it seems – even within this respect – that the two approaches are not of different natures. The basic reason lies in the demands for justice, assumptions which have to be taken into account to reach an ideal state of objective reasoning; independent from the strategy of both lines of argumentation. Furthermore Sen (2010, p. 44) outlines that the Rawlsian approach imposes an elitist picture of democracy, demanding the necessary condition of ‘reasonable people’. But how can we even think of universal premises for reasonability of human beings, a rather difficult task. What brings Rawls, Habermas and even Smith together? ‘[T]here is an essential similarity in their respective approaches to objectivity to the extent that objectivity is linked, directly or indirectly, by each of them to the ability to survive challenges from informed scrutiny coming from diverse quarters’ (Sen 2010, p. 45). Sen points out that this is truly a necessity for thinking about social justice and democracy in particular, but to him it seems a little bit awkward to assume that there must be a unique set of the principles capable of surviving scrutiny. Indeed, any approach to justice that follows the rigidity of a unique institutional structure (this is part of transcendental institutionalism discussed in the Introduction), and which proceeds to tell us, step by step, an as if history of the unfolding justice, cannot easily accommodate the co-survival of competing principles that do not speak in one voice. (Sen 2010, pp. 46–47)

Democracy in practice 309 In consequence we need to open the system of political thought towards a theory of endogenous change, a theory where the unexpected needs to be expected. Sen argues in favour of a comparative institutionalism, but before we dig deeper into the pillars of Sen’s productive and, to a certain degree, pragmatist approach, we investigate the roots of comparative institutionalism and derive the connection to the open-system approach, evolutionary theory and process thinking.

Comparative institutionalism and democracy in practice Modern pragmatist thinkers such as Richard Rorty or Hillary Putnam highlighted the importance of leaving metaphysics behind us. Rorty (1991) emphasizes the notion of contingency for epistemological questions and irony as a mechanism for the creation of novelties. Sen (2010, p. 41) also refers to Putnam and quotes him regarding the previous discussion on reasoning and objectivity, ‘Real ethical questions are a species of practical question, and practical questions don’t only involve valuings, they involve a complex mixture of philosophical beliefs, religious beliefs, and factual beliefs as well.’ Sen identifies the information-sharing problem as the crucial element for the future of democratic practice and theory. Within an institutional framework reasoning becomes a social issue and the problem of nested reasoning or shared beliefs emerges, the former also addressed by Kawamura (2009) and the latter by Aoki (2007, 2010). For Sen (2010) the social consequences and realizations are more important for the assessment of institutions, which stands in true tradition to the institutional economics approach elaborated above. He argues that Rawls was in search for the ideal behaviour for justice and contrasts it to the investigation of actual behaviour and social choice guiding towards social justice. The comparative outline defines itself as an alternative towards contractarian systems within political economy. In Sen’s comparative institutionalism information-sharing is the process of democracy, whereas the contractarian system suggests finding the ideal set of information. Since economies are globally interconnected today through information structures such as the price system, the global financial infrastructure, and global information and communication technology, there is a need to consider democracy as a global challenge. Held (2010) warns critically against squandered time in respect of global democracy reform. Certainly democracy on a global scale cannot be approached within closed system transcendentalism. In Sen’s (2010, p. 71) words, ‘The possibility of proceeding, in this case, through the Rawlsian sequence of setting up just institutions for the global society, i.e. demanding a world governance, is, however, deeply problematic’. Many have demanded behavioural reforms, that people must reflect on their behaviour in order to challenge global crises. Certainly this problem was already discussed in detail by Veblen (2000 [1899]); consider the example of conspicuous consumption. However, nor could Veblen offer any clear-cut solution for the regulation of consumer demands. Even this issue falls back as an information-sharing problem, so what does Sen (2010) suggest to achieve within a comparative institutionalism? In particular he revisits the Theory of Social Choice.

310

Policy realms

Social Choice Theory can be regarded as a micro evolution in democratic models. It is characterized by the willingness to find procedures for social choices and suggests ranking them in a comparative way. Kenneth J. Arrow, in Social Choice and Individual Values (1970), made Social Choice Theory prominent, unfortunately along its intrinsic characteristics of formal impossibility. Arrow tried to link individual preferences of lower order to a social or collective preference of a higher order. In this manner he bridged individual-to-social choices. Hence Arrow investigated how the aggregation of individual preferences meets some stated normative agreements. What followed was his formulation of the Impossibility Theorem. The theorem shows that any accumulation procedure (in case of democratic elections: voting) cannot meet all the stated conditions; additionally they will not even meet three out of four conditions (for a comprehensive overview of the conditions compare also Taylor and Pacelli 1995, p. 102). Pareto Condition: A social choice procedure fulfils Pareto Condition if for any pair of alternatives (x ( , y) applies, that if everybody prefers x over y then y cannot be the social choice. Condorcet Winner Criterion: An alternative x is a Condorcet Winner, if x beats any other alternative in a one-on-one match. Hence x must be at least at one half of the preference lists ranged above y. A social choice procedure fulfils Condorcet Winner Criterion if there is a Condorcet Winner. Monotonicity: A social choice procedure is monotone, if x is a social choice and an individual changes his preference setting that x ranks higher as before, x must still remain a social choice. Independence of Irrelevant Alternatives: If a set of social choices includes x but not y and one or more individuals changes his preference, but not the ranking between x and y, then the set of outcomes should not change and y should stay excluded. Nevertheless it is possible that any alternative z ranks above x after the preference change, but y should stay excluded. The most common procedures which are used in most democratic countries as a voting procedure are plurality voting for single seat constituencies and proportional representation for multiseat constituencies. Plurality voting accumulates the social choice in dependence of the most first rankings of individual preference orders, whereas proportional representation constitutes parliament seats out of the number of votes for a specific alternative. In case of single-seat procedures we can list the most famous alternatives as Condorcet Method, Borda Count and Instant-Run-Off (Hare System for single seat). Nevertheless there seem to be more improvements on non-ranked single-seat systems, as discussion on Approval Voting indicates (compare Brams and Fishburn 1978, 2005). Returning to Arrow we are able to follow that none of these procedures can fulfil Monotonicity and Independence of Irrelevant Alternatives at the same time, which summarizes the Impossibility Theorem in short. From a technical and merely formal micro-orientated approach we need to consider that democracy obviously faces serious lock-in situations. But perhaps we are able to improve procedures and techniques for elections to aim desirable political processes and

Democracy in practice 311 go beyond superficial overemphasis of lock-ins in socioeconomic and political systems. Today various improvements for social choice procedures exist, the most prominent ones represent Black’s Theory of Committees and Elections (1958). Black raises the importance of single-peaked preferences to overcome Arrow’s paradox with simple majority rule, but neglects universality of individual preferences. Otherwise Sen (1977, 1999b) shows that Arrow’s theorem holds if the conditions are weakened, in particular relaxing the transitivity of individual preferences and removing the Pareto Condition. Thereby Sen circumvents the utilitarian aspects of social choice and returns to the bottom line, namely comparing alternative outcomes of social choice. Nevertheless we need to be aware that all normative approaches to the theory of social choice – in particular the search for an optimal welfare function in a contractarian way and the optimization of individual choice towards an optimal social choice in a utilitarian way – will not improve democratic practice any further. However there are several pragmatist approaches towards election methods and social choice procedures which could practically improve the information-sharing problem from an institutionalist’s perspective: consider, for instance, Smith (2000). In fact Sen suggests looking into the opportunities lying within social choice theory to enhance public informing. It is particularly important for a theory of practical reason to accommodate a framework for reasoning within the body of a capacious theory – that, at any rate, is the approach to the theory of justice that this work pursues. . . . Perhaps the nature of the task can be clarified a little with the help of social choice theory (Sen 2010, pp. 89, 91) He focuses on the positive and constructive aspects of social choice theory and remarks the mathematical fallacies. Today voting outcomes still have very limited informational content, such as GDP represents only limited information on the general well-being within a country. If no other information is added (remember the connection to the entropy/power discussion above) voting procedures are as marginal as the meaningfulness of GDP. By improving the informational content within voting procedures or more generally by improving the role of political information structures, democracy may steer practically towards more transparency and in consequence towards a more direct control of power. This is what a theory of democratic practice, a comparative institutionalism is about – distributing and communicating information or expanding bandwidth in generic terms (compare for the latter Schwarz and Wäckerle 2012). Sen (2010, p. 94) also indicates the strong motivational link to education. The Marquis de Condorcet (1743–94), one of the founding fathers of social choice theory, passionately advocated the necessity of public education, as well as the enrichment of societal statistics, ‘since they all help to advance the use of more information in the procedures of public choice and in the exploration of social justice’ (Sen 2010, p. 94). However, there is another great ally within American

312

Policy realms

pragmatism, who encouraged society to promote public education, to share information, John Dewey. In his writings on Democracy and Education (2008 [1916]), Dewey linked the issue of education in a similar manner to democracy as already indicated (compare Reuter 1996, p. 79). Dewey considered the development of society as an infinite process of trial-and-error, where advances need to be met gradually by practical reason; this notion can also be regarded as The Institutionalist Methodology (compare Reuter 1996, p. 99), insofar as Dewey incorporates evolutionary thought and the open-system approach into institutional economics. In conclusion I want to refer to Martha Nussbaum’s remarkable book, Not for Profitt (2010), on education and democracy. She builds upon many aspects in Dewey’s theory and shows the obvious necessity of humanist education for democratic evolution. All the more one can find several linkages and cross-references between Sen and Nussbaum, who additionally know each other quite well. In this respect the story gets rounded up with an intellectual invitation towards practical information-sharing and communicative distribution of knowledge within the open society, as the Argumentative Indian would say (Sen 2005). The fine aspects of a knowledge-driven democracy are at the core of a generic institutionalism and show once again the modernity of the American pragmatist and institutional school of thought. Democracy refers to a generic institutional principle which needs to be carried out in practical terms, thereby advancing and distributing the knowledge base in society. Democracy in practice is naturalistically and socially embodied in social practices, habits and dispositions, structuring a basin of attraction for the bottom-up programming of institutional communities in a nested and modular way.

Outlook

In this research monograph we have developed cornerstones of a generic institutionalism, emphasizing the foundations of an evolutionary institutional economics. Generic institutionalism synthesizes existing concepts of institutional change within the broader framework of evolutionary economics, by looking into a variety of generic heuristics. The elaborated synthesis delivers theoretical novelties contributing to the development of the scientific discipline in a pluralist and interdisciplinary way. The theoretical structure in this monograph is given by three layers, ontology (Part I), heuristics (Part II) and methodology (Part III). Applications building upon this structure are discussed in concrete policy realms (Part IV). This proposed structure allows a concise framework for the development of evolutionary economic programs. We understand programs in semantic and synthetic terms, where the idea of bottom-up development is used in a ubiquitous way. The evolution of institutional programs is discussed from the bottom up with regard to (1) research agendas of evolutionary economics, discussed within ontologies and (2) evolving institutional systems shaping society and economy, discussed within generic heuristics. Generic institutionalism offers a development kit for these two theoretical streams by introducing their basic semantics in a non-nomological way. However, in this book we have argued to synthesize these semantics in formalized bottom-up models of institutional change in order to feed back the semantic knowledge in synthetic form. Models are always built for specific research communities coded within a certain discourse in consequence. Models entail formalized stories of research agendas and generic heuristics in synthetic form, thereby they are essential for social learning processes within a scientific discipline. Bottom-up models can express the theoretical knowledge of institutional change in precise ways. In consequence we are able to communicate the idea of institutional economic evolution within a broader discourse. The language structure of algorithms (3) establishes this third foundation of generic institutionalism thereafter. The foundations of evolutionary institutional economics introduce this realm with a strong didactic focus informing on the building blocks of evolutionary economics in general. We regard institutions as durable social structures of rule-sets evolving as central knowledge repositories in society, insofar as institutions provide a variety of social learning environments for the evolving economy. Evolution in the

314

Outlook

economy is given on a generic level by the continuous change in knowledge and its coordination. Knowledge is conceived as naturalized, socialized and embodied in economic agents, expressed in generic rules, such as social practices, routines, habits and dispositions. The ontological ground for naturalized knowledge entails a series of tricky problems and questions not yet sufficiently disentangled for broader pedagogic purposes. This research frontier needs to be advanced in the future, since knowledge on institutional change and about the evolving economy is not really widespread in society. In conclusion it is argued that the power of institutional bottom-up programming is not yet fully recognized and applied in realistic terms, which nevertheless builds the anchor for a solidary and open society. The generic rule-based approach offers a first adequate prototype to combine the evolutionary ontology with institutional heuristics in synthesized terms. Thereby it represents currently the only evolutionary economic framework carrying realistic power for broader didactics and probably even for an evolutionary institutional pedagogy. It is proposed that the major aim of evolutionary institutional economics must be its diffusion in a broader generic discourse, if we are looking forward to explain the advantages of social learning and shared knowledge in an institutional way, insofar as the rule-based approach within a micro–meso–macro framework delivers such synthetic characteristics to expand the small box towards pluralist and interdisciplinary connections. Generic institutionalism hints at this potential by elaborating prototype synthetic connections between evolutionary institutional economics and post-structural sociology/philosophy as well as agent-based computational modelling. Such a scientific pluralism can truly communicate the theoretical ingredients of an institutional evolution from the bottom up, transitioning through states of an affective order, where knowledge and moreover its practices are shared across the discourses. Programming in algorithmic form enhances this vision with regard to didactics and pedagogy. The idea of evolution as computation leads us to (re)programming of real-life communication networks and institutional structures thereafter. Generic institutionalism elaborates on the evolution of power on generic networks, the emerging forces which change the prevalent generic rule structure of the economy from within. In the information society we are confronted with new modes of production and re-configurations of consumer and producer rules. Obviously such changes invade the social practices and dispositions of everyday life. Bandwidth evolves to a significant resource for economic operations in a meticulously working capitalism of human–(digital) machine complexes. Knowledge implies power embodied and expressed in social practices, routines, habits and dispositions. Communication power is then dependent on the bandwidth between and within information structures and the institutions operating on them. A deeper look into the foundations of evolutionary institutional economics reveals some major challenges and open questions, demanding special attention in future forms of generic institutionalism. In particular these major research frontiers are given (1) by the recursive interrelation of onto- and phylogeny or

Outlook 315 the theoretical integration of the evolutionary and developmental approach in the social and economic sciences. Advancements in this direction serve for a better understanding of generic heuristics thereafter, leading to easier synthesis in generic rule sets. (2) We still face tremendous problems in synthesizing a socioeconomic theory between the social and economic sciences. This notion becomes apparent in discussions about core social capacities and properties shaping the agency–structure relationship. Obviously it is the differentiation between the operant and generic level of institutional economic change, which demands the evolutionary concept. However with regards to modelling, even in multiagent systems, we are confronted (3) with some basic difficulties to integrate evolutionary change on both levels. Novelty comes certainly from a variation of generic rules, which need to be addressed in future agent-based complex adaptive systems of evolving institutional networks. We have argued that knowledge evolves in practical terms via concretized experience in social practices, routines, habits, dispositions and rule actualizations in general. Naturalized knowledge is always socially embedded, giving rise to emerging novelty which can diffuse over social practices. With this social interaction we focus again on institutional programming on communication networks. In relation to the urging policy realms, institutional networks are dependent on the creation of weak links, where novel institutional communities are able to dock on to established and prevalent existing stable structures. Openness to new links leads to novelties in policy realms, with emphasis on the idea of recombination in a Schumpeterian modular way. Ecological and financial sustainability as well as the crisis of democracy exhibit tremendously complex political economic problems. In fact there are not any straightforward solutions at hand. In these contexts generic institutionalism suggests focusing on social learning and knowledge distribution decreasing power inequalities endogenously. Better educational programs/structures and communication channels for the bottom-up programming of institutions in democratic form are to be considered as essential infrastructures. On the meso level generic institutionalism refers to community governance to improve synthesis of shared knowledge and ideas, insofar as generic rule sets can be seemingly synchronized for sustainable paths, capable of stabilizing a trustworthy social structure. Such social learning environments build the necessary basis to process novel components of institutional evolution in a bottom-up democratic way. Policies work if they consider a variety of evolutionary economic programs and synthesize them in practical terms. The novelty of generic institutionalism is given by its modular, synthetic and open theoretical structure. Within this framework it turns out that institutional change and inertia are driven substantially by affective social orders in contrast to rational orders as communicated in orthodox economic realms. The characteristics of affective orders are derived theoretically from intersections between ontology and heuristics, where interdependencies between instinct, cognition, rationality, reason, routine, social practice, habit or disposition are essential for the embodiment of knowledge, insofar as the diffusion and synchronization of

316

Outlook

generic rules may establish affective social orders where institutions accumulate as knowledge repositories, then assigning them also a rationally accessible status; a synthesis visible in all the elaborated generic heuristics. Resistance to novel generic rules as well as the dismantling of prevalent social structures works also on grounds of this bottom-up logic. This kind of research indicates new generic directions to study social learning in particular and institutional economic evolution in general.

Notes

2 Dualistic approaches 1

Ontological premises always underlie a vision. Ontology, a branch of philosophy, is the science of being or existence in general. Economic ontology concerns the foundations of an economic universe, which is explicitly or implicitly posited by economists as a vision concerning the subject matter and basic methods of economics. (Shionoya 2008, p. 16)

2 Compare Catephores (1994). 3 Arthur Spiethoff is not well known in economics today, but he was one of the central mentors of the young J.A. Schumpeter, compare Kurz (2010). 4 It was Werner Sombart who first introduced the terminology of creative destruction into economics and Sombart adapted the concept by reading Friedrich Nietzsche, compare Reinert and Reinert (2006). 5 Salient exceptions to be noted are Schumpeter (1954) and Hodgson (2001). 3 Naturalistic approaches 1 This mistake was once made by introducing fixed preferences and rational utilitymaximizing behaviour into economics with the framework of Homo œconomicus. We do not have to repeat such fallacies. 2 For a detailed description of the macroeconomic idea of flow-equilibria compare Witt and Brenner (2008). 3 A system may evolve autocatalytically if its elements reach some critical diversity, i.e. the variety of elements reaches a specific critical mass. Compare Kauffman (1995) for the theory of autocatalysis and Schelling (1978) for critical mass theories. 4 In this respect it is also comparable to abduction, principally elaborated by Charles Sanders Peirce as a principle for pragmatism, explained and discussed as the philosophical foundation of American institutionalism in Chapter 6. 5 In the sense that Lakatos (1980) assumes that there is some need for ad hoc assumptions when it comes to major scientific changes in research programs. 6 The terminology of a law is associated with a nomological statementt in classical physics from a methodological point of view. Such a statement defines itself through invariancy and symmetry of time, compare Dopfer (2005, p. 16). 5 What are institutions? 1 Compare especially the idea of the emergent mind in Dewey’s (1958 [1925]) Chapter VII with Bourdieu’s (1982) notion of embodiment and incorporation of cultural capital as well as Dewey’s (1958 [1925], p. 381) emphasis on ‘Knowledge and science, as a

318

2 3 4 5

Notes

work of art, . . . Hence art becomes unique’ in Chapter IX with Bourdieu’s (1982) general assessment of distinction. The arguments are congruent. Further synergies appear with Bourdieu’s (1984) Homo academicus and Dewey’s (1958 [1925], p. 382) articulation of the major problem with orthodox science, aiming for complete remoteness from the arts of life, ‘to be approached only with peculiar rites’. By the means of giving up to define institutions and their properties. Ostrom (2005a, p. 140): ‘DEONTIC is a holder for the three modal verbs analysed by von Wright. These are “may” (permitted), “must” (obliged), and “must not” (forbidden).’ For a detailed analysis see Ostrom (2005a, pp. 139–173). Heuristic device is here understood in the manner of Witt’s (2008a, pp. 9–12) distinction between heuristics and ontology, as discussed in the first chapter.

6 Veblen heuristics 1 Commenting on the arms race (prisoner dilemma) in the cold war, in Scientific American, 211(4): 27 (1964): Both sides in the arms race are . . . confronted by the dilemma of steadily increasing military power and steadily decreasing national security. It is our considered professional judgment that this dilemma has no technical solution. If the great powers continue to look for solutions in the area of science and technology only, the result will be to worsen the situation. 2 This is also very close to Marx. Marx defined the value via the social relations of labour and labour intensity. 3 Trigg (2001) offers a detailed comparison of Veblen’s and Bourdieu’s model of the cultural inheritance of tastes, preferences and habits, which is discussed in Chapter 9. 4 Here we can see Veblen’s strong connection with technology, which will be a central issue in the next chapter. 5 Compare Reuter 1996, p. 176. 6 Remember that it was the creation and usage of artefacts such as tools that enabled the emergence of higher primates, not at least because it forced the primates to upright carriage. 7 Here, the literature also suggests distinguishing between responsive tool-use and reflective tool-use, compare Cordes (2005). Responsive usage of tools and artefacts let animals, intelligent primates for instance, use tools for their means, via imitation. Reflective usage of tools and artefacts enables a different layer; human beings could engage in reflecting the idea of the tool as a mechanism. Therefore they could reproduce tools or artefacts according to stored ideas or imaginations, like using geometry as a production template, compare also Dopfer (2004) for the notion of shared imagination in this context. 7 Hayek heuristics 1 Compare Foucault’s (2004 [1974], p. 173) explanation of governmentality. 2 Compare Goldschmidt and Rauchenschwandtner (2007) on the relationship between Husserl’s eidos and von Eucken’s ordos, as well as Foucault’s interpretation and genealogy of ordoliberalism. In this respect the market economy represents an organic order. The Foucaultian (1978) interpretation of ordoliberalism suggests, according to Goldschmidt and Rauchenschwandtner (2007, pp. 22–23): Yet ordoliberalism is not a frame within which the market is supposed to operate, it does not set limits around the market. Instead, it is the expression of a (fundamental) principle of order as well as an imperative, namely that all obstacles to

Notes

319

competition, except the most vital political cushions, are, from a social policy point of view, undesirable. With regard to the eidetic order of the market, this means that, not only should the endeavours of competition be given free rein, but more importantly, competition should be created and produced. . . . Following the ordoliberal logic, Foucault positions the solution of the problem of monopoly on the institutional level, to maintain competition operational. Arriving at a monopoly position is not a phenomenon that is inherent to the market; rather, it is caused by external effects. . . . The legal-constitutional framework then enables competition to be really effective. 3 Sugden (1989) ascribes that the introduction of signals corresponds to Robert Aumann’s (1987) concept of coordinated equilibrium with a Bayesian notion. 4 This critique involves a multitude of work among a certain stream of the New Institutional Economics (NIE) program, compare for instance Greif (1994), Greif and Laitin (2004), Aoki (2001, 2007) as well as Young (1996). This approach within NIE aims to synthesize historical or comparative institutional analysis with game theory. Thereby NIE treats institutions mostly as conventions (later also treated as Schelling coordination). Otherwise the Hayekian or even Smithian conception of institutional change focuses more on the emerging process of a spontaneous order – highlighting the dynamics. 5 For a discussion on ‘Hermeneutic Economics’ compare for instance Perrin (2005). Traditional Austrian economics was always considered in a methodological dualism perspective, where the human subject rules out anything else. Now especially Hayek and foremost Popper showed that it is possible to overcome this dualism by means of evolutionary epistemology and psychology, on a more practical level of science. Vanberg (2004) showed that Hayek transcended the problem at hand; he introduced a naturalistic approach to subjectivism, which is able to treat the economy as an evolutionary system with certain history. Hence deductive and inductive methods gain equal importance in such a picture. 6 Foucault has shown in several works that the concept of power was transformed in the seventeenth and eighteenth century with the rise of classical liberalism. Power evolved from authoritative central disciplinary power to disciplinary, endogenous methods in society. The modern phenomenon of neighbourhood watch can also be regarded as a part of such disciplinary methods, as well as the evolution of altruistic punishment, social norms and contingent cooperation. 7 Compare Foucault’s (2004 [1974], p. 49) analysis of the evolution of liberal governmentality. 8 For a detailed discussion of the results as well as a visual presentation of simulation runs and model graphs, please have a look in Boyd and Richerson (2005, p. 128). 8 Schumpeter heuristics 1 Schumpeter (1954, p. 255) insists that the original popluation problem was formulated 200 years ago, by Giovanni Botero (1544–1617), who was also characterized through a strong pessimism regarding population growth. Thomas Robert Malthus (1766–1834) reinterpreted these concepts and ideas. In Botero’s time populationist thinking was too dominant for alternative attitudes. Additionally, it was William Petty (1623–87) who introduced the law of geometric progression, which was, then, used by Malthus to demonstrate how populations may grow. 2 This was a belief in increasing returns to scale from a growing population. 3 Compare also the original writing with more detail, in Schumpeter (1997 [1911], p. 100). 4 Schumpeter (1997 [1911], p. 320): ‘Und neuer Aufschwung folgt auf die Depression, wenn der Resorbierungsprozeß des Neuen beendet ist.’ [And new upswing is following the depression, when the process of novelty resorption is finished.]

320

Notes

5 Schumpeter (1997 [1911], p. 322): ‘Wirkung des (in diesem Stadium bereits erklärten) massenweiten Auftretens neuer Unternehmungen auf die Lebensbedingungen der alten und auf den eingelebten Zustand der Volkswirtschaft, unter Berücksichtigung der (im zweiten Kapitel) begründeten Tatsachen, daß das Neue in der Regel nicht aus dem Alten herauswächst, sondern neben das Alte tritt und es niederkonkurriert und alle Verhältnisse so ändert, daß ein besonderer ‚Einordnungsprozeß’ nötig wird.’ [Effect of (at this stage already explained) mass-wide emergence of new enterprises on the living conditions of the old and of the routinized condition of the economy, taking into account (in the second chapter) substantiated facts that the new is not growing out of the old, but appears next to it and competes it out and all relations change so that a special ‘classification process’ becomes necessary.] 6 Compare MakeITfairr and WEED reports on exploitation in mobile phone and computer production in Africa and Asia: Pöyhönen and Simola (2007), Chan et al. (2008), Pöyhönen (2009) and WEED (2008). 7 Compare also the movie-documentation on contemporary globalized exploitation of the labour force in several industry sectors: miners in Donbass, Ukraine, sulphur carriers in Kawah Ijen, Indonesia, butchers in Port Harcourt, Nigeria, welders in shipbreaking yards in Gadani-Pakistan, and steelworkers in Liaoning, China (Glawogger 2005). 9 Bourdieu heuristics 1 The following German translations are used in this book: Bourdieu (1982) – Die feinen Unterschiede: Kritik der gesellschaftlichen Urteilskraft; Bourdieu (1984) – Homo academicus; Bourdieu (1994) – Praktische Vernunft: Zur Theorie des Handelns; Bourdieu (1998) – Gegenfeuerr and Bourdieu (2001) – Gegenfeuer 2. 2 Following quotes are translated from the German texts by the author. 3 A specific social space is only virtual; it consists of social practices of individuals. For example the field or space of secondary education lecturers can be described through low to medium economic capital but medium to high cultural capital (Bourdieu 1982, p. 19). This field may develop for a specific social class through political action or political movement; it becomes only a class through a collective actualization in contrast to virtualization. Every actualization necessitates virtualization but a virtualization does not necessitate actualization. 10 Synthesizing heuristics with generic rules 1 Hughes (2011, p. 129) clarifies the notion of differenciation in contrast to differentiation: Technically, differenciation is the process by which the actual is constituted. Propositions of consciousness or representations or solutions are what populate the actual. Differenciation explains how we get there from the virtual. The human game explains the rules and coordinates of the represented world. ‘Differentiation is the process by which a problem becomes completely determined. Differenciation is the process by which solutions are constituted’ (Hughes 2011, p. 142). 2 Here we find again another connection to Nietzsche, because Deleuze builds here upon Nietzsche’s parable of metamorphoses of spirit in Thus Spoke Zarathustra, published in 1883: ‘I name you three metamorphoses of the spirit: how the spirit shall become a camel, and the camel a lion, and the lion at last a child’ (quoted in Hughes 2011, p. 133). The camel represents imagination, the lion memory and the child the act of novelty creation. Of course it is not surprising that Schumpeter was heavily influenced by Nietzsche’s thought, which marks another key point of convergence between generic evolutionary economics and post-structural philosophy.

Notes 321 13 An agent-based model of institutional change 1 The two asymmetrical outcomes (C,D) and (D,C) are not considered there. 2 For a detailed analysis and categorization of timing events in agent-based simulations, compare Radax and Rengs (2010). 3 Obviously, this formula is a rather naïve guess, since it does not take into account the probability of not meeting any agents at all and ending up with no playing partners. 4 R − S − T + P ≠ 0 and R − T − S + P ≠ 0, in our case 4 − 0 − 5 + 2 ≠ 0 and 4 − 5 − 0 + 2 ≠ 0, for details compare Young (1998, p. 33). This condition has strong consequences for the calculation of the informal payoff of agents. If we picked payoff values not meeting the nondegenerative condition (e.g. R − S − T + P = 0) then the informal payoff function would be in linear dependence of alpha (trust), i.e. a very special and singular case.

Bibliography

Aldrich, H.E., Hodgson, G.M., Hull, D.L., Knudsen, T., Mokyr, J. and Vanberg, V.J. (2008), ‘In defence of generalized Darwinism’, Journal of Evolutionary Economics, 18(5): 577–596. Aoki, M. (2001), Toward a Comparative Institutional Analysis, Cambridge, MA/London: MIT Press. Aoki, M. (2007), ‘Endogenizing institutions and institutional changes’, Journal of Institutional Economics, 3(1): 1–31. Aoki, M. (2010), Corporations in Evolving Diversity: Cognition, Governance, and Institutions, Oxford: Oxford University Press. Arena, R. (2008), ‘On the relation between economics and sociology: Marshall and Schumpeter’, in Shionoya, Y. and Nishizawa, T. (eds), Marshall and Schumpeter on Evolution: Economic Sociology of Capitalist Development, Cheltenham: Edward Elgar, pp. 65–93. Arena, R. and Festré, A. (1996), ‘Banks, credit, and the financial system in Schumpeter: an interpretation’, in Moss, L.S. (ed.), Joseph A. Schumpeter, Historian of Economics, London: Routledge; and in Hanusch, H. (ed.) (1999), The Legacy of Joseph A. Schumpeter Volume II, I Cheltenham: Edward Elgar, pp. 117–131. Arrow, K.J. (1962), ‘Economic welfare and the allocation of resources for invention’, in Nelson, R. (ed.), The Rate and Direction of Inventive Activity: Economic and Social Factors, Princeton, NJ: Princeton University Press. Arrow, K.J. (1970), Social Choice and Individual Values, New Haven, CT: Yale University Press. Arthur, B. (1989), ‘Competing technologies, increasing returns, and lock-in by historical events’, The Economic Journal, 99(394): 116–131. Aumann, R. (1987), ‘Correlated equilibrium as an expression of Bayesian rationality’, Econometrica, 55(1): 1–18. Axelrod, R. and Hamilton, W.D. (1981), ‘The evolution of cooperation’, Science, New Series, 211(4489): 1390–1396. Barabási, A.-L. (2003), Linked: How Everything Is Connected to Everything Else and What It Means for Business, Science, and Everyday Life, New York/London: Plume. Barabási, A.-L. and Albert, R. (1999), ‘Emergence of scaling in random networks’, Science, 286(5439): 509–512. Bargigli, L. and Gallegati, M. (2012), Finding Communities in Credit Networks, Economics Discussion Papers, No. 2012-41, Kiel Institute for the World Economy. Battiston, S., Delli Gatti, D., Gallegati, M., Greenwald, B.C. and Stiglitz, J.E. (2009), Liaisons Dangereuses: Increasing Connectivity, Risk Sharing and Systemic Risk,

Bibliography 323 NBER Working Paper No. 15611: Cambridge, MA: National Bureau of Economic Research. Baumol W.J. (1952), ‘The transactions demand for cash: an inventory theoretic approach’, Quarterly Journal of Economics, 66(4): 545–556. Beinhocker, E.D. (2007), The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics, London: Random House Business Books. Beinhocker, E.D. (2011), ‘Evolution as computation: integrating self-organization with generalized Darwinism’, Journal of Institutional Economics, 7(3): 393–423. Berg, J., Rixtel, A., Fernando, A., de Bondt, G. and Scopel, S. (2005), The Bank Lending Survey for the Euro Area, European Central Bank Occasional Paper Series No. 23, Frankfurt: European Central Bank. Berger, S. and Elsner, W. (2008), ‘European contributions to evolutionary institutional economics: the cases ‘Open-Systems Approach’ (OSA) and ‘Cumulative Circular Causation’ (CCC)’, in Hanappi, H. and Elsner, W. (eds) Advances in Evolutionary Institutional Economics, Cheltenham: Edward Elgar. Bernanke, B.S. and Gertler, M. (1995), ‘Inside the black box: the credit channel of monetary policy transmission’, The Journal of Economic Perspectives, 9(4): 27–48. Bernanke, B.S., Gertler, M. and Gilchrist, S. (1999), ‘The financial accelerator in a quantitative business cycle framework’, in Taylor, J.B. and Woodford, M. Handbook of Macroeconomics 1A, Section 21, Amsterdam: Elsevier. Bertalanffy, L.v. (2001 [1968]), General System Theory, New York: George Braziller. Bertocco, G. (2007), ‘The characteristics of a monetary economy: a Keynes–Schumpeter approach’, Cambridge Journal of Economics, 31(1): 101–122. Bezemer, D.J. (2009), Banks as Social Accountants: Credit and Crisis Through an Accounting Lens, MPRA Paper No. 15766, Munich: MRPA. Bhaskar, R. (1989), The Possibility of Naturalism. A Philosophical Critique of the Contemporary Human Sciences, 3rd edition, London: Routledge. Binder, M. (2010), Elements of an Evolutionary Theory of Welfare, Abingdon: Routledge. Black (1958), The Theory of Committees and Elections, Cambridge: Cambridge University Press. Blanchard, O. (2000), Macroeconomics, 2nd edition, Harlow: Prentice-Hall. Bofinger, P. (2001), Monetary Policy: Goals, Institutions, Strategies and Instruments, Oxford: Oxford University Press. Bösel, B. and Wäckerle, M. (2013), ‚Ökonomie im Ereignis – Zeit der Verzweiflung? Zu Joseph Vogls kulturwissenschaftlicher Kritik der Oikodizee’, in Pahl, H. and Sparsam, J. (eds) Wirtschaftswissenschaft als Oikodizee? Diskussionen im Anschluss an Joseph Vogls Gespenst des Kapitals, Wiesbaden: Springer, pp. 113–141. Bourdieu, P. (1974), Zur Soziologie der symbolischen Formen, Frankfurt: Suhrkamp. Bourdieu, P. (1982), Die feinen Unterschiede: Kritik der gesellschaftlichen Urteilskraft. Frankfurt: Suhrkamp. Bourdieu, P. (1984) Homo academicus, Frankfurt: Suhrkamp. Bourdieu, P. (1992), Die verborgenen Mechanismen der Macht, Hamburg: VSA. Bourdieu, P. (1994), Praktische Vernunft: Zur Theorie des Handelns, Frankfurt: Suhrkamp. Bourdieu, P. (1998), Gegenfeuer: Wortmeldungen im Dienste des Widerstands gegen die neoliberale Invasion, editions discours, Konstanz: UVK. Bourdieu, P. (2001), Gegenfeuer 2: Für eine europäische soziale Bewegung, Konstanz: UVK.

324

Bibliography

Bourdieu, P. (2005), The Social Structures of the Economy, Cambridge: Polity Press. Bowles, S. and Gintis, H. (2005), ‘Social capital, moral sentiments and community governance’, in Bowles, S., Boyd, R., Fehr E. and Gintis, H. (eds), Moral Sentiments and Material Interests, Cambridge, MA: MIT Press. Boyd, R. and Richerson, P.J. (1980), ‘Sociobiology, culture and economic theory’, Journal of Economic Behaviour and Organisation, 1(2): 97–121. Boyd, R. and Richerson, P. (2005), The Origin and Evolution of Cultures, New York: Oxford University Press. Boyd, R., Richerson, P.J. and Henrich, J. (2011), ‘The cultural niche: Why social learning is essential for human adaptation’, Proceedings of the National Academy of Sciences of the United States of America, 108(2): 10918–10925. Boyer, R. (2008), ‘Pierre Bourdieu, a theoretician of change? the view from régulation theory’, in Ebner, A. and Beck, N. (eds), The Institutions of the Market. Organizations, Social Systems, and Governance, Oxford: Oxford University Press, pp. 348–398. Brams, S.J. and Fishburn, P.C. (1978), ‘Approval voting’, American Political Science Review, 72(3): 831–847. Brams, S.J. and Fishburn, P.C. (2005), ‘Going from theory to practice: the mixed success of approval voting’, Social Choice and Welfare, 25(2): 457–474. Brunnermeier, M.K. and Sannikov, Y. (2011), ‘The I theory of money’, unpublished manuscript. Brunnermeier, M.K. and Sannikov, Y. (2012), ‘A macroeconomic model with a financial sector’, unpublished manuscript. Callebaut, W. (2005), ‘The ubiquity of modularity’, in Callebaut, W. and RasskinGutman, D. (eds), Modularity: Understanding the Development and Evolution of Natural Complex Systems, Cambridge, MA/London: MIT Press. Callebaut, W. and Rasskin-Gutman, D. (2005), Modularity: Understanding the Development and Evolution of Natural Complex Systems, Cambridge, MA/London: MIT Press. Castells, M. (2009), Communication Power, Oxford: Oxford University Press. Castells, M. (2010 [1997]), The Information Age: Economy, Society, and Culture, Volume II. The Power of Identity, 2nd edition, Malden, MA/Oxford: Blackwell. Catephores, G. (1994), ‘The imperious Austrian: Schumpeter as bourgeois Marxist’, New Left Review, NLR I/205: 3–30. Chan, J., de Haan, E., Nordbrand S. and Torstensson, A. (2008), Silenced to Deliver: Mobile Phone Manufacturing in China and the Philippines, part of the MakeITfair project, SOMO and SwedWatch, Amsterdam and Stockholm, online, available at: http://makeitfair.org/en/the-facts/reports/2007-2009/reports-from-2009. Christiano, L.J., Eichenbaum, M. and Evans, C.L. (2005), ‘Nominal rigidities and the dynamic effects of a shock to monetary policy’, Journal of Political Economy, 113(1): 1–45. Christiano, L.J., Motto, R. and Rostagno, M. (2010), Financial Factors in Economic Fluctuations, ECB Working Paper No. 1192, Frankfurt: European Central Bank. Cincotti, S., Raberto, M. and Teglio, A. (2010), ‘Credit money and macroeconomic instability in the agent-based model and simulator Eurace’, Economics: The OpenAccess, Open-Assessment E--Journal, 4: 2010–2026. Coase, R.H. (1937), ‘The nature of the firm’, Economica, 4(16): 386–405. Coase, R.H. (1960), ‘The problem of social cost’, The Journal of Law and Economics, 3: 1–44. Coase, R.H. (1998), ‘The new institutional economics’, American Economic Review, 88(2): 72–74.

Bibliography 325 Commons, J.R. (1924), Legal Foundations of Capitalism, New York: Macmillan. Commons, J.R. (1936), ‘Institutional economics’, American Economic Review, 26(1): 237–249. Cordes, C. (2005), ‘Veblen’s ‘Instinct of Workmanship,’ its cognitive foundations, and some implications for economic theory’, Journal of Economic Issues, 39(1): 1–20. Corning, P.A. (2005), Holistic Darwinism: Synergy, Cybernetics, and the Bioeconomics of Evolution, Chicago, IL: University of Chicago Press. Csermely, P. (2009), Weak Links: The Universal Key to the Stability of Networks and Complex Systems, Dordrecht: Springer. D’Ippoliti, C. (2011), Economics and Diversity, Abingdon: Routledge. Dasgupta, P. and Stiglitz, J.E. (1980), ‘Industrial structure and innovative activity’, The Economic Journal, 90(358): 266–293. Dawkins, R. (2006 [1976]), The Selfish Gene, Oxford: Oxford University Press. de Bondt, G., Maddaloni, A., Peydró, J.-L. and Scopel, S. (2010), The Euro Area Bank Lending Survey Matters: Empirical Evidence for Credit and Output Growth, European Central Bank Working Paper Series, No. 1160, Frankfurt: European Central Bank. De Grauwe, P. (2009), Economics of Monetary Union, 9th edition, Oxford: Oxford University Press. DeLanda, M. (2006), A New Philosophy of Society, London: Continuum. DeLanda, M. (2011), Philosophy and Simulation. The Emergence of Synthetic Reason, London: Continuum. Deleuze, G. (2010 [1968)], Difference and Repetition, London: Continuum. Deleuze, G. and Guattari, F. (2010 [1980]), A Thousand Plateaus, London: Continuum. Delli Gatti, D., Gaffeo, E. and Gallegati, M. (2010), ‘Complex agent-based macroeconomics: a manifesto for a new paradigm’, Journal of Economic Interaction and Coordination, 5(2): 111–135. Delli Gatti, D., Gallegati, M., Greenwald, B.C., Russo, A. and Stiglitz, J.E. (2009), ‘Business fluctuations and bankruptcy avalanches in an evolving network economy’, Journal of Economic Interaction and Coordination, 4(2): 195–212. De Masi, G.D., Fujiwara, Y., Gallegati, M., Greenwald, B. and Stiglitz, J.E. (2011), ‘An analysis of the Japanese credit network’, Evolutionary Institutional Economic Review, 7(2): 209–232. Dewey, J. (1958 [1925]), Experience and Nature (unabridged and unaltered republication of the 2nd edition published 1925), New York: Dover Books. Dewey, J. (2008 [1916]), Democracy and Education, Radford, VA: Wilder Publications. Diamond, D.W. and Rajan, R.G. (2006), ‘Money in a theory of banking’, American Economic Review, 96(1): 30–53. Dopfer, K. (2004), ‘The economic agent as rule maker and rule user: Homo sapiens oeconomicus’, Journal of Evolutionary Economics, 14(2): 177–195. Dopfer, K. (2005), ‘Evolutionary economics: a theoretical framework’, in Dopfer, K. (ed.), The Evolutionary Foundation of Economics, Cambridge: Cambridge University Press, pp. 3–55. Dopfer, K. (2012), ‘The origins of meso economics: Schumpeter’s legacy and beyond’, Journal of Evolutionary Economics, 22(1): 133–160. Dopfer, K. and Potts, J. (2004), ‘Evolutionary realism: a new ontology for economics’, Journal of Economic Methodology, 11(2): 195–212. Dopfer, K. and Potts, J. (2008), The General Theory of Economic Evolution, Abingdon: Routledge.

326

Bibliography

Dopfer, K. and Potts, J. (2010), ‘Why evolutionary realism underpins evolutionary economic analysis and theory: a reply to Runde’s critique’, Journal of Institutional Economics, 6(3): 401–413. Dopfer, K., Foster, J. and Potts, J. (2004), ‘Micro–meso–macro’, Journal of Evolutionary Economics, 14(3): 263–279. Dosi, G. (1982), ‘Technological paradigms and technological trajectories: a suggested interpretation of the determinants and directions of technical change’, Research Policy, 11(3): 147–162. Dosi, G. and Nelson, R.R. (1994), ‘An introduction to evolutionary theories in economics’, Journal of Evolutionary Economics, 4(3): 153–172. Dosi, G., Fagiolo, G. and Roventini, A. (2010), ‘Schumpeter meeting Keynes: A policyfriendly model of endogenous growth and business cycles’, Journal of Economic Dynamics and Control, 34(9): 1748–1767. Elsner, W. (2007), ‘Why meso? On “aggregation” and “emergence”, and why and how the meso level is essential in social economics’, Forum for Social Economics, 36(1): 1–16. Elsner, W. (2010), ‘The process and a simple logic of “meso”: emergence and the coevolution of institutions and group size’, Journal of Evolutionary Economics, 20(3): 445–477. Elsner, W. and Heinrich, T. (2009), ‘A simple theory of meso: co-evolution of institutions and platform size’, Journal of Socio-Economics, 38(5): 843–858. Epstein, J.M. and Axtell, R. (1996), Growing Artificial Societies: Social Science from the Bottom Up, Washington, DC: Brookings Institution Press. Ferguson, N. (2009), The Ascent of Money: A Financial History of the World, d Harmondsworth: Penguin. Fine, B. (2001), Social Capital versus Social Theory, London: Routledge. Fontana, G. (2003), ‘Post Keynesian approaches to endogenous money: a time framework explanation’, Review of Political Economy, 15(3): 291–314. Foster, J. (1997), ‘The analytical foundations of evolutionary economics: from biological analogy to economic self-organisation’, Structural Change and Economic Dynamics, 8(4): 427–451. Foster, J. and Metcalfe, J.S. (2012), ‘Economic emergence: an evolutionary economic perspective’, Journal of Economic Behavior and Organization, 82(2/3): 420–432. Foucault, M. (1978), Dispositive der Macht: Über Sexualität, Wissen und Wahrheit, Berlin: Merve. Foucault, M. (1981), Archäologie des Wissens, Frankfurt: Suhrkamp. Foucault, M. (2004 [1974]), Geschichte der Gouvernmentalität, two volumes, Frankfurt: Suhrkamp. Foucault, M. (2005 [1994]), Analytik der Macht, Frankfurt: Suhrkamp. Fox, S. (2002), ‘Communities of practice, Foucault and actor network theory’, Journal of Management Studies, 37(6): 853–868. Fracchia, J. and Lewontin, R.C. (1999), ‘Does culture evolve?’, History and Theory, 38(4): 52–78. Friedman, M. (1956), ‘The quantity theory of money’, in Friedman, M. (ed.), Studies in the Quantity Theory of Money, Chicago, IL: University of Chicago Press. Georgescu-Roegen, N. (1971), The Entropy Law and the Economic Process, Cambridge: MAHarvard University Press. Gertler, M. and Karadi, P. (2011), ‘A model of unconventional monetary policy’, Journal of Monetary Economics, 58(1): 17–34.

Bibliography 327 Gertler, M. and Kiyotaki, N. (2010), ‘Financial intermediation and credit policy in business cycle analysis’, in Friedman, B.M. and Woodford, M. (eds) Handbook of Monetary Economics 3A, Amsterdam: Elsevier, pp. 547–600. Ghiselin, M.T. (1974), The Economy of Nature and the Evolution of Sex, Los Angeles/ San Francisco: University of California Press. Gilbert N. (2008), Agent-Based Models, quantitative applications in the social sciences series, Thousand Oaks, CA: Sage Publications. Glawogger, M. (2005), Workingman’s Death, documentation movie, Indigo Studio Austria; European best documentary movie award 2005. Godley, W.A.H. and Lavoie, M. (2012), Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, 2nd edition, New York: Palgrave Macmillan. Goldschmidt, N. and Rauchenschwandtner, H. (2007), The Philosophy of Social Market Economy: Michel Foucault’s Analysis of Ordoliberalism, Freiburg Discussion Papers on Constitutional Economics, 07/04, Freiburg: University of Frieburg Department of Economic Policy and Consitutional Economic Theory. Goodwin, R.M. (1990), ‘Walras and Schumpeter: the vision reaffirmed’, in Heertje, A. and Perlman, M. (eds), Evolving Technology and Market Structure: Studies in Schumpeterian Economics, Ann Arbor, MI: University of Michigan Press; and in Hanusch, H. (ed.) (1999), The Legacy of Joseph A. Schumpeter Volume II, I Cheltenham: Edward Elgar, pp. 75–86. Gorton, G.B. (2009), ‘Information, liquidity and the (ongoing) panic of 2007’, American Economic Review, 99(2): 567–572. Gould, S.J. (2002), The Structure of Evolutionary Theory, Cambridge, MA: Harvard University Press. Goyal, S. and Vega-Redondo, F. (2007), ‘Structural holes in social networks’, Journal of Economic Theory, 137: 460–492. Granovetter, M. (1983), ‘The strength of weak ties: a network theory revisited’, Sociological Theory, 1: 201–233. Gregg, M. and Seigworth, G.J. (eds) (2010), The Affect Theory Reader, Durham, NC/ London: Duke University Press. Greif, A. (1994), ‘Cultural beliefs and the organisation of society: a historical and theoretical reflection on collectivist and individualist societies’, Journal of Political Economy, 102(5): 912–950. Greif, A. and Laitin, D.D. (2004), ‘A theory of endogenous institutional change’, The American Political Science Review, 98(4): 14–48. Habermas, J. (1981), Theorie des kommunikativen Handelns, two volumes, Frankfurt: Suhrkamp. Hagemann, H. (2008), ‘Schumpeter on development’, in Shionoya, Y. and Nishizawa, T. (eds), Marshall and Schumpeter on Evolution: Economic Sociology of Capitalist Development, Cheltenham: Edward Elgar, pp. 225–243. Hall, R.B. (2008), Central Banking as Global Governance, Cambridge: Cambridge University Press. Hall, P.A. and Taylor, R.C.R. (1996), Political Science and the Three New Institutionall isms, MPIFG Discussion Paper 96/6, Cologne: Max Planck Institute. Hanappi, G. (1989), Die Entwicklung des Kapitalismus, Bern: Peter Lang. Hanappi, G., Radax, W., Rengs, B. and Wäckerle, M. (2009), ‘‘Modelling global institutional networks’, conference paper presented at EAEPE 2009, Amsterdam. Hanappi, H. (1994), Evolutionary Economics, Aldershot: Avebury.

328

Bibliography

Hanappi, H. (2003), ‘Evolutionary economic programs’, invited paper at the Ausschuß für Evolutionäre Ökonomie of the Verein für Socialpolitik, Erfurt, July 2003. Hanappi, H. (2008a), On the Nature of Knowledge, MPRA Paper No. 27615, online, available at: http://mpra.ub.uni-muenchen.de/27615/1/MPRA_paper_27615.pdf [the paper itself is unpaginated: page numbers in the text refer to the pdf’s page numbers in Adobe Reader]. Hanappi, H. (2008b), ‘The concept of choice: why and how innovative behaviour is not just stochastic’, Journal of Evolutionary Economics, 18(2): 275–289. Hanappi, H. (2009), ‘Money, credit, capital, and the state: on the evolution of money and institutions’, invited paper at the Verein für Socialpolitik (Ausschuss für Evolutorische Ökonomik) July 2009 in Jena. Hanusch, H. and Pyka, A. (2005), Principles of Neo-Schumpeterian Economics, Discussion Papers, Augsburg: Universität Augsburg, Intsitut für Volkswirtschaftslehre. Hanusch, H. and Pyka, A. (ed.) (2007a), Elgar Companion to Neo-Schumpeterian Economics, Cheltenham: Edward Elgar. Hanusch, H. and Pyka, A. (2007b), ‘A roadmap to comprehensive neo-Schumpeterian economics’, in Hanusch, H. and Pyka, A. (eds), Elgar Companion to NeoSchumpeterian Economics, Cheltenham: Edward Elgar, pp. 1160–1170. Hardin, G. (1968), ‘The tragedy of the commons’, Science, 162(3859): 1243–1248. Harker, R.K. (1984), ‘On reproduction, habitus and education’, British Journal of Sociology of Education, 5(2): 117–127. Hayek, F.A. (1931), Prices and Production, London: G. Routledge and Sons. Hayek, F.A. (1933), Monetary Theory and the Trade Cycle, New York: Sentry Press. Hayek, F.A. (1945), ‘The use of knowledge in society’, American Economic Review, 35(4): 519–530. Hayek, F.A. (1952), The Sensory Order: An Inquiry into the Foundations of Theoretical Psychology, London: Routledge. Hayek, F.A. (1967), Studies in Philosophy, Politics and Economics, Chicago, IL: University of Chicago Press. Hayek, F.A. (1973), Law, Legislation and Liberty Vol. 1, Chicago, IL: University of Chicago Press. Hayek, F.A. (1976a), Denationalisation of Money, London: Institute of Economic Affairs. Hayek, F.A. (1976b), Law, Legislation and Liberty Vol. 2, Chicago, IL: University of Chicago Press. Hayek, F.A. (1978), New Studies in Philosophy, Politics, Economics and the History of Ideas, London: Routledge. Hayek, F.A. (1979), Law, Legislation and Liberty Vol. 3, Chicago, IL: University of Chicago Press. Hayek, F.A. (1988), The Fatal Conceit: The Errors of Socialism, Chicago, IL: Chicago University Press. Hayek, F.A. (1989 [1937]), Monetary Nationalism and International Stability, New York: Augustus M. Kelley. Held, D. (1996), Models of Democracy, Stanford, CA: Stanford University Press. Held, D. (2010), Cosmopolitanism, Cambridge: Polity Press. Herrmann-Pillath, C. (2004), On Power as a Unifying Concept in a Naturalistic Foundation of the Social Sciences, SSRN Working Paper Series, online, available at: http:// ssrn.com/abstract=950582 or http://dx.doi.org/10.2139/ssrn.950582.

Bibliography 329 Herrmann-Pillath, C. (2007), The Concept of Information and the Problem of Holism Vs. Atomism in Biological and Economic Uses of Universal Darwinism, SSRN Working Paper Series, online, available at: http://ssrn.com/abstract=1009787 or http://dx.doi. org/10.2139/ssrn.1009787. Herrmann-Pillath, C. (2008), ‘Consilience and the naturalistic foundations of evolutionary economics’, Evolutionary Institutional Economic Review, 5(1): 129–162. Hicks, J.R. (1935), ‘A suggestion for simplifying the theory of money’, Economica, 2: 1–19. Hicks, J.R. (1980), ‘IS-LM: an explanation’, Journal of Post-Keynesian Economics, 3(2): 139–154. Hodgson, G.M. (1997), ‘The evolutionary and non-Darwinian economics of Joseph Schumpeter’, Journal of Evolutionary Economics, 7(2): 131–145. Hodgson G.M. (2001), How Economics Forgot History, London: Routledge. Hodgson, G.M. (2002), ‘Darwinism in economics: from analogy to ontology’, Journal of Evolutionary Economics, 12(3): 259–281. Hodgson, G.M. (2004a), The Evolution of Institutional Economics: Agency, Structure and Darwinism in American Instituionalism, London: Routledge. Hodgson, G.M. (2004b), ‘Reclaiming habit for institutional economics’, Journal of Economic Psychology, 25(5): 651–660. Hodgson, G.M. (2006), ‘What are institutions?’ Journal of Economic Issues, 40(1): 1–25. Hodgson, G.M. (2007), ‘Institutions and individuals: interaction and evolution’, Organization Studies, 28(1): 95–116. Hodgson, G.M. (2008a), ‘Marshall, Schumpeter and the shifting boundaries of economics and sociology’, in Shionoya, Y. and Nishizawa, T. (eds), Marshall and Schumpeter on Evolution: Economic Sociology of Capitalist Development, Cheltenham: Edward Elgar, pp. 93–116. Hodgson, G.M. (2008b), ‘The emergence of the idea of institutions as repositories of knowledge’, in Ebner, A. and Beck, N. (eds), The Institutions of the Market. Organizations, Social Systems, and Governance, Oxford: Oxford University Press, pp. 23–40. Hodgson, G.M. (2011), ‘Sickonomics: diagnoses and remedies’, Review of Social Economy, 69(3): 357–376. Hodgson, G.M. (2012), From Pleasure Machines to Moral Communities. An Evolutionary Economics without Homo Economicus, Chicago, IL: University of Chicago Press. Hodgson, G.M. and Knudsen, T. (2004), ‘The firm as an interactor: firms as vehicles for habits and routines’, Journal of Evolutionary Economics, 14(3): 281–307. Hodgson, G.M. and Knudsen, T. (2006), ‘Why we need a generalized Darwinism and why generalized Darwinism is not enough’, Journal of Economic Behavior and Organization, 61(1): 1–19. Hodgson, G.M. and Knudsen, T. (2012), ‘Generalized Darwinism and evolutionary economics: from ontology to theory’, Biological Theory, 6(4): 326–337. Holland, J.H. (1998), Emergence: From Chaos to Order, Oxford: Oxford University Press. Hölldobler, B. and Wilson, E.O. (2009), The Superorganism: The Beauty, Elegance, and Strangeness of Insect Societies, New York: W.W. Norton & Co. Inc. Hookway, C. (2008), ‘Pragmatism’, in Zalta, E.N. (ed.) (2009): Stanford Encyclopedia of Philosophy, online, available at: http://plato.stanford.edu/entries/pragmatism, visited Dec 2009. Huberman, B.A. and Glance, N.S. (1993), ‘Evolutionary games and computer simulations’, Proceedings of the National Academy of Sciences, 90(16): 7716–7718.

330

Bibliography

Hughes, J. (2011), Deleuze’s Difference and Repetition, London: Continuum. Hull, D.L. (1976), ‘Are species really individuals?’ Systematic Zoology, 25(2): 174–191. Jackson, M.O. (2005), ‘A survey of models of network formation: stability and efficiency’, in Demange, G. and Wooders M. (eds), Group Formation in Economics: Networks, Clubs and Coalitions, Cambridge: Cambridge University Press. James, W. (1890), Habit, re-published in Slater, L. (2011), The Pragmatistic Thought of Peirce, James and Dewey, Leo, IN: Slater Press. Jessop, B. (2008), ‘Polanyian, regulationst, and autopoieticist reflections on states and markets and their implications for the knowledge-based economy’, in Ebner, A. and Beck, N. (eds), The Institutions of the Market. Organizations, Social Systems, and Governance, Oxford: Oxford University Press, pp. 328–348. Kapeller, J. (2011), Modell-Platonismus in der Ökonomie: Zur Aktualität einer klassischen epistemologischen Kritik, Frankfurt: Peter Lang. Kauffman, S. (1993), The Origins of Order: Self-Organisation and Selection in Evolution, Oxford: Oxford University Press. Kauffman, S. (1995), At Home in the Universe: The Search for Laws of Self-Organisation and Complexity, Oxford: Oxford University Press. Kawamura, T. (2009), ‘A note on the institution as a nested reasoning structure in terms of bounded cognition’, Evolutionary and Institutional Economics Review, 5(2): 293–305. Keynes, J.M. (2008 [1936]), The General Theory of Employment, Interest and Money, New York: Classic House Books. Khalil, E.L. (1997), ‘Friedrich Hayek’s theory of spontaneous order: two problems’, Constitutional Political Economy, 8(4): 301–317. Kiyotaki, N. and Moore, J. (2012), ‘Liquidity, business cycles and monetary policy’, unpublished manuscript. Klein, D.B. (1997), ‘Convention, social order, and the two coordinations’, Constitutional Political Economy, 8(4): 319–335. Knell, M. (2012), ‘Schumpeter, Minsky and the financial instability hypothesis’, unpublished manuscript. Knottenbauer, K. (2009), Recent Developments in Evolutionary Biology and their Relevance for Evolutionary Economics, Papers on Economics and Evolution #0911, Jena: Max Planck Institute of Economics. Knudsen, T. (2002), ‘Economic selection theory’, Journal of Evolutionary Economics, 12(4): 443–470. Kuhn, T.S. (1962), The Structure of Scientific Revolutions, Chicago, IL: University of Chicago Press. Kurz H.D. (2010), ‘The beat of the economic heart: Joseph Schumpeter and Arthur Spiethoff on business cycles’, unpublished working paper, MPRA No. 20429, online, available at: http://mpra.ub.uni-muenchen.de/20429. Lakatos, I. (1980), The Methodology of Scientific Research Programmes, New York: Cambridge University Press. Lavoie, M. (1984), ‘The endogenous flow of credit and the post-Keynesian theory of money’, Journal of Economic Issues, 18(3): 771–797. Lawson, T. (2003), Reorienting Economics: Economics as Social Theory, London: Routledge. Leube, K.R. (1996), The essence of J.A. Schumpeter: Die wesentlichen Texte Band 3, Die österreichische Schule der Nationalökonomie, Internationales Institut Österreichische Schule der Nationalökonomie.

Bibliography 331 Loasby, B. (1984), ‘Entrepreneurs and organisation’, Journal of Economic Studies, 11(2): 75–88; and in Hanusch, H. (ed.) (1999), The Legacy of Joseph A. Schumpeter Volume II, I Cheltenham: Edward Elgar, pp. 168–182. Luhmann, N. (1984), Soziale Systeme, Frankfurt: Suhrkamp. Lukes, S. (2005 [1974]), Power: A Radical View, 2nd edition, Basingstoke: Palgrave Macmillan. Luthi L., Tomassini, M. and Pestelacci, E. (2009), ‘Evolutionary games on networks and payoff invariance under replication dynamics’, BioSystems, 96(3): 213–222. Maddaloni, A. and Peydró, J.-L. (2010), Bank Risk-Taking, Securitization, Supervision and Low Interest Rates: Evidence from the Euro Area and the U.S. Lending Standards, ECB Working Paper Series No. 1248, Frankfurt: European Central Bank. Madden, B. (2006), Milton Friedman Letters, paper online, available at: www.learningwhatworks.com/papers/MiltonFriedman%20_2_.pdf (visited in November 2009). Marengo, L., Pasquali, C. and Valente, M. (2005), ‘Decomposability and modularity of economic interactions’, in Callebaut, W. and Rasskin-Gutman, D. (ed.), Modularity: Understanding the Development and Evolution of Natural Complex Systems, Cambridge, MA: MIT Press. Margulis, L. (1998), Symbiotic Planet: A New Look at Evolution, Amhurst, MA: Perseus Books. Maynard-Smith, J. (1982), Evolution and the Theory of Games, Cambridge: Cambridge University Press. Metcalfe, J.S. (1998), Evolutionary Economics and Creative Destruction, The Graz Schumpeter Lectures, London/New York: Routledge. Metcalfe, J.S. (2005), ‘Evolutionary concepts in relation to evolutionary economics’, in Dopfer, K. (ed.), The Evolutionary Foundation of Economics, Cambridge: Cambridge University Press, pp. 391–431. Metcalfe, J.S. (2008), ‘The broken thread: Marshall, Schumpeter and Hayek on the evolution of capitalism’, in Shionoya, Y. and Nishizawa, T. (eds), Marshall and Schumpeter on Evolution: Economic Sociology of Capitalist Development, Cheltenham: Edward Elgar, pp. 116–147. Milonakis, D. and Fine, B. (2008), From Political Economy to Economics: Method, the Social and the Historical in the Evolution of Economic Theory, Abingdon: Routledge. Miller, J.H. and Page, S.E. (2007), Complex Adaptive Systems: An Introduction to Computational Models of Social Life, Princeton, NJ: Princeton University Press. Minsky, H.P. (1992), The Financial Instability Hypothesis, Jerome Levy Economics Institute Working Paper Series No. 74, online, available at: http://ssrn.com/ abstract=161024 or http://dx.doi.org/10.2139/ssrn.161024. Minsky, H.P. (2008 [1986]), Stabilizing an Unstable Economy, New York: McGraw Hill Books. Mirowski, P. (2002), Machine Dreams: Economics Becomes a Cyborg Science, Cambridge: Cambridge University Press. Mirowski, P. (2007), ‘Markets come to bits: evolution, computation and markomata in economic science’, Journal of Economic Behavior and Organization, 63(2): 209–242. Mirowski, P. (2010), ‘Inherent vice: Minsky, Markomata, and the tendency of markets to undermine themselves’, Journal of Institutional Economics, 6(4): 415–443. Mishkin, F.S. (1996), ‘The channels of monetary transmission: lessons for monetary policy’, Banque de France Bulletin Digestt No. 27, Paris: Banque de France. Mitchell, W.C. (1913), Business Cycles, Berkeley, CA: University of California. Mitchell, W.C. (1937), The Backward Art of Spending Money, New York: McGraw-Hill.

332

Bibliography

Mittnik, S. and Semmler, W. (2012), ‘‘Estimating a banking-macro model for Europe using a multi-regime VAR’, unpublished manuscript. Morgan, J. and Olsen, W. (2011), ‘Conceptual issues in institutional economics: clarifying the fluidity of rules’, Journal of Institutional Economics, 7(3): 425–454. Mouzelis, N. (1995), Sociological Theory: What Went Wrong? Diagnosis and Remedies, London: Routledge. Mouzelis, N. (2007), ‘Social causation: between social constructivism and critical realism’, Science and Society: Journal of Political and Moral Theory, 17/18: art. 6, online, available at: www.scribd.com/doc/130254394/Mouzelis-Social-Causation. Müller, S.S.W. (2010), Theorien sozialer Evolution: Zur Plausibilität darwinistischer Erklärungen sozialen Wandels, Bielefeld: transcript Verlag. Mutch, A. (2003), ‘Communities of practice and habitus: a critique’, Organisational Studies, 23(3): 383–401. Myrdal, G. (2009 [1944]), An American Dilemma: The Negro Problem and Modern Democracy, New Brunswick, NJ: Transaction Publishers. Nelson, R.R. (1984), ‘Incentives for entrepreneurship and supporting institutions’, Weltwirtschaftliches Archiv, 120(4): 646–660, and in Hanusch, H. (ed.) (1999), The Legacy of Joseph A. Schumpeter Voume II, I Cheltenham: Edward Elgar, pp. 182–199. Nelson, R.R. and Nelson, K. (2002), ‘Technology, institutions and innovation systems’, Research Policy, 31: 265–272. Nelson, R.R. and Winter, S.G. (1982), An Evolutionary Theory of Economic Change, Cambridge, MA: The Belknap Press of Harvard University Press. Newell, A. and Simon, H.A. (1975), Computer Science as Empirical Inquiry: Symbols and Search, ACM Turing Award Lecture, online, available at: www.cs.utexas. edu/~kuipers/readings/Newell+Simon-cacm-76.pdf. North, D.C. (1990), Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge University Press. Noteboom, B. (2009), A Cognitive Theory of the Firm, Cheltenham: Edward Elgar. Nowak, M.A. (2006), Evolutionary Dynamics. Exploring the Equations of Life, Cambredge, MA: The Belknap Press of Harvard University Press. Nussbaum, M. (2010), Not for Profit: Why Democracy Needs the Humanities, Princetone, NJ: Princeton University Books. Ostrom, E. (2005a), Understanding Institutional Diversity, Princeton, NJ: Princeton University Press. Ostrom, E. (2005b), ‘Policies that crowd out reciprocity and collective action’, in Bowles, S., Boyd, R., Fehr E. and Gintis, H. (eds), Moral Sentiments and Material Interests, Cambridge, MA: MIT Press. Ostrom, E. (2010), ‘Organizational economics: applications to metropolitan governance’, Journal of Institutional Economics, 6(1): 109–115. Ostrom, E. and Basurto, X. (2011), ‘Crafting analytical tools to study institutional change’, Journal of Institutional Economics, 7(3): 317–343. Oyama, S. (2000), Evolution’s Eye: A Systems View of the Biology–Culture Divide, Durham, NC: Duke University Press. Pape, H. (2004), Charles S. Peirce zur Einführung, Hamburg: Junius Verlag. Peirce, C.S. (1998), Naturordnung und Zeichenprozeß. Schriften über Semiotik und Naturphilosophie, 2nd edition, ed. H. Pape, Frankfurt: Suhrkamp. Perrin, P. (2005), ‘Hermeneutic economics: between relativism and progressive polylogism’, Quarterly Journal of Austrian Economics, 8(3): 21–38.

Bibliography 333 Pigliucci, M. and Müller, G. (2010), Evolution: The Extended Synthesis, Cambridge, MA: MIT Press. Popper, K. (1972), Objective Knowledge: An Evolutionary Approach, Oxford: Oxford University Press. Popper, K. (2004 [1934]), The Logic of Scientific Discovery, London: Routledge. Potts, J. (2000), The New Evolutionary Microeconomics. Complexity, Competence and Adaptive Behaviour, Cheltenham: Edward Elgar. Pöyhönen, P. (2009), Legal and Illegal Blurred: Update on Tin Production for Consumer Electronics in Indonesia, part of the MakeITfairr project, FinnWatch, Helsinki, online, available at: http://makeitfair.org/en/the-facts/reports/2007-2009/reports-from-2009. Pöyhönen, P. and Simola, E. (2007), Connecting Components, Dividing Communities. Tin Production for Consumer Electronics in the DR Congo and Indonesia, part of the MakeITfairr project, FinnWatch, Helsinki, online, available at: http:// makeitfair.org/en/ the-facts/reports/2007-2009/reports-from-2009. Pozsar, Z., Adrian, T., Ashcraft, A. and Boesky, H. (2012), ‘Shadow banking’, FED of NY Staff Report No. 458, online, available at: www.ny.frb.org/research/ staff_reports/ sr458.pdf. Pribram, K. (1998), Geschichte des ökonomischen Denkens, Vol. 1, Frankfurth: Suhrkamp. Prigogine, I. (2005), ‘The rediscovery of value and the opening of economics’, in Dopfer K. (ed.), The Evolutionary Foundation of Economics, Cambridge: Cambridge University Press. Putnam, R. (1993), Making Democracy Work: Civic Traditions in Modern Italy, Princeton, NJ: Princeton University Press. Putnam, R. (2000), Bowling Alone: The Collapse and Revival of American Community, New York: Simon & Schuster. Radax, W. and Rengs, B. (2010), ‘Timing matters: Lessons from the CA literature on updating’, for the Third Word Congress of Social Simulation, Kassel, 6–9 September 2010. Radax, W., Hanappi, H. and Wäckerle, M. (2009a), ‘From agents to large actors and back: formalized story-telling of emergence and exit in political economy’, presented at HetEcon 2009, Kingston. Radax, W., Rengs, B. and Wäckerle, M. (2009b), ‘An agent-based approach to institutional change’, presented at EAEPE 2009, Amsterdam. Rawls, J. (1971), A Theory of Justice, Cambridge, MA: Harvard University Press. Reinert, H. and Reinert, E.S. (2006), ‘Creative destruction in economics: Nietzsche, Sombart, Schumpeter’, in Backhaus, J.G. and Drechsler, W. (eds), Friedrich Nietzsche (1844–1900): Economy and Society, Dordrecht: Springer, pp. 55–85. Reuter, N. (1996), Der Institutionalismus: Geschichte und Theorie der evolutionären Ökonomie, Marburg, Metropolis Verlag. Rorty, R. (1991), Kontingenz, Ironie und Solidariät, Frankfurt: Suhrkamp. Runde, J. (2009), ‘Ontology and the foundations of evolutionary economic theory: on Dopfer and Potts’ general theory of economic evolution’, Journal of Institutional Economics, 6(3): 401–413. Safarzynska, K. (2013), ‘The coevolution of culture and environment’, Journal of Theoretical Biology, 322: 45–57. Safarzynska, K. and Van den Bergh, J.C.J.M. (2012), ‘An evolutionary model of energy transitions with interactive innovation-selection dynamics’, Journal of Evolutionary Economics, DOI: 10.1007/s00191-012-0298-9.

334

Bibliography

Sanchez-Pages, S. and Straub, S. (2006), The Emergence of Institutions, ESE Working Papers, Edinburgh: Edinburgh School of Economics, University of Edinburgh. Sanchez-Pages, S. and Straub, S. (2010), ‘The emergence of institutions’, The B.E. Journal of Economic Analysis and Policy, 10(1): 1–36. Schelling, T. (1960), The Strategy of Conflict, Cambridge, MA: Harvard Press. Schelling, T. (1978), Micromotives and Macrobehavior, New York: Norton & Co. Schumpeter, J.A. (1930), ‘Mitchell’s business cycles’, The Quarterly Journal of Economics, 45(1): 150–172. Schumpeter, J.A. (1939), Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process, two volumes, New York/London: McGraw-Hill. Schumpeter, J.A. (1950), ‘Wesley Clair Mitchell (1874–1948)’, The Quarterly Journal of Economics, 64(1): 139–155. Schumpeter, J.A. (1954), History of Economic Analysis, Oxford: Oxford University Press. Schumpeter, J.A. (1970), Das Wesen des Geldes, Göttingen: Vandenhoeck und Ruprecht. Schumpeter, J.A. (1997 [1911]), Theorie der wirtschaftlichen Entwicklung, 9th edition, Berlin: Duncker & Humblot. Schumpeter, J.A. (2005 [1942]), Kapitalismus, Sozialismus und Demokratie, Stuttgart: UTB. Schwarz, R. and Wäckerle, M. (2012), ‘Ökonomie der Bandbreite: Evolutionär-ökonomische und kulturanthropologische Überlegungen zu Schnittstellen in MenschMaschine-Komplexen’, Momentum Quarterly, 1(3): 184–202. Schweitzer, F., Fagiolo, G., Sornette, D., Vega-Redondo, F., Vespignani, A. and White, D.R. (2009), ‘Economic networks: The new challenges’, Science, Vol. 325(5939): 422–425. Schwingel, M. (1995), Pierre Bourdieu: zur Einführung, Dresden: Junius Verlag. Scott, J. (2000), Social Network Analysis: AH, H London: Sage Publications. Screpanti, E. and Zamagni, S. (2005), An Outline of the History of Economic Thought, Oxford: Oxford University Press. Searle, J.R. (2005), ‘What is an institution?’ Journal of Institutional Economics, 1(1): 1–22. Sen, A. (1977), ‘Social choice theory: a re-examination’, Econometrica, 45(1): 53–89. Sen, A. (1999a), Development as Freedom, Oxford: Oxford University Press. Sen, A. (1999b), ‘The possibility of social choice’, The American Economic Review, 89(3): 349–378. Sen, A. (2005), The Argumentative Indian. Writings on Indian History, Culture and Identity, London: Penguin. Sen, A. (2010), The Idea of Justice, London: Penguin Books. Seppecher, P. (2012), ‘Flexibility of wages and macroeconomic instability in an agentbased computational model with endogenous money’, Macroeconomic Dynamics, 16(S2): 284–297. Shionoya, Y. (2008), ‘Schumpeter and evolution: an ontological exploration’, in Shionoya, Y. and Nishizawa, T. (eds), Marshall and Schumpeter on Evolution: Economic Sociology of Capitalist Development, Cheltenham: Edward Elgar, pp. 15–36. Siemsen, H. and Siemsen, K.H. (2009), ‘Resettling the thoughts of Ernst Mach and the Vienna Circle in Europe: the cases of Finland and Germany’, Science and Education, 18(3/4): 299–323. Simmel, G. (1900), Philosophie des Geldes, Frankfurt: Suhrkamp.

Bibliography 335 Simon, H. (1962), ‘The architecture of complexity’, Proceedings of the American Philosophical Society, 106(6): 467–482. Simon, H. (1982), Models of Bounded Rationality, Cambridge, MA: MIT Press. Simon, H.A. (1991), ‘Bounded rationality and organizational learning’, Organization Science, 2(1): 125–134. Simon, H.A. (1996), The Sciences of the Artificial, 3rd edition, Cambridge, MA: MIT Press. Simon, H.A. (1997), An Empirically Based Microeconomics, Cambridge: Cambridge University Press. Slater, L. (2011), The Pragmatistic Thought of Peirce, James and Dewey, Leo, IN: Slater Press. Smets, F. and Wouters, R. (2007), ‘Shocks and fricitions in U.S. business cycles: a Bayesian DSGE approach’, American Economic Review, 97(3): 586–606. Smith, A. (1984 [1759]), The Theory of Moral Sentiments, London: Routledge. Sober, E. and Wilson, D.S. (1998), Unto Others: The Evolution and Psychology of Unselfish Behavior, Cambridge, MA: Harvard University Press. Steele, G.R. (2001), Keynes and Hayek: The Money Economy, London: Routledge. Steppacher, R. (2008), ‘Property, mineral resources and sustainable development’, in Otto Steiger (ed.), Property Rights, Creditor’s Money and the Foundation of the Economy, Marburg: Metropolis, pp. 323–354. Stiglitz, J.E. and Gallegati, M. (2011), ‘Heterogeneous interacting agent models for understanding monetary economies’, Eastern Economic Journal, 37(1): 6–12. Stiglitz, J.E. and Weiss, A. (1988), Banks as social accountants and screening devices for the allocation of credit, NBER Working Paper Series, Working Paper No. 2710, online, available at: www.nber.org/papers/w2710. Stoehlhorst, J.W. (2008), ‘Generalized Darwinism from the bottom-up’, in Hanappi, H. and Elsner, W. (eds), Advances in Evolutionary Institutional Economics, Cheltenham: Edward Elgar. Sugden, R. (1989), ‘Spontaneous order’, The Journal of Economic Perspectives, 3(4): 85–97. Tang, S. (2011), ‘Foundational paradigms of social sciences’, Philosophy of the Social Sciences, 41(2): 211–249. Taylor, A.D. and Pacelli, A.M. (1995), Mathematics and Politics: Strategy, Voting, Power and Proof, f Berlin: Springer. Thurner, S. (2011), Systemic Financial Risk: Agent-Based Models to Understand the Leverage Cycle on National Scales and its Consequences, OECD/IFP Project Report on ‘Future Global Shocks’, online, available at: www.futurict.eu/sites/ default/files/ Report%20commissioned%20by%20the%20OECD%20on%20Systemic%20Risk,%20 by%20Stefan%20Thurner.pdf. Tobin J. (1956), ‘The interest elasticity of the transactions demand for cash’, Review of Economics and Statistics, 38(3): 241–247. Tomassini, M., Luthi, L. and Giacobini, M. (2006), ‘Hawks and doves on small-world networks’, Physical Review E, 73(1 Pt 2): 016132. Tomassini, M., Pestelacci, E. and Luthi, L. (2010), ‘Mutual trust and cooperation in the evolutionary hawks–doves game’, BioSystems, 99(1): 50–59. Trigg, A.B. (2001), ‘Veblen, Bourdieu and conspicuous consumption’, Journal of Economic Issues, 35(1): 99–115. Trivers, R.L. (1971), ‘The evolution of reciprocal altruism’, The Quarterly Review of Biology, 46(1): 35–57.

336

Bibliography

Van den Bergh, J.C.J.M. (2007), ‘Evolutionary thinking in environmental economics’, Journal of Evolutionary Economics, 17(5): 521–549. Van den Bergh, J.C.J.M. and Gowdy, J.M. (2000), ‘Evolutionary theories in environmental and resource economics: approaches and applications’, Environmental and Resource Economics, 17(1): 37–57. Van den Bergh, J.C.J.M., Faber, A., Idenburg, A.M. and Oosterhuis, F.H. (2006), ‘Survival of the greenest: evolutionary economics and policies for energy innovation’, Environmental Sciences, 3(1): 57–71. Vanberg, V. (1994), ‘Hayek’s legacy and the future of liberal thought: rational liberalism versus evolutionary agnosticism’, The Cato Journal, 14(2): 179–199. Vanberg, V. (2004), ‘Austrian economics, evolutionary psychology and methodological dualism: subjectivism reconsidered’, Freiburg Discussion Papers on Constitutional Economics 04/3, Freiburg: Albert-Ludwigs-Universität Freiburg und Walter Eucken Institut. Veblen, T. (1898), ‘Why is economics not an evolutionary science?’ The Quarterly Journal of Economics, 12(4): 373–397, online, available at: http://emergentpublications.com/ECO/ECO_other/Issue_12_2_6_CP.pdf?AspxAutoDetectCookieSupport=1. Veblen, T. (1898–99), ‘The instinct of workmanship and the irksomeness of labor’, American Journal of Sociology, 4: 187–201. Veblen, T. (2000 [1899]), Theorie der feinen Leute: Eine ökonomische Untersuchung der Institutionen, Frankfurt: Fischer. Veblen, T. (2009a [1904]), Theory of Business Enterprise, Gloucester: Dodo Press. Veblen, T. (2009b [1914]), The Instinct of Workmanship, Whitefish, MT: Kessinger Publishing. Velupillai, K.V., Zambelli, S. and Kinsella, S. (eds) (2011), The International Library of Critical Writings in Economics: The Elgar Companion to Computable Economics, Cheltenham: Edward Elgar. Vromen, J. (2004), ‘Conjectural revisionary economic ontology: outline of an ambitious research agenda for evolutionary economics’, Journal of Economic Methodology, 11(2): 213–247. Vromen, J. (2007), Generalized Darwinism in Evolutionary Economics: The Devil lies in the Details, Papers on Economics and Evolution #0711, Evolutionary Economics Group, Jena: Max Planck Institute of Economics. Vromen, J. (2011), ‘Routines as multilevel mechanisms’, Journal of Institutional Economics, 7(2): 175–196. Wapshott, N. (2011), Keynes Hayek. The Clash That Defined Modern Economics, New York: W.W. Norton & Company. Wassermann, S. and Faust, K. (1994), Social Network Analysis: Methods and Applications, Cambridge: Cambridge University Press. Watts, D.J. (2004), Six Degrees: The Science of a Connected Age, New York: W.W. Norton & Company. Weber, M. (2005 [1871]), Die protestantische Ethik und der Geist des Kapitalismus, München: Verlag C.H. Beck. WEED (2008), The Dark Side of Cyberspace: Inside the Sweatshops of China’s Computer Hardware Production, Berlin: World Economy, Ecology and Development, online, available at: www2.weed-online.org/uploads/ the_dark_side_of_cyberspace_ dec.2008.pdf. Weed, F.J. (1981), ‘Interpreting “institutions” in Veblen’s evolutionary theory’, American Journal of Economics and Sociology, 40(1): 67–78.

Bibliography 337 Whitehead, A.N. (2011 [1926]), Science and the Modern World, d Cambridge: Cambridge University Press. Wiener, N. (1961) [1948], Cybernetics of Control and Communication in the Animal and the Machine, 2nd edition, Cambridge, MA: MIT Press. Williamson, O.E. (1975), Markets and Hierarchies: Analysis and Antitrust Implications, New York: Macmillan. Williamson, O.E. (1979), ‘Transaction-cost economics: the governance of contractual relations’, Journal of Law and Economics, 22(2): 233–261. Wilson, D.S. (2010), ‘Multilevel selection and major transitions’, in Pigliucci, M. and Müller, G. (eds), Evolution. The Extended Synthesis, Cambridge, MA: MIT Press, pp. 81–95. Witt, U. (1997), ‘Self-organisation and economics – what is new?’ Structural Change and Economic Dynamics, 8(4): 489–507. Witt, U. (2003), The Evolving Economy: Essays on the Evolutionary Approach to Economics, Cheltenham: Edward Elgar. Witt, U. (2008a), ‘Heuristic twists and ontological creeds: a roadmap for evolutionary economics’, in Hanappi, H. and Elsner, W. (eds), Advances in Evolutionary Institutional Economics, Cheltenham: Edward Elgar. Witt, U. (2008b), ‘What is specific about evolutionary economics?’ Journal of Evolutionary Economics, 18(5): 547–575. Witt, U. (2008c), ‘Observational learning, group selection, and societal evolution’, Journal of Institutional Economics, 4(1): 1–24. Witt, U. (2009), ‘Propositions about novelty’, Journal of Economic Behavior and Organization, 70(1/2): 311–320. Witt, U. (2011), ‘The dynamics of consumer behaviour and the transition to sustainable consumption patterns’, Environmental Innovation and Societal Transitions, 1(1): 109–114. Witt, U. and Brenner, T. (2008), ‘Output dynamics, flow-equilibria and structural change: a prolegomenon to evolutionary macroeconomics’, Journal of Evolutionary Economics, 18(2): 249–260. Wolfram, S. (2002), A New Kind of Science, Champaign, IL: Wolfram Media. Wortmann, H. (2010), Zum Desiderat einer Evolutionstheorie des Sozialen, Konstanz: UVK Verlagsgesellschaft. Young, H.P. (1996), ‘The economics of convention’, Journal of Economic Perspectives 10(2): 105–122. Young, H.P. (1998), Individual Strategy and Social Structure, Princeton, NJ: Princeton University Press.

Index

Page numbers in italics denote tables, those in bold denote figures. abduction 71, 198, 317n4 absolute emergence see emergence absolutism 305 academia 170 accumulation of capital 157, 158, 176, 178 action 71 actual 201, 202 actualization 192, 202 adaptation 22, 23, 25, 31, 57, 93, 168, 185, 190, 191, 197, 198, 225, 259, 290 adoption 194, 196, 197, 198, 290 affect 86–7, 94, 129, 168, 184, 185, 194, 307, 308 affective orders 184, 185, 190, 203, 206, 207, 263, 268, 272, 273, 314, 315, 315–16 agency 68, 70–1, 99, 100; economic 38; individual 37 agency and structure 1, 4, 7, 13, 28–9, 33, 38, 56, 167, 168, 169, 259, 315 agent-based modelling 205, 224, 225–6, 227, 229–56, 267, 268, 281, 291, 292, 297, 314 agents 224, 225; representative 195, 197, 283, 290; see also economic agents aggregate demand 96 aggregation 195, 197 Aldrich, H.E. 39 Alexander, S. 217 altruism 126 American institutionalism 70–85 analytical approaches 3, 4 anarchy 302 antisocialization 14 Aoki, M. 103, 210, 215–16, 309, 319n4 applied science 145, 146 Approval Voting 310

arbitrageurs 156 Arena, R. 132, 133, 152, 155, 156, 284, 285 aristocracy 170, 174, 302, 303 Aristotle 48, 300, 301 Arrow, K.J. 162, 310, 311 Arthur, B. 106 artificial–natural – distinction 108–9 artificial selection 15 as-if argument 55–6, 110–11 assemblages 268 assets, long-term versus short-term 156 association axiom 52–3 assumptions 219 Atkinson, P.A. 186 Aufhebungg 138, 141 Aumann, R. 319n3 autocatalysis 45, 291, 317n3 Axelrod, R. 125 axiomatic variation 4 Axtell, R. 125 balance sheet channel 288 balance sheets 282, 286 bank lending 281–2, 288–9, 294–8 bank lending channel 288 Bank Lending Survey (BLS) 294–8 bank money (bank notes) 153, 283, 285 banking 9, 97, 152–4, 155, 280, 281, 284–5, 286, 290; interconnectedness in 290–1; shadow 290 banking-macro nexus 280, 281, 283, 287, 290, 292–8 Barabási, A.-L. 227, 290 Basurto, X. 222, 223 Battiston, S. 291 Baumol, W.J. 282

Index 339 Becker, G. 100, 178 behaviour 25, 281; firms 23; individual 37 Beinhocker, E.D. 3, 7, 222, 223, 267 beliefs 103; fixation of 71; shared 43, 122–3, 210, 309 Bentham, J. 304 Berg, J. 295 Berger, S. 114, 273–4, 274–5 Bernanke, B.S. 288, 289 Bertalanffy, L.v. 14, 220 Bertocco, G. 287, 293 Bezemer, D.J. 284 Bhaskar, R. 55, 56 bimodality 64, 86 bimodality axiom 51–2 Binder, M. 259 bio-politics 265 biological evolution 14, 16, 18, 19, 37–8, 46, 140–1, 191 biotechnology 149 Black, D. 311 body– y mind nexus 65, 167, 168, 169, 190, 192, 207, 307 Boehm, F. 130 Bofinger, P. 282 Böhm-Bawerk, E. von 95 boom 146, 147 Borda Count 310 Bösel, B. 30, 200, 265 Botero, G. 319n1 bottom-up approaches/processes 2, 4, 7, 9, 32, 37–9, 75, 87, 167, 190, 197, 200, 205, 224, 268, 281, 287, 290–2, 292–8, 313, 314 bounded rationality 219, 225, 281, 297 Bourdieu, P. 6, 7, 49, 65–6, 68, 80, 81, 112, 127, 167–89, 191, 193, 200–1, 206, 317–18n1, 320; capital transformation 179–80; capital, varieties of 170, 173, 174, 175–9, 261; critique of capitalism 169; cultural dispositions versus economic positions 169, 175–7, 185; distinction, theory of 168, 171–2; fields, theory of 169, 181–5, 190, 193, 196, 201, 206, 262; habitus 65, 66, 68, 112, 129, 167, 168, 169, 170–5, 181–5, 186, 187, 188, 190, 192, 193, 196, 202, 206; taste 80, 81, 172, 173; theory of practice 65, 168, 169, 172, 174, 180–6; ContreFeux 1 et 2 169; Distinction: critique sociale du jugement, La 169; Homo academicus 170; Raisons pratiques: sur la théorie de l’action 170 Bowles, S. 105, 127–8

Boyd, R. 17, 40, 93–4, 119–20, 121, 122, 124, 125, 126, 127, 184, 319n8 Boyer, R. 181, 182, 184, 185 brain 92, 93, 94 Brams, S.J. 310 Brenner, T. 96, 317n2 Bretton Woods 97 Brunnermeier, M.K. 289 bureaucracy 306 business class 80, 82, 156 business cycles 78, 82, 84–5, 95, 142, 146–51, 155, 285, 295 Callebaut, W. 50, 58, 220, 257, 290 Cambridge approach to economic thought 282, 297 capabilities 259 capacities 217 capacity utilization 96, 156–9 capital 28, 31, 261; accumulation 157, 158, 176, 178; competence 158; cultural 170, 173, 174, 175, 176, 177–8, 187, 320n3; distribution of 157; economic 173, 175, 176, 177, 178, 179, 180, 182, 187; financial 80; human 158; and knowledge 257, 258; money as 159; overall 175; social 127, 128, 177, 178–9; symbolic 167, 170, 176, 179, 182, 184; transformation 179–80, 182 capitalism 134, 139, 153, 155, 157, 158, 159, 160, 176–7, 280, 281, 305; Bourdieu on 169; creative destruction in 133, 141; finance 169, 264; industrial 158, 169, 264; information 264–5; integrated 158; Keynes on 97; merchant 158; and money economy 87–8; selfdestructing property of 90; varieties of 205; Veblen’s critique of 79–85 Caramazza, A. 93 Castells, M. 8, 263–4, 265, 266, 268, 272 catallaxy 105, 106, 210 Catephores, G. 317n2 causation 91; linear 207; social 13, 14; universal 90; see also cumulative causation [CBST] rule matrix 193 central banks 97, 153, 285, 286, 287–8 central planning 108, 113 change 133, 134, 135, 143, 150, 151; agent-based model of 229–56; continuity of 36, 47, 63, 191; and cultural acceptance 134; endogenous 50, 138, 185, 194, 196, 216, 293, 309; generic 40–1, 192, 198–9, 208, 315;

340

Index

operant level of 192, 208, 315; rulebased approach 7, 191–5 chaos 102, 114 choice 25, 210, 259; collective 222; free 101; rational 10, 18, 23, 25, 30, 104, 142, 178; social 9, 309, 310–11 Christiano, L.J. 288, 289 Cincotti, S. 291 circular cumulative causation (CCC) 273–4, 275 city-republics 302 civilization 31 class: business 80, 82, 156; industrial 80, 81; working 157, 173; see also social classes class conflict 300 class struggle 139 class system 80, 157 classical economics 48, 156, 157 cliques 226–7 closed-system approach 4–5, 274, 292–3, 299, 308 co-evolution 1, 16, 17, 19, 25, 33, 38, 39, 40, 41, 100, 117, 180–6, 190, 196, 200–1, 203, 207, 259, 277, 279 Coase, R.H. 63, 73, 75 cognition 91–4, 168, 281, 315; nested 281, 297 cognitive niche 127 collective-action problems 128, 129 collective choice arena 222 common goods 73, 74, 103–4 Commons, J.R. 63, 69, 72, 73, 75, 78–9, 82, 83–4 communication 260 communication networks 263, 264, 265, 266, 268, 315 communication power 262, 263–6, 314 communities of knowledge 208, 209 communities of practice 186–9, 268 community detection 227 community governance 105, 127–9, 315 comparative advantage 162 comparative institutionalism 9, 103, 299, 309–12 competence capital 158 competition 79, 80, 130, 144, 145, 146, 160–1, 304; artificial 108; evolutionary 26; free 156, 305; and innovation 160, 161, 165; intergroup 126; monopolistic 162; perfect 161, 163; in R&D 162; Schumpeterian 21, 22, 24 complex adaptive systems 45, 46, 50, 59, 94, 170, 218, 247, 258

complex population systems 6 complexity 17, 39, 211–68 complexity science 7, 18, 26, 44, 50, 59, 216, 219–20 computation 218–24, 257, 267, 291, 314 computational agent-based modelling 7, 8 computer games 225 Comte, A. 56, 138, 140 concentration: industrial 161; media 264, 265 Condorcet, Marquis de 130, 138, 140, 311 Condorcet Method 310 Condorcet Winner Criterion 310 conflict, intergroup 126 connectivity 250, 251, 252, 253, 254 conspicuous consumption 79, 80, 89, 94, 172, 274, 309 constructivism 99, 100, 108, 109, 130; rational 307 consumption 8, 68, 81, 293; conspicuous 79, 80, 89, 94, 172, 274, 309; cultural 167, 168, 170; trickle-down model of 81–2, 170, 173; wasteful 79, 80 contagion 289, 290, 293 contesting 160–1 contingency 24, 133, 309 contingent trust 203, 205 continuity of change 36, 47, 63, 191 continuity hypothesis 6, 15, 16, 17, 18, 19, 33, 39, 40–5, 53 contractarian system 303–4, 305, 306, 307, 308, 309 conventions 103, 104, 105, 106, 107, 108, 110, 129 cooperation 125, 126, 127–8, 203, 204, 229, 230, 232, 234, 236, 245, 246, 248, 255 coordination 105, 106, 107, 108, 171, 203, 207; meta- 106, 107, 108, 110, 122 Cordes, C. 91–3, 318n7 Corning, P.A. 58 corruption 89 cost-of-capital 287–8 creative destruction 31, 65, 133, 138, 141, 144, 147, 159, 162, 198, 228, 262, 317n4 creativity 86, 94, 101, 144, 160, 171 credit 133, 152–6 credit channel 287–92, 293–4 credit crunches 280 credit demand 296 credit-money 8–9, 153–4, 159, 280–7, 294; history of economic thought perspective 282–7 credit policy 288–9

Index 341 credit rules 281–2, 283, 294–8 credit supply 296 crisis regime 289 critical realism 56 Csermely, P. 227, 228, 257, 290 cultural capital 170, 173, 174, 175, 176, 177–8, 187, 320n3 cultural consumption 167, 168, 170 cultural dispositions 169, 175–7, 185 cultural evolution 17, 18, 37–8, 41, 69, 94, 110–17, 118, 130–1, 206; and group selection 118, 119, 126–7; transmission and persistence in 119–20 cultural inheritance 170, 173, 177, 187, 318n3 cultural selection 35 cultural transmission 93–4, 100, 119–21 culture 16, 64, 65, 73 cumulative causation 65, 68, 69, 75, 76, 206, 220, 273, 290; circular (CCC) 273–4, 275 cybernetics 220 cyborgs 113–14 Darwinian evolutionism 138, 140–1 Darwinian heuristics 19 Darwinian naturalism 19, 33–40 Dasein 28, 31, 36, 46, 55 Dasgupta, P. 161–2, 163 Dawkins, R. 34, 57–8 de Bondt, G. 294, 296 De Grauwe, P. 289 De Masi, G.D. 290, 291 decision-making, firms 161–2 decomposability 220, 259 dedicated learning 127 deduction 71, 198 defection 125, 126 Delamont, S. 186 DeLanda, M. 8, 205, 216–17, 218, 220, 260, 265, 268 Deleuze, G. 86, 200, 201, 202, 208, 210, 320n2 Delli Gatti, D. 291 demand: aggregate 96; credit 296; for money 96, 154, 282–3, 297 demand-for-loan rules 296–7 democracy 9, 72, 99, 113, 299–312, 315; classical models of 300–2, 306; direct 300, 305; ideal 299, 300, 303, 304, 306, 309; leadership 306; liberal 304, 305; models of 301; representative 305 depression 82, 146, 147, 148 derivative contracts 289

Descartes, R. 99, 185, 307 design 99, 101, 108; purposeful versus emergent 100 determinism 98 Dewey, J. 63, 66, 70, 72, 112, 113, 168, 169, 312, 317–18n1 Diamond, D.W. 288 different/ciation 201, 202, 208, 320n1 differential reproduction 36 diffusion 6, 197, 198; of information 165, 196, 263 direct democracy 300, 305 disequilibrium 21, 45, 96, 277 Dispositiff 258 dispositions 172, 194, 314, 315; cultural 169, 175–7, 185 dissemination 6, 17, 18; of novelty 41–2, 44 distinction 168, 171–2 domination, power as 262 Dopfer, K. 2, 5, 18, 38, 142, 150, 164, 185, 190–1, 201, 202, 203, 206–7, 208, 222, 225, 271, 317n6, 318n7; evolutionary realism 6, 46, 47, 48, 50–2, 53, 58–9; generic rule-based approach 7, 191, 194–5, 199, 200, 223, 267, 281; mesodynamics 151, 195–6, 197–8; shared imagination 43, 122 Dosi, G. 24, 25 163, 164–5, 278, 291 DSGE (Dynamic Stochastic General Equilibrium) models 288, 290, 292 dual-inheritance 17, 58 dualistic approaches 19, 20, 21–32 dualistic ontology 6 durability of institutions 247, 248, 253, 254, 255 Durkheim, E. 169 dynamic capabilities 22 eco-certificates 278 econometrics 214, 215 economic agency 38 economic agents 100, 157, 159; energeticdynamic 28, 30, 65; hedonistic-static 28, 30 economic capital 173, 175, 176, 177, 178, 179, 180, 182, 187 economic change 21, 159 economic crisis 79, 82, 83, 85 economic development 21, 27, 277 economic growth 21, 86, 159, 277 economic imperialism 176 economic policy 26 economic positions 169, 175–7, 185 economic rationality 77

342

Index

economic thought 136 economy 16, 105 education 113, 173, 174–5, 177, 184, 187–8, 303, 305, 311–12, 315 efficiency, in production 144, 145 efficient market hypothesis 283 eidetic order 102 Elsner, W. 114, 128, 203–5, 208, 218, 254, 273–4, 274–5 embodied knowledge hypothesis 44 emergence 17, 18, 216–17, 218, 255, 257, 267, 290; absolute 216; relative 216 emotions 307, 308 empathy 113 empirical axioms 47, 49, 181 empiricism 56, 77 employment, full 96 enabling, institutional 134 endogenous change 50, 138, 185, 194, 196, 216, 293, 309 endogenous money 159, 285–6, 287; accommodationist approach 285, 286; structuralist approach 286 endogenous risk 289 Engels, F. 64, 135, 157, 169, 305 Enlightenment 140 entity 31 entrepreneurship 22, 65, 133, 141–6, 147, 151, 152, 155, 183, 190, 285 entropy 273, 274, 276 entropy principle 114, 116, 192 environmental economics 276–9 Epstein, J.M. 125 equal rights 305 equilibrium 21, 45, 273, 299, 306, 307; general 195, 197, 283, 284, 285, 288, 290, 292 Erdös, P. 227 ethnic markers 122, 124, 125 ethnomethodology 65 Eucken, W.v. 101, 130, 318n2 European Central Bank (ECB), Bank Lending Survey (BLS) 294–8 European Union 169 Eurozone 289 evolution 223, 277; biological 14, 16, 18, 19, 37–8, 46, 191; emanatist conception of 138; genetic 17, 18; immanent 140; Schumpeter on 137–41; social 14–15; see also cultural evolution evolutionary agnosticism 130 evolutionary biology 58 evolutionary developmental biology (evodevo) 50, 58 evolutionary economic

programs 1–9, 15, 16, 26, 39, 42, 46, 46, 48, 49, 50, 56, 57, 58, 59, 94, 167, 191, 194, 209, 216, 263, 265, 267, 313, 315; bottom-up 2, 4, 7, 9, 75, 189, 213, 292; meso-level 195–203 evolutionary metaphysics 70 evolutionary realism 6, 19, 33, 46–54, 58, 191, 223 evolutionary regime transitions 50–1 evolutionary theory 1 (ET1) 17 evolutionary theory 2 (ET2) 17 exchange rate channel 287, 288 existence, struggle for 34 expectations 203; rational 283, 304 experience, learning by 70, 71, 84, 86 expert-driven governance 306 externalities 73 falsification 47 Faust, K. 226 Federal Reserve Bank 288 feedback 101, 116, 161, 165, 215, 230–1, 273; between micro and meso layer 241–56; negative and positive 44 Ferguson, N. 153, 280, 283, 285 Festré, A. 155, 156, 284, 285 fields, theory of 169, 181–5, 190, 193, 196, 201, 206, 262 finance 133, 169; development of 26 finance capitalism 264 financial capital 80 financial instability hypothesis 280–1, 286, 298 financial sector 89 Fine, B. 30, 179, 183 firm-bank networks 290, 291, 293 firms 22, 24, 37, 108; behaviour 23; decision-making 161–2; as interactors 35; size 144 Fishburn, P.C. 310 Fisher, I. 282 fitness 22, 57, 258–9 fitness power 259 folk theorem 125–6 Fontana, G. 283, 285–6 Foster, J. 36, 208 Foucault, M. 8, 117, 258, 260–2, 263, 265, 268, 272, 318n1, 319n6 and 7 Fox, S. 261 Fracchia, J. 118 framing, institutional 134 free choice 101 free markets 299, 304 free-riding 126, 129, 254, 255, 268

Index 343 free will 72, 98 freedom 83, 84, 102 Freiburg school 130 Friedman, M. 55, 110, 282, 283 frozen institutions 247, 248 full employment 96 Gadamer, H.-G. 55 Gallegati, M. 291 game theory 7, 103–4, 122–6, 203–5, 210, 215, 216, 227, 319n4 general equilibrium 195, 197, 283, 284, 285, 288, 290, 292 general system theory 14 general will 303, 305 generalized Darwinism 6, 15, 16, 17, 19, 33–40; from the bottom-up 37–9 generic analysis 5 generic approach 49, 50 generic change 40–1, 192, 198–9, 208, 315 generic entropy 192 generic heuristics 19, 61–210 generic institutionalism 1–2, 5, 7, 8, 9, 37, 47–8, 53, 63, 65, 68, 94, 129, 132, 181, 182, 183, 313, 314, 315 generic knowledge 207 generic naturalism (GN) 19, 33, 40–54 generic power 260–1, 262 generic-rule-based approach 7, 191–5, 199–205, 206, 214, 223–4, 267, 281, 314 genetic engineering 159–60 genetic evolution 17, 18, 49 genetic search algorithms 218 genotypes 18, 24, 25, 50 Georgescu-Roegen, N. 8, 15, 114, 273, 274, 275, 276 German historical school 29, 287; see also Youngest German Historical School Gertler, M. 288, 289 Geworfenheitt (throwness) 28, 29 Ghiselin, M.T. 58 Gilbert, N. 224, 225–6 Gintis, H. 105, 127–8 Glance, N.S. 233 Glawogger, M. 320n7 globalization 149 Godley, W.A.H. 286, 297 Goldschmidt, N. 318–19n2 Goodwin, R.M. 151 Gorton, G.B. 289 Gould, S.J. 58, 277 governance: community 105, 127–9, 315; expert-driven 306; polycentric 188

governmentality 65, 101–2, 117 Gowdy, J.M. 277, 278 Goyal, S. 227 Granovetter, M. 178, 226, 227 graph theory 218, 226, 257 green-washing 278 greenback studies 78 Gregg, M. 86 Greif, A. 319n4 grids 224, 225 group conflict theory 64 group interest 135, 136 group selection 100, 116, 117, 118–31, 136, 159, 168, 169, 185, 186, 227, 260 Guattari, F. 86 Haberler, G. 141 Habermas, J. 263, 308 habits 35, 65, 66, 68, 69, 86, 87, 93, 94, 118, 129, 194, 314, 315; economic 81; pragmatist notion of 70, 71, 72, 86, 112, 113; of thought 69, 80, 89, 91, 92, 168, 190, 192, 273, 281 habitus 65, 66, 68, 112, 129, 167, 168, 170–5, 181–5, 186, 187, 188, 190, 192, 193, 194, 196, 201, 206, 272 Hagemann, H. 148, 149, 150, 152 Hall, P.A. 63, 64 Hall, R.B. 283 Hamilton, W.D. 125 Hanappi, H. 2–3, 4, 6, 17, 47, 147, 148, 154, 155, 157, 158–9, 159, 164, 209, 210, 213–14, 215, 220, 278, 285 Hanusch, H. 26 Hardin, G. 74–5 Harker, R.K. 187 hawk– k dove games 103–4, 230, 236–56 Hayek, F.A. 1, 6, 38, 46, 64, 66, 68, 95–131, 133, 140, 185, 186, 191, 206, 207, 271, 276, 287, 293, 318–19; business cycle theory 82, 95; cultural evolution 110–17, 118, 119, 130–1; embodied knowledge hypothesis 44; group selection 100, 116, 117, 118–31, 185; laissez-faire 98; liberalism 130; money system 96–7; naturalized knowledge 65, 193, 261; order 65, 99–110, 114–16, 190, 210; rules of conduct 83, 99–100, 102, 108, 110–17, 118, 121–2, 129, 190; tradition 118, 134; Law, Legislation and Liberty 95, 101; Politics and Economics 95; Road to Serfdom, The 95; Sensory Order, The 98, 111, 113; Studies in Philosophy 95

344

Index

Hebb rule 238 Hegel, G.W.F. 138, 139, 141 Heidegger, M. 31, 32, 55 Heinrich, T. 128, 203–5, 218, 254 Held, D. 9, 299, 300, 301, 302, 303, 309 herding 85 hermeneutics 28, 55, 56, 65, 98 Herrmann-Pillath, C. 46, 55, 56, 57, 58, 258–9, 260 heterodoxy 13 heterogeneity 219 heterogeneous behaviour 13 heuristics 2, 5, 6–7, 14, 15, 16, 17, 18, 41, 42; Bourdieu 167–89; Darwinian 19; generic 19, 61–210; Hayek 95–131; Schumpeter 132–66; Veblen 69–94 Hicks, J.R. 282–3 hierarchy of systems 219–20, 257 Hildebrand, B. 30 historians’ evolutionism 138 historical institutionalism 64 historical theory 48 historicism 29, 31 Hobbes, T. 304 Hodgson, G.M. 6, 23, 27, 29, 33, 34, 35, 36, 40, 56, 65, 66, 67, 68, 69, 86, 87, 88, 90–1, 92, 105, 128, 191, 206, 208, 222, 265, 271, 272 Holland, J.H. 221 Hölldobler, B. 58 homeostasis 271, 272 Homo academicus 318n1 Homo oeconomicus 28, 98, 100, 127, 128, 142, 175, 191, 199, 317n1 Homo politicus 302 Hookway, C. 70 Huberman, B.A. 233 Hughes, J. 200, 201–2, 203, 208, 320n1 Hull, D.L. 58 human capital 158 Human Genome Project 149 Hume, D. 100, 130, 307 hunter– r gatherer societies 76, 81 Husserl, E. 318n2 hyperstructures 257–8, 262 hypothesis testing 47, 71 ideal democracy 299, 300, 303, 304, 306–9 idealism 70, 71; logical 70; objective 70 idea(s) 52, 139, 160, 201–2 ideationalism 13–14 ideology 28, 31, 135–6, 137 idle money 155 imagination 43; shared 43, 104–5, 122, 210

imitation 21–2, 111–12, 114, 117, 121, 122, 123, 125, 168, 185, 190, 191, 198, 225 immanent evolution 140 Impossibility Theorem 310 improvisational learning 127 incorporated cultural capital 177, 178 independence of irrelevant alternatives 310 individual agency 37 individual behaviour 37 individual learning 40, 128 individual skills 23 individualism 56 individuals 58 induction 47, 71, 198 industrial capitalism 158, 169, 264 industrial class 80, 81 industrial concentration 161 industrial production 88, 89–90, 92 Industrial Revolution 149, 150 industrial society 76 industry development 26 inequality 68, 79, 134 inference 47, 71 inflation 152 information 57, 305 information asymmetry 156 information capitalism 264–5 information and communication technology (ICT) 149, 159, 215, 216, 263, 309 information processing and transmission 40, 57, 119–20 information-sharing 309, 311, 312 information society 209, 263–6, 314 information theory 222, 223 innovation 21, 22, 26, 28, 29, 89, 139, 143, 144, 163, 284, 285, 293; and competition 160, 161, 165; diffusion of 165, 196, 263; process 145, 162; product 145, 162; routinization of 32; Schumpeter’s conception of 30–1, 32, 132, 134, 142, 152, 155, 165–6, 190, 191, 195–6; technological 22, 92, 146, 163 insider– r outsider distinction 129 Instant-Run-Off 310 instinct 86, 87, 88–9, 91–4, 118, 315; of workmanship 69, 81, 87, 88, 92, 93, 94, 206 institution-building 230, 233–4, 246 institutional connectivity 250, 251, 252, 253, 254 institutional cycles 247–8, 252, 253, 254, 255

Index 345 institutional development 31, 32 institutional durability 247, 248, 253, 254, 255 institutional exports/imports 183 institutional facts 67 institutional freeze 247, 248 institutional method 72–9 institutional programs 263–4, 265, 313, 315 institutional properties 252–5 institutional size 248, 250, 254, 255 institutional statements 67 institutionalized cultural capital 177–8 institutions 63–8, 89, 109, 110 intellectualist evolutionism 138, 140 intelligence 93 intention 56, 71, 86 interaction 34, 40, 99, 122–5 interactionism 56 interactors 18, 34–5, 36, 39, 50, 57 interbanking 290 interconnectedness 290–1, 293 interdependence 290, 291 interest rate channel 287 interest rate targeting 293 interest rates 82, 152, 154, 156, 281, 282, 288 internet 149, 263 intuition 43 investment 81, 133, 155, 293; overinvestment theory 82 irony 309 Jackson, M.O. 227 James, W. 63, 70, 72, 113 Jessop, B. 209, 268 Jevons, W.S. 29 Journal of Institutional Economics 222 Juglar cycles 148, 149, 151 Juglar, J.C. 146 justice 9, 308, 309 Kaldor, N. 286 Kant, I. 3 Kapeller, J. 4 Kapp, W. 114, 273 Karadi, P. 289 Kauffman, S. 44–5, 219, 317n3 Kawamura, T. 210, 223, 281, 297, 309 Keynes, J.M. 95, 96, 97, 282, 284, 286; on capitalism 97; on liberalism 97; General Theory of Employment, Interest and Money 96, 297; `Treatise on probability’ 98 Keynesian economics 286, 287, 293 Khalil, E.L. 108, 109–10

Kitchin cycles 148, 149, 151 Kiyotaki, N. 288 Klein, D.B. 105–6, 107, 108 Kleistenes 300 Knell, M. 280, 287, 298 Knies, K. 30 Knottenbauer, K. 57, 58 knowledge 168–9, 259, 315; and capital 257, 258; codified 111; communities of 208, 209; dispersed 261; distribution of 68, 100; as an ecosystem 268; embodied 44; evolution of 46–7, 257; generic 207; growth of 133; limitations of 101; naturalized 184, 190, 193, 207, 261, 263, 314, 315; and power 261–2; as a process component 209; stock 214; structural 209; tacit 23–4, 26, 35, 111, 129, 186; transformation of 116; transmission of 49, 57, 63, 64, 93, 100, 101, 117 knowledge-based economy 209 knowledge languages 213 knowledge repositories 207–8, 268, 313, 316 Knudsen, T. 6, 23, 33, 34–5, 36, 38, 40, 86 Kondratieff cycles 147–8, 149, 150, 151 Kuhn, T.S. 2, 3, 164, 186–7 Kuznets cycles 149 labour 28, 31, 69, 81, 169; division of 89, 92; global division of 150 labour theory of value 30 laissez-faire 98, 156, 157, 304, 305 Laitin, D.D. 319n4 Lakatos, I. 2, 47, 164, 317n5 Lamarckism 34, 35 language 40, 67; structures 213 Lavoie, M. 283, 286, 297 law 102, 109; natural 48, 71, 83, 304 Lawson, T. 18 layered ontology 19 leader-influence 231, 241–2, 246, 247, 250, 251, 253, 254 leader satisfaction 249, 250, 251, 252 leadership 31, 133, 142, 144; power 229, 231, 242–3, 244, 249, 250, 268 leadership democracy 306 learning 9, 35, 38, 45, 54, 57, 91–4, 169; dedicated 127; by doing 122; by experience 70, 71, 84, 86; improvisational 127; individual 40, 128, 292; instincts 92–3; observational 119–20, 121, 122, 128; organizational 23, 24, 25, 26, 40, 173, 290; see also social learning legal positivism 102

346

Index

legal rules 102 Leube, K.R. 142 Levi-Strauss, C. 65 Levitt, P. 93 Lewes, G.H. 217 Lewontin, R.C. 118 liberal democracy 304, 305 liberal republicanism 303 liberalism 97, 130; naturalistic 130; rational 130 liberty 83, 84, 102, 109, 302, 304, 305 linear causality 207 liquidity preference 286 liquidity traps 280, 291 Loasby, B.J. 143, 144, 145, 160 local copy selection 35, 36, 38 lock-in situations 106, 310, 311 Locke, J. 304 logical idealism 70 Lowe, A. 146 Luhmann, N. 14 Lukes, S. 261–2 Luthi, L. 231, 239 McElreath, R. 122 Mach, E. 113 Machiavelli, N. 302, 303, 306 machine process 69, 89–91, 92, 113 macro structure 196, 197 Maddaloni, A. 295, 296 Madden, B. 56 maintenance 198 Malthus, T. 48, 319n1 Malthusian trap 74, 137 Marengo, L. 220 marginal utility of money 282–3 marginalist revolution 29 Margulis, L. 271, 272 markets 130; as democratic 83 Marshall, A. 133, 134 Marsilius of Padua 302 Marx, K. 31, 48, 64, 79, 88, 90, 135, 157, 169, 305, 318n2 Marxian evolutionism 138, 139–40, 141 Marxism 29, 31, 300 mass communication 264, 266 Massumi, B. 86 materialism 13–14, 70, 71 matter– r energy actualization 52 Maynard-Smith, J. 237 meaning, shared 263 media 264, 265 memory 226, 244, 245; of an organization 23, 24

Menger, C. 29, 30, 95, 105, 106 merchant capitalism 158 meritocracy 170, 174 meso-dynamics 151, 195–205, 207, 218, 222 meso trajectory 195, 197–8, 278 meso unit 195, 196 meta-coordination 106, 107, 108, 110, 122 meta-theory 27 metaphysics 70, 71, 138–9 Metcalfe, J.S. 49, 133, 134, 159, 160–1, 208 Methodenstreit der Nationalökonomie 29, 30, 47, 48, 73 methodological individualism 100, 142, 258 methodology 2, 5, 15, 218–19 micro–meso–macro framework 196–7, 214, 314 micro structure 196, 197 migration 123, 124–5 Mill, James 304 Mill, John Stuart 56, 156, 275, 304–5 Miller, J.H. 221, 224 Milonakis, D. 30 mind 46, 54, 86, 87, 93 mind– d–body nexus 65, 167, 168, 169, 190, 192, 207, 307 Minsky, H.P. 8, 280, 284, 286, 287, 288, 293, 297, 298 Mirowski, P. 3, 48, 113–14, 223 Mises, L.v. 95 Mishkin, F.S. 287 Mitchell, W.C. 63, 69, 72, 73, 75, 76–7, 78, 82, 84–5 Mittnik, S. 290 modularity 58, 257; nested 259 monarchy 302, 303, 304 monetary base 96, 152, 153 monetary circuit 286–7 monetary policy 96, 282, 287–90, 293–4 monetary system 96–7 monetary unions 289 money 85, 133, 152–6, 275; as capital 159; as a commodity 283, 285, 292; credit 8–9, 153–4, 159, 280–7, 294; denationalization of 97; endogenous 159, 285–6, 287; idle 155; Inventory or Transactions approach 282; Keynesian approach 282; marginal theory of value 292; marginal utility of 282–3; as medium of exchange 282; quantity theory of 152, 159, 281, 282, 283, 287, 287–90, 292, 297; as store of value 282;

Index 347 as unit of account 282, 283; value theory of 283; velocity of 153, 282 money demand 96, 154, 282–3, 297 money economy 87–8 money market 155, 156 money supply 153, 282, 283, 285–6, 292, 293, 297 monistic ontology 6 monopolistic competition 162 monotonicity 310 Mont Pellerin Society 95, 130 Montesquieu, Baron de 153, 303 Moore, J. 288 moral community 105 moral philosophy 100 morality 67 Morgan, J. 222 Morgenstern, O. 114 Mouzelis, N. 13, 65, 66, 170, 171, 180 Müller, G. 50, 58 Mutch, A. 186 Myrdal, G. 273–4 nanotechnology 149 Nash equilibrium 104 nation states 155 National Bureau of Economic Research 78 natural law 48, 71, 83, 304 natural orders 108, 109 natural rights 83 natural science 220 natural selection 14–15, 34, 35, 36, 41, 74–5, 121 naturalism 55; critical 56; Darwinian 19, 33–40; generic 19, 33, 40–54 naturalistic approaches 6, 19, 20, 33–54 naturalized knowledge 184, 190, 193, 207, 261, 263, 314, 315 nature 8, 16, 73, 168; exploitation of 271, 272–3 negative feedback 44 Nelson, K. 271 Nelson, R.R. 6, 18, 21, 22, 23, 24, 25, 35, 37, 144, 145, 146, 161, 271 neo-Darwinism 34, 35, 56 neo-Schumpeterian economics 15, 16, 17–18, 19, 21–6, 27 neoclassical economics 25, 29–30, 31, 34, 42, 44–5, 46, 47, 55, 58, 64, 73, 83, 100, 178, 179, 217, 285 neoliberalism 95, 169, 183 nested cognition 281, 297 nested modularity 259 nested reasoning 309

nested selection model 34–5, 36 nestedness 227, 257 network analysis 7–8, 226–7 network science 7 network theory 281, 290–1 networking 178 networks 224, 225, 226–8, 267; as assemblages 268; communication 263, 264, 265, 266, 268, 315; firm-bank 290, 291, 293; formation 227–8; interbanking 290; power within 8, 257–66, 272, 314; weak links in 227–8, 257, 290, 291, 315 Neumann, J.v. 114, 223 neuroscience 92–3 new economics of organization literature 64 New Institutional Economics (NIE) 63, 64, 72–3, 182, 319n4 Newell, A. 220 niche construction 290 Nietzsche, F. 141, 317n4, 320n2 nomocracy 128 nomological institutionalism 4, 83 nomological research programs 4–5 nomological worlds 48 nomos (law of liberty) 109 norms 110, 117, 119, 129 North, D.C. 67 Noteboom, B. 297 novelty 6, 17, 18, 41–4, 65, 134, 147, 160, 171, 210, 257, 259, 309, 315; dissemination of 41–2, 44, 54; domainspecific 42; emergence of 41–3, 139; objective 42; subjective 42; universal 42 Nowak, M.A. 227 Nussbaum, M. 9, 312 nxn matrix 226 object rules 200, 206, 298 objectified cultural capital 177 objective idealism 70 objectivism 172, 180, 181 objectivity 308, 309 observational learning 119–20, 121, 122, 128 Old Institutional Economics (OIE) 63, 72–3 oligarchy 302 oligopoly 162 Olsen, W. 222 ontogenesis 5, 58, 59, 111, 116, 190, 222, 223, 314 ontology 2, 5–6, 11–20; layered 19; social 18

348

Index

open source software 209, 233, 268 open-system approach (OSA) 274, 275, 312 openness of the economy 293 operant analysis 5 operant entropy 192 operant level of change 192, 208, 315 operational power 242, 251, 256, 258, 260, 268 operationalization 191, 192, 194, 202 order 114–16; constructed (`taxis’) 101, 102, 107, 109–10; eidetic 102; evolved (`cosmos’) 101, 102, 103, 107, 108, 109–10; natural 108, 109; rational 190, 315; social 100–10, 114–16, 122, 130–1; spontaneous 65, 99–110, 190, 210; see also affective orders ordoliberalism 101–2, 130, 318–19n2 organization 101, 102; modes of 22, 23; self- 36, 38, 44, 45, 52, 53, 101, 103, 109, 291 organization theory 64 organizational learning 23, 24, 25, 26, 40, 173, 290 organizational routines 22, 23, 24, 26, 67, 143–4 organizations 18, 67, 101, 108, 109; memory 23, 24; as special institutions 67, 68; tacit knowledge 23–4, 26 origination 195, 196, 197–8 Ostrom, E. 67, 74, 127, 128, 186, 188–9, 222, 223, 318n3 and 4 overinvestment theory 82 overproduction 82, 146 Oyama, S. 277 Pacelli, A.M. 310 Page, S.E. 221, 224 Pape, H. 70, 71 paradigms: scientific 2–3, 164; technological 163, 164–5 Pareto Condition 310, 311 path-dependency 24, 37, 41, 105, 106, 133, 136, 274–5 pattern recognition 43, 111–12, 113, 116 Peirce, C.S. 3, 63, 70, 71, 72, 113, 200, 317n4 perception 225; risk 281, 297 perfect competition 161, 163 Perrin, P. 319n5 Petty, W. 319n1 Peydró, J.-L. 295, 296 phase transitions 45, 228, 257, 280 phenomenology 65, 111–12

phenotypes 18, 24, 25, 43, 50, 57 philosophers’ evolutionism 138 phylogenesis 50, 58, 59, 111, 116, 190, 222, 223, 314 physics 48, 292, 306 Pigliucci, M. 50, 58 Pillath, H. 8 planned economy 108, 113 Plato 300, 301, 302, 306 plurality voting 310 Polanyi, K. 88, 105 policy realms 269–312 polis 300, 302, 304 political participation 305 polycentric governance 188 Popper, K. 38, 47, 100, 319n5 population 137; growth 74, 137, 319n1 positive feedback 44 positivism 55–6, 109; legal 102 possession 275 post-Keynesians 98, 283, 285, 286, 291, 297 post-structuralism 65, 112, 200, 205, 208, 263, 268 Potts, J. 5, 6, 7, 46, 51–2, 53, 58, 59, 185, 190–1, 194–5, 201, 202, 203, 208, 218, 223, 257, 258, 267, 281, 293, 295 power 67, 156, 180, 258, 293; communication 262, 263–6, 314; as domination 262; as equity 260; fitness 259; generic 260–1, 262; and knowledge 261–2; leadership 229, 231, 242–3, 244, 249, 250, 268; legitimization of 9; within networks 8, 257–66, 314; operational 242, 251, 256, 258, 268; relative 231, 242–3, 244, 249, 250, 251–2 power law 251–2 power relations 8, 9, 68, 83, 183, 219, 227, 229, 267 Pozsar, Z. 290 practice, theory of 65, 168, 169, 172, 174, 180–6 pragmatism 9, 30, 63, 65, 70–2, 81, 86, 112, 113, 180, 198, 200, 279, 309, 312 preconception 28 preferences 81, 310, 311 prices 82, 130, 148, 158–9, 288; fluctuation 85, 288; level 96, 297; stability 96 Prigogine, I. 48 principal–agent relationship 300, 306 prisoner dilemma (PD) 125, 129, 203, 204, 229–30, 231, 236, 237

Index 349 private equity 79, 80 private property 79, 156 process axiom 53 process innovation 145, 162 product innovation 145, 162 production 22, 24, 68, 81; capitalist 79, 88, 280, 305; efficiency in 144, 145; global 150; industrial 88, 89–90, 92; modes of 139; over- 82, 146 productivity 81, 82, 86 profit maximization 21 profit-seeking 80, 82, 85, 88, 92 programming language 2, 3 programs: institutional 263–4, 265, 313, 315; research 2–3, 4, 163, 164; see also evolutionary economic programs properties 217 property 103, 275; private 79, 156 property rights 81, 83, 84, 128, 177, 275 proportional representation 310 proprioception 272–2 psychology 92–3 public goods 73, 74 public sector, development of 26 punctuated equilibria 277 punishment 125, 126, 127 purchasing power 152, 153 Putnam, H. 309 Putnam, R. 127, 178 Pyka, A. 26 Quantity Theory of Money 152, 159, 281, 282, 283, 287–90, 292, 297 Radax, W. 230, 231, 244, 245, 321n2 Rajan, R.G. 288 random network structures 227 Rasskin-Gutman, D. 50, 58, 290 rational choice 10, 18, 23, 25, 30, 104, 142, 178 rational choice institutionalism 64 rational constructivism 307 rational expectations approach 283, 304 rational liberalism 130 rationalism 70 rationality 184–5, 315; bounded 219, 225, 281, 297; economic 77 Rauchenschwandtner, H. 318–19n2 Rawls, J. 306, 307, 308, 309 realism 98; evolutionary 6, 19, 33, 46–54, 58, 191, 223; see also critical realism reality 72, 138, 213 reason 101, 118, 308, 315; synthetic 217, 218, 220, 260, 267, 268

reasoning 92, 93, 307, 309; nested 309 recession 148 reciprocity 125, 127–8 reductionism 56 reflexivity 106 regime change 290, 302 régulation theory 79, 182, 183, 184, 185, 206 Reinert, H. and Reinert, E.S. 141, 317n4 relative emergence 216 relative power 231, 242–3, 244, 249, 250, 251–2 Renaissance 302 Rengs, B. 321n2 rents 82 Rényi, A. 227 replication 34, 40, 198, 239–40 replicators 18, 34–5, 36, 39, 40, 50, 57 representation, genesis of 200 representative agents 195, 197, 283, 290 representative democracy 305 reproduction 35; continuity in 36; differential 36; habitual 187 republicanism 302–4; developmental 302; liberal 303; protective 302–3 reputation 205 research and development (R&D) 144, 161, 162 research programs 2–3, 4, 163, 164 resilience 278 resistance 262; to rules 222, 223, 262, 316 retention 6, 17, 22, 33, 36, 37, 38, 39, 45, 194, 196, 198, 290 Reuter, N. 69, 71, 72, 73, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 312, 318n5 Richerson, P.J. 17, 40, 93–4, 119–20, 121, 122, 124, 125, 126, 319n8 risk: endogenous 289; perception 281, 297; systemic 290, 293 risk-taking 161 Robinson, J.V. 286 Rorty, R. 309 Roscher, W. 30 Rousseau, J.-J. 99, 130, 303 routines 18, 24, 35, 118, 119, 129, 207, 314, 315; organizational 22, 23, 24, 26, 67, 143–4 rule actualization 192 rule-based approach 7, 191–5, 199–205, 206, 214, 222, 223, 267, 281, 314 rule carriers 191, 194, 222, 294 rule of law 128, 130 rule-makers 191, 223, 225, 295, 296, 297 rule operationalization 191, 192, 194

350

Index

rule-users 191, 223, 225, 295, 296, 297 rules 221–2; fluidity of 222; resistance to 222, 223, 262, 316 rules of conduct 83, 99–100, 102, 108, 110–17, 118, 121–2, 129, 190 Runde, J. 199, 200 Safarzynska, K. 279 Samuelson, P. 100 Sanchez-Pages, S. 231–2, 233, 235, 253 Sannikov, Y. 289 Saussure, F. de 169 saving(s) 81, 133, 153, 155 scale-freeness 227 scarcity 34 Schelling, T. 104, 105, 106, 108, 203, 317n3 Schmoller, G. 30 Schumpeter, J.A. 1, 6, 7, 15, 17, 46, 49, 64, 65, 66, 68, 84, 88, 90, 132–66, 191, 192–3, 206–7, 271, 280, 281, 284, 285, 293, 297, 300, 305, 306; business cycles 142, 146–51, 155; credit and money 133, 152–6; economic thought 136; entrepreneurship 133, 141–6, 152, 183, 190; evolutionism 137–41; ideology 135–6, 137; innovation 30–1, 32, 132, 133, 134, 142, 152, 155, 165–6, 190, 191, 195–6; population 137; technological change 132, 159–66; visions 136–7; Capitalism, Socialism and Democracy 299; Das Wesen des Geldes 283; History of Economic Analysis 132, 135, 136; Theory of Economic Developmentt 152, 298 Schumpeterian economics 16, 19, 26–32, 55, 283, 286–7 Schwarz, R. 223, 264, 265, 268, 311 Schweitzer, F. 290, 291, 297 Schwingel, M. 180, 181 science 3, 186–7 scientific language 2, 4 scientific paradigms 2–3, 164 scientific revolution 3 Scott, J. 226 Screpanti, E. 30 Searle, J.R. 66–7 securitization 289 Seigworth, G.J. 86 selection 6, 17, 18, 22, 24, 25–6, 33, 34, 36, 37, 38, 39, 40, 44, 45, 279, 290, 291; artificial 15; cultural 35; local copy 35, 36, 38; nested 34–5, 36; see also natural selection

self-control 71 self-criticality 280 self-organization 36, 38, 44, 45, 52, 53, 101, 103, 109, 291 self-transformation 36, 42, 50, 293 semi-conductor industry 150 semiotics 70, 86 Semmler, W. 290 Sen, A. 9, 53, 103, 259, 272, 299, 306–9, 311, 312 separation of power 303, 305 Seppecher, P. 291 shadow banking 290 shared beliefs 43, 122–3, 210, 309 shared imagination 43, 104–5, 122, 210 shared meaning 263 shareholder value 80 Shionoya, Y. 27, 28, 29, 31–2, 317n1 shocks 289, 290 Siemsen, H. and Siemsen, K.H. 113 signal selection 260 Simmel, G. 85 Simon, H.A. 3, 144, 219–20, 221–2, 257, 281, 297, 298 simulation 4, 7, 218, 221; computational 40; social 224, 225 situational embeddedness 75 size of institutions 248, 250, 254, 255 skills, individual 23 Slater, L. 71 small- and medium-sized enterprises 306 small-worldness 227 Smets, F. 288 Smith, A. 48, 105, 106, 113, 130, 137, 207, 307, 308 Sober, E. 58 social capital 127, 128, 177, 178–9 social causation 13, 14 social choice theory 9, 309, 310–11 social classes 31, 139, 157, 167, 173, 305 social contract 99, 129, 303, 304, 307 social evolution 14–15 Social Evolution Paradigm (SEP) 14 social fields 167 social justice 308, 309 social learning 38–9, 40, 45, 64, 93–4, 104, 105, 113, 118, 119–20, 135, 138, 173, 190, 208, 246, 248, 254, 263, 265, 268, 313, 314, 315, 316; and bankingmacro nexus 292, 293; communitybased 128; and continuity of change 63; and cultural capital 177; environment 127; and generic knowledge 207; and novelty 210; and purposeful/emergent

Index 351 design 100; and semiotics 86; through imitation 111–12, 117 social network analysis 226–7 social networks 178, 205 social ontology 18 social practices 58, 65, 89, 167, 170, 172–3, 174, 175, 181, 182, 186, 187, 198, 255, 260, 261, 265, 312, 314, 315, 320n3 social simulation 224, 225 social spaces 173, 175–6, 320n3 Social System Paradigm (SSP) 14 social systems theory 14 social unity 31 socialization 14, 35, 93, 181 society 16, 65, 69, 73 sociogenesis 181, 182, 206 sociological institutionalism 64 sociology 27, 28, 132–3 Sombart, W. 30, 141, 317n4 Spiethoff, A. 30, 146, 317n3 Spinoza, B. de 86 spontaneous order 65, 99–110, 190, 210 state of nature 304 Steele, G.R. 96, 97, 98, 287, 293 Steppacher, R. 276, 277 Stiglitz, J.E. 161–2, 163, 284–5, 291 stock-flow consistency 286 stock markets 155, 288 Stoehlhorst, J.W. 37, 38, 40 Straub, S. 231–2, 233, 235, 253 structural functionalism 64 structural holes 227, 259 structural knowledge 209 structuralism 65, 169 structure and agency 1, 4, 7, 13, 28–9, 33, 38, 56, 167, 168, 169, 259, 315 subject rules 200, 298 subjective value 30 subjectivism 172, 180, 181 Sugden, R. 103–5, 106, 319n3 super-critical states 257 surpluses 79 surveillance systems 265 survivor-selection 34 sustainability 271, 272, 315 sustainable development 275–6, 277, 279 swarms 116 symbolic capital 167, 170, 176, 179, 182, 184 symbolic markers 118, 122, 123, 124, 125, 126, 260 synthesis 3, 13–14, 19 synthetic programming 213–28, 257, 267

synthetic propositions or sentences 3 synthetic reason 217, 218, 220, 260, 267, 268 system theory 14, 18, 26, 35, 44 systemic risk 290, 293 tacit knowledge 23–4, 26, 35, 111, 129, 186 Tang, S. 13–14, 14–15, 18, 35 taste 80, 81, 172, 173 Taylor, A.D. 310 Taylor, R.C.R 63, 64 technical rules 281, 293 technocracy 306 technological change 26, 27, 28, 86, 132, 159–66, 258, 278; demand-pull model 163, 164; ecological consequences of 278; technology-push model 163, 164 technological innovation 22, 92, 146, 163 technological paradigm 163, 164–5 technological trajectory 165, 278 technologies of the self 262, 268, 272 technology 8, 69, 89–91 theory of mind 121–2 theory of practice 65, 168, 169, 172, 174, 180–6 thesis (law of legislation) 109 Thurner, S. 291 time 181 time-invariancy 48 Tobin, J. 282 Tomassini, M. 231, 236, 237, 238, 239, 241, 250, 253 tool-using 93, 119, 318n7 top-down approaches 224, 287, 289–90, 292–3 trade unions 85, 150 tradition 118, 134 trajectories 191, 194–5; meso 195, 197–8, 278; technological 165, 278 transaction costs 64, 73, 179, 180, 182 transcendental institutionalism 9, 103, 299, 306–9 transformation: capital 179–80, 182; self36, 42, 50, 53, 293 trend-values 156 trickle-around model 81, 170 trickle-down model of consumption 81–2, 170, 173 Trigg, A.B. 170, 173, 177, 318n3 Trivers, R.L. 125 trust 8, 99, 127, 128, 129, 180, 204, 227, 229, 232, 267, 293; contingent 203, 205; mutual 236; societal 244, 245–6, 248, 249, 250, 255, 258

352

Index

truth 71, 72, 99, 138 Turing, A. 223 typological approach 49–50 tyranny 302 uncertainty 96, 142, 293; novelty-induced 44; probabilistic 44 utilitarianism 30, 98, 130, 304, 306, 307, 308 utility 258, 259; maximization 100, 283 value: labour theory of 30; subjective 30 value theory of money 283 Van den Bergh, J.C.J.M. 276–7, 278, 279 Vanberg, V. 130–1, 319n5 variation 6, 17, 22, 24, 25, 33, 34, 36, 37, 38, 39, 45; axiomatic 4 Vbra, E.S. 277 Veblen, T. 1, 6, 7, 15, 49, 63, 64, 65, 68, 69–94, 168, 185, 191, 193, 206–7, 208, 271, 275, 293, 318; business-cycle theory 82; class system 80; consumption 8, 80 (conspicuous 79, 80, 89, 172, 274, 309; trickle-down model 81–1, 170, 173); critique of capitalism 79–82, 88; cumulative causation 65, 69, 75, 76, 206, 220, 273; habits of thought 69, 80, 89, 91, 92, 168, 190, 192, 273, 281; instinct of workmanship 69, 81, 87, 88, 92, 93, 94, 206; machine process 69, 89–91, 92, 113; technology 69, 86, 89–91; Instinct of Workmanship, The 86; Theory of Business Enterprise, The 86; Theory of the Leisure Class 79–80 Vega-Redondo, F. 227 velocity of money 153, 282 Velupillai, K.V. 223 Vienna Circle 113 virtual 201, 202 vision(s) 7, 28, 31, 136–7, 194 visualization 7 volatility paradox 289 Voltaire 130 Vor-Strukturr 28 Vorgrifff 28 Vorhabe 28

Vorsichtt 28 voting procedures 310, 311 Vromen, J. 18, 19, 39, 40, 119 Wäckerle, M. 30, 200, 223, 264, 265, 268, 311 wage negotiations 85 wages 82, 96, 288 Walras, L. 29, 30, 155, 285 Wapshott, N. 95, 96 Washington consensus 179, 183 Wassermann, S. 226 Watts, D.J. 227 weak links in networks 227–8, 257, 290, 291, 315 wealth: creation of 133; distribution of 83; of utility-maximizers 283 wealth channel 287, 288 Weber, M. 30, 78, 167, 169, 300, 305, 306 Weed, F.J. 76 Weismann barrier 57 Weismann doctrine 57 Weiss, A. 155, 285 Whitehead, A.N. 167 Wiener, N. 220 Wiesner, J.B. 74 Williamson, O.E. 63, 73 Wilson, D.S. 119 Wilson, E.O. 58 Winter, S.G. 6, 18, 21, 22, 23, 24, 35, 37, 144, 161 Witt, U. 5, 6, 15, 16, 17, 18, 19, 25, 36, 38, 39, 40–4, 58, 96, 118, 119, 129, 210, 279, 317n2, 318n5 Wolfram, S. 221 working class 157, 173 workmanship, instinct of 69, 81, 87, 88, 92, 93, 94 World Bank 179 Wouters, R. 288 York, H.F. 74 Young, H.P. 103, 106, 125, 210, 319n4 Youngest German Historical School 30 Zamagni, S. 30