Summary of JOIE article (First View, 16 November 2019) by Brendan Markey-Towler, Affiliated researcher, RMIT Blockchain Innovation Hub. The full article is available on the JOIE website
In my recent paper, newly available online in the Journal of Institutional Economics, I develop a complete, coherent theory of how institutions obtain their hold over our behaviour. Drawing on various literatures from cognitive psychology to affective neuroscience, we obtain a behavioural institutional economics. This theory reveals the necessity of rules, perception and emotions for institutions to order society, the surprising secondary importance of rationality and reasoning, and augurs against the possibility of large-scale social engineering in favour of anarchistic processes in socioeconomic change.
Institutions are broadly accepted rules across society which order our socioeconomic systems. Since our socioeconomic systems emerge out of our behaviour, institutions must therefore serve to guide our behaviour. The question naturally arises then, of how exactly institutions guide our behaviour. To answer this, we need a behavioural theory of how institutions obtain a hold over the human mind and behaviour. We need a behavioural institutional economics.
Oliver Williamson in his various works, particularly The Economic Institutions of Capitalismprovided a good enough placeholder: institutions create the incentives to which economic agents adhere. This is a good theory as it allows us to place institutional economics at the front-end of an established behavioural theory – that of the rational economic agent optimally responding to incentives. But in the golden era of behavioural science, a more compelling behavioural foundation for our theory of institutions is desirable as a complement for the more rationalistic Williamsonian approach.
Douglass North, of course, hinted toward such a theory, famously arguing that institutions are cognitive artefacts which guide our behaviour. In my recent paper, newly available online in the Journal of Institutional Economics, I expand on his work as well as sophisticated recent work by Carsten Herrmann-Pillath and Masahiko Aoki to develop a more coherent behavioural institutional economics. Drawing broadly from various literatures from cognitive psychology to affective neuropsychology as well as the formal schema developed in my book An Architecture of the Mind, I develop a complete, coherent theory of the place and function of institutions in the psychological process which has testable implications and offers practical insights for institutional theory.
This theory reveals the necessity of rules, perception and emotions for institutions to have a hold on behaviour and organise socioeconomic systems. It reveals the surprising secondary importance of rationality and reasoning as post hocjustifications for actions already taken guided by institutions. It reveals that large-scale social engineering is all but impossible without straying into morally questionable methods, and suggests an anarchistic approach to socioeconomic change is more possible and preferable.
Rules, Perception, Emotions
What is an institution? The literature now seems to offer a relatively well settled answer to this famous question: it is a rule, generally accepted across society, which delimits the range of appropriate behaviour in any given socioeconomic environment. If we take that definition and place it within a coherent schema of psychological theory, we can recover a coherent theory of when institutions determine behaviour, and thus a foundation for behavioural institutional economics.
Such a schema was what I offered in my book An Architecture of the Mind, and applied to this problem, drawing on cognitive and affective psychology and neuroscience. This schema, taking its lead from the Hayek’s great Sensory Order, views the mind, much like the brain from whence it emerges, as a network structure upon which and within which the psychological process operates to transform the world into behaviour. By applying this schema, we obtain a theory in which institutions act as ruleswhich intermediate between the world as presented to our mind by perceptionand our behaviour, over which they gain force by their interaction with emotion.
To be more specific, in order for an institution to obtain a hold our behaviour, our theory suggests that it is necessary and sufficient for the following to be true:
- Rules:An institution as a rule which delimits appropriate behaviour in any given environment must be incorporated into the mind as a cognitive rule expressed in mental networks which, applied to analysing any given environment, informs the individual of appropriate behaviour within it. The particular process by which this occurs is discussed at more length in earlier papers and involves presenting ideas of a particular form to the mind and reinforcing them against entropic decay.
- Perception:As a cognitive rule, the institution must be appliedby the psychological process to analysing socioeconomic environment in which the individual finds themselves. Because of the way perception is contingent on mental networks, this means an institution as a cognitive rule must be nested within a perceptual apparatus that connects the rule to percepts of the various environments in which it ought to guide behaviour.
- Emotions:As a cognitive rule, an institution must be anchored by motivational complexes in order to obtain force over preferences and thus behaviour. Hence an institution as a cognitive rule must be anchored within mental networks by some sufficiently strong emotionto provide the individual with motivation to act in consonance with the rule in which an institution is manifest.
If an institution can satisfy these three conditions, it will determine behaviour and serve to order interaction within socioeconomic systems. If any of the three is not met, it will not – a testable implication.
What is interesting about these three conditions is the relative absence of rationality, in the sense of “reasoning”. Rationality, in the sense of “reasoning” about behaviour, or the rules which guide behaviour, appears indeed to be more likely to be anteriorto that behaviour – justifying it or, if negative consequences thereof are discovered to be sufficiently severe, serving to inhibit emotional responses. Indeed, the theory we adopt suggests those reasons presented to the mind about behaviour already taken are more likely to be incorporated into mental networks the more they are are consonant(the contrary of Festinger’s “cognitive dissonance”) with experience at that point. Rationality in the sense of “reasoning” about rules comes afterrule-based behaviour, and build on the experience thereof.
This is quite in consonance with the neuropsychological and moral psychology literature. Neurologically speaking, we know that the prefrontal cortex (the neurological “seat” of higher-order reasoning) is anterior to the amygdala and hypothalamus (the neurological “seats” of emotion) and serves to justify or inhibit their sufficiency for behaviour (Sapolsky has written extensively on this). Similarly, Jonathan Haidt has presented what is essentially conclusive evidence that in matters of moral judgement, reasoning comes afterrule-based behaviour anchored in emotion.
This theory is not only intellectually satisfying in terms of the behavioural microfoundations. It also offers practical insights for institutional theory and policy. It offers a perspective on which institutions are more likely to serve to determine behaviour and order society, and how they are propagated. This perspective is not unheard of – it is, unsurprisingly, very similar to that offered by Hayek in The Fatal Conceit– but our theory provides it with behavioural microfoundations.
Those institutions are more likely to determine behaviour and organise interaction in socioeconomic systems which have been established by a long process of cultural evolution and thus become enculturated. Such institutions have been spread through socioeconomic interactions and become integrated within the minds of the population at large, reinforced and nested within a perceptual apparatus and anchored to emotions through developmental processes. They are not institutions, interestingly, about which a rational discussion and argument has occurred in the agoraconcerning their desirability.
We expect, for instance, that those laws which historically emerge from common law in equity (but also at law) or directly codify social norms, will have a greater hold over behaviour in socioeconomic systems ceteris paribus than laws which emerge from statute. It is probably no accident that our most sacred criminal laws emerged from evolved social and religious custom (via common law in the USA and Commonwealth Realms), while our (decidedly) less sacred tax codes originate largely in statute. This, for instance, allows us to better understand why certain constitutions are more robust than others to changing environments.
The present theory, further, suggests that when large-scale social engineering projects are undertaken – which can be thought of as exercises in implementing institutional change – the State must necessarily stray into morally questionable practices to affect successful change. The State replicating the rhetorical processes which spread institutions and cause them to be integrated into the minds of the population on a large scale calls to mind the disturbing propaganda systems described in Chomsky’s Manufacturing Consent. The State replicating developmental processes on a large scale which build the perceptual apparatus which applies institutions to various environments calls disturbing images to mind not dissimilar to Huxley’s Brave New World. The State implementing punishments for transgression necessary to create sufficient emotional fear about transgressing institutions on a large scale calls to mind a dystopian totalitarianism not dissimilar to Orwell’s 1984.
The same rhetorical, developmental and affective processes, when implemented by decentralised society at large however, are much less disturbing. They are quite the stuff of everyday social life, with institutions emergent from myriad social interactions and cultural evolutionary pressures. Not only less disturbing, these process are also more successfulwhen confined to a particular locality in socioeconomic systems. The conditions for institutions to be successful in determining behaviour are much more easily satisfied when applied to a small group rather than a large group.
The present theory thus augurs against large-scale social engineering as not only extremely difficult but morally questionable, and argues instead for anarchistic emergence of institutions which create socioeconomic change from local communities.
New behavioural institutional economics
In my recent paper in the Journal of Institutional Economics, I develop a complete, coherent theory of the place and function of institutions in the psychological process which has testable implications and offers practical insights for institutional theory. I develop, in short, a foundation for behavioural institutional economics. There is significant scope for developing this foundation and integrating it into a still more complete and compelling institutional economics.
In the first instance, there is important work to be done on integrating this behavioural foundation into institutional theory at large. Integrating this theory of how institutions organise interaction within socioeconomic systems with theories of the origins, emergence and evolution of institutions offers a more compelling and complete institutional economics. But there is also work to be done expanding behavioural institutional economics itself.
Each of the three necessary conditions for institutions to determine behaviour contain further propositions about the exact nature of the interaction of the psychological process with the environment. Further research ought to research more of this interaction and its relevance for institutional theory. This would help to integrate behavioural economics proper into institutional theory – revealing the importance of framing of the environment for the hold of institutions over behaviour.
Further, and I find this particularly interesting, there is more research to be done on investigating the nexus between developmental psychology and the great literature stemming from the contributions of Jean Piaget with institutional economics. Better understanding the need to integrate and then reinforce an institution within mental networks and how this might be satisfied by the developmental process promises a rich new understanding of institutional theory.
In any case, whether the theory I have developed turns out to be useful or not, I hope that it stimulates further research into behavioural institutional economics. Developing the microfoundations of institutional economics promises to make institutional theory still more coherent and compelling.
Aoki, Masahiko, (2015) “Why is the equilibrium notion essential for a unified institutional theory? A friendly remark on the article by Hindriks and Guala”, Journal of Institutional Economics, 11(3), pp.485-488
Aoki, Masahiko, (2011) “Institutions as cognitive media between strategic interactions and individual beliefs”, Journal of Economic Behavior and Organization, 79(1-2), pp.20-34
Festinger, Leon, (1957) A Theory of Cognitive Dissonance, Stanford University Press, Stanford
Haidt, Jonathan (2001) “The Emotional Dog and Its Rational Tail: A Social Intuitionist Approach to Moral Judgment”, Psychological Review, 108, pp.814-834
Haidt, Jonathan (2012) The Righteous Mind, Vintage, London
Hayek, Friedrich, (1952) The Sensory Order, University of Chicago Press, Chicago
Hayek, Friedrich, (1988) The Fatal Conceit, University of Chicago Press, Chicago
Hermann-Pillath, Carsten (2017) “Institutional naturalism: reflections on Masahiko Aoki’s contribution to institutional economics”, Evolutionary and Institutional Economics Review, 14(2), pp.501-522
Markey-Towler, Brendan (2018) An Architecture of the Mind, Routledge, London
Markey-Towler, Brendan(2019) “The competition and evolution of ideas in the public sphere: a new foundation for institutional theory”, Journal of Institutional Economics, 15(1), pp.27-48
North, Douglass, (1990) Institutions, Institutional Change and Economic Performance, Cambridge University Press, Cambridge
Piaget, Jean, (1923) The Language and Thought of the Child, Routledge, London
Sapolsky, Robert M. (2017) Behave, Penguin, London
Williamson, Oliver, (1985) The Economic Institutions of Capitalism, Free Press, New York