Economic cognitive institutions

Summary of JOIE article (First View, 6 April 2020) by Enrico Petracca, School of Economics, Management and Statistics, University of Bologna and Shaun Gallagher, Department of Philosophy, University of Memphis and Faculty of Law, Humanities and Arts, University of Wollongong. The full article is available on the JOIE website.

Institutional theory grapples with ontological issues concerning the nature and working of institutions. How do minds cause institutions? How are minds, in turn, influenced by institutions? Answers to these questions tend to trigger even more questions. Rizzello & Turvani (2000) have effectively represented the study of the relationship between minds and institutions as a “deadlock”. As a way out of the deadlock, we suggest establishing institutional theory on an ontological position originating in the philosophy of mind called ‘extended mind’ (Clark & Chalmers, 1998). In particular, our paper introduces the new notion of ‘cognitive institution’ (Gallagher & Crisafi, 2009), based on the specific ontological position of the ‘socially extended mind’ (Gallagher, 2013). Our discussion is primarily devoted to introducing this new notion in institutional economics. 

Before getting into some details, it is paramount to make clear that by assuming an extended mind point of view, we are advocating an ‘externalist’ stance on institutional economics. Briefly stated, externalism in the philosophy of mind maintains that cognitive phenomena cannot be restricted to what goes on in people’s heads but also involve action-oriented processes of body and environment. By explicitly mentioning externalism, we aim to motivate a distinctly externalist research program in institutional theory. However, although institutional economics has been much more concerned with ‘internalist’ approaches to institutions (e.g., Searle, 2005), it would be wrong to assume that externalism and institutional economics have so far ignored each other. We start our discussion of externalism in institutional theory identifying a specifically externalist thread in institutional economics inaugurated by Douglass North and by philosopher Andy Clark, the first proponent of the extended mind hypothesis. In the 1990s and early 2000s, North and Clark collaborated rather intensely in the elaboration of some externalist notions of institutions. Denzau and North (1994) introduced the notion of institutions as ‘shared mental models’ that, however, moved only half-way to externalism, in so far as mental models remain distinctly internalist concepts, although mitigated by the sharing requirement. Along a line of increasing externalism, Clark (1997) proposed his view of ‘scaffolding institutions’ as directly dependent on his notion of extended mind. What does the hypothesis of the extended mind say? Considerthe famous example of Otto and Inga. Otto suffers from a memory impairment so that he needs a notebook to store and retrieve any sort of information, while Inga has access to her biological memory. The extended mind hypothesis states that Otto’s notebook, as a vehicle of Otto’s memory, plays the same function of Inga’s neurons, as vehicles of Inga’s memory, and as such should be considered equivalent. In other words, in certain circumstances, external resources acquire the same functional status of internal resources. Returning to Clark’s notion of scaffolding institutions, these are conceived as institutions that play the same role as Otto’s notebook in extending people’s cognitive processes. Providing constraints and resources, institutions do part or, in certain cases even more, of individuals’ cognitive work. 

The hypothesis of the ‘socially’ extended mind is critical of the extended mind hypothesis as it considers the latter to be too conservative. It is true that Clark explicitly counts institutions as legitimate ways to extend the mind, but it is also true that this is in contrast to some restrictive criteria of mind extension that Clark provided later (Clark, 2008). The hypothesis of the socially extended mind unambiguously states that institutions are legitimate loci for mind extension. Furthermore, although less central than in North’s framework, Clark’s extended mind is still populated with internalist concepts such as mental models. In contrast to this view, the socially extended mind maintains that what is extended are not ‘mental models’ but ‘mental processes’. This is congruent with the idea that cognition is not made of models, beliefs, propositional attitudes, but rather of processes, such as judgment, decision-making, and problem-solving (Gallagher, 2017). The substantial differences between the extended mind and the socially extended mind reflect on the notion of institutions that they support. While scaffolding institutions enable minds to perform a variety of cognitive processes that would otherwise be difficult to perform solely in our heads, cognitive institutions constitute cognitive processes that would not exist or even be possible otherwise. In philosophical terms, it can be said that while scaffolding institutions enable cognitive processes, cognitive institutions constitute cognitive processes.  

We emphasize two other fundamental ingredients of cognitive institutions: the ontological richness and the dynamic notion of constitution. Ontological richness means that cognitive institutions are populated with a variety of entities that are constitutive of institutions: cognitive artifacts, practices, and social interactions. For instance, in the case of legal institutions, a cognitive artifact may be a law book that stores the codified corpus of law that we could never store in our biological memory; practices, in turn, are those forms of behavior that can be thought of as established forms of institutional (external) memory, as in the case of routines. Furthermore, social interactions form a cornerstone of our framework, as institutions are constituted (in philosophical terms we would also say enacted) by the continuous interaction between its constituents. Dynamic constitution means, in other words, that institutions are continuously shaped and reshaped through the interaction between the constituents acting in institutions.

Our paper considers the market as a paradigmatic example of an economic cognitive institution (see also Gallagher, Mastrogiorgio & Petracca, 2019). The perspective of the socially extended mind allows us to re-conceptualize basic notions such as those of bid and ask. While bid and ask are usually considered to be manifestations of an individual-based value assessment process, in our view they are consistent with an extended process of value assessment. People not only bid or ask to get a step closer to the final transaction, but also to ‘know more’ about the object of the transaction or of other participants in the market. This view seems at first compatible with distributed, co-creational views of the market such as Hayek’s (1945) or, more recently, Arthur et al.’s (1997). However, markets as cognitive institutions are different in some fundamental regards. For instance, Hayek’s view remains somehow abstract (that is, it seems to neglect the specificity of the price mechanism in different contexts) and does not fully consider the ontological richness of markets. Accordingly, in Hayek we do not find a conceptualization of market practices. On the other hand, Arthur et al. seem to be distinctly rooted in internalist concepts such as that of ‘expectation’.

Our paper also introduces a definition of cognitive institution that is specific to economics. Following the idea of mind intrinsic to the socially extended mind hypothesis, that is, the idea that cognitive processes serve the goal of surviving and prospering in different environments (Gallagher, 2017), economic cognitive institutions are defined as extended problem-solving entities. As such, they help individual agents solve problems that they could never solve on their own and constitute the cognitive processes leading to the solution.


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