Saturday, January 22, 2022

538 Prisoner’s dilemma

 The prisoner’s dilemma is as follows. Two prisoners get a reduced sentence when confessing to their joint crime. If they both persist in denial, there is not enough evidence, and they are both released. For them, that is the best action, but they are each tempted to confess, accuse the other, and get a reduced sentence, fearing that the other might do so. The result is that they both confess, to prevent a one-sided heavy sentence.

A comparable situation may occur in the economy. A classic example is the tobacco industry. Advertising did not increase sales much, and seemed wasteful, but was needed not to lose market share, if the company reduced advertising but competitors did not. The government intervened for health reasons, limiting advertising, and this imposed a profitable solution for the firms.

In banking, regulation should have been imposed in the 2008 financial crisis, but the governments were also in a prisoner’s dilemma: if they imposed controls, and other countries  did not, this might lure banks to move elsewhere. So, the EU tried to impose restrictions that were common at least in Europe.

Such situations of collaboration versus defection have been investigated by game theory, which is not a theory but a tool for analysing strategic action, anticipating actions of others. There can be several players of the game. An example is bubbles on the stock market, where people assume that others will keep on buying the share, raising its value.

The situation of a game changes when it is repeated. Then one may try to build a reputation of honouring agreements, and keep to them. Game theory yielded the strategy of tit-for tat, where you collaborate as long as the other does, and retaliate when he/she defects. However, then you run the serious risk of getting locked in in mutual defection. An improvement is forgiving tit-for tat, where in case of defection you try out collaboration again, to see if the counterpart may be so wise as to follow. Trust can yield mutually beneficial outcomes, by discounting the risk of defection.

            Another example is that of the game of hawk and dove. Hawks prey on doves, but if that is so successful that doves become extinct, that is not in the interest of the hawks, and it is beneficial to both if doves learn to hide or escape better.

            Another famous game is where A has to decide how much money he/she gives to B, and B has to decide how much to give in return. Often, people are inclined to the fair solution that B returns half and they both have 50%. It has been used in many experiments, to find out how much it matters when an outside gamekeeper gives both players a bonus when they share more or less, the effect of building a favourable reputation by giving a fair return in a repeated game, and what then happens at the last play, and the difference if they have contact and could deliberate.

 There are many useful applications of game theory, but it has its limits. It assumes that the options for strategic choice and the outcomes of combinations of choice are known, but this is often not the case. There, one discovers the options for choice and the value of outcomes only after the action. Here, trust comes in again: are you willing to accept that uncertainty, on the basis of an assessment of someone’s trustworthiness or a leap of faith?

           There are models of search in the form of travelling across a hilly landscape in the mist, in search the highest summit. There, the situation may be that treading on the land causes earthquakes, shifting the hills.

 Questions

-          As a prisoner would you confess, getting a reduced sentence, or would you deny, risking a high sentence, why, and what would change your choice

-          Have you ever experienced a prisoner’s dilemma

-          When or why would you not use game theory

-          How was the weapons race stopped

  

Friday, January 14, 2022

 537 Certainty and uncertainty

 Certainty is scarce, though it does exist. There can be certainty of something when it logically follows from the axioms of an underlying mathematical system that you take for granted, but it is conditional on that. That is called ‘analytic’truth, by deduction, in contrast with ‘synthetic’, empirical truth.

Uncertainty can be denied, by religion, with a benevolent God, belief in an afterlife, and may be hidden in ritual. Natural scientists used to search for the certainty of laws of nature. David Hume warned that no matter how long one has observed a regularity, this does not logically imply that it will continue in the future. The regularity of nature is an assumption. One needs a causal account to justify the regularity of any phenomenon. This inspired Kant to the idea that we do not know reality as it is ‘in itself’, but only by the working of mental frames of interpretation. I would give that a little twist in adding that one does not know to what extent ideas form and distort reality. If we do not know reality as it is in itself, how do we know that and in how far ideas misrepresent it? We can only have confidence in ideas to the extent that they satisfy logic, cohere with other ideas that have withstood the test of time and have survived a variety of criticisms.

Thoughts are formed in ‘mind frames’ that are ‘triggered’ by circumstance. An example is the following. Show someone a white napkin, a white shirt, a white sheet of paper and ask what cows drink. Often, triggered by the whiteness of things, people say ‘milk’, but the right answer is ‘water’.

On the other side of the dilemma, the view is that uncertainty is pervasive and inevitable. Physicists have become accustomed to the Heisenberg uncertainty principle, that one cannot with certainty measure both the position and the momentum of an elementary particle such as an electron. An electron circling the nucleus of an atom has a ‘cloud’ of probabilities of location. When colliding with something else, the cloud collapses to a determinate location. Nature was before seen to consist of things existing independently but is now seen as inherently conditional upon interaction with other particles. That yields a process view of things (Nooteboom 2021).

According to Karl Popper, theories can be falsified but not proven, and logically this is an incontrovertible claim Theory seeks laws that claim universal validity: given conditions A, B. always occurs. Popper proposed that the ethic of science is to search for falsifications. Others objected that it is not rational for scientists to do this. They have an interest in gaining recognition by theories that are confirmed, giving a rational incentive not to search for falsificationn, or even hide it when inadvertently found. In a famous debate (Lakatos and Musgrave, 1970), Popper admitted this and even pleaded for a certain conservatism of neglecting falsification, not only because such conduct is a fact of life, but also because it is rational in yielding information on the limits, the ‘true strength’ of a theory, and yields hints in what direction to seek renewal, in tune with Hegel’s principle of learning by failure.

Economists distinguish between risk and uncertainty. In risk, one does not know what will happen, but one knows what can happen. You can see this as a set of all possible occurrences or outcomes. One can assign probabilities to them and calculate ‘expected value’. If one does not know objective probabilities, the procedure is to assign equal probability to all possibilities, and adapt them as experience accrues concerning their frequency of occurrence. Under uncertainty, by contrast, one does not know all that can happen, but one can imagine some possible futures, in narratives about it, called scenarios. One cannot optimise a policy across all possible but unknown futures, but one can consider the robustness of a phenomenon or policy across a few such possible futures, choosing a policy that is not necessarily optimal in any of those futures but yields a satisfactory outcome in all of them.

Uncertainty is unsettling to many people, who are then tempted to deny the uncertainty of a phenomenon, or even the very existence of uncertainty, and to construe myths that do yield an imagined certainty, in conspiracy theories that yield apparent certainty, often encompassing a multitude of phenomena, for the sake of simplicity, while rejecting criticism, theoretical or empirical, as exemplifying the bias and interest of the conspirators, and thereby confirming rather than falsifying the conspiracy theory.

Economists seldom take uncertainty seriously, and mostly opt for treating it as risk, because under uncertainty they cannot engage in the calculation of an optimum, which belongs to the core of economics (Hodgson 2019). As a result, they cannot offer an adequate account of innovation or learning, where uncertainty is of the essence. With a treatment in terms of risk, they can manage to reconstruct innovation that is incremental, staying within the basic principles of established practice. In government innovation policy this is favoured, because one likes to plan innovation in concert with incumbent business leaders, politically necessary for acceptance, while still waving the fashionable flag of innovation. For the leaders of large business, with a stake in established practice, incremental innovation is preferable because it does not yield the creative destruction of more radical innovation crossing the limits of established practice and the investments sunk in it. Radical innovation is erroneously expected to follow from specifying intended outcomes and timetables of achieving them, which is a contradiction in terms. Radical innovation yields unexpected outcomes that are not yet useful now, which are then labelled as ‘failures’, while even in their failure they are useful in showing which avenues do not yield results and indicate new avenues to try. Furthermore, radical innovations that do yield a useful outcome have a large and wide impact that compensates for  the host of efforts that did not have impact. This yields a criticism by many researchers of policy where fundamental research is challenged to be useful in the short term, while its often large impact emerges in the longer term. This criticism was included in a report to the Dutch government that was developed under my supervision. It was not appreciated, for threatening to ruin the game of calling incremental improvement innovation.

An alternative perspective, accepting uncertainty, is that of evolution, which does not presume a rational ‘intelligent design’, but explains development of novelty as the outcome of a process of selection by the environment, in combination with the generation of variety submitted to selection, in nature by chromosome cross-over in sexual reproduction, mutation of genes and variations in the interactions of genes and their ‘expression’ under influence of their environment. In heterodox, evolutionary economics, variety is created by invention and innovation, by entrepreneurs, and selection is done by the market and institutions.

In science, research proposals and papers are regularly rejected by scientific journals because they do not fit in the core of the research programme adhered to by the editors and reviewers of the journal. This is an example of selection, in an evolutionary theory of science. However, scientists held back by this selection frequently create their own proprietary journal, thus creating their own selection environment. This also happens to some extent in nature, when organisms defend themselves against selection, or create a benevolent selection environment, with beavers building dams, rabbits digging warrens, or species engaging in symbiosis with others or being parasites. This matching of selection environments with life forms to be selected, is called ‘co-evolution’ When this prevents a stable selection environment, evolution breaks down. For libertarians who disregard market imperfections, this yields an argument not to interfere with the selection mechanism of the market.

An example is the present breakdown of selection of opinions by arguments of truth, logic and facts, since truth has been made irrelevant by demagogues and some governments, in the dissemination of ‘fake news’. Opinions are now presented as certain, incontrovertible, by the loudest and most charismatic mouths.

I propose to follow Dewey’s notion of truth as warranted assertibilility, with warrants of logic, facts and practical workability. Now, warrants of logic and facts are often ignored, and are replaced by emotion-laden appeals ‘Is’ is replaced by ‘ought’. I allow for emotions, value them, but this killing of rationality spells disaster.

Science is held to yield the progress of truth, but has a considerably conservative practice. As discussed before, according to Imre Lakatos (1978) science takes the form of research programmes, collections of theories that have a shared hard core of basic assumptions and methodological principles, and a surrounding protective belt of subsidiary assumptions. When a theory in the programme is falsified, the core is left unaffected, and adjustments are made in the protective belt. The economist’s drive for calculation of an optimum belongs to the core of the discipline of economics. When a theory is falsified, the principle of maximisation is not challenged, but the function to be maximised is tinkered with. I once received the following rejection of a paper submitted to an economic journal: ‘this is not optimisation of an objective function, therefore it is not science’.

Questions

-          Is there any certainty

-          Is there fixed truth

-          What certainty does science give

-          Is evolutionary theory a good approach in the humanities

-          What is the rationality of theoretical conservatism

-          What scenarios would you propose to investigate

 

Friday, January 7, 2022

 536. Competition and collaboration

 In economics, the focus has lain on competition, as a goad to efficiency and innovation. However, there are several economic and other reasons for collaboration. When demand for a product gets saturated, due to the law of decreasing returns, the producer can enter a new market elsewhere, as discussed before, in the cycle of discovery, or he can engage upon a new activity besides the current one. The law of diminishing returns says that the more one has of something, the less an additional unit, called a marginal unit, is worth to you. The theory of price entails that price is set by equalising the ratio between price and marginal utility to the user between different products. As a producer, you can compete by lowering price or raising marginal utility, with innovation, or promotion.

In entering a new activity, you can build up the needed resources and skills yourself, or you can faster and more cheaply buy into those of someone already engaged upon it, in collaboration. In cooperation, the goal is to go beyond the zero-sum game of competition, where you gain by the other’s loss, to a positive sum game where you both gain

In the first approach, this is based on what exists. The deeper value of collaboration, however, lies in resonance, in mutual influence that yields an opening up to ‘novel combinations’ of ideas, resources and skills of the partners. That entails uncertainty concerning the potential of partners and their conduct . Not to forego that potential, one needs trust and restraint of control. That is not only a moral but also an economic imperative.

The value of collaboration was seen but only according to economic doctrine, where it had to be based on a balance of give and take, a ‘quid pro quo’. Williamson (1993) proposed, and I agree, that if trust means give and take without going beyond calculative rationality, it does not add anything to economic doctrine, because that already includes enlightened self-interest, in surrendering advantage in the present in order to gain greater advantage in the future. But due to the uncertainty of conduct and contingencies in the future, trust requires a leap of faith across that uncertainty, and cannot be fully calculative, even if to some extent one can make rational inferences of trustworthiness from the arrangement of the relationship and observed conduct, as discussed before. If it does go beyond calculative self-interest, Williamson argued, it cannot survive in the competition of markets. Against that I have argued, also in personal debate with Williamson, that since in modern times innovation is crucial for survival of firms, and innovation engenders uncertainty, trust beyond calculative rationality is needed in markets. The give and take, voice and trust in a collaborative relationship tie in with the concept of resonance.

What kind of cooperation could or should there be? Innovation is enhanced by collaboration between different, complementary skills, knowledge or other resources at some cognitive distance, discussed before. Such distance hampers mutual understanding and hence the efficiency of collaboration, but also offers the opportunity of novel combinations. Optimal distance is large enough to offer the opportunity of novelty, but not so large as to prevent understanding. The combination of some distance for variety and enough understanding is a source of innovation. Where that optimum lies depends on accumulated knowledge, and experience with partners who think differently. The larger those are, the more one has the ‘absorptive capacity’ to understand, and the larger distance can be., but the larger distance must also yield something new. As discussed, this was confirmed with an econometric model (Nooteboom et al.2007)

Organisations can cooperate by merging or by one side taking over the other. The alternative to such mergers and acquisitions (MA) is an alliance between partners staying apart as separate  entities. In MA, cognitive distance can decline too much, because in the new, merged organisation there is a need to limit cognitive distance by means of an ‘organisational focus’, to align workers in a joint purpose and ways of conflict resolution. Also, an MA is less flexible because more difficult to end and disentangle than an alliance. That does depend on institutional conditions. In the US one can separate from a partner, in firing a worker or selling part of a firm, more easily than in Europe. An MA can better control conflicts of interest, in an overarching hierarchy that is lacking in an alliance. In the absence of such hierarchy, an alliance needs to be better at the practice of trust beyond control, discussed before. It needs to master the art of ‘voice’ to deal with conflicts. However, a MA may be needed to realise certain forms of economy of scale.

There are different types of economy of scale. One is to profit from specialisation that is technically inseparable and necessitates integration in an organisation. In removal, one needs two pairs of hands to move furniture. Another effect of scale is the pots and pans effect, characteristic of process industries such as chemicals, refuse processing, energy production, steel manufacturing and a nuclear reactor. The effect is a consequence of the mathematical law that the surface of a spherical container, such as the reaction chamber of a process industry, is proportional to the square of the radius, and its content is proportional to its third power. The surface determines the material cost, and hence weight and transportation cost, of the container, its cost of cleaning and its radiation of heat or refrigeration to the outside. The content determines the volume of production, and hence revenue. Productivity, measured as the ratio between revenue and cost then is proportional to the radius and hence the diameter and size of the container.

The formula also applies to containers such as houses, trucks and Jumbo jets. There also, the surface determines costs of material, air resistance and fuel, while the content determines the space for users, such as the possible number of seats.

Why are warm-blooded animals at the north pole large and bulbous? Because the loss of warmth by radiation through the hide relative to inner warmth of the body is less than for small size. That is also why small animals and people huddle together in the cold. But why, then, are there also large, bulbous animals in hot climates, such as elephants, rhino’s and hippopotami? The same principle applies, but in reverse. There it is about absorption of heat into the body through the hide. Then, why are there also thin, elongated, lean animals there, like puma’s and leopards? Because in the spurt of pursuing a prey, they generate even more heat relative to their environment, and they have to radiate that outwards. When not in pursuit, they lie panting in the shade of a tree.

Another economy of scale arises with an indivisible production factor such as an attendant in a shop, a bank counter, emergency or service desk, and so on. Its productivity depends on the number and frequency of calls, which relates to size. Lack of custom causes the improductivity of idle capacity. This is one factor causing the decline of small shops relative to large ones. This could be dodged when shops were at home, so that idle capacity could be used for housekeeping or child care, or for a shoe shop to repair shoes in the absence of customers. The problem of idle capacity at small size of utilisation arises also for specialist professional service, in a small organisation, such as a legal expert. Together with other small organisations, the organisation then has to collectively outsource that service, to create sufficient utilisation of capacity. This economy of scale combines with that of the size of an airplane in the need for a pilot, whether a plane is large or small. This economy of scale is a prod towards automation and self-service, in shops, hotels, gas stations, self-driving vehicles, and so on.

There is also economy of scope, where costs are lowered or production is increased by combining different, complementary activities. A classic example is an orchard, where there must be enough space between the trees to allow for light and air, in combination with sheep grazing the grass in the fallow space between the trees. This also may best be done in collaboration between tree growers and sheep keepers.          

While trust and resonance are part of fruitful collaboration, there remains an element of rivalry and the possibility that dependence is grasped as a basis for power play, to exert pressure and gain material advantage. That is why there trust is accompanied by a degree of control, to hedge for that risk, until that risk becomes minimal, in habituation, deepening trust in mutual benevolence and solidarity. Trust will seldom be blind.

Questions

-          Is collaboration between rivals viable, how

-          Why are mammals at the north pole bulbous

-          Do you profit from economies of scale, how

-          In business, would you prefer a merger/acquisition or an alliance, under what circumstances

-          Can trust survive in markets, how

 

 

Saturday, January 1, 2022

 535. Serenity and excitement

 Connected to the dilemma of stability and change, there is the dilemma of serenity and excitement. Serenity requires some stability, tranquillity, limited uncertainty, while excitement entails turbulence, the unexpected, uncertainty. Nietzsche discussed the contrast between Apollo as a symbol of harmony, and Dionysos as the paragon of excitement, transgression, turbulence, and drunkenness. The latter connects with the notion of thymos, a striving for action, manifestation of the self, discussed before. Thymos is a feature of discovery and crossing boundaries, as with adventurers, discoverers, entrepreneurs, scientists. and revolutionaries. After the exertion and risk of climbing a mountain, one can enjoy the serenity of a view from the top.

In love one finds the distinction, in ancient Greek, between desire, ’eros’, and ‘philia’, deep friendship. Such friendship gives a sense of connectedness, a feeling of relatedness, mutual commitment and trust, to the point that one can vigorously criticise each other in ways that one would not dare towards a stranger. This shows how the peace of friendship can engender the change of insight.

The notion of romanticism has several meanings. One is that of eros, passion, being in love, admiration, transcendence. Another is adventure, crossing boundaries, transgression, excitement and danger. A third is a sense of belonging to a greater whole, beyond oneself, of having a shared identity, transcendence, safety, belonging and a sense of protection. That is the field of romantic nationalism, supported by myths of a heroic past. Romanticism is also the feeling of being united with nature. Germans have an expression of ‘Wald im Kopf’, forest in the head. That is akin to a feeling of peace, serenity, but can also be a feeling of transcendence, a feeling of losing the shackles of the limited self.

The combination or alternation of serenity and excitement occurs in relations. A successful marriage has had eros, and, if all is well, develops into philia. They can follow upon each other, as stability and change do in the cycle of discovery. One can feel consolation in friendship, but also excitement at the offer of some surprising insight. Resonance can produce both excitement and serenity.

There is a related dilemma of order and control. Stability, harmony, laws and institutions, routines, rituals, are forms of order society cannot do without. But there is also an urge for Dionysian chaos, excitement, adventure, thymos, the romance of crossing boundaries. It is part of the gist of life, entrepreneurship and discovery. It is needed to prevent ossification. As argued before, the order of complete control is illusory and undesirable.

In puberty, adolescents need to wrest free from the order of home, to develop their own identity and direction. This requires interaction with other youths, in play, parties and at school, which were closed off by the lockdowns against Covid-19. There are compensations to some extent in telephone, face-time on the mobile phone, and Zoom, but young people need the jostling of push and shove, excitement and uncertainty in the taunt and retort of physical contact, dancing and quarrels and teasing to explore the limits of what one can take and inflict, and to experience the vicissitudes of love and sex.

Order, organisation, is achieved by differentiated elements relating to each other, like organs in an organism, and people in a community. That related differentiation is the essence of democracy. It decays when the elements no longer differentiate or no longer relate, as is now occurring in the US between republicans and democrats, but also occurs more widely, in people withdrawing into ‘filter bubbles’. This is related to the dilemma of unity and difference discussed before. One does not have to make a permanent choice between serenity and excitement, but like stability and change, they can alternate, or one can take a middle position

Questions

-          Do you prefer serenity or excitement

-          Can you combine them, how

-          Are you in a filter bubble

-          What are your sources of serenity, excitement

 

Friday, December 24, 2021

534. Stability and change

 In ancient Greece, Plato and Parmenides considered change to be an illusion, and reality to be stable. An argument against novelty was that it either arises out of what exists, and then is not truly novel, or arises out of nothing, which is impossible. Heraclitus, by contrast, considered everything to be in ongoing flux.

 Many things do indeed seem to be stable, but upon closer scrutiny or in a longer time frame one sees change.

Evolution is a counterexample to the claim that change is an illusion. A truly new species arises from a former one by combining existing and mutating genes. However, in evolution there must be a relatively stable selection environment. If it changes too often too radically, evolution does not work.

Body and mind have processes by which they serve to maintain ‘homeostasis’, a balance of properties within boundaries, needed for the maintenance and flourishing of life. Emotions serve to identify violation of those boundaries, and to call forth remedial action (Damasio, 2003). Excessive deviation causes pain, redress gives pleasure. Thirst signals lack of moisture, drinking gives relief. When relief is reached, and homeostasis is re-established, the renewed balance can yield boredom. Deviation and corresponding pain may then be sought to energise life and obtain the pleasure of relief. Perhaps this is the source of the phenomenon of ‘thymos’, the urge to manifest oneself, seeking diversion, enterprise or adventure.

For another example of stability and  change, the theory of ‘research programmes’, discussed before, implies a degree of stability in that change is considered only in the ‘protective belt’ of subsidiary assumptions, not in the ‘core’ of the programme. This obstructs interdisciplinary mixes of programmes, and is akin to the idea that in evolution different species cannot interbreed. That would eliminate the differential survival needed for evolution. If you mix all colours you get only a drab brown.

For science, this might even yield an argument against interdisciplinarity. Another metaphor supporting that is that one cannot look in all directions at the same time. Looking in one direction, one cannot simultaneously look in another. Disciplines serve to look in a certain direction. On the other hand, combining disciplines can yield a fresh insight. Combining is not necessarily mixing. In terms of Lakatosian research programmes, interdisciplinarity does not necessarily imply mixing or dropping cores, but can be the incorporation of different results emerging from those programmes, possibly in a new programme. When an economist shows that a firm can maximise profit by taking over a competitor, and a sociologist sees it as power play to impress shareholders or scare off competitors, both may be right.

There is evolutionary psychology and sociology. The human potential to form ideas arises from adaptation in the evolution of humanity (Tomasello 2016, Moseley 2019). In cognition, the priority was to categorise things as objects moving in time and space, such as a prey in hunting, the location of a lost child, the speed and direction of a preying animal or enemy, the direction and speed of an arrow, the location of a shelter against bad weather. This has been ingrained in mind and culture to such an extent that it is forming and biasing higher level concepts in metaphor to it (Lakoff and Johnson 1980). An example is the treatment of the meaning of a word as an object to which the word refers, like an exhibit in a museum, and information moving through a ‘communication channel’. However, meaning is not like an object moving in time and space. A word moving from one sentence to another changes its meaning. It is as if a chair changes its colour or shape, or drops a leg, when moved from one room to another. In communication, meaning is twisted, expanded or reduced.

According to this bias, we talk of being ‘in’ love as if it were an abode. This is the container metaphor, powerful from the experience of finding shelter in a hut or cave. Marbles are in or out of a pot, but you can be ‘in’ several moods at the same time. Nationality is not being in the box of a nation: one can have several nationalities at the same time, while one cannot simultaneously be in two boxes. We say we are ‘at’ war as if it were a place. War used to be localised, but now it can be at the distance of a drone. ‘Sales going ‘up’ is good, and going down is bad, because to be alive and healthy one stands, and when sick or dead one is lying down. The very notion of ‘things’ as objects is problematic. Many ‘things’ are processes (Nooteboom 2021). Happiness is not like a piece of cake one can acquire, but a process of living. Knowledge is not having something ‘in’ mind, stored away as if in a chest of drawers, but a neuronal process. The body is not a thing we ‘have’, but a process we ‘are’. Electrons in an atom are not determinate things moving around the nucleus, but clouds of probabilities of location.

Concerning morality, evolutionary psychology proposes that in early tribal societies, it had survival value to collaborate in the hunting of big game and in defense. This entailed the ability to see things from the perspective of the partner. Since it was cumbersome to develop empathy and collaboration each time for a specific endeavour, a general inclination towards empathy and benevolence developed. When after more than 300.000 years of evolution in hunter-gatherer groups, humanity settled down in farming, possessions, of land and resources became salient, and that to some extent eroded this instinct of benevolence or put more weight on self-interest, protecting one’s resources. On the other hand, Berry (2017:103) claims that it was adaptive to control alpha dominators, and that this is the root of an impetus to opposition of oppressive leadership. It was still adaptive to care for vulnerable birthlings and partners, and this confirmed an intuition of care of the weak.

These roots of cognition and morality are ‘pre-wired’, yielding a potential to produce more determinate forms of conduct according to circumstances, like genes, whose ‘expression’ in concrete forms depends on conditions. Babies have an inborn inclination to both smile and frown at strange faces, but which comes to dominate depends on how the babies are treated. Certain brain areas are geared to disgust and rejection, which is adaptive in the defence against poison, but can develop into rejection of foreigners or ‘infidels’.

Nooteboom (2000) offered a ‘logic’ of development, a ‘cycle of discovery’ that produces structural change of cognition in some way similar to evolution, in a process of assimilation of phenomena into frames of thought, which, if that fails, triggers accommodation of that frame, adopted from the work of the developmental psychologist Jean Piaget (Flavell,1967). It works as follows: Cognition is assimilation, attempts to fit experience into present frames of mind. When that fails, one can shift into an alternative frame if one has one, or adapt the current frame. In accordance with Hegel’s principle that one gets to know things in their failure, one can subject an existing frame to novel challenges, in a different ‘selection environment’, in evolutionary terms. This can mean that a product is introduced into a new market, in line with Hayek’s maxim of ‘competition as a ‘discovery device’. In science, it can mean the application of a theory.in a new field, say economics in a field customarily studied by sociology, or vice versa. In the cycle of discovery this is called generalisation. This yields an opportunity by failure to fit. If that occurs, the sensible thing to do is to search memory for alternatives that were tried before, but were then discarded, and to try to use that in minor ‘twists’ of current practice. In the theory, this is called differentiation. If that does not solve the misfit, one can look around in the new environment to see how local practices are successful where one’s own is not, and adopt elements from it to explore and try out ‘novel combinations’ of habitual and new, local elements. Initially, that is ‘incremental change’ that still has to fit in the basic logic or design of the existing practice, to limit the risk and expenditure of change before the novelty has proven itself. In the theory, this is called reciprocation. This yields ‘hybrids’ of old and new that allow for experimentation, trying out the usefulness of novel elements. This hybridisation is a familiar phenomenon in technological development (Mokyr, 1990). Those hybrids are prone to yield limited lack of fit, inconsistencies, bottlenecks, duplications, which yield inefficiencies and require work-arounds. This gives hints in what directions the basic logic or design might be changed to eliminate the problems of the hybrid. This yields experiments with those new directions until there is a breakthrough in a novel design This is called accommodation. The new design still carries leftovers of the old design, obstructing the realisation of the full potential of the new one. The ironing of out of  these is called consolidation.

An example of the imperfection of the radical novelty lies in the development of the steam engine. An early application was in pumping water out of coal mines. The application in trains required the development of adequate forms and materials, safety measures concerning the power of steam pressure, the addition of brakes, and the engineering of pistons and the transfer of their pumping movement to the turning of wheels. In the application to steam boats one had to deal with the problem of salt in the water heated to steam. Meanwhile, the old technology of sailing ships did not stand still. In paintings of Turner one sees elegant sailing ships next to awkward, lumbering new steam boats.

Another example is that of an artillery team, where one member stepped back more than needed to protect himself against the recoil of the cannon. It turned out that this was a leftover from old horse-drawn artillery where someone had to control the horses at the cannon’s boom.

The point here, in the cycle of discovery, is that it exhibits an alternation of stability and change. Stability in generalisation, where there is no change of the practice, but change of context, then differentiation with minor change of content, followed by reciprocation with greater change of introducing new elements, then accommodation with radical, structural or ‘architectural’ change, and finally consolidation with minor change. This rhymes with the earlier claim that a certain amount of stability is needed to find out where the limits of existing practice lie, and to collect hints of directions for change .This takes time and demands patience, with a vision towards the longer term future.

The logic of the cycle was confirmed in a conversation with a former CEO of Shell Oil company. He told that formerly the extension of production abroad was to compensate for saturation of the home market, for the sake of ongoing growth. A restriction was that existing practice must be maintained, to achieve economies of scale, and the deviations of differentiation and reciprocation were disallowed, until they found out that those were a source of innovation.

As a result, great power of an multi-national enterprise (MNC) to impose existing practice in the host country, with the promise of employment technology transfer and access of local production to the MNC’s home market, forces local adjustments to fit the practice, and preserve economies of scale, while companies with lesser power are driven to adjustment to local conditions, yielding more innovation.

An economic argument for stability is not to throw away past investments before the need or opportunity of change is pressing, and to earn ongoing returns from that investment. Also, some stability is needed to recover strength after exertion. Standing still, or taking a step back, is needed for reflection to let things sink in, to let ideas come to fruition. After dinner you have to digest. An uninterrupted flux of change makes for ineffectual neuroticism, jumping about without direction. The French have an expression ‘reculer pour mieux sauter’, stepping back for a better jump. However, people are often afraid that standing still is falling back, and economically that is often true, in falling back in the race of technology, consumption and acquisition.

 

Questions

-          Do you prefer stability or change

-          How would you combine them

-          Is change an illusion, or stability

-          Why is some stability needed

  

Saturday, December 11, 2021

 532. Rationality and emotions

 Here I continue a series of 14 dilemmas. This is the seventh.

 Feelings do not necessarily generate actions, emotions do, as the etymology of the word says: they e-move, move one outwards. Here I concentrate on what moves action: rational reasons, intuitions, heuristics, habits and emotions. Rational reasons are conscious and deliberate, emotions are conscious but automatic, not deliberate. The West has been imprinted by the Enlightenment, which has celebrated rationality, and thereby has produced a wealth of progress in science, technology and prosperity, but reason has galloped beyond itself, neglecting body, emotions and feelings.

 A dominant metaphor,  going back to Plato has been that of seeing. The original meaning of the ancient Greek word ‘theory’ was seeing. One sees truth in one’s mind, in the form of clear and distinct ideas (Descartes). And indeed, when one sees a cat on the mat, one cannot doubt that one sees a cat. In the postmodern literature the metaphor of seeing is seen as objectifying people, forcing them into a pre-established frame, robbing them of their particularity and denying their inscrutability and irreducibility (Levin 1999). However, I do not think this is necessarily the case. Everyone has experiences with telling reciprocal glances that give resonance and show empathy. Not looking at someone while talking to him/her is alienating. But one cannot look in all directions at the same time, and hence looking is constraining. Looking is also incomplete, complemented by hearing and touch.

 How do we reason? Apart from ‘seeing’, is reason calculative? According to utilitarianism, which currently is the dominant ethical stance, we are moved by pleasure and pain, and rationality entails that we aim for maximum utility, minimum pain and maximum pleasure. For early utilitarians, such as Jeremy Bentham and Adam Smith, the aim was the greatest utility for the greatest number of people. The ideal was to attach a number to utility, called cardinal utility that could be maximised. That is problematic. How can you put a number to the totality of different pleasures, such as attending a soccer match, enjoying a pizza and the smile of your daughter? J.S. Mill recognised that not all pleasures are commensurable, cannot all be added up in a single measure of utility. He distinguished between ‘higher’ pleasures of the mind and spirit, and ‘lower’ pleasures of body and matter. The economist Pigou later adopted the idea of higher and lower pleasures (Berry 2017). Later, the notion arose of a hierarchy of needs in Maslow’s pyramid, with at the bottom physiological, bodily needs of food, sex and defense, next, on a higher level, needs of shelter and safety, then social needs of recognition and belonging, and at the top of the pyramid spiritual needs of self-realisation. The order is not universal; sometimes prestige supercedes survival. It is even more difficult to aggregate the pleasures across people. In economics, based on utilitarianism, the aim of people shrivelled to the greatest utility for the self-interested individual

 Later, economics replaced cardinal utility by preferences, called ordinal utility. No number was attached to utility, but a person can decide which he prefers in a number of options, regardless of how strong that preference is. Preference had to satisfy certain axioms, such as transitivity: if you prefer A over B, and B over C, then rationally you must prefer A over C. The problem to aggregate across individuals remains. Economists assume preferences to be given, prior to choice, but in fact they develop with action. Choice may precede preference: You may have to try something before you know if you prefer it. Furthermore, preferences depend on means to realise them. It is hardly rational to consider options for preference that one cannot realise for lack of means. Preferences are affected by learning, and moral considerations, and therefore by place of birth and culture. They may be formed by mistaken or ill-informed ideas, affected by false news and rhetoric, misdirecting preferences from what one ‘really wants’.

 I give an example concerning shops, say supermarkets (Nooteboom 1984). Shops have several dimensions of utility: price, proximity, and range of goods offered (called ‘assortment’, in width of types of foods offered, and depth of brands and prices per type of good). Let price be indicated by 1, range of goods by 2, and proximity by 3. Cheaper shops tend to be farther away, larger than the neighbourhood shop, but to offer a greater range of goods. Let preference be indicated by the symbol >. Let the decision rule for choice be that you choose the shop that is preferred in most dimensions. Now let there be three shops you can choose from: A, B and C, and:

1.      You prefer A over B, because a1>b1, and a2>b2 (A is a hyperstore, with a wide assortment of food and non-food, and is cheap), but is further away: a3<b3.You prefer B over C, because it is more proximate, b3>c3, and cheaper, b2>c2, though it has a narrower range of goods, b1<c1.  You prefer C over A, because although it is more expensive, a2>c2, it is more proximate, c3>a3, and has a deeper assortment of goods, c1>a1, (it is a neighbourhood delicatessen). The result violates the axiom of transitivity: A>B, B>C and C>A. This is supposed to be irrational, but the story of the shops is plausible, I propose.

 The illustration is logically the same as Kenneth Arrow’s famous ‘paradox of majority voting’, but that operates on comparison of preferences between people, on inter-personal preferences between choice options. With Arrow, the paradox of intransitivity turns on ‘preference reversals’ concerning the choice of a single thing between people, with X preferring A over B, and Y the reverse.

 Pigou reverted to cardinal utility, and while admitting that economic welfare is not equal to total welfare, and ignoring the problems of aggregating different utilities, especially across individuals, he went ahead and developed the notion of national product, in the drive to measure economic success. National product is misleading, since it incorporates only things included in price. That means that if a man marries his housekeeper, national product goes down. National product excludes so-called ‘external effects’, i.e., things not included in price formation, such as pollution, or, on the positive side, public services such as safety (police, fire-brigade, army), public schools, street lighting, health care, refuse collection, scientific research, roads and bridges, culture and art, and jurisdiction. No small shortcoming. Positive external effects arise when everyone benefits, and people cannot be excluded from the benefit. On toll roads one has to close off exit and entry where there are no pay booths.

 I cannot cease to marvel at the blitheness with which economists create and use ideas that are admittedly untrue. They celebrate rationality, but are themselves irrational in making unrealistic assumptions and then applying them to reality in policy advice. Their argument is that it is still useful and it is better to have something rather than nothing, as a basis for policy.

 Against the reasoning of a subject is the recognition that rather than being an outside subject looking at the world, we form our ideas in interaction with the world. There is ‘framing’, having a mindset by which one interprets a situation, and which harbours a repertoire of actions triggered by that interpretation. It is a form of bias. This is non-rational but may be adaptive in fast response to danger or opportunity.

 David Hume claimed that reason is the ‘slave of the passions’. Emotions set the agenda, and help to step out of routine conduct. The subconsciousness of choice, in routines, is rational, in that if we had to consciously reason about all we do, the scope for rational reflection beyond daily actions would be severely restricted. Now, because we have routines, we can operate daily activities without using our limited capacity for rational attention, and dedicate that capacity to the unfamiliar and unexpected. With that, we can converse and reflect while driving a car. But routines can yield disaster when unusual conditions arise. Routinised driving of a car covers the normal, but when an accident is about to happen, we need the emotion of scare to catapult us out of routine into rational reflection.

 Our choices are ruled by non-reflective and often non-rational ‘decision heuristics’, bypassing rational reflection and calculation. While they are non-rational, they can be adaptive, assisting survival. One is loss aversion: we make greater efforts to avoid the loss of what we have than to acquire things we do not have. This can lead to irrational, fruitless litigation to defend against loss. This is adaptive in that in evolution loss often was loss of life or livelihood. A second heuristic is statistically unwarranted generalisation, raising incidents to the level of law-like regularities. Mishaps or incidental misconduct is seen as ‘always’ happening. This is adaptive in being alert to the possible recurrence of opportunities warranting engagement, and vulnerability to recurrent threat. Another is escalation of commitment, where past losses of a line of action give a motivation to stick to it. This is not rational because bygones are bygones, water under the bridge, and rationally only future costs and benefits matter. Thus, loss of the lives of soldiers prods continuation of the war, because otherwise those losses ‘would be in vain’. It is done in spite of its non-rationality, for reasons of reputation, because withdrawal would signal an admission of having made a bad decision. However, it can also be an indication of perseverance in the face of setbacks. Another is anchoring and adjustment, where people stick to established practices, or allow only for marginal adjustment, even though what is established is arbitrary or counterproductive, requiring a new approach. Yet, this also may be adaptive as perseverance.

 Psychology has shown that intuition often works better than rational calculation. When you buy a house you need to rationally consider things like the state of the roof and of foundations, the drains, electricity wiring, water pipes, conduct of neighbours, proximity of public transport, and so on. But you generally don’t then decide by sitting down to make a list of pro’s and cons, attaching weights, and calculating the balance. You may do that, but generally that does not clinch the issue. You sleep on it and decide on how ‘it feels’. Such decision making often works out well, Apparently, there is some process in the mind that does the balancing, mixing rational considerations, feelings, memories, and emotions. The conscious, rational considerations are not useless, but they feed a wider, subconcious process that we call intuition.

 Reason still is one of the ‘cardinal’ virtues, i.e. about which everything turns, next to the virtues of courage, moderation and justice. Emotion loads empathy and benevolence, needed for the cardinal virtues of moderation and justice.

 Institutions are rules of the game (Hodgson 1998), enabling and constraining action, such as laws and regulations. police, jurisdiction, prisons, etc. They constitute largely rational governance of actions, requiring organisation and control, limiting or promoting negative freedom. Action can also be guided by morality, which is more laden with feelings and emotions, and does not require organisation and control, but arises by assimilation in education, schooling, and experience along the path of life. While institutions mostly affect negative freedom, morality can yield positive freedom, such as justice in access to resources.

 In evolution, humans and other beings have developed mechanisms to maintain equilibrium, homeostasis, against destabilising threats, and to seize opportunities, from the environment, in order to survive. Those take physical forms, of physics and chemistry, but also psychological ones, and there emotions come in, such as anger, fear, disgust, hatred, love. Damasio (2003) proposed that feelings arise as mental representations, literally reflections, somehow, of emotions, yielding conscious thought and reason. Thus, reason builds on emotions and goes beyond them. Emotions are unreflected, non-deliberate part of a psychological mechanism of survival, developed in evolution. Damasio was inspired to this by Spinoza, with his notion of conatus, who recognised the role of emotions in decision making.

 Certainty and uncertainty

 Certainty is scarce, though it does exist. There can be certainty of something when it logically follows from the axioms of an underlying mathematical system that you take for granted, but it is conditional on that. That is called ‘analytic’ truth, by deduction, in contrast with ‘synthetic’, empirical truth.

 Uncertainty can be denied, by religion, with a benevolent God, belief in an afterlife, and may be hidden in ritual. Natural scientists used to search for the certainty of laws of nature. David Hume warned that no matter how long one has observed a regularity, this does not logically imply that it will continue in the future. The regularity of nature is an assumption. One needs a causal account to justify the regularity of any phenomenon. This inspired Kant to the idea that we do not know reality as it is ‘in itself’, but only by the working of mental frames of interpretation. I would give that a little twist in adding that one does not know to what extent ideas form and distort reality. If we do not know reality as it is in itself, how do we know that and in how far do ideas misrepresent it? We can only have confidence in ideas to the extent that they satisfy logic, cohere with other ideas that have withstood the test of time and have survived a variety of criticisms. In (post)modern philosophy, there is no outside subject looking at the world from outside, but the subject I part of reality, emerging in interaction with it.

 An example of mind frames that are ‘triggered’ by circumstance is the following. Show someone a white napkin, a white shirt, a white sheet of paper and ask what cows drink. Often, triggered by the whiteness of things, people say ‘milk’, but the right answer is ‘water’.

 On the other side of the dilemma, the view is that uncertainty is pervasive and inevitable. Physicists have become accustomed to the Heisenberg uncertainty principle, that one cannot with certainty measure both the position and the momentum of an elementary particle such as an electron. An electron circling the nucleus of an atom has a ‘cloud’ of probabilities of location. When colliding with something else, the cloud collapses to a determinate location. Nature was before seen to consist of things existing independently but is now seen as inherently conditional upon interaction with other particles. That yields a process view of things (Nooteboom 2021).

 According to Karl Popper, theories can be falsified but not proven, and logically this is an incontrovertible claim Theory seeks laws that claim universal validity: given conditions A, B. it always occurs. Popper proposed that the ethic of science is to search for falsifications. Others objected that it is not rational for scientists to do this. They have an interest in gaining recognition by theories that are confirmed, giving a rational incentive not to search for falsification, or even hide it when inadvertently found. In a famous debate (Lakatos and Musgrave 1970), Popper admitted this and even pleaded for a certain conservatism of neglecting falsification, not only because such conduct is a fact of life, but also because it is rational in yielding information on the limits, the ‘true strength’ of a theory, and yields hints in what direction to seek renewal, again in tune with Hegel’s principle of learning by failure.

 Economists distinguish between risk and uncertainty. In risk, one does not know what will happen, but one knows what can happen. You can see this as a set of all possible occurrences or outcomes. One can assign probabilities to them and calculate ‘expected value’. If one does not know objective probabilities, the procedure is to assign equal probability to all possibilities, and adapt them as experience accrues concerning their frequency of occurrence. Under uncertainty, by contrast, one does not know all that can happen, but one can imagine possible futures, in narratives about it, called ‘scenarios’. One cannot optimise a policy across all possible but unknown futures, but one can consider the ‘robustness’ of a phenomenon or policy across a few such possible futures, choosing a policy that is not necessarily optimal in any of those futures but yields a satisfactory outcome in all of them.

 Uncertainty is unsettling to many people, who are then tempted to deny the uncertainty of a phenomenon, or even the very existence of uncertainty, and to construe myths that do yield an imagined certainty, in conspiracy theories that yield apparent certainty, often encompassing a multitude of phenomena, for the sake of simplicity, while rejecting criticism, theoretical or empirical, as exemplifying the bias and interest of the conspirators, and thereby confirming rather than falsifying the conspiracy theory.

 Economists seldom take uncertainty seriously, and mostly opt for treating it as risk, because under uncertainty they cannot engage in the calculation of an optimum, which belongs to the core of economics (Hodgson 2019). As a result, they cannot offer an adequate account of innovation or learning, where uncertainty is of the essence. With a treatment in terms of risk, they can manage to reconstruct innovation that is incremental, staying within the basic principles of established practice. In government innovation policy this is favored, because one likes to plan innovation in concert with incumbent business leaders, politically necessary for acceptance, while still waving the fashionable flag of ‘innovation’. For the leaders of large business, with a stake in established practice, incremental innovation is preferable because it does not yield the ‘creative destruction’ of more radical innovation crossing the limits of established practice and the investments ‘sunk’ in it. Radical innovation is erroneously expected to follow from specifying intended outcomes and timetables of achieving them, which is a contradiction in terms. Radical innovation yields unexpected outcomes that are not yet useful now, which are then labelled as ‘failures’, while even in their failure they are useful in showing which avenues do not yield results and indicate new avenues to try. As noted before, according to a Hegelian principle, one gets to learn things in their failure. Furthermore, radical innovations that do yield a useful outcome have a large and wide impact that compensates for the cost of efforts that did not have impact. This yields a criticism by many researchers of policy where fundamental research is challenged to be useful in the short term, while its often large impact emerges in the longer term. This criticism was included in a report to the Dutch government. that was developed under my supervision. It was not appreciated, for threatening to ruin the game of calling incremental improvement innovation.

 An alternative perspective, accepting uncertainty, is that of evolution, which does not presume a rational ‘intelligent design’, but explains development of novelty as the outcome of a process of selection by the environment, in combination with the generation of variety submitted to selection, in nature by chromosome cross-over in sexual reproduction, mutation of genes and variations in the interactions of genes and their ‘expression’ under influence of their environment. In heterodox, evolutionary economics, variety is created by invention and innovation, by entrepreneurs, and selection is done by the market and institutions.

 In science, research proposals and papers are regularly rejected by scientific journals because they do not fit in the core of the research programme adhered to by the editors and reviewers of the journal. This is an example of selection, in an evolutionary theory of science. However, scientists held back by this selection frequently create their own proprietary journal, thus creating their own selection environment. This also happens to some extent in nature, when organisms defend themselves against selection, or create a benevolent selection environment, with beavers building dams, rabbits digging warrens, or species engaging in symbiosis with others or being parasites. This matching of selection environments with life forms to be selected, is called ‘co-evolution’ When this prevents a stable selection environment, evolution breaks down. For libertarians who disregard market imperfections, this yields an argument not to interfere with the selection mechanism of the market.

 An example is the present breakdown of selection of opinions by arguments of truth, logic and facts, since truth has been made irrelevant by demagogues. and some governments, in the dissemination of ‘fake news’. Opinions are now presented as certain, incontrovertible, by the loudest and most charismatic mouths

 I propose to follow Dewey’s notion of truth as ‘warranted assertability’, with warrants of logic, facts and practical workability. Now, warrants of logic and facts are often ignored, and are replaced by emotion-laden appeals ‘Is’ is replaced by ‘ought’. I allow for emotions, value them, but this killing of rationality spells disaster.

 Science is held to yield the progress of truth, but has a considerably conservative practice. As discussed before, according to Imre Lakatos (1978) science takes the form of ‘research programmes’, collections of theories that have a shared ‘hard core’ of basic assumptions and methodological principles, and a surrounding ’protective belt’ of subsidiary assumptions. When a theory in the programme is falsified, the core is left unaffected, and adjustments are made in the protective belt. The economist’s drive for calculation of an optimum belongs to the core of the discipline of economics. When a theory is falsified, the principle of maximisation is not challenged, but the function to be maximised is tinkered with. I once received the following rejection of a paper submitted to an economic journal: ‘this is not optimisation of an objective function, therefore it is not science’.