Vernon Smith on Constructivist and Ecological Rationality

I went kayaking with my dad yesterday, just upriver from one of my favorite places: Mount Vernon, and he brought along a big box of my papers I had left at the house from undergrad. I threw away most of it, but kept a few things - including material from my honors thesis, a lot of readings from my history of economic thought class, and several readings from a week-long workshop in experimental economics at George Mason University. This was my first real exposure to George Mason economics and the Austrian school, which of course came up a lot that week. I thought I'd share a selection from a Vernon Smith lecture we got at the workshop. This was based on his Nobel Prize lecture, which can be found in the AER here. It looks like the text is largely similar, but I'll be using the lecture I have. By way of introduction, Smith starts by introducing the two types of rational orders that Hayek identified - constructivist and ecological rationality. Constructivist rationality is the "conscious deliberate use of reason to analyze and prescribe actions judged to be better than alternative feasible actions that might be chosen", and ecological rationality "refers to emergent order in the form of practices, norms and rules governing action by individuals and institutions that are part of our cultural and biological heritage, created by human interactions, but not by conscious design".

Smith says:

"Roughly, we associate the former with attempts to invent or design social systems, and the latter with processes of discovery in natural social systems. As we shall see, the two need not be mutually exclusive, opposed or incompatible: we sometimes apply reason to understand and model emergent order in human cultures and to evaluate the intelligence and function of such order. Again, individuals and groups invent products, ideas, policies, etc. but whether they endure or are copied is subject to forces of selection and filtering that are well beyond the control of the initiators. Ecological rationality, however, always has an empirical, evolutionary and/or historical basis; constructivist rationality need have none, and where its specific abstract propositions lead to some form of implementation must survive tests of acceptibility, fitness, and/or modification.

In our time it was Hayek who articulated forcefully the idea that there are two kinds of rationality. He did this with characteristic insight in several lectures and articles. I am not aware, however, that this important idea has had any significant influence on economic thinking, certainly nothing like the influence of his recognition that the market pricing system serves as an information and coordinating system. If my assessment is correct, why has the idea not been influential? I would conjecture that a critical element in understanding this proposition is to be found in human perception. We naturally recognize only one rational order because it is so firmly a part of the humanness of our reason. Emergent rational orders are not plainly visible to our perception, intellectual curiosity, and reason."

If anything I think Smith is being pessimistic here (and certainly unnecessarily pessimistic outlooks have played an important part in propelling research agendas). People may not use Hayek's words (and perhaps using Hayek's words and citing Hayek would bring more precision to the discussion), but I think the point here is intuitive and broadly recognized. Take as an example the last chapter of The General Theory of Employment, Interest, and Money.

Keynes writes of individualism and decentralization of decision making:

"It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. 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 experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future."

Decentralized action, for Keynes, united all the most important guarantors of future betterment: (1.) traditions that (to quote Smith) emerge through "forces of selection and filtering that are well beyond the control of the initiators"; (2.) what Keynes calls "the diversification of its fancy" (i.e. - personal preferences of the current generation), and (3.) support for experimentation with new ideas.

And Keynes certainly proposes ideas for experimentation - derived from a constructivist approach to the economy and a cognizance of the emergent system on which he is commenting. Earlier he writes:

"At the same time we must recognise that only experience can show how far the common will, embodied in the policy of the State, ought to be directed to increasing and supplementing the inducement to invest; and how far it is safe to stimulate the average propensity to consume, without foregoing our aim of depriving capital of its scarcity-value within one or two generations. It may turn out that the propensity to consume will be so easily strengthened by the effects of a falling rate of interest, that full employment can be reached with a rate of accumulation little greater than at present. In this event a scheme for the higher taxation of large incomes and inheritances might be open to the objection that it would lead to full employment with a rate of accumulation which was reduced considerably below the current level. I must not be supposed to deny the possibility, or even the probability, of this outcome. For in such matters it is rash to predict how the average man will react to a changed environment. If, however, it should prove easy to secure an approximation to full employment with a rate of accumulation not much greater than at present, an outstanding problem will at least have been solved. And it would remain for separate decision on what scale and by what means it is right and reasonable to call on the living generation to restrict their consumption, so as to establish in course of time, a state of full investment for their successors."

Keynes has a long history of couching his ideas in the necessity of experimentation and the response and openness of society to change. In my 1920-21 paper, I cite instances in his earlier Tract on Monetary Reform where he does the same thing.

None of this is to say Keynes "beat Hayek to it", it's simply to say that Hayek's point, being right, is necessarily reflected in the way that a lot of people approach economic and social policy making. How broadly and how explicitly it is accepted is a different matter, of course. Vernon Smith thinks that most people, seeing a pattern, assume the existence of a designer. I suppose this might be true. Most people certainly don't analyze patterns in social life as emergent patterns with the erudition of a Vernon Smith, a Friedrich Hayek, or a John Maynard Keynes. Does that mean they think someone consciously designed it, or does that just mean that they don't really put much thought into the origins of patterned and structured social life when they see it? I don't really know, but I would tend to be somewhat suspicious of the assumption that they assume the existence of a designer. I think people generally adopt a viewpoint that in sociology is called "functionalism" - social institutions and patterns exist because they are functional and therefore persist. Ask someone about why we do things a certain way as a society - "because it works well" is likely to be the response. Functional institutions survive, dysfunctional institutions die off or get replaced.