The Competitiveness of Nations
in a Global Knowledge-Based Economy
October 200
3Brian J. Loasby
Cognition,
imagination and institutions in demand creation
Journal
of Evolutionary Economics
2001,
11: 7-21
Index
Formal
rationality plays a limited role in human cognition, which originated in the
creation of patterns to interpret phenomena and link phenomena with action. The creation of new patterns rests on
imagination, not logic, typically stimulated by a perceived inadequacy in
established patterns. Internal routines
of the brain and external institutions form structures of cognitive capital;
the institutions of markets, including money prices, aid the development of
consumption capital, which simplifies most choices and provides scope for
selective experiment and innovation in creating goods. Such innovation depends on differences between
individuals and changes in their circumstances.
In a paper presented to a symposium on ‘Cognition, Rationality, and Institutions’ at the Max-Planck Institute in Jena, Andreas Ortmann and Gerd Gigerenzer (2000) examined the parallel conflicts in psychology and economics between those who believe that people act rationally, as rationality is prescribed by the principles of logic and probability theory, and those who believe that people systematically deviate from these principles. The definition of rationality as a purely formal relationship between premises and conclusions, was, they claimed, not in dispute between the contending parties in either discipline, and this was reflected in the experimental procedures by which both psychologists and economists attempted to test their beliefs. Many experiments in which subjects were set explicit reasoning tasks had generated apparently strong evidence of ‘rationality failure’;
7
but in
more recent experiments, subjects presented with problems that were formally
identical to these reasoning tasks, but with substantive content and context,
had performed much better.
What
conclusions should we draw from the evidence that Ortmann
and Gigerenzer presented? We might simply argue that since all choices
that are of professional interest to economists are made in well-defined
contexts (arid, we might add, are subject to strong personal incentives) the
predictive validity of rational choice theory is confirmed rather than undermined
- at least for economics; economists might be happy to allocate the study of irrational
behaviour to psychologists. This is not a conclusion which is explicitly
drawn by the authors, although they do warn us against accepting the results of
context-free experiments as a straightforward refutation of models which rely
on formal rationality. Their principal
recommendation is that experimental design, in both psychology and economics,
should reflect the danger of isolating subjects from precisely those factors
which maybe major determinants of their performance in non-experimental
situations.
This is a
valid, and important, warning - though it is best interpreted not as a
recommendation to avoid context-free experiments but as a reminder that these
should be the first experiments in a sequence. Technological innovation typically begins with
the isolation of a potentially valuable effect, but this initial result is no
less typically followed by a development process which is intended precisely to
discover what significant factors have been excluded by this experimental
isolation. Managers of innovation might
also remind us that the most common result of this development process is that
the initial results cannot be reproduced within the wider economic and social
context - often not even within a manageable technological system - and that
the prospective innovation must be rethought or abandoned. Experimental isolation is an invaluable
introduction to the study of complex phenomena, because it excludes many
possibilities at low cost; it should not be expected to demonstrate the truth
of any conjecture. Theoretical isolation
has similar virtues arid similar dangers: it may identify crucial factors and
relationships, but the simplifications which allow us to reach clear
conclusions may exclude precisely the factors which tend to dominate in the
practical situation which the theorist is trying to represent.
The contrasting experimental results from differing styles of presentation likewise suggest that the application of rational choice theory to human decisions may be problematic. If people behave in a way that seems to correspond to a formal definition of rationality in familiar situations, but not when presented with a technically straightforward logical problem, perhaps their powers of reasoning are available only in response to familiar cues: rational sequences may be domain-specific. (This possibility is discussed by Ortmann and Gigerenzer.) If that is so, this is a significant feature of human behaviour, not least in designing systems that are intended to prevent accidents, which so often involve a failure to respond appropriately to an unusual event. But perhaps what we observe when people appear to act rationally is not the result of formal reasoning at all; perhaps people are not choosing their actions by calculating the consequences
8
of the alternatives that are
available to them - or even the consequences of the alternatives which they
perceive to be available - but are simply applying rules, often unconsciously,
which connect their perceptions of the situation with established patterns of
response. When they are deprived of
perceptual cues, as in the simplified experiment, these rules are inaccessible.
Choi (1999, p.
68n.) generalises this proposition by claiming that “whatever
explanatory power neoclassical economics has comes largely from the fact that
people are often ruled by conventions arid customs, the very factors that are
ignored or absent in modern economics”.
I wish to
suggest four general inferences from this discussion. First, it illustrates what we might call
Pounds’ principle, that problems - in this instance
problems for the analyst - are defined by differences (Pounds, 1969; see also Loasby, 1976, chapter 6); for it was the apparently
systematic difference between the results of context-free and context-specific
experiments which indicated that there was something worth discussing. Second, it reminds us that information, such
as these experimental results, can only be interpreted within a framework (as
indeed is implicit in the original conception of ‘bits’ of information), and
that a change of framework may easily produce a change of interpretation. This is not a remediable defect, since every
framework is a decomposition imposed on a system which is imperfectly
decomposable, and the total system cannot be encompassed within any attainable
scheme of human thought. Indeed, despite
the common attribution of ‘rationality failure’ to ‘framing effects’, it is not
at all clear that the effect of frameworks on interpretation is fundamentally a
defect at all, although, like most kinds of human behaviour,
it has its own pathology. The great
virtue of ambiguity in interpretation is that it makes variety possible, and
the generation of variety is a condition of progress.
In this
particular instance, the apparent conflict of experimental evidence has
suggested hypotheses about human mental processes, and the external influences
on these processes, which would not be suggested by either class of experiment
alone. That this should be so leads to
the third inference, which is the proposition, familiar to us from our reading
of Schumpeter, that the source of novelty is a new
combination. By connecting the second and
third inferences we can produce a fourth, that what new combinations are
possible in any situation (many of which will not be realised)
is governed by the context in which the relevant mental processes are
operating. These four inferences may serve
as a guide (or interpretative framework) to the following discussion.
To understand increased product variety and changing preferences we need to understand how new combinations arise. Now if what appears to the observer to be rational action is simply the application of a familiar routine, there would seem to be no possibility of innovative activity. The absence of rationality apparently frustrates our inquiry. No doubt many economists, especially those working
9
within
North American analytical systems, would agree. However, I shall argue that it is precisely by
escaping from formal concepts of rationality that we can make room for
innovation. Formal rationality, even
when extended to include probabilities and information costs, ties outcomes
firmly to premises, and the fundamental premises are
themselves not the results of rational choice but natural givens. Any change in behaviour
must therefore be a consequence of a change in one or more of these givens; all
innovation must be exogenous to the analytical system. People may be surprised, but they always
respond optimally to surprises; their own actions are never surprising. Routines, however, are not natural givens; they
are evolved procedures which are provisionally matched to a poorly specified
range of circumstances. The formation,
use, and modification or replacement of routines all need to be explained; and
the explanation provides a basis for understanding
human innovation, including innovation by consumers.
Alfred
Marshall (1994) produced a simple evolutionary model which still appears
serviceable as an introductory parable to current ideas of human cognition. In this model, the evolution of the brain is
governed by the basic needs for survival, which require swift responses to
threats and opportunities. Evolutionary
fitness is therefore promoted by an architecture which permits rapid access to
stored information, leading to rapid interpretation of complex phenomena, and
the triggering of complex action patterns. Our decision models must be quickly closed so
that action can be taken. Marshall’s
model brain conforms to these requirements: it collects impressions, initiates
actions, and collects impressions of what follows; a combination of positive and
negative feedback then establishes increasingly strong links between clusters
of impressions which represent artificial categories of phenomena and action
sequences which have been selected as appropriate to each representation. The creation of such networks has a clear
evolutionary priority over the serial processing which is privileged in the
economic and psychological conceptions of rationality considered by Ortmann and Gigerenzer. Some evolutionary economists would no doubt
suggest that the development of cognitive systems should be treated as an
example of self-organisation, but I shall do no more than
indicate this possibility, so that readers may be alerted to the option of
construing parts of what follows in those terms.
The present comparative advantage of the human brain over the brains of other species may lie in its capacity for ratiocination; but its absolute cognitive advantage is not in the formation of rational sequences but in making and using combinations. The architecture of the brain, certainly in humans, has the potential for the formation of a very large number of alternative networks; but they are necessarily alternatives - the establishment of one set of connections precludes the establishment of many others within the same brain. Thus for each person at any time many possible phenomena, some of which may be important in other locations or other conjunctures, have no means of representation. But within a human population there is the potential for many different combinations. In what circumstances and in what ways may what part of this potential be realised?
10
Within a
stable environment (in which stability is to be interpreted in terms
appropriate to the climate rather than the weather) evolutionary success
depends on the formation of connections which are appropriate to that
environment; and so successful adaptation gives the appearance of rationality,
even though no rational calculations whatever occur. What we observe is a retrospective ‘logic of
appropriateness’, which within this environment has become isomorphic with the
anticipatory ‘logic of consequences’. As
Schumpeter (1934, p. 80) observed, though rational choice is always a fiction,
it can be a good predictor of behaviour if time has
hammered logic into men - or, we should add, into other animals; and some
biologists have duly adopted this fiction in order to explain patterns of
animal behaviour in terms of optimisation.
But if this behaviour,
in either biological or economic systems, is a selected adaptation which is
effectively a situationally-closed model and not a
specific application of a general logic of choice, then the introduction of
substantial novelty - a change not of weather but of climate - is liable to be
severely disruptive, as Schumpeter also insisted.
However,
humans have some capacity to escape from backward-looking behaviour:
in Marshall’s model of the human brain this capacity is located in a second
compartment, which deals, not with impressions and actions, but with ideas of
impressions and actions, and can project these ideas into the future. It is this faculty of imagination which allows
us to open up our stored representations and to contemplate a future which is
more than a mapping from the past, thus making possible a reasoned choice of
novelty. Imagination is not a logical
process, as both Marshall and Schumpeter recognised. Moreover, since what appears to be formal
rationality is actually behaviour that has been programmed
to respond to familiar situations, response to novelty may be highly
problematic. Indeed, the evidence
reported by Ortmann and Gigerenzer
suggests that the response to novel problems that are technically simpler
versions of familiar problems which have been routinely solved may be quite
inappropriate. This suggestion is supported
by non-experimental evidence, including evidence from profit-seeking firms.
We should also note the restrictions which Marshall places on the extent of human reasoning, restrictions which seem to be confirmed by recent work. Reasoning is expensive in time and energy, and should therefore be used sparingly. Whitehead ([1911] 1948, pp. 41-42), who was an expert mathematician, castigates the “profoundly erroneous truism... that we should cultivate the habit of thinking of what we are doing. The precise opposite is the case. Civilisation advances by extending the number of important operations which we can perform without thinking about them.” Marshall anticipated Whitehead’s argument; only by ceasing to think about old problems can we find the time and energy to tackle the new. Once the imaginative powers of the brain have produced a satisfactory linkage between ideas of impressions and ideas of action, the corresponding linkage between impressions and action is installed in the brain’s operating system, where it works by imposing appropriate patterns rather than by anticipating possible consequences. Thereafter new possibilities may be imagined in other contexts, arid new choices may result; but the proportion of human activities
11
which
is governed by routines increases. Many
of these routines are entrusted to machines, though we can never be sure of
their range of applicability, as has been demonstrated by the millennium
problem in computers.
In Marshall’s
model, not only does the practical management of daily life remain the province
of routine behaviour; the stimulus to imagination
arises from failures of routine. It is
when a standard response no longer seems to work, and the ‘sequence impression
of situation - action - impression of satisfactory outcome’ cannot be
completed, that a signal is sent to the part of the brain that is capable of
imagining alternative ways of classifying situations and of assembling action
sequences in response. Within this model
conscious thought is a response to a perceived problem; and what is perceived
as a problem within an individual brain is a mismatch between the operating
routines of that brain and the perceptions of the situation with which it is trying
to cope. This may be retrospectively
regarded as a precursor of the ‘aspiration-achievement gap’ in behavioural theory. It
is also an application of Adam Smith’s (1980) psychological theory of
scientific progress; for Smith believed that the perception of new anomalies
was a necessary stimulus to the generation of new knowledge. It is apparent from many passages in
Marshall’s Principles that he
believed such stimuli to be important for human progress; the capabilities of
each person’s imaginative faculty are developed by exercise, and so
satisfaction with all current routines is hardly compatible with “self-reliance,
independence, deliberate choice and forethought” (Marshall, 1920, p. 5). But we should not forget the dual
importance of these routines, both in economically preserving successful
products of the imagination and also in providing the impetus to thought which
may lead to further innovation.
It will not have escaped readers’ attention that the internal routines of the brain appear to perform similar functions to the external phenomena of institutions, which serve to classify phenomena, simplify complexities, dissolve uncertainties and constrain choices. In the imaginary world of unboundedly rational choice, neither mental routines nor institutions would be necessary (including the institutional system which is constituted by rational choice theory). But if the networks that can be formed within any brain can represent only a fraction of the possibilities, and if what is formed in each individual’s brain is dependent on the perceived features of the particular environments to which that individual has been exposed, subject to selective interventions by the imaginative part of the brain, then outside assistance can be extremely helpful. One of the most significant features of Choi’s (1993) analysis of conventions is that they first appear as individually-generated rules and patterns, which are indispensable in order to resolve - or often to suppress - complexity and uncertainty, even in the absence of any interaction with other people. But each person’s ability to develop serviceable conventions is severely limited, and it is therefore an attractive economy to adapt conventions that appear to work for other people. The shared
12
conventions
that we think of as institutions thus emerge as people try to make use of other
people’s experiences, arid other people’s ways of behaving, in order to improve
their own abilities to cope with uncertainty and complexity. It is the recognition of this personal benefit
which provides the basis for common, though independent, use. The advantages in communication - notably the
reduction in the costs of transacting ideas - which result then
encourage their acceptance as regulators of human interaction within the group
of common users. Menger’s
([1871] 1976) explanation of money is the classic analysis of this process
within economic thought; and as we shall shortly see, it is of particular
relevance to this paper. Sometimes the
adoption of other people’s conventions becomes a problem-solving routine: the
rule is to follow the fashion. Examples
range from clothing and holiday destinations to formulae for successful
management and for economic analysis.
For each
individual, the combination of internal connections and external institutions economises on the scarce resource of cognition, first by
allowing many operations to be performed without thinking about them, and then,
when thought is required, by providing both cognitive maps (Eden, 1992), with
which to make sense of novel situations, and decision premises (Simon, 1959),
to which logical reasoning may be applied. They do this by drawing on the stock of
previous examples of successful performance and of previously successful ways
of making sense, not only within the direct experience of each individual but
also within the experience of members of that individual’s reference group. Direct access to other people’s experience is
unnecessary; provided that their experience is assumed to be relevant,
observation of their current practices is sufficient. Furthermore, each individual has reason to
believe that as long as they observe these helpful conventions their behaviour, even when reacting to situations which have some
novel characteristics, will be acceptable to other people within the group, and
compatible with their actions.
The relevance of Smith’s (1 976a) Theory of Moral Sentiments to this analysis should be clear; but to develop the connections would produce a paper that was either longer or somewhat different. I prefer to make two other links. The first is to the Austrian conception of capital structures as specific combinations of elements, oriented towards a range of possible future conjunctures; cognitive and institutional capital appears to be a structure of just such a kind, which allows knowledge to be repeatedly reused. The theme of capital as reusable knowledge is developed by Langlois (1999), but although he extends the concept of capital to include context-specific managerial skills, he does not take the further step of considering cognitive skills arid institutions as reusable knowledge; his purpose is different. The second link is to Alfred Marshall’s (1920, p. 138), assertion that “Capital consists in a great part of knowledge and organization”. In the present context what is especially notable is Marshall’s recognition of the importance of the knowledge which each business gains through its external organisation, and which, in the terms of this discussion, helps to provide it with cognitive frameworks and decision premises. Its present relevance is that each individual, whether running a business or not, has a particular external organisation on which
13
to
draw; and, as Marshall noted, the range and quality of this external organisation generally reflects the individual investment
of effort and the effects of time. If we
are thinking specifically of individuals as consumers, we may say that each
develops a stock of consumption capital, which is likely to be heavily dependent
on external connections.
For consumers,
a particularly important set of external connections is provided by the
institutions of the various markets to which each consumer has access. We may take our definition from Ménard (1995, p. 170): “a market is a specific
institutional arrangement consisting of rules and conventions that make possible
a large number of voluntary transfers of property rights on a regular basis”. A
market is thus a set of devices for reducing the costs of each transaction through
the provision of reusable knowledge. In
any market with which they are familiar, consumers do not need to think how to
transact, arid can therefore concentrate on what to transact. Moreover, as Marshall (1919) and Casson (1982) explain, it is generally the suppliers who
have the greatest incentive to invest in the development of transaction
technologies; customers therefore need to expend relatively little of their
cognitive resources in order to discover effective transaction routines. Competition between suppliers, as Hayek (1948,
p. 97) pointed out, then helps customers to discover who is most effective in
meeting their particular requirements, and thus allows a further simplification
of their decisions.
An efficient
set of market institutions gives consumers ready access to those who have the
capabilities which are necessary to meet their demands; in such an environment
consumers have both the incentive and also the combination of routines and
decision premises to develop their own consumption capital, and thereby to
increase their own welfare. Markets thus
facilitate consumer innovation. Langlois and Cosgel (1998)
develop this argument, examining the circumstances in which consumers may have
a comparative advantage or stronger incentives to develop the capabilities and
institutions which are relevant to particular innovations. Before turning directly to innovation,
however, we should return to Menger’s explanation of
the institution of money. The
replacement of multilateral barter by direct monetary exchange not only reduces
transaction costs; the extensive set of money prices which is thereby generated
becomes an institution which greatly simplifies the comparison of values for
each individual and the consequential development of more coherent patterns of
consumption. In an evolving economy, the
role of prices as conventions may be no less important than their allocative function. What we can certainly say is that a situation
in which prices are changing rapidly is one in which people have to commit a
substantial part of their cognitive powers to the interpretation of prices -
problems which in a stable environment are effectively handled by routines - at
the expense of enquiry into ways of improving their consumption patterns.
In relation to innovation, institutions are a mixed blessing. Cognitive maps, decision premises, and external regularities are necessarily retrospective; they anchor the definition of problems and the repertoire of responses to past environments, and inhibit experimentation within their domain; in many circumstances they may be actively misleading. But in relinquishing any claim on the scarce
14
resource of imagination they release it for other uses; they
provide the constraints which allow people to try to follow the logic of
consequence that is required by formal models of rationality, or alternatively
to conceive bold conjectures. As G.K.
Chesterton once remarked, “A man must be orthodox on most things, or he will
never have the time to practise his own particular
heresy.”
Innovation
must originate with individuals (though this may be interaction between
particular individuals rather than the creation of a solitary thinker.) It therefore depends on differences between
individuals, first in their perceptions of a situation as problematic, and
second in the responses to that situation which arise in their imaginations. As we have seen, the possibility of such
differences is inherent in the architecture of the human brain, and the
dependence of both thought arid action on making connections, most of which are
not logical relationships. Thus different
situations are likely to lead to differences in behaviour,
including different ideas for innovation.
This, of
course, is the basic principle of Adam Smith’s (1976b) theory of economic development
as a consequence of specialisation, a theory which
rests precisely on the combination of wide-ranging potential but limited
capacity to realise that potential which, as we have
observed, characterises the human brain; by
encouraging diversity, a human society can therefore achieve progress at a rate
and of a kind that no single individual can even imagine. But if diversity is to be encouraged, it is
essential to avoid any universal principles of co-ordination; that is why the
conception of economics as the study of efficient allocations is not
appropriate to a theory of development. But
as Smith well knew, diversity requires some means of co-ordination, and so
institutions are necessary, both to a developing economy and to any adequate
theory of development. In this paper I
have tried to demonstrate the close connection between human institutions and
human mental processes, which is a feature of Smith’s system of social science
that has been little noticed by modern economists; in this final section I will
sketch some ideas about consumer innovation within a framework of institutions,
making further connections to eminent economists of the past.
In the standard textbook definition of economics as the science of allocation, the first of the ‘givens’ is the set of goods. But in his attempt to establish a secure basis for economic reasoning Menger ([1871] 1976) insisted on providing an explanation for goods. An object becomes a good only when someone perceives that it can be used for the satisfaction of human wants - or in terms of Marshall’s psychological model (which incidentally predates Menger’s Principles) makes a causal connection between the two. To this causal connection (which we may think of as an addition to ‘knowledge that’) we should add a second connection, which links the object to the capabilities (or knowledge how’) which is necessary to put that object to use. (The distinction between ‘knowledge that’ and ‘knowledge how’ is taken from Ryle (1949) and was used by Hayek (1952) in
15
The Sensory Order; it is
further developed in Loasby, 1998). For simple goods, like berries picked off a
bush, no distinctive capabilities are required; but many objects can only be
turned into goods by the application of skills which have to be created or
redirected; thus the possessors of particular skills are likely to be
especially important in the creation of new goods.
Menger went on to explain how objects which appear very
remote from human wants may be turned into goods by the creation of roundabout
means of production, and thereby founded the particularly Austrian interest in
the specifically oriented complexity of capital structures, which we have
already applied to human capital. Specifically oriented complexity, however,
need not be restricted to production systems; many modern products are also
complex, and particular consumption activities even more so: indeed the total
set of interrelated consumption activities may be analysed
as an identifiable lifestyle, which typically draws on external organisation. The
importance of complex structures of various kinds should remind us of the
contribution to innovation which Adam Smith (1976b, p. 21) attributed to “philosophers
or men of speculation” who perceived relationships between “the most distant
and dissimilar objects”. Distant and dissimilar
ideas and actions may both be formed into new combinations to create novelty;
but we should note that what seems distant and dissimilar may depend on the
connections that are formed within the human brain; philosophers and men of
speculation order their ideas differently from those whose interests are more
tightly specified. As Smith observed, specialisation increases the variety of connections which
can contribute to innovation.
Menger’s explanation of human progress rested primarily on
the increasing knowledge which resulted in the multiplication of goods, and
especially in the creation of goods of higher order which increase the
efficiency of productive processes. Though the primary concern of this paper is
innovation in consumption, the language in these paragraphs has been suggestive
of production rather than consumption; arid this was not accidental. Swann (1999) has drawn attention to Marshall’s
(1920, p. 90) proposition that “much that is of interest in the science of wants
is borrowed from the science of efforts and activities”, and suggests that
ideas about both process and product innovation may be developed in the context
of the consumer as a producer of personal or household satisfactions. The concept of household production functions
is now well established, but it is used to extend the analytical scope of
rational choice theory to intra-household allocations; innovation receives no
more attention in the theory of household production than in choice-theoretic
models of the firm. It is a different
analytical system that Swann has in mind.
Mises’ (1949) conception of economics as praxeology rested on the universal principle of purposeful action which continually stimulates the search for something better; this should not be confused with rational choice among possibilities which are already known. Mises asserted that anyone could be an entrepreneur, and that certainly included consumers. Kirzner (1973) deduces from Mises’ proposed universal principle the concept of entrepreneurial alertness, which depends on perception. It is crucial to Kirzner’s argument that people differ in what they
16
perceive,
and that entrepreneurial perception is not the consequence of thought nor
subject to any principles of efficient allocation. These features of Kirzner’s
conception of entrepreneurship may be directly related to the earlier
discussion of different networks of associations which are readily accessible
in each person’s brain, without the intervention of conscious thought. In Kirzner’s
original exposition the perception of an opportunity was tightly linked to
action, but he has since extended his notion of entrepreneurship to allow for
conscious thought about the implications of what has been perceived.
Among the
hitherto unrecognised opportunities identified by the
alert entrepreneur, Kirzner includes the redirection
of resources to meet an apparent need in a better way. Casson (1982, 1997)
has developed the concept of the entrepreneurial firm as an intermediator
between resources and customers, generating both profit and consumer
satisfaction through its superior capabilities in making connections between
the two. Casson
usually writes about information rather than capabilities, but he makes it
clear that the specific advantages of any firm lie in its ability to identify,
acquire, interpret, arid use particular combinations of information. The psychological model suggests that the
connections that are produced by thinking in both Kirzner’s
and Casson’s theories are not merely logical. ‘Knowing how’ to think about particular
classes of problem is itself a capability, which may be shaped like any other
skill, and both the standard of performance and the range of application are consequently
likely to differ among individuals. This
capability would certainly fall within Menger’s
definition of a good.
Marshall’s
evolutionary psychology does not readily accommodate the concept of a given preference
function; and so a Marshallian version of the Mengerian process of creating goods by establishing a
causal relationship between objects and wants must pay explicit attention to
the generation of wants. What Marshall
had in mind in emphasising the applicability of the
science of efforts and activities to the science of wants appears to have been
primarily the sociological theme of preferences being changed by changes in the
working environment. We have only to
recall his account of the twin benefits of the increased opportunities for
working people to become managers: this would result both in greater material
progress for society because less talent would be wasted, and also a better
quality of life for the individuals through the development of new preferences
as a consequence of higher income and of new associations. These new associations would both stimulate
new questions about consumption and provide new cognitive frameworks and new
decision premises to guide the search for answers; thus Marshall’s evolutionary
psychological theory is also relevant.
Swarm draws attention to Marshall’s emphasis on the different kinds of wants that consumers encounter as they climb the ‘ladder of consumption’. Maslow (1972, pp. 35-46) has developed a psychological version of a lexicographic ordering of wants, in a sequence from physiological imperatives through needs for safety, belonging and esteem to self-actualisation. Maslow not only argues that each person’s motivation is strongly focussed on the particular stage in the sequence that has currently been reached, but that as a person moves between
17
stages “the
whole philosophy of the future tends also to change” (Maslow,
1972, p. 37). Marshall seems to have had
a similar view. This implies the need
for new cognitive maps, and new ways of choosing; and the difficulties of
devising these for oneself provide an obvious inducement to look for new models
of behaviour in newly-appropriate reference groups. It is not a difficult step from Marshall’s and
Maslow’s conceptions to Woo’s (1992) proposition that
preferences are often the outcome rather than the premises of choice processes;
new regions of choice are likely to give rise to new systems of preferences.
The
connection between a new category of wants and the means of satisfying them is
liable to be highly problematic. But
even within a familiar category the link is not as straightforward as it
appears in consumer theory. People do
not buy goods, or even bundles of objectively-defined characteristics; they
construct solutions to problems. Peter Drucker (1964, p. 87) long ago remarked that “the customer
rarely buys what the business thinks it sells”, because customers and their
suppliers are thinking in different ways about different problems. Moreover there are likely to be substantial
differences between customers, and perhaps suppliers too. Bianchi (1999) argues that the ability of a
good to satisfy a consumer cannot be explained by summing its attributes, but
depends on the interaction between them; and what interactions are relevant is
subjectively determined. As a simple
example, a lightweight folding umbrella is not, I suggest, bought as a
protection from the rain, but as a solution to the dilemma of whether to carry
a substantial umbrella on a day when rain, though possible, seems unlikely and
the umbrella consequently merely an encumbrance, or to do without it and risk
getting soaked. The problems that people
attempt to solve through buying a personal computer are extraordinarily varied.
Marshall
(1920, p. 86) begins his discussion of the relationship between wants and
activities by emphasising the pervasive human desire
for variety and distinction, which people may seek to satisfy in many different
ways. This theme has been developed by Scitovsky (1976), who points out that
preference functions of the kind which support conventional equilibria must exclude novelty. The origination of new kinds of consumption
(even if they are new only to a particular consumer) is outside the scope of
rational choice theory; it is, however, readily accommodated by the concept of
mental processes used in this exposition. Scitovsky also
discusses the desire to remove discomfort, which occurs at the beginning of Maslow’s sequence. This
is normally quite distinct from the attractions of new forms of consumption;
but we might recall that in Smith’s (1980) psychological theory of scientific
development, the search for better explanatory patterns is motivated by the
desire to restore the tranquility of the imagination, but success produces
substantial and lasting pleasure. The
same may sometimes be true of other remedies for discomfort.
Whatever their motivations, consumers make conjectures, using their own mental frameworks against a background of institutions. Sometimes they just do what seems best, sometimes they deliberately experiment; but in either case it is as true for consumers as for business people that “imagination, rather than information in any ordinary sense, is what entrepreneurs require in order to
18
discover
new ways of combining resources in order to meet consumers’ desires”
(Richardson, 1960, p. 105). This is a
process of trial and error; we should note Menger’s
warning that ‘goods’ may be wrongly identified, either because the supposed
causal connection does not exist or because the supposed human want is not
genuine. The process is complicated by
ambiguity, which extends from interpretation of information before acting to
interpretation of the results, and in particular of what causes should be
assigned the credit or blame for the outcome. Consumers make plenty of mistakes, and what is
observed at any time is very unlikely to be a general equilibrium.
What happens
in any particular case depends - though not usually in a deterministic way - on
the cognitive framework which is applied. Just as within a large organisation
an unsatisfactory situation may be interpreted as ‘a marketing problem’, a
‘production problem’, a ‘personnel problem’, or an ‘organisational
problem’, and the responsibility for dealing with it allocated accordingly, so
may consumers interpret a particular situation in any one of a variety of ways,
each of which directs attention to a particular category of solutions. Each consumer, however, rarely recognises more than a very few of the interpretations that
are possible, and indeed usually no more than one. Familiar routines and well-practised
ways of thinking lead to familiar kinds of interpretation and action. Thus most changes are incremental; consumers,
like firms, tend to move along particular trajectories, and variations tend to
follow regular patterns (Schlicht, 1997). For an organisation
and for an individual, finding a new category for an awkward problem may be the
route to innovation. Fortunately, though
the developed cognitive repertoire of each person is limited, the effectiveness
of human cognition is magnified by the division of cognitive labour in society, which sustains many different
classification systems and ways of thinking.
The evolution of demand seems to have some way to go; and so does the
analysis of this evolution.
To understand
demand creation, it is necessary to replace standard choice theory, in which
all action is the necessary consequence of exogenous premises, with a cognitive
model which reflects not only human limitations but the distributed capacity to
create, modify and apply patterns. Patterns
support individual routines and the institutions on which we all rely; in doing
so they create the space for creativity. Purposeful behaviour
is guided by problems, and is thus intended to suit particular contexts - which
may be widely or narrowly defined. The
solution to one problem allows attention to be focussed
on another, and since human beings have a remarkable capacity to solve
problems, in consumption as well as in production (in part by the application
of logic, but primarily by making non-local connections) the manifestations of
economic evolution extend to the generation of novel demands.
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The Competitiveness of Nations
in a Global Knowledge-Based Economy
October 200
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