The Competitiveness of Nations in a Global Knowledge-Based Economy
Brian J.
Loasby
The Innovative Mind
DRUID Summer Conference 2003 on
Creating, Sharing and Transferring Knowledge.
The role of Geography, Institutions and Organizations.
Copenhagen June 12-14, 2003
Content
NeoDarwinism and neoconstructivism
The foundation of this paper is the
cognitive theory presented by Hayek in The Sensory
Order. Hayek’s account of the
creation of mental orders is related to Smith, Marshall, evolutionary
psychology and some recent work in neuropsychology,
with particular emphasis on the distinction between development of the species
and development at the level of the individual. The applications of pattern-making for the creation
and use of knowledge are discussed in terms of domain specificity, with reference
to the division of labour and imperfect
specification, and attention is drawn to the problems of co-ordination.
1
Adam Smith, Alfred Marshall and Friedrich Hayek were all confronted
with the uncertain basis of knowledge before they began their study of
economics; and what their responses have in common is not only a theoretical
focus on the process by which people develop what we call ‘knowledge’ but also
a reliance on similar kinds of process, which result in the formation of
connections within particular domains. Each
author recognises the impossibility of demonstrating
that any such process can deliver proven truth; instead each envisages
sequences of trial and error within particular contexts, leading to the
preservation of what seems to work - until it no longer does, when a new
sequence of trial and error begins. In
other words, they all offer evolutionary theories, Marshall and Hayek
explicitly so, while Smith, directly and indirectly, had a major influence on
the development of Darwin’s ideas.
Raffaelli (2003), who was the first to emphasise the significance of Marshall’s theory of human
cognition, has now demonstrated the pervasiveness of its influence in
Marshall’s economics. A comparison
between Marshall and Hayek is therefore on the agenda; however in this paper it
is appropriate to concentrate on Hayek, because he offers the most elaborate
account by an economist of the neurological basis of thought and action. Reference will be made to Smith and Marshall
either when the resemblances are particularly striking or when they offer
particularly valuable complements, but these will be indications rather than
explorations.
The problem which attracted Hayek’s attention was this. “In order to be
able to give a satisfactory account of the regularities existing in the
physical world the physical sciences have been forced to define the objects of
which this world exists increasingly in terms of the observed relations between
these objects, and at the same time more and more to disregard the way in which
these objects appear to us” (Hayek 1952, pp. 2-3). Not only have sensory qualities been
progressively discarded from this scientific account; they have not been
replaced in a way that allows them to be mapped onto the new categories, but by
a distinctive ordering. Thus “objects
which appear alike to us do not always prove to behave in the same way towards
other objects,... objects which phenomenally resemble each other need not be
physically similar to each other, and... sometimes objects which appear to be
altogether different may prove to be physically very similar” (Hayek 1952, pp. 5-6).
Hayek’s formulation accepts the
superiority of the physical order as a representation of relationships within
the physical world, including the physical properties of humans, but he does
not raise the question why the human species should have first developed an
apparently inferior classification system; instead he asks how this sensory
order came into existence. ‘How’ may be
thought a more ‘scientific’ question than ‘why’, and in this instance it may
also be thought to have logical priority: indeed Hayek’s analysis provides a
basis for explaining why, though that will not be the primary concern of this
paper. That concern is the value of
Hayek’s analysis as a general theory of the creation of mental orders - an
explanation of how the mind works.
Since the disparity to be explained is that between a classification
that is based on the effects produced by external events on other external
events and a classification based on their effects on our senses, the focus of
inquiry is on systems
of relationships, and the key to Hayek’s analysis is the
hypothesis that ‘causal connexions’ in either
classification are linked to ‘structural connexions’
within the human brain. It follows that
the sensory and physical orders are linked to different neurological networks,
and that networks of the latter kind are of relatively recent origin. The essential point to note here is that
connections within the brain are selective, and so connections between human
perceptions and the physical world (including the physical world of the brain)
are also selective; moreover, being selected within the human brain, which as a
physical system is capable of sustaining alternative connections, they are
‘subjective’ rather than ‘objective’ The
characteristic Austrian emphasis on subjectivity therefore has a psychological,
indeed biological, basis. This allows
great scope for error (connections may be false or incomplete) and for sheer
ignorance as defined by Israel Kirzner (connections
may never have been made); it also allows great scope for imagination and
novelty (through the making of new connections). The influences on the formation of
connections, and on the possibilities of aligning them with the external world,
then become an important field of study, the results of which may be
significant for policy. We shall return
to these implications later.
Since connections are formed within the brain, it might be supposed
that individuals could develop patterns of connections which are so diverse
that they fail to understand each other; and this is not a possibility that we
should ignore. However, Hayek argues
that similarities of experience promote similarities of patterns and
perceptions, at the level of the individual or the species - as we shall see,
there are important differences between the evolutionary processes at these two
levels; Smith’s (1976a [1759]) Theory of Moral Sentiments also rests on
such similarities of patterns and perceptions. Because of the normal connotations of the word
‘experience’ it might be more appropriate to use Kelly’s (1963) terminology of
‘construing the replication of events’. This
is indeed an accurate definition of the process that is analysed
in Hayek’s neuropsychological theory, for what events are deemed to constitute
a replication is determined by the interpretative framework that is applied to
them. In what circumstances people are
likely to use similar constructions is an issue that we shall have to consider
later, as is the issue - perhaps of greater importance - of the possibility of
understanding substantially different constructions which are used by other
people, and of using such different constructions within a single coherent
economic or social system. Any
discussion of such issues must be based on some account of how these interpretative
frameworks are formed; and that is the problem that Hayek explores.
Because its conceptual basis is that of a selectively-connected system,
Hayek’s theory is to be sharply distinguished from general equilibrium models,
in which every element is connected to every other - indeed the completeness of
the connections (the equivalent of a ‘field theory’) is the basis both for
analyses of the existence and stability of general equilibrium allocations and
for claims about their welfare properties. (For an incisive argument that the
incompleteness of their connections is the crucial fact about all economic
systems, see Potts 2000; the incompleteness of all cognitive systems is also
the foundation of Simon’s work on human decision-making and organisational
design). Hayek’s hypothesis of
connectivity also naturally, almost inevitably, suggests the need for a
process-theoretic explanation of the development of connections, and this is
what Hayek provides. Suggesting a
topological isomorphism between the neural and phenomenological orders (Hayek
1952, p. 40),
3
he argues
that instead of direct connections between particular stimuli and particular
sensory qualities, the effect that is produced by any stimulus depends, first,
on how (or indeed whether) it is translated into an impulse in some nerve fibre (Hayek 1952, p. 10) and, second, on the location of
this impulse in relation to other impulses within the network of connections
(Hayek 1952, p. 53). De Vecchi explores the influence on Hayek’s thinking of gestalt psychology, which insisted on the importance of
perceptions which derived not from the parts but from the relationships between
them; these relationships are “the result of a process of organization... performed
by the nervous system” (De Vecchi 2003, p. 144.)
Any impulse, which is itself not a carrier of the initial stimulus but
a ‘representation’, perhaps with some different properties, is interpreted in
terms of the relationships which have already been established within the
brain: thus “the qualities which we attribute to the experienced objects are
strictly speaking not properties of that object at all, but a set of relations
by which our nervous system classifies them” (Hayek 1952, p. 143). Hayek immediately and explicitly draws on
Popper’s language to emphasise that “all we
know about the world is of the nature of theories and all ‘experience’ can do
is to change these theories”; in other words, we create a different set of
connections. All knowledge, including
‘knowledge how’ as well as ‘knowledge that’ (Ryle
1949), is constituted by connections; it is a particular set of relationships
among many other sets which are technically possible, and which is always
potentially subject to replacement - though major changes are not easily
achieved, as we shall see.
These theories are themselves the outcome of a trial and error process
in which theories, and the patterns of neural connections which embody them,
are tested by the effectiveness of the actions to which they lead - or, as we
shall see almost immediately, of their success in interpreting phenomena. The test, of course, is of sufficiency, not
optimality; the perceived inadequacy of a theory, as a basis for action or
understanding, stimulates a search for better theories. Indeed, it is such a process, Hayek argues,
that has gradually led to the supersession, for some
important purposes, of sensory theories by physical theories. As Hayek points out, this gives us some reason
to expect a closer fit between these physical theories and the environment,
provided that the environment does not change at a faster rate than the
revision of theories - a point to which we shall return when we come to
consider alternative versions of this evolutionary process. However, because we must always use theories
to interpret experience before we can use experience to modify theories,
existing theories provide both the conditions which
stimulate, or fail to stimulate, the revision of theories and the starting point
for any such revision; thus history matters, though we need not assume that it
determines unique paths or unique outcomes. Moreover, since all of these theories “are generalisations about certain kinds of events, and since no
number of particular instances can ever prove such a generalization, knowledge
based entirely on experience may yet be entirely false” (Hayek 1952, p. 168). This, we should note, is a restatement of
David Hume’s objection to induction as a means of demonstrating empirical truth.
It is worth pausing at this point to observe the similarities between
Hayek’s analysis and the psychological theories that, as noted in the
introduction, were developed early in their careers by two other economists who
were also concerned about the nature and foundations of human knowledge. It was the sensory order that
Hayek set out
to explain; in his exposition of “the principles which lead and direct
philosophical enquiries” Adam Smith (1980 [1795]) had sought to account for the
development of mental representations of the physical order. Smith responded to Hume’s scepticism
by explaining how science emerged from the attempt to achieve comfort by the
invention of “connecting principles” that could be satisfactorily imposed on
events; the discomfort occasioned by the failure to accommodate some new
phenomenon within an established pattern then provided the stimulus to create a
new interpretative system by a rearrangement of connections. That Smith, like Hayek, had a conception of
knowledge as a set of replaceable theories is most strikingly demonstrated by
his insistence that Newton’s theories were the product of Newton’s imagination,
not a direct perception of the truth. Smith
(1980 [1795], p. 77) even noticed that the desire for theoretical comfort could
be powerful enough to override the evidence of the senses (such as the overwhelming
sensory evidence of a stationary earth), in a process that had advanced much
further by the time that Hayek began to consider his problem.
Smith did not attempt to provide a physiological underpinning for what
we may now call his evolutionary theory of cognition, but used it to introduce
in this particular context the argument that the division of labour promotes the growth of knowledge. First, science emerges as an identifiable
category of knowledge, and then, as scientific knowledge expands, specialisation between the sciences simultaneously
increases the range of study within the scientific community and the attention
to detail within each sector; and this attention to detail accelerates the
perception of anomalies which, by causing intellectual discomfort even when
they appear to have no practical significance, stimulate the invention of new
‘connecting principles’ that may accommodate them. This argument was subsequently broadened into
Smith’s (1976b [1776]) fundamental proposition that the division of labour, because of its powerful effects on the growth of
knowledge, is the primary instrument of economic growth. (For an extended account, see Loasby 2002).
It was this application, not Smith’s underlying psychological theory,
that attracted Marshall’s attention; however Marshall had already recognised the possibility of a conjunction between
contemporary associationist psychology and Darwin’s
ideas (which, as we shall see later, owed much to Smith’s emphasis on the
advantages of differentiation), and in the process provided a physical
equivalent of Smith’s cognitive theory. He did not think of connections between
neurons (which was a later pattern of thought), but wondered how far these
psychological processes could be represented by a mechanical system, and
devised the most elaborate model of his whole life in order to investigate this
question (Marshall 1994). In doing so he
was consciously following the example of Charles Babbage, who in turn had been
inspired by the decision of the French mathematician Prony
to organise the production of mathematical tables on
Smith’s principles of the division of labour (see Raffaelli 2003, pp. 52-3). The possibility of reducing biology to physics
is not a recent idea, and the problematic relationship between mechanical and
biological concepts which pervades Marshall’s economic analysis seems to have
its origin here.
Smith, Marshall and Hayek all built their systems on the fundamental
economic principle of scarcity; but what is scarce in their systems is human
cognitive capacity and the energy that is necessary to drive it. These are precisely the only resources that
are assumed to be freely available in most formal models in present-day
5
economics, which thus ignore the most fundamental of all
allocation problems that human beings face. The Chicago objection to regulation rests on
the assumed abundance of entrepreneurship, while the Austrian objection is
based on the importance of incentives to expand the supply (Audretsch,
Baumol and Burke 1999, p. 620). Smith, Marshall and Hayek also effectively, if
unintentionally, provide the basis for explaining why the assumption that
cognition alone has no opportunity costs is maintained by most economists; it
is essential to underpin the concept of rational choice equilibrium (as Herbert
Simon often pointed out), and thus, in Smith’s (1980, p. 77) words, “to
preserve the coherence of the ideas of their imagination”. Smith’s, Marshall’s and Hayek’s psychological
systems rely on routines and institutions which economise
on cognition, and so do the economic systems that they later considered and
which are populated by human beings who are equipped with such systems. The preservation of established structures is
an important economising principle. (The practice of mainstream economists
naturally exemplifies these features rather than the principles which are
apparently embodied in their models.)
These routines and institutions have the additional merit of focussing attention on the issues for which they are
inadequate at any particular time; consequently they are systems in which the
evolutionary sequence of variety generation, selection, and the preservation of
selected variants in the form of modified or novel routines and institutions is
a natural occurrence. Indeed, one can
say that there can be no evolution without routines. This evolutionary sequence may be handled, in
somewhat different ways, at several levels; these may include, for example,
genetic and neurophysiological structures, ideas, and
organisations, formal and informal, which link
together clusters of routines and institutions and provide both the framework
and the problems for continuing innovation.
NeoDarwinism and neoconstructivism
Hayek’s theory of the formation and modification of mental orders is
explicitly designed to encompass two distinct processes, one of which “takes
place in the course of the development of the single individual” and one “in
the course of the development of the species and the results of which will be
embedded in the structure of the individual organism when it commences its
independent life (or when it reaches maturity” (Hayek 1952, p. 102). The idea of an embedded framework of the human
mind which (correctly) controlled human knowledge of such basic and universal
concepts as space and time was developed, in a non-evolutionary fashion, by
Kant in response to Hume, and it was Herbert Spencer (now so out of favour) who proposed an evolutionary interpretation of such
embedding which would preserve Kant’s conception of the mind’s power of
structuring perceptions against the claims of extreme empiricists (Raffaelli 2003, pp. 31-4), thus preparing the way for
Hayek’s two processes. Smith had already
gone further in observing how “the ideas of the imagination” could overthrow “the
evidence of the senses”, which we might now interpret as the ability of ‘the
development of the single individual’ to override the results of ‘the development
of the species’. The significance of
this development will become a major theme of this paper.
Since Hayek’s specific objective was to explain how the sensory order
could differ from the physical order, it was reasonable for him to leave open
the application of his unifying principle to the distinctive systems of
individual and species
development - as Smith left open the application of his
unifying principle of the division of labour to the
distinctive systems of firms and markets; but it is now difficult to ignore the
important differences between them. Hayek’s presentation in terms of individual
development, which was - and for many of us still is - easier to connect with
our own established schemes of ordering, avoids any discussion of these
differences, and this presumably explains why Hayek’s theory of species
development is so often overlooked. The neoDarwinians, however, are very sensitive to the
implications of proposing two distinctive evolutionary processes. They would argue that Hayek’s theory of
development within the lifetime of an individual gives no reason why any such
developed order should be transmitted across generations, whereas the neoDarwinian transmission mechanism of genetic inheritance
can be comfortably fitted to a theory of the development of species-specific
patterns of behaviour.
Hayek’s account of development within the individual may be interpreted
as driven by experience (in Kelly’s sense of the constructions that are imposed
on a sequence of events), both in providing the stimulus to experiment with new
connections and in supplying the criteria for choosing among these new connections;
but in species development the role of ‘experience’ is not to stimulate
experimental changes in mental ordering but to select among changes which have
occurred by random mutations. The double
helix is a device for accurate reproduction, and so all mutations must be
technically regarded as mistakes in copying; and although environmental factors
may be allowed to influence the frequency of mistakes it is a fundamental
principle of neoDarwinism that it cannot influence
the kind of mistakes that are made. There
is thus no role for adaptations that are prompted by experience; instead a very
small fraction of these mistakes turn out to enhance fitness, and these are
preserved by accurate copying to succeeding generations. Experience-led learning by individuals is
regarded with suspicion by neoDarwinians, and it
cannot be inherited; our mental orders are genetically adapted to some past
environment, with the era of hunter-gatherers being a current favourite (see Cosmides and Tooby 1994).
Indeed we may now observe an emerging conflict for supremacy in the
social sciences between the rival unifying theories of rational choice
equilibrium and neoDarwinian evolution. The two stand in a curious relationship. Both are theories about selection between
alternatives and the preservation of what is selected; and in both, selection
is based on the consequences of those alternatives which are presented for
selection. However, rational choosers,
being equipped with rational expectations, know these consequences in advance,
and having made the correct choices they naturally have no wish to change them,
but remain in their equilibrium state until there is some shock to the economic
system. (Their cognitive system, being
already fully connected and therefore perfect, never changes.) In the neoDarwinian
model, by contrast, no-one knows the consequences of the available
alternatives, and any attempt to design alternatives in order to produce
desirable consequences is a pretence that is unworthy of science; but if neoDarwinian processes can discover the best answer that is
currently available only after trying all existing (though not all possible)
alternatives, nevertheless the best currently available answer will be
discovered, and once discovered it will be conserved in the genetic code, which
may then be indistinguishable from an equilibrium allocation. By appropriate allowance for the costs of this
process, which is claimed to be the only process possible, one may even be able
to make claims for optimality along similar lines to the claims for
7
optimality, subject to information and transaction costs,
that are sometimes put forward in economics. Thus assumptions which appear to be polar
opposites can, with a little sleight of thought, support identical outcomes.
Now deriving equilibria from the initial data
is analytically simpler than tracing processes, because the stages of these
processes are not full equilibria and are therefore
difficult for the modeller to control in a
non-arbitrary fashion. Partial equilibria can be devised, but any particular partial
equilibrium is always open to objection - particularly by those who believe
either in rationality or in the long-term power of neoDarwinian
processes. (The standard isolation of
game-theoretic models from the wider environment raises dual questions about
the appropriateness of this assumption of environmental irrelevance and their
applicability in a wider domain, which modellers do
not always address.) So we should not be
surprised that some evolutionary theorists are attracted to equilibrium modelling ;
and one particularly attractive application is the attribution of particular
medical conditions or behaviour to specific genes. The explanation of performance by structure is
a favourite theoretical principle across the
disciplines, and a direct link between final outcomes and the initial data has
the dual appeal of simplicity and plausibility, especially when the initial
data can be identified as a specific gene sequence.
However, there is some resistance to the dominance of this strategy
among neuropsychologists; and the combination of
argument and evidence which they have produced should have particular resonance
among social scientists of an evolutionary inclination, especially those who
are impressed with Hayek’s reasoning. The
following account is based on a series of papers, some jointly-authored, by
Professor Annette Karmiloff-Smith, Head of the Neurocognitive Development Unit at University College
London. In a lecture to mark the
Centenary of the British Psychological Society (Karmiloff-Smith
2002), her starting-point is the use by neoDarwinian
geneticists of evidence from adult neuropsychological patients and children
with genetic disorders to support claims that the human brain is organised into specialised
modules which are directed by specialised genes. She offers a fundamental methodological
criticism that will appeal to all Austrians: an exclusive focus on the
relationship between initial conditions and end-states may lead us astray, and
a better understanding of causation requires attention to the processes by
which these end-states are produced.
Her central example is of a genetic disorder, the Williams Syndrome,
which is clearly associated both with the deletion of 17 specific genes and
with a specific set of physical consequences in adults, including a smaller
brain volume, an abnormal size, orientation and density of neurons, and
atypical proportions of several regions of the brain, together with
psychological consequences of low IQ, and low spatial skills, with the notable
exception of proficiency in facial recognition. This combination appears to supply strong prima
facie evidence for an exclusively genetic explanation, and has been cited
(e.g. by Pinker 1997, 1999) in support of a theory of the direct determination
of behaviour, including altriuism,
aggression, intelligence, spatial cognition and language, by specific genes or
specific sets of genes (Karmiloff-Smith 2002, p.
526).
Such an exclusive explanation is then confronted with further evidence.
First, patients who lack a subset of
these 17 genes do not exhibit corresponding subsets of
the symptoms. (Though
the sample size is small, universal claims, such as that for exclusive and
specific genetic determination of end-states, may logically be refuted by a
single counter-example; questions about the sample must be questions about the
experimental procedure which has generated an apparent counter-example, not
about the logical implications of its results.) Second, the claim that the apparently
unimpaired proficiency in facial recognition of people with Williams Syndrome
demonstrates an intact face-processing module is undermined by careful
experimentation which revealed that these people were processing faces feature
by feature, whereas the supposed ‘face-processing module’ relies on
configuration. (Of particular interest
is the observation that control subjects are equally reliant on featural processing when presented with inverted faces; the
implications of this will be considered later.) Differences were also found in the production
of some other supposedly-intact skills; thus the “pattern of intact versus
impaired modules formed from intact versus mutated genes”, which the theory of
purely genetic determination requires, is removed by “[d]ifferentiating
between superficial behavioural scores and underlying
cognitive processes” (Karmiloff-Smith 2002, p. 536). Third, experimentation with infants revealed
substantial differences from the results with adults, while the use of infants
with Down’s Syndrome as controls had the incidental effect of demonstrating
notable differences between the infant and adult states of those affected by
this syndrome also; such changes in response during the course of development,
implying a reconfiguration of neural networks, is not what one would expect
from genetic programming.
These results do not, of course, overthrow the conception of a
genetically driven evolutionary process, or indeed the argument that many human
physical and behavioural characteristics are
genetically determined; but the modified theory that is offered by Professor Karmiloff-Smith, in conjunction with other cognitive neuropsychologists, allows scope for “complex pathways from
gene-to-brain-to-cognitive-processes-to-behaviour” (Karmiloff-Smith 2002, p. 526). Even here, genetics and the neoDarwinian model of which they are the focus retain a
major role; but there is nevertheless considerable space for social scientists
to develop evolutionary explanations of a somewhat different kind, for which
genetic constraints may provide an appropriate baseline, such as all
evolutionary explanations need. This
kind of permissive linkage between disciplines appears to correspond to Ziman’s view of science. Though commending ‘weak’ reductionism - the
search for underlying commonalities - as a research strategy, Ziman (2000, pp. 323, 326) objects to ‘strong’ reductionism
- the unification of knowledge by the universal application of fundamental
principles, precisely because no such principles can explain “the spontaneous
emergence of novel modes of order in complex systems”; and these selective
connections produce “a simplification of nature, and of human cognition
as naturally evolved, that actually makes scientific research possible”.
Explanations of the emergence of order, in human brains and in human
societies, are not confined to random mutations and natural selection, though
neither is excluded, but can incorporate the search for novelty, through making
new connections, and choices that are made for what appear to be good reasons,
because they embody plausible connections. They may go beyond this to suggest why
particular reasons may be thought to be good and why searches may be undertaken
in particular circumstances and may proceed in particular directions. Thus they are not restricted to explaining how
people may get things right, but may also help to
9
understand how they may go astray - and an understanding of
the reasons for failure may have practical uses. The drastic simplifications of assuming all
economic agents to be hard-wired optimisers who are
extremely well-informed (and if confronted with asymmetric information know
precisely what are the implications of what they do not know), which excludes
the need for any process other than Bayesian updating, will, however, not
suffice. The kind of psychology-based
social science developed by Hayek, and also by Smith and Marshall, on the other
hand, is highly congenial.
In fact, the final sentence of Karmiloff-Smith’s
lecture would serve as a present-day introduction to Hayek’s Sensory Order: “The
contrasting view [to the static model of genetic determination of adult states]
presented in this lecture is that our aim should be to understand how genes are
expressed through development, because the major clue to
genotype-phenotype relations is not simply in the genes, or simply in the
interaction between genes and environment, but in the very process of
development itself” (Karmiloff-Smith 2002, p. 540). In other papers she argues that “on the gene
side, the interaction lies in the outcome of the interacting, cascading effects
of interacting genes and their environments and, on the environment side, the
interaction comes from the infant’s progressive selection and processing
of different kinds of input... The child’s way of processing environmental
stimuli is likely to change repeatedly as a function of development, leading to
the progressive formation of domain-specific representations” (Karmiloff-Smith 1998, p. 390).
In a jointly-written paper advocating “an emergentist
solution to the Nature-Nurture controversy”, she and her colleagues emphasise “the extraordinarily plastic and
activity-dependent nature of cortical specialization”. Because “cortical regions are likely to differ
from the outset in style of computation, which means that they will also differ
in the variety of tasks they can perform best”, there may be widespread
dispositions to convert domain-relevance into domain-specificity; nevertheless
any particular pattern of domain-specificity is a consequence of development
(Bates et al. 1998). (The
argument that localisation of mental functions does
not imply localisation in any particular part of the
cortex, and that alternative pathways may be developed in response to specific
damage, had already been made by Hayek (1952, pp. 147-8), citing Lashley’s (1929) account of “vicarious functioning”and
“equipotentiality”.) Though much is genetically determined and the
remainder is genetically constrained, nevertheless in important respects “the
brain progressively sculpts itself, slowly becoming specialised
over developmental time” (Karmiloff-Smith 2002, p.
527).
“The expression of genes through development”, rather than entirely by
programming, may itself be given an evolutionary explanation, as Karmiloff-Smith (1998, p. 390) notes: “although evolution
has pre-specified many constraints on development, it has made the human neocortex increasingly flexible and open to learning during
postnatal development. In other words,
evolution is argued to have selected for adaptive outcomes and a strong
capacity to learn, rather than prior knowledge. Within such a perspective, it is more
plausible to think in terms of what one might call domain-relevant mechanisms
that might gradually become domain-specific as a result of processing
different kinds of input.” There has
been some evolution away from genetically specified domain-specificity towards
a genetically-enabled multi-specific capability for creating domain-specific
skills through development, in a Smithian
evolutionary process. Present-day humans
therefore embody a partial shift from “evolution in the course of the
development of the
species” towards “evolution in the course of the development
of the single individual” - a shift which has been confirmed by natural
selection, but which entails other forms of selection (for a discussion of some
of these, see Loasby 2001). This process of learning works through the
creation and modification of connections within the brain, for selective
connections are the key to human cognition. If two stimuli are experienced differently, “this
difference must be reflected somewhere in the brain. Every new piece of learning
changes the structure of the brain in some fashion, however minor” (Bates et
al., 1998). This is precisely how
learning is modelled by Hayek, and also by Marshall
(1994). The development of a new system
of connections that constitutes a physical order, and which at first supplements
and then increasingly supersedes our sensory order in many contexts, may be
seen as a consequence of this major trend in selection within the human
species. This deserves some further
consideration.
That specialisation on a particular range of
activities would result in a progressive movement from relatively
undifferentiated potential to domain-specific knowledge and capabilities, which
could confer distinctive advantages, was Adam Smith’s great idea. It was applied to the world of nature by
Milne-Edwards (1827, p. 534) to explain the great variety of species, and this
gave Darwin the principle which governed the direction of evolution. We may now draw on our knowledge of genetics
to argue that the detailed specification of a limited range of behaviour for each species provided evolutionary space for
very many different species to demonstrate that their evolved domain-specific behavioural regularities conferred sufficient comparative
advantage within their specific environment to allow them to survive, though
any comparative advantage may be extinguished by changes in this environment,
including the evolution of other species. Only in the human species is this specialisation associated with exchange, though the
principle of complementary specialisation is manifest
in social insects and in many specific inter-species relationships - plants and
pollinating insects provide the largest class of examples - and in a broader
sense in ecology.
The growth of the pre-human brain allowed for an increasing range of behaviour within each individual; but what appears to have
been a crucial change resulted from a very rapid increase in brain size between
500,000 and 100,000 years ago. Because
it followed the change to an upright stance, which inhibited enlargement of the
birth canal, this increase could be accommodated only by the birth of infants
at a very early stage of brain development; this made them extremely vulnerable
to both accident and predation for an exceptionally long period, and could
therefore have been selected for only if it was associated with some great
advantage. This advantage, we may now
conjecture, seems to have been precisely the ability to direct this new
genetically-guided cognitive capacity to form better representations of the
environment as it was experienced, and to develop more
appropriate skills to deal with it - which is the kind of adaptation cited by Karmiloff-Smith. For
this purpose “the unusually slow period of human postnatal brain development” (Karmiloff-Smith 1998, p. 394) is actually an advantage, for
the connections in the brain are being formed while the child is interacting
with the environment. With an
appropriate genetic endowment of programmable rather than programmed capacity,
domain-specific skills can be developed within individuals as well as through
the evolution of species; and this has some advantages. This developmental process of theory-revision
can cope with faster environmental change than reliance on the selection and
diffusion
11
of fortuitous genetic mutations, and also with movement into
an environment that has not previously been experienced by that individual. Hayek’s model of development at the individual
level applies.
This interaction between the growing brain and the environment could
not have happened if the development of this larger brain were strictly
genetically determined; but the extraordinary increase in the size of the brain
entailed a far greater proportionate increase in the number of potential
connections, and it is very hard for a non-specialist to see how the
programming capacity of the genome could have increased sufficiently to cope
with this increase. Specialists appear
to share this view. “On mathematical
grounds, it is difficult to understand how 1014 synaptic connections in the human
brain could be controlled by a genome with approximately 108 genes,
particularly when... humans share approximately 98% of their genes with their
nearest primate neighbours” (Bates et al. 1998). (We may immediately recall
Hayek’s (1952, p. 185) proposition that “the capacity of any explaining agent
must be limited to objects with a structure possessing a degree of complexity
lower than its own”.) Instead, “brain development in the higher vertebrates appears to
involve massive overproduction of elements early in life (neurons, axons and
synapses), followed by a competitive process through which successful elements
are kept and those that fail are eliminated” (Bates et al. 1998) - a
non-genetic application of neoDarwinian evolution to
introduce a different evolutionary process.
The loss of genetic control has allowed cognitive development to be
shaped by interaction with particular environments at the level of the
individual, on evolutionary principles of variation and selective preservation.
Thus the evolutionary process has itself
evolved, as genetic determination has been supplemented by genetically-enabled
capabilities, in a way that increases adaptation - at least in the short term,
in relation to the time scale of genetic evolution (though even within a human
lifetime, as Adam Smith realised, the development of
domain-specific skills and habits of thought may lead to dangerous reductions
of adaptability). The evolution of the
evolutionary process (though not precisely so expressed) is also a feature of
Adam Smith’s psychological theory of the growth of knowledge, in which specialisation between individuals, in both knowledge and
capabilities, is a later development that enhances the effectiveness of the
powerful motivation to create mental models of puzzling phenomena (Loasby 2002). The
principle that greater diversity requires a relaxation of central control is
familiar in studies of organisational design and
innovation; and it is, of course, a central principle of Austrian economics. (It is not good news for economists who rely
on general equilibrium modelling.) That this diversity within the human species
should apparently be an unintended consequence of the increase in brain size
(even though to a neoDarwinian all consequences are
unintended) should also appeal to an Austrian mindset.
Let us now consider some of the implications of Hayek’s
psychological theory of the development both of general cognitive powers and of
individual knowledge and capabilities, in the light of the general
corroboration and specific refinements of this theory by neuroconstructivists.
We shall also exploit the similarities
with the constructivist (and fallibilist) views of
the growth of knowledge and capabilities developed by Smith and Marshall, and
with George Kelly’s (1963) theory of
personality,
which focuses particularly on the problem of preserving the internal coherence
of an individual’s ‘interpretative system’ while simultaneously maintaining a
satisfactory correspondence with the events encountered by that individual or
precipitated by her actions, and in doing so provides a powerful line of enquiry
into biases in and obstructions to learning. Apparently-relevant evidence may be ignored,
and locally-effective explanations may be dismissed, because they appear
incompatible with ways of making sense that have become indispensable - even in
the hardest of sciences, as Ziman (1978) observes.
Hayek’s principal application of his proposition about the limits of
any apparatus of classification is to show that “no explaining agent can ever
explain objects of its own kind, or of its own degree of complexity, and,
therefore, that the human brain can never fully explain its own operations”
(Hayek 1952, p. 185); thus, although we can hope to understand the principles
underlying our own mental processes, “mind must remain forever a realm of its
own which we can know only through directly experiencing it, but which we shall
never be able fully to explain or to ‘reduce to something else” (Hayek 1952, p.
194). This is his conclusion to his
investigation into the problem of psychological explanation; human cognition is
inevitably bounded, as Simon also insisted. Hayek also, naturally, draws attention to the
impossibility of achieving a full explanation of the world around us, while
simultaneously supplying a principle of organisation
for the human brain and for human societies; and this is the starting-point for
the following discussion.
Hayek’s impossibility theorem warns us that our knowledge is
necessarily fallible and incomplete, but it also suggests how it may be
improved and tested, and what kinds of opportunity costs are likely to be
incurred along different pathways of attempted improvement. Knowledge is created by selecting connections
which will constitute domain-specific modules; and we may identify two general
principles on which to base this selection, which apply both to everyday
cognitive operations and to those special cases - which are not so very special
- in which we are consciously attempting to construct interpretative
frameworks, some of which we may choose to call theories. One directs us towards fine discrimination in
our definition of categories, at the expense of reducing the breadth of our
view and ignoring interactions with the rest of the universe, thus restricting
our pattern-making to a narrow domain which we may be able to explore in some
depth. The second principle points
towards the strategy of aggregating the elements of our universe into invented
categories on the basis of similarities that we suppose are significant for our
particular purpose, while ignoring the differences which we assume to be of little
relevance for that purpose - or which we simply fail to notice, thus creating a
domain which is broad but almost empty. Though each has a physical counterpart in the
human brain, all categories are located in the space of representations, and
may be manipulated without further reference to what they are deemed to
represent. Such manipulations may be
enlightening, or misleading; much depends on how they are used (Loasby 2003).
Normally, there is some accommodation between these two principles, and
all our representations are sub-systems which include both a few external
connections and a few subdivisions within their components. To illustrate from formal economics, near one
extreme we find theories in which everything of interest is bundled into a few
composite categories, as when a whole economy is represented by the
13
combination
of undifferentiated labour and capital to produce
undifferentiated output, with a unit price for each category; near the other
extreme we find models of precisely-specified games which are isolated from all
external influences - though in a wider scientific perspective, the agents
within a game represent a high degree of aggregation by comparison with the
attempt to identify fundamental particles. Even this supposedly-ultimate objective, we
may note, retains the principle of aggregation within each category of
particle; but since, as Herbert Simon (1982, 2, p. 142) observed, the purpose
of theory is to economise on fact, some aggregation
is unavoidable.
Indeed, as Hayek (1952, p. 176) pointed out, nothing can be recognised unless it can be assigned to some existing
category. Perhaps the clearest, and
prior, statement of this necessary principle of contextual similarity, and the
implicit dangers of ignoring apparently irrelevant differences in favour of salient resemblances, was provided by Frank
Knight (1921, p. 206); Hayek (1952, pp. 145-6) also emphasises
that all classification must be based on selected elements, so that the
resulting “system of acquired connexions... will give
only a very distorted reproduction of the relationships” which it purports to
represent, and “will often prove to be false”, generating misleading
expectations. (Simon
(1982, 2, pp. 306-7) similarly observes that because of the active filtering
involved in both direct perception and the handling of information “the
perceived world is fantastically different from the ‘real’ world”.) Hence the importance of a procedure for
revising, or even replacing, classifications which no longer seem to work, and
of a strong intrinsic (and therefore genetic) motivation for doing so; such
revisions are of course the means by which the physical order began to emerge
from the sensory order.
The possibility of revision implies the ability to conceive of
alternative principles of classification on which to construct representations.
What is distinctive, at least in degree,
about the human species is that the multifarious forms of the division of labour among its members have produced such an
unprecedented variety of these representations and so have enormously increased
the total of human knowledge. Hayek’s
account of the functioning of the human brain and neurocognitive
theory both lead to the conclusion that human knowledge is dispersed and
incomplete; furthermore, the particular potential and limitations of the human
brain imply that knowledge can be less incomplete only if it is more dispersed.
The division of labour
exploits the ability of individuals to create domain-specific networks - if
they are given the freedom to so. In
currently-fashionable terminology that implies delegation and empowerment, or
in economic language imperfectly-specified contracts; but the obverse of such
discretion is loss of control, which to those concerned with the overall
efficiency of allocation, either as analysts or policy-makers, is a serious
deficiency. The fundamental reason for
this negative perception is the illusion that the system can be safely treated
as if it were fully connected (Potts 2000); this is comparable to the illusion
that the connective structures of the greatly-enlarged human brain can be fully
specified genetically though this is a very different specification, not of a
fully connected system but of disjoint modules. Both illusions exclude uncertainty; but in
doing so they also exclude endogenous innovation.
The incentive problems of dispersed knowledge, under the title of
asymmetric information, have become a major focus of attention in economics,
and that in itself is no bad thing; but because full specification (at least of
all contingencies and their
implications)
is necessary for the calculation of system optima it is inevitable, though
unfortunate, that such problems are treated as some kind of ‘organisational failure’, rather than being part of the
pathology of success. (Kirzner, by contrast, has rightly insisted on differential
alertness to opportunities as an essential contributor to economic progress.) One important consequence of this prevalent
attitude is an implicit assumption that the co-ordination of dispersed
knowledge is simple if incentives are entirely compatible, whereas there is
abundant evidence of the major contribution of well-intentioned misunderstandings
to many failures: for those of a generous disposition, economists’
recommendations to the transition economies of eastern
Europe may be so classified. The apparently
analysable problems of information have diverted
attention from the more fundamental issue of interpretation; asymmetric
interpretation is at once a threat to co-ordination, a basis for opportunism
and a route to innovation. The recent
growth of interest in ‘knowledge management’ may provide an opportunity for a
balanced analysis of the costs and benefits of the growth of knowledge, related
to an understanding of the processes of this growth -but not if the management
of knowledge is treated as primarily a problem of information technology.
It is no accident that the principles and compromises that are inherent
in the use of human mental capabilities are to be found in the organisation of social, economic and political systems, for
the operation of these systems entails equivalent cognitive problems, which
cause us to rely on abstract systems of rules for the selection and
classification of relevant phenomena. As
De Vecchi (2003) points out, Hayek used this
equivalence in his later work, and advocated the dispersion of both political
power and economic decision-making; Kirzner has
pursued the theme of domain-specific entrepreneurial alertness; and Marshall
(1919, pp. 647-8), though describing the state as “the most precious of human
possessions”, insisted on the importance of confining it to “its special work”,
and applied his cognitive model of conjectured linkages to industrial organisation (Raffaelli 2003). For example, a cluster of small firms has
greater potential for variety than a large firm, especially if the advantages
of large-scale are believed to require conformity to routine, and therefore
inhibit the changes in administrative and cognitive organisation
that generate increasing returns. As Quéré (2003, p. 198) points out, “Increasing returns do not
pre-exist. They are the result of an
economic process; that is, a result of the way co-ordination problems
are managed overtime”. Marshall recognised the connection between the management of
co-ordination problems in the economy and the management of co-ordination
problems within the brain: both require combinations of routines and novelty,
and these combinations are themselves modified by evolutionary processes of
trial and error.
Economic growth and the growth of knowledge both entail the division of
labour in order to achieve an effective allocation of
resources to the development of domain-specific cognitive modules within the
economy and within society - indeed within many kinds of ‘space’. As Darwin learnt from Smith, perhaps
indirectly through Milne-Edwards, these are the advantages of the division of labour that have led biological evolution towards the
variety of species; they have led human societies towards the variety of
knowledge. The genetic specification of
life forms has created many short-lived inefficient allocations of resources
along the way, for only a very small proportion of all possible
genetically-induced specialisations produce any
advantages; but as Smith saw, the most important advantage of the division of
labour
15
is not its
effective application of the differentiated knowledge and capabilities that are
already available but the effects of specialisation
on the generation of new knowledge and new capabilities, which also create many
short-lived inefficient allocations of resources to unsuccessful novelties
along the way. The economy is an
evolving system which is continually creating and modifying domain-specific
modules of knowledge, and of productive organisations
that are based on particular combinations of knowledge.
The realisation of this potential would be
very severely restricted if domain-specific modules could be created only by
genetic mutations and natural selection among the variants that they produce. Much more can be achieved once genetic
mutations (which cannot, of course, be contrived) begin to supplement the
programming of behaviour with the potential to
develop domain-specific programmes of behaviour within the individual brain; for this allows the
division of labour to be extended and knowledge to be
improved within a human lifetime - especially when an increase in brain size
expands the range of possible connections. As in the economy, the realisation
of this potential requires a relaxation of control; and it was therefore
fortunate that the genome did not grow enough to permit an increase in genetic
instructions to match the increase in brain size. The imperfectly-specified brain structure has
similar merits to the imperfectly-specified contract of the Coasean
firm and the imperfectly-specified activities of a Hayekian economy.
It is important that the resulting knowledge-domains should also be
imperfectly specified: indeed ‘domain-specificity’, though adequate to mark the
contrast with notions of general applicability, is a misleading label (compare
the relationship between ‘bounded rationality’ and ‘rational choice’). In Nelson and Winter’s (1982) evolutionary
theory, the primary units of evolution are skills, including skills of organisation, which are treated as cognitive programmes of limited scope; but Nelson and Winter take
care to emphasise and to illustrate how ambiguous
this scope may be, and use this ambiguity within their theory. Imperfect specification is also a condition of
those experiments at the margin, inspired by differences of temperament and
interpreted experience, on which Marshall relied for the variations that were “a
chief cause of progress” (Marshall 1920, p. 355), and it is essential for
Penrose’s (1959, 1995) central notion of the imagination of new services to be
obtained from resources and of new productive opportunities to which these services
may be directed. Since increasing
attention is being paid to the knowledge content of capital (of which Marshall
was very well aware), it may be helpful to apply to structures of knowledge Lachmmm’s (1978) analysis of capital goods: they are substitutable
between uses but within each use they are complementary to a particular set of
other capital goods when combined in a specific way; in other words they are
multi-specific. Lachmann’s
warning also applies: just as the value of capital cannot be maintained simply
by maintaining the current set of combinations, so the value of knowledge
cannot be maintained simply by perpetuating its current uses. It is indeed a most important characteristic
of knowledge that it can be reused, but in a way that is not simply
deducible from current uses - a consideration which is not prominent in
endogenous growth theory, because it is not easily accommodated within the
system of thought to which it belongs. Imagination
(which Lachmann rated almost as highly as Shackle) is
the genetically-derived device by which genetic evolution allows the humans
species to exceed the limits of genetic evolution.
The exploitation of our cognitive capabilities may be enhanced by a
(genetically-programmed) motivation to search, which is cnucial
to Smith’s account of the growth of knowledge; this increases the rate of
‘mutation’ among networks in what is likely to be the appropriate neighbourhood, though we should not lightly assume that it
will improve the success rate within this neighbourhood.
Incentives (broadly defined) replace
instructions as the search space is increased. Since these are fundamental principles of
human behaviour we should not be surprised that they
apply to organisational design and management. However, although we may welcome the present
interest in incentives among economists, we should note that this
interest is heavily concentrated on the delivery of what is already specified,
at the expense of the search for new possibilities, let alone the search for unrecognised problems. In addition it is generally restricted to a
very narrow view of human motivation (Frey 2002); here the contrast with Smith
is especially striking.
Discretion is important in two ways: it allows the development of
substantially different cognitive structures for different specialisms,
and it also allows local variation, and therefore localised
progress within each specialism. Both major and minor differences in the
environment make their distinctive contributions; and these environments
include the size and structure of organisations,
which were of especial interest to Marshall. (This is the context in which he introduced
his ‘law of increasing return’; and that is why he was not prepared to
attenuate it in order to conform to a particular concept of equilibrium.) At neither level is it possible to prescribe
the ‘best’ direction in which to seek improved knowledge; human consciousness
and human purpose may lead to a faster rate of variety generation, and may even
raise the average quality, but the growth of knowledge remains a process of
trial and error, as Hayek continued to argue throughout his life. Despite the waste generated in this process,
that is so obvious in retrospect, the necessary superiority of a centrally
directed search for knowledge is no less an illusion than the necessary
superiority of central planning.
The digital revolution in information processing has diverted attention
from the structural nature of knowledge. The evidence on facial recognition presented
earlier is particularly relevant at this point. The motivation to recognise
faces is, we may presume, a shared genetic endowment - its advantages in the
formation of human society (including its importance in controlling
opportunism) are obvious; but it is not linked to a unique facial module. Recalling that recognition by feature is
always employed by those affected by the Williams Syndrome, but also by those
not so affected when they are presented with inverted faces, we may identify
recognition by feature as the default mode; configural
recognition is employed by those who have both the capability to do so and have
also been presented with the material that is necessary to build patterns. Pattern-making is an inherited capability,
which may therefore be impaired by a genetic disorder; how that capacity is
used depends on the environment and individual attempts to make sense of it. The use of different procedures for upright
and inverted faces is also a demonstration that domains may become very
specific through development few people encounter inverted faces frequently
enough to build appropriate patterns by which to identify them, but experiments
with inverting spectacles have shown that it can be done. (There is also a familiar economic principle
at work here; investment in developing the skill of configural
recognition within a specific domain, such as inverted faces, is not justified
if this skill is very rarely used.) Developed
capabilities are configurations that economise on
cognition; Marshall (1920, p. 251) explains how someone who has
17
learnt to skate can employ that knowledge as a unit in
constructing more elaborate figures. Ziman (2000, p. 120) points out that “pattern recognition
is deeply embedded in scientific practice”, and that the construction, use and
modification of such patterns within each scientific field is a particular (we
may say domain-specific) application of a universal and inter-subjective human
capability.
Patterns provide a basis for extending similarities by physical and
mental experimentation at the margin; and since cognitive patterns differ
somewhat between people there will be different margins at which to experiment.
Marshall’s recognition that these
differences in cognitive patterns and in their corresponding experimental
margins are substantially influenced by interactions with particular
environments explains his profound interest in the “linkage between what people
do and how they are changed by doing it”, which Becattini
(1991, p. 16) forecast would justify “a radical repositioning of Marshall from
theorist of price and equilibrium to theorist of industrialization and
development”. (Raffaelli
(2003) presents such a radical repositioning.) There will also be different margins at which
knowledge may be most readily absorbed from other people or from written or
electronic sources, for absorption requires incorporation into or amendment of
some configuration; and what is absorbed is likely to differ slightly even
between those who have undergone standardised
training. Creative and absorptive
capacity both depend on the ability to make new connections, and are therefore
limited by the connections that already exist; this ability and its potential
domain, we may suppose, are genetically determined, but its use is not. That use, however, follows the broad
evolutionary principles of variation, selection, and retention.
Language allows us to experiment with simile and metaphor; and it is
surely no accident that abstract thought is so reliant on metaphor. Many English metaphors are derived from
classical languages, and these are commonly used without recognition of their
original meaning, but others, though very tired, are not yet dead: for example,
we are invited to ‘draw a line under’ the past and ‘move ahead, bringing others
with us towards new horizons’, perhaps through ‘leaps of faith’. Though metaphors may often suppress thought,
yet they occasionally have the power to make a connection between previously
distant domains and thereby produce a significant innovation in thought or
practice. As in genetic evolution, even
mistakes in copying may occasionally turn out to be productive.
A characteristic of this cognitive theory, as of all evolutionary theories,
that is often overlooked is the intimate dependence of change on the absence of
change. Systematic development is
impossible unless there is a stable baseline from which to begin and a stable
environment against which options may be assessed - and which, in theories such
as Hayek’s that allow for deliberate attempts to generate conjectures, may give
direction to these attempts. Smith’s
(1980) psychological theory was identified in its title as an explanation and
illustration of “the principles which lead and direct philosophical inquiries”.
The heavens provided a stable
environment, which was subject to improving techniques of observation, and the
sequence of robust interpretative systems examined by Smith was used, two
centuries later, to illustrate Kuhn’s (1962, 1970) theory of scientific
development, which is remarkably close to Smith’s. Routines stabilise
evolved patterns, thus releasing mental energy and providing a basis for
experiment; this interplay between routine and innovation, within an individual,
a firm, an industry, and an economy, is a pervasive theme in
Marshall’s economics (Raffaelli 2003).
Thus a sensible use of the concept of
equilibrium is to enquire which elements of a system stand in an equilibrium
relationship to each other; for these equilibrium relationships provide the
foundations of change. A natural
consequence of this dependence of innovation on stability (which is also
essential to neoDarwinian theory) is a substantial
degree of path-dependency within each cognitive domain - including that of a
whole economy, as is indicated by Marshall’s (1919) surveys of national
systems; but this tendency is partially offset by the variety and the
quasi-independence of domains - another consequence of the combined effects of
cognitive limitations and the division of labour.
The counterpart of this quasi-independence is the problem of
co-ordination, which arises in two forms: the compatability
of separately-produced knowledge, and its comprehensibility to those who have
not participated in its production. The
division of labour offers to the innovator the
protection of cognitive distance; the integration of what has been divided
requires cognitive proximity. We should
not overlook the effects of our shared genetic inheritance, which extends
beyond the substantial component of programmed behaviour
to the shared procedures by which our interpretative frameworks are formed (Ziman 2000, p. 121). Smith’s (1976a) hopes for a civil society
rested substantially on his argument that most people could both understand and
appraise the behaviour of others in situations that
were different from their own. Since
then, social and economic evolution, based on an inherited capacity to create
differentiated patterns, has increased the variety of situations and increased
the possibilities of juxtaposing interpretative frameworks that have few
elements or connections in common. Development
within the individual dilutes the shared genetic inheritance of domain-specific
behaviours. Cultural
evolution, in particular, may serve either to reinforce or to override the
similarities of attitudes and behaviour embedded in
humans on which both Smith and Hayek relied.
Kelly (1963) construes human personality in terms of the interpretative
frameworks which guide each person’s understanding and behaviour;
and the failure to achieve an acceptable coherence between interpretative
frameworks in a changing environment thus becomes Kelly’s construction of a
personal breakdown. In an organisational context, this analysis can easily be
extended to include problems of incompatability
between the frameworks which seem to apply in the work environment and those
with which each worker is comfortable in other parts of life, and also to
problems of incompatability between the changes of
framework that seem to be required in different parts of the organisation to cope with major changes in the organisation’s environment. ‘A breakdown of corporate personality’ may be
an appropriate way to describe what has happened to many organisations
(including the Soviet Union).
We should remember, however, that compatability
may be necessary in only a few dimensions, and systems may be connected along
the dimensions where it is most readily achieved (Ziman
2002, pp. 302-6). Success may depend
both on bringing some people together and keeping others apart; and this may
sometimes require the redefinition of organisational
boundaries, as Allyn Young (1928) argued. Richardson’s (1972) analysis of capabilities
along the dimensions of similarity and complementarity
provides a basis for such redefinition. Adaptability
- the capacity to modify connections - is preserved, and sometimes enhanced, by
rearranging the
19
connections between units or between levels. Such rearrangements may increase independence
or exploit complementarities, thus redefining the cognitive unit, though not
without creating new problems. Organisational design is always an option of difficulties.
Although the division of labour is usually
associated with the separation of activities, Smith (1976b, p. 21) recognised not only the benefits of recombination but also
that the selectivity of connections provides scope for those who “are often
capable of combining together the powers of the most distant and dissimilar
objects”; thus integration, he observes, is itself a specialised
activity. It is a particularly important
exemplar of the advantages of the division of labour,
because it encourages novel extensions of the results of more narrowly-focussed specialisation through
the development of new configurations. The
skills of integration across domains are themselves domain-specific, and for
each individual, as the careers of ‘Schumpeterian’ entrepreneurs have shown,
they are normally restricted to particular categories of “distant and
dissimilar objects”. Witt (1999) has
also pointed to the entrepreneurial role in creating and maintaining compatible
interpretations within a firm; because we all need plausible interpretative
schemes, entrepreneurs may thereby crowd out opportunism. These interpretations must also be, in some
degree, differentiated from those which frame the activities of other firms,
and sometimes differentiated from the shared assumptions of an industrial community;
Schumpeter and Marshall both recognised the
importance of the outsider as a source of novelty, though it was Schumpeter who
drew attention to the major co-ordination failures that may result from the
destruction of established knowledge.
As Potts (2000) has reminded us, a system consists of elements (which
may themselves be systems) and the connections between them; changes in systems
may therefore be traced to changes in either elements or connections, or to
interactions between these two kinds of change. It is an essential feature of general
equilibrium modelling that any model should be fiully connected; consequently any differences between
equilibrium models must be attributed exclusively to differences in their
elements. There is an apparent exception:
the effects of imperfect information appear to depend on missing connections. However, this appearance is deceptive, because
the standard modelling strategy is to explain why the
system works ‘as if’ it were completely connected. It is because Williamson leaves some
connections to be handled by governance structures, which are left outside his
model, that this explanation of the firm is not quite admissible into the
choice-theoretic core.
Unfortunately, complete connections within these models require
significant omissions from the elements of which they are composed, even in the
supposedly complete Arrow-Debreu system. What is excluded is nothing less than what
Arrow called ‘the costs of running the system’ - everything from the energy costs
of cognition to the creation and operation of markets and organisations.
Not only does this make these models
incompetent to handle externalities and institutions (Coase
1988, p. 15) - both of which are the consequences of incompletable
connections; economising on these costs requires a
high degree of selectivity among connections. The elements and the connections in a model
cannot, in general, be independently chosen by the modeller.
Structures matter. Marshall’s
(1920, p. 139) suggestion that organisation should be
reckoned as a distinct agent of production is not an idiosyncratic idea,
especially as he defined organisation very broadly
(almost as the equivalent of ‘the costs of running the system’. The idea is particularly appropriate if we are
interested, as Marshall certainly was, in the process of economic development. Just as perfect reproduction excludes genetic
evolution, so does perfect organisation (and, of
course, perfect competition) exclude novelty. Hayek’s theory of the mind is a theory of
connection-building: at the level of the species, it is part of a general
theory of genetic evolution; at the level of the individual it is a theory of
the innovative mind; and if one combines the two we have a theory of the
evolution of the evolutionary process itself, along the lines suggested by Karmiloff-Smith and her co-authors.
Domain-specificity (in contrast to general equilibrium) is a key
concept. The genome appears to be
inherently a method of constructing a system of domain-specific elements, embodying
Smith’s principle of the division of labour; but with
the remarkable enlargement of the human brain we seem to have a partial but
significant movement away from genetically-determined domain-specificity (which
seems likely to include at least a major part of the sensory order) towards a
genetically-enabled development towards domain-specificity at the level of the
individual. As Hayek argues, this
requires novel - and additional - patterns of connections within the brain; and
these patterns are produced, as Smith and Shackle notably emphasised,
by the human imagination. Though the
results of genetic evolution are still pervasive, there are now significant
possibilities for development at the level of the individual to modify, and
even sometimes to override, development at the level of the human species.
This is by no means all. The
mental orders created by our imagination and tested in specific domains are
themselves forms of organisation, for all knowledge
is a structure of selected connections. Now
although much of our “life-world knowledge is coded organically into our behaviour, genetic make-up and bodily form” (Ziman 2000, p. 299), these created mental orders vary
greatly across individuals. Consequently
the knowledge available in any human society depends on organization - which
means on particular patterns of connections - of the kinds listed by Marshall,
which exploit the advantages of similarity (these depend not on total
homogeneity but on local variation within imperfectly-specified patterns, as in
genetic modifications) and of differentiation, which can produce new species of
knowledge incomparably faster than genetic evolution. The distribution and selective connection of
domain-specific modules within the economy is a central issue for explaining
economic development and for effective policy at the level of firms and
governments.
However, economists should never forget opportunity costs. There are important disadvantages of
domain-specificity at all levels. Though
it is perhaps somewhat easier to escape from internally-generated patterns of
thought and action than from those that are genetically determined, it is
nevertheless true (as the studies reported by Karmiloff-Smith
confirm) that patterns resulting from development become increasingly rigid. The reconstruction of a personality to match a
changed environment is a formidable challenge. (As a problem for clinical
psychologists, it stimulated Kelly’s (1963) Theory of Personality).
Changing the patterns of all the
members of a group in a way that preserves intra-group compatability
while adjusting
21
to a different environment is even more difficult
reconstructing an organisation, formal or formal, of
any size seems to be impossible without changing the membership. Penrosian firms,
like individual entrepreneurs, may find that nothing fails like success,
because success may entrench belief in the patterns that appear to have
produced it. The coherence of larger
societies may depend on moderating the demands for compatability;
for although, as Ziman (2000, p. 121) observes, the
world-wide appeal of some soap operas indicates the similarity of evolved
mental and emotional mechanisms, the power of genetics is being continually
attenuated by individual and social developments which, though genetically
enabled, are not genetically controlled.
In the end, there is no escape from Knightian
uncertainty; no procedures for expanding either theoretical knowledge or
practical skills can be proved to be correct in relation to the total system to
which they are to be applied, because our best representations of this system
are necessarily incomplete, and likely to be erroneous in some unrecognised respects. However, Knightian
uncertainty is also a precondition for novelty, as Shackle kept reminding us;
and human cognitive systems have a distinct, if limited, capacity for creating
novelty as an integral part of their cognitive operations. They may well also have a genetically-based
need to search for novelty, and so a degree of uncertainty (balanced with some
perceived stability) may be a necessity for the survival of the human species,
as well as a potential threat to that survival.
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