Toward a General Theory of Exchange: Strategic Decisions and Complexity

By Dr. Javaid R. Khwaja

The new economy, under the impetus of the ever-widening outreach of the Internet, is undergoing a transition. In the meantime, theres also been a shift to the information paradigm, with its emphasis on lack of foresight. These processes have almost completely supplanted the concept of market that was once one of the most cardinal features of conventional economic theory.

In Toward a General Theory of Exchange: Strategic Decisions and Complexity, author Dr. Javaid R. Khwaja traces the slow melting of the market, the most ubiquitous contraption and the summum bonum of economic science, as an organized manifestation of complexity, with its wide-ranging impact on the flow of funds. Using the historical background of economic theories, this study blends the interdisciplinary range and fills the vacuum that has existed among current conventional economic theory, the theory of strategic decision making, actor-network theory, the domain of law and economics, and the science of complexity.

An observer of economic development for several decades, Khwaja shows the relationship between technology and economics and how it affects social exchanges and trends.

• Language: English
• Publisher: iUniverse
• Release date: Oct 1, 2013
• ISBN: 9781475997408

Dr. Javaid R. Khwaja

Dr. Javaid R. Khwaja earned a doctorate in economics from Duke University. He has taught at several business schools and also has many years of experience with American businesses. He currently lives in Missouri.

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Table of Contents

List of Illustrations

List of Tables

Preface

I.   Angles of Vision

The Rationality Postulate

The Process Of Ideation

Inter-Disciplinary Orientation

Epilogue

End of the Chapter Notes

PART I:    Calculus Of Selection And Scarcity

II.   Value: A Historical Quest

Stability of Value: The Focal Point of Modern Economic Science

Mercantilist Pursuit Of Species As A Source Of Value

Portents Of Modernity: Physiocratic Reaction To State Intervention

A. R. J. Turgot: Passage To Classical Economics

Smithian Paradox Of Value In Exchange & Value In Use

Ricardian Rationale

Marxian Dialecticism

Marginalist Transformation

Jevononian Calculus Of Stimulus & Response

Edgeworthian Takeoff Into Indeterminacy of Barter Exchange

Austrian Theory of Value

Cournot Revival and Walrasian General Equilibrium System

Paretian Economic Welfare Paradigm

Scissor & The Scale: Marshallian Magisterium

Post-Marshall Paretian Revival

Revealed Preference

Social Welfare Functions and Community Indifference Curves

Arrow’s Impossibility Theorem

End of Chapter Notes

III.   A Digression* Into Capital Theory

American Contribution to Capital Theory: Irving Fisher

Ramsey-Clark-Knight Parable and Austrians

Ramsey Optimality: Long Term Growth

Cambridge Capital Controversy

Endogenous Growth

End of the Chapter Notes

IV.   Transition to Modern Theory of Value

Economic Analysis And Mathematical Programming Wald Rules

Shadow Prices and the Dual

Activity Analysis and the Primal

Integer Programming Extensions Into Operations Research

Criteria of Optimization

Modes of Preference Ordering

Utility Function: A Figure of Merit

Expected Utility and Uncertainty

Net Revenue Function

Multiple Criteria Functions

Bounded Rationality As A Theoretical Critique

End of the Chapter Notes

V.   Structure of an Exchange Paradigm

Microcosm and Macrostructure

Aggregation By Consumers

Aggregation By Commodities

Markets and Economy: A Systems Analysis Approach

The Penumbra of Approbation and Equilibrium

Computable General Equilibrium (CGE)

End of Chapter Notes

PART II:    Challenge And Response: Expanding Frontiers

VI.   Products And Processes In Engineered Systems*

Products

Processes of Production

Innovations and Tempo of Economic Activity

Innovations and Engineered Systems

Cost-Benefit Ratio and Engineered Systems

Innovations and Market Structure

Diffusion of Technology and Innovations

End of Chapter Notes

VII.   Strategic Behavior and Exchange I

Mutually Inclusive Decisions

Tragedy of Commons

Existence and Uniqueness of the Game Equilibrium

Pursuit-Evasion

Typologies of Theory of Games

Statics and Dynamics

Backward and Forward Inductions

Signalling in Exchange

Gertner, Gibbons and Scharfstein Form: Asymmetric Game

Principals, Agencies and Franchises

Risk Assets, Utility Functions and Strategic Decisions.

Dutch Books and Arbitrage

End of the Chapter Notes

VIII.   Strategic Behavior and Exchange II

Conflict Resolution and Strategic Decisions

Bargaining

Core and Theory of Strategic Decision Making

Innovations and Strategy of Cooperation

Coordination Failure and Economic Activity (27)

Predictions Markets

End of the Chapter Notes

PART III:    Perimeters Of Strategy

IX.   Socioeconomic Domain of Exchange

Social Exchange Theory: A Historical Perspective

Generalized Exchange Versus Restricted Exchange

Social Exchange and Social Choice

Network Experimentation as a Social Good

Social Exchange and Networks,

Formation of Networks

Actor-Network Theory (ANT)

End of the Chapter Notes

X.   Domain Of Law And Exchange I

Introduction

Law And Economics Movement

Transaction Costs and Social Choice

Transaction Costs and the Money Market

Economics of Property Rights

Intellectual Property Rights (IPR) and Information Goods

Vertical Integration and Property Rights

Product Bundling and Information goods

Strict Liability in Torts

Economics Of Organized Crime

Organizational Crime

Efficient Market Hypothesis

Inside Trading

Insider Trading & Information Markets

End of Chapter Notes

XI.   Domain of Law and Exchange II: Some Basic Considerations

Introduction

Theory of Strategic Decision Making

Rules and Standards

Behaviorism and the Domain of Law and Economics

Scarcity and Rationality

Behaviorism and Evolutionary Biology

End of Chapter Notes

XII.   Complexity And Economic Science

Introduction: A Shifting Paradigm

Economics and Paradigm Shift

Raison d’être: Portents of Complexity in Economic Thought

Nature of Dynamics in Economic Thought

Complexity Theory and The Economy As An Adaptive Nonlinear Network

Complex Exchange

Agent Heterogeneity and Uniqueness of Equilibrium

End of the Chapter Notes

XIII.   Quasi Market & Nonmarket Exchange

Introduction

Information Paradigm And Logistics

Information Goods Revisited

Role of Databases & Logistics

Information Management

Imputations, Shadow Pricing & Cost-Effectiveness

Informal Economy

End of Chapter Notes

XIV.   Network Exchange and the Extent of Market

Introduction

Firms Versus Market

Markets or Networks

Complex Financial Networks

Contagion and Systemic Risk

End of the Chapter Notes

XV.   Epilogue

Prospects For Further Research

End of Chapter Notes

About the Author

List of Illustrations

Chapter VI

Figure 6. 1 Impact of Innovations on Marginal Revenue

Figure 6.2 New Product Development

Figure 6.3 Impact of Innovations on Marginal Cost

Figure 6.4 Design Process Hall

Figure 6.5 Anatomy of Design Rosenstein-English

Figure 6.6 Design Process Asimov

Figure 6.7 System Designing Kline-Lifson

Figure 6.8 Idea Screening.

Figure 6.9 Concept Devepment and Testing

Figure 6.10 Technical Implementation

Chapter VII

Figure 7.1 Strategic Complements and Strategic

Substitutes (Cournot & Bertrand)

Figure 7.2 Strategic Substitutes.

Figure 7.3 Strategic Complements

Figure 7.4 Limit Pricing

Figure 7.5 Extensive Entry Form

Figure 7.6 Sales Share Extensive Form

Figure 7.7 Quality Choice with Perfect Knowledge

Figure 7.8 Pooling and Separating Equilibria

Figure 7.9 Gertner, Gibbons and Scharfstein Form

Imperfect Knowledge Monitoring

Figure 7.10 Principal Versus Agent Perfect Knowledge

Figure 7.11 Franchiser versus Franchisee Imperfect

Knowledge Monitoring

Figure 7.12 Simple versus Compound Lotteries

Figure 7.13 Risk Aversion or Risk Neutrality

Chapter VIII

Figure 8.1 Strategy

Figure 8.2 A Determinate Classical Resolution

Figure 8.3 Bargaining Game

Figure 8.4 Bargaining: Bargainer

Figure 8.5 Bargaining: Bargainer

Figure 8.6 Two Sided Market Game

Figure 8.7 Exclusive Equilibrium

Figure 8.8 Multiple Equilibria

Chapter IX

Figure 9.1 Exchange-Transaction Paradigm

Figure 9.2 Center Star Network

Figure 9.3 One Way Networks

Figure 9.4 Another One Way Network

Figure 9.5 Flower Network

Figure 9.6 Linked Star Network

Figure 9.7 Wheel Without Center Network

Figure 9.8 Wheel Network

Chapter X

Figure 10.1 Evolution of a discovery into Commercial

Line of Product

Figure 10.2 Role of IPR Protection and Coverage

Figure 10.3 Cosean Determinants of Vertical Integration

Figure 10.4 Reneging of the Contract Opportunistic Behavior

Figure 10.5 Sales Share Protection Deterrent Game

Figure 10.6 Contract Typology

Figure 10.7 Major Determinanats Valuation Variability

Figure 10.8 Cost of Precaution

Figure 10.9 Marginal Change in Expected Cost of Accidents

Figure 10.10 Learned Hand Formula

Figure 10.11 Organized Crime

Figure 10.12 Transaction Cost Approach to Organized Crime

Chapter XI

Figure 11.1 Coase and Strategic Behavior

Chapter XII

Figure 12.1 Hick Trade Cycles

Figure 12.2 Ceiling & Floor

Figure 12.3 Complexity

Chapter XIII

Figure 13.1 Continuum of Information

Figure 13.2 Logistics

Chapter XIV

Figure 14.1 Purchasers and Sellers Network

Figure 14.2 Demonstration Effect in Networks

List of Tables

Chapter II

Table 2.1 Ordering of Preferences

Chapter IV

Table 4.1 Arrow & Debreu Modes of Preference Orderings

Table 4.2 Psychological Distortions in Decision Making

Chapter VII

Table 7.1 Fudenberg-Tirole Taxonomy

Table 7.2 von Neumann Maxmin Matrix

Table 7.3 Normal or Strategic Form

Table 7.4 Prisoners’ Dilemma

Table 7.5 An Entry Game

Table 7.6 Outcomes/Payoffs Table

Table 7.7 Backward Induction Solution

Chapter VIII

Table 8.1 Payoff Matrix

Chapter X

Table 10.1 Disposition Of Legal Rules On Bundling

Chapter XIII

Table 13.1 Informal Economy in 1999-

Preface

This study grew out of many years of ensuing speculation, since late nineties, though just before the unleashing of the phenomenon of Internet. Its universe of discourse has largely remained within the ramifications of JEL description of thought since 1925, though it was supported in chapter II, by earlier analyses, in order to provide a proper perspective. This study is aimed at, blending the interdisciplinary range, and filling the great vacuum that has existed, between current conventional economic theory, theory of strategic decision making, actor-network theory, domain of law & economics, and the science of complexity. There have been many specialized studies, though without the unique focus, that the present work aims at providing.

My own thinking and long-term points of view, were greatly impacted by Prof. S. A. Abbas, and his associations with University of Panjab, Lahore, Pakistan, Columbia University, USA, McGill University, Canada, and UNCTAD. It is essentially, an applied approach to economic science, flowing through him, from Jan Tinbergen Rotterdam Economic Institute, Holland. I hold great gratitude to Professors, J. J. Spengler, Charles E. Ferguson, H.H. Winsborough and Philip M. Marcus. My words, I think, are not sufficient to express that. Thanks are also due, to all others too, who made completion and publication of this study a reality.

Javaid R. Khwaja

Winter 2013

Chapter 1

Angles of Vision

To live is to war with trolls in heart and soul

To write is to sit in judgment on oneself

Peer Gynt

—Henrik Ibsen

Like Monsieur Jourdain in Moliere’s Le Bourgeois Gentilhomme who was surprised at learning that he had been talking prose all his life, so in everyday life persons live and interact, and know so much about socio-economic reality without ever having attended a formal lecture of social science. Nature of practical realm is such, that ethical and economic considerations, get juxtaposed and merged together. The title of this chapter, is reminiscent of Hirschman’s (1980) Frank E. Seidman Award Lecture, Morality and the Social Science: A Durable Tension, in which he considers economics, as a product of Machiavelli-Montesquieu-Smith-Marx tradition. From seventeenth century onwards, the weltanschaung of the social science, has been narrowed down, and has come to be known as wertfreiheit. Contrary to this, Hirschman suggests, that

The mutual exclusiveness of moralizing and analytical understanding may be nothing but a happenstance reflecting the particular historical conditions under which scientific progress in various domains was attained.(1) (2)

Money income as visualized by the economists as earned, and it accrues through an application of various elements, imparting value and productivity, in a specific and technically described proportion and process. These factors or elements, have been traditionally categorized, by the economists, as land, labor, capital and enterprise, due to their analytical properties, though they assume specific forms and shapes, generally known as goods and services, in the open market. Thus the act of earning, needs to be considered in terms of self-interest, as a motivation manifested in behavior, as against ethical norms, and considerations, in broader liberal arts context. An act of earning, indeed forms, the basis of all claims, (3) in such a construct. Various disciplines of liberal arts, add and impart multi-dimensionality, to an otherwise strictly economic principle of scarcity, being the environment for economic activity. The two archetypes, that emerge, for instance, in the case of claims are, economy versus polity. While self-interest guides the individual, as the basic unit of analysis in economics, it is the public interest, that leads the way to an improvement of the performance, according to the political criterion of unanimity. (Buchanan 1987) Justice consists, in an orderly and fair settlement of claims. It is of the essence of enforceability of the contracts, and the transferability of the claims, to private property rights, as constituent part of the doctrine of political economy, given the ideal of social institutions.(Rawls, 1971) In an exchange oriented political process, agreements emerge from the revealed preferences of individuals, into observed political outcomes.(Buchanan, 1987) Economics in this multi-dimensional setting, provides a set of symbols, and a syntax, to the entire debate of rights, duties and privilege in the modern society:

A policy oriented analysis has to be based upon a complete framework broad enough to allow comparisons of alternative choice patterns. General Systems Theory essentially provides a point of view in context of an inherent order, regularity and nonrandomness. (4) General Systems Analysis involves analogies which are of course, involved in all abstractions. Thus equivalence relations may be postulated between the systems in such a way that may not represent correctly, and thereby the system may prove to be abortive. These dangers are most probable in social sciences and less probable in physical systems, while biological systems are somewhere in between. Social systems do not allow a possibility of controlled experiments and only experiment we know of, is human history itself. Thus history in this context defines capacity of theory to survive over alternative circumstance. A generalization based upon practical understanding of present, requires of necessity, information about the past. (4)

Thus knowledge of liberal arts, in general, imparts insights and adds power to theoretical models, thereby, making them more useful. Human knowledge, has grown tremendously, over the twentieth century. Thus, the capacity for analysis, can be attributed and ascribed to insights, afforded by the portrayal of human conditions, in historical as well as literary narrations, and descriptions over the ages. The point is particularly illustrated, and exemplified by Hirschman (5) pertaining to an understanding of social reality, and its laws of change, inherent in the kind of cognitive style that hinders or promotes understanding. Problem of excessive paradigmatic thinking, and application, particularly comes out more thoroughly, in Kuhn-Popper controversy in Philosophy of Science (1965), on questions pertaining to logic of discovery, and dangers of normal science. (6) Kuhn especially emphasizes, the pre-existing research agenda, of the relevant community of scientific interest, labeled by him as rules of game or an edifice, an organized structure of science which provides the scientist with a generally accepted problem-situation. Contrast this, with the dictum A. N. Whitehead a generation earlier, of an elucidation of immediate experience as sole justification of a thought. Popper on the other hand suggests, that science is essentially critical: that it consists of bold conjectures, controlled by criticism and it may therefore, be described as revolutionary. (7)

Economics at deeper level of socio-economic controversy, raises questions about the possibility of equilibrium, versus persistence of disequilibrium, and growth, in terms of open and free markets. These questions focus, upon the smoothness and optimality characteristics, of the socio-economic processes, as contrasted to inefficiency and wastage of resources. Assumption of self-interest, about homo economicus in this context, was supposed to produce, a stable equilibrium system. (8) If such an assumption is relaxed, it is argued, then an evolutionary process, will tend to reduce the fitness of individual actors, to an extent, that they are altruistic, while the overall system will reap, the benefits consequent upon altruism, and will tend to grow faster. (Simon, 1993) This differential growth, is attributed to the element of cooperation, and the consequent synergistic contribution to the overall system output. On the other hand, individual altruists suffer and are eventually liquidated in an evolutionary contrast.(9) In a completely structured political system, as in economic realm Individuals choose identifiable economic interest. As a matter of contrast, these actors pursue, their private objectives and interests, that they cannot appropriately attain, through market exchange processes. (10) While economic exchanges, can be easily evaluated, according to criterion of efficiency, inherent in the divisibility of goods and services, changing hands. This evaluation, is made possible, by a comparison and contrast, of actual political decision rules with the rule of unanimity, reflecting the choice of relevant political aggregate. (11) In modern times however, the focus of economists’ attention, has been, more in the direction of technical, rather than normative considerations, as celebrated in the Veblen’s concept of trained incapacity.(12) Nevertheless, related fields of liberal arts seem to have a definite role to fill the gap. With the development of human capital formation approach, as a more formal component of economic theory, since early sixties, this gap between economics and other disciplines, has been increasingly bridged. It may be observed en passant, that Arrow (1994), holds on to his "Learning by Doing (1962) argument, that it is the society, that reaps the permanent reward, (13) ascribed to learning, since the serial number of the machines, is raised, and labor requirement of production is reduced. His newer argument, about individualism and socialness of the knowledge affirms, Information may be supplied socially but to be used it has to be absorbed individually. This he considers, is not very compatible with neoclassical paradigm, particularly not with rational choice." Despite his emphasis, on social dimension, Arrow does consider the alternative possibility, that growth in knowledge may be exogenous to the economy, in addition to the postulate, that knowledge grows as inherent consequence of economic process. Also he reviews, the Hayek’s classification of scientific and tacit knowledge, and observes, that Hayek does not assign due significance to the technological knowledge, and the relative ease with which it is transmitted.

The Rationality Postulate

Rationality is the most pervasive assumption in most disciplines of the liberal arts. Anthropology, sociology and psychoanalysis, greatly emphasize the functional reasoning. A behavior pattern, that is functional, is usually goal oriented. These goals need not be explicit. They can be latent or conscious. A presence or an absence of these goals, determines whether or not behavior patterns or institutions are functional. Economists have largely been involved, with the consequence of rational choice, as contrasted to the process. This enables the economist to perform the task of determination of values. Contrasted to this, is what psychologists refer to, as the notion of rationality. Their concern is with the process of thought rather than the outcome. (14) Rationality is interesting, only if its application, produces non-trivial solutions. This is in terms of styles of behavior, that follows definite goal achievement, within the constraints specified, for such a mode of action. If a goal is suggested for example, as maximization of performance in terms of a criterion, e.g. expected value, such a criterion function yields principles, and postulates that allow systematic ordering of preferences, in a consistent manner. On the other hand, constraints and conditions, arise out of the technical characteristics of a problem situation. These characteristics, may pertain to elements, exogenous (e.g. environments) or endogenous (e.g. characteristics of organism) to the system under study. In this context, rationality consists in logically explicit formulation of assumptions, about goals and constraints from a valid premise

A typical system involves the objects, attributes, and parameters of the system. Parameters of the system, include input, process, feedback control, and a restriction. A system state, is described by the parameters of the system, by taking a number of different values. Attributes of the parameters, are the properties that allow, assignment of a value, and a description. Relationships, link the objects and the attributes, and may be first order or second order. A first order relationship describes, the functional necessity, while a second order relationship involves complementarity. Synergy is, for example, a complementary and therefore, second order relationship, where cooperative action of the independent agents, produce together total effects, that may be larger, than the sum total of their independent effect. (15) Mutation and selection, defines and determines, the process of learning, that produces common values, and indeed, most taste patterns. Contrasted to this, in an exchange economy, the process of learning produces technology. Technology, focuses and aims, at production of goods and services, exchanged for services of factor inputs, in the market, and used by the consumers, for the satisfaction of their demand. (16) Ultimately, taste and technology relations together, determine the economic values, in terms of interaction of supply and demand. These two types of matrices, indeed, are the forces behind the market determination of values. Tastes determine, what economists ordinarily call, utility function, which is also known as a criterion, or preference function as well. Subsumed under this catchword, is an entire set of behavior pattern, that has been traditionally considered, by the economists to be rational choice. Despite the actual practices, the model structure is quite resilient and flexible enough, to absorb and enlarge the orbit of analysis, with minor alterations in the utility function, to include a whole range of behavior pattern, otherwise considered to be irrational and emotionally determined. (Becker, 1962) (Frank, 1987, 1988) (Hirschleifer, 1978) (17) According to Scitovsky (18), economists have traditionally abdicated their search about consumer behavior and have tended to emphasize that consumers know what they are doing the best they can to an extent that can be considered to be unscientific. That a more thorough investigation into consumer behavior, in terms of physiological psychology, can indeed render, a better and clearer view, of the equilibrating tendencies between consumption and production processes and patterns. Thus traditional emphasis, on mass scale production utilizing economies of scale, and meeting consumer demand, at most popular level ends-up, producing lesser variety and leaves little room, for the exercise of novelty. (19) Beyond an application of inter-disciplinary approaches strictly to consumption, such a line of reasoning also shows, that the traditional theory of consumer behavior, ends-in ignoring, the finer differences between various categories of necessities, comforts, and luxuries, attributable to scientific considerations. (20) Also, that an extension of such considerations, can yield substantial insights and information, into questions of status seeking, and status consumption as well. (Scitovsky, 1976, pp. 108-11)) An important contribution of Scitovsky, is particularly the emphasis, that he places upon consumption as a cultural activity, involving stimulus enjoyment. (Scitovsky, 1976, pp. 226-36) Thus, in Scitovsky paradigm, the entire question of cultural skills, is brought into limelight, since it is a major driving force behind taste. In a pedestrian sense, a basic level of consumption skills, is ordinarily imparted to all the members of society, as the minimum sensible level of learning. The extent and the nature of specialization in consumption skills, is however, determined by the degree and intensity, to which stimulus satisfaction: learning is pursued, by the individual consumer. (Scitovsky, 1976, pp. 189-92) He goes on to argue, that the fine arts are:

vast stocks of past novelty accumulated over centuries and… . as if culture or consumption skills are the windows through which to watch and enjoy a colorful procession that passes whether or not it was viewed and enjoyed by anybody (Scitovsky, 1976, p 227)

What economists have done, over the ages of the development of economic thought, has been an enumeration, of the various ways, an economy adds to human welfare, in terms of its nature, extent, and composition. Nevertheless, there is a lack of emphasis upon, the economy’s place in the total scheme of human satisfaction. (Scitovsky, 1976, p 80) An economy in terms of various kinds of circular flows, establishes a system of reciprocity, in rendering and receiving satisfaction, and the need to pay, what a market price occasions it. Psychologists on the other hand, often talk about work as a source of stimulation, and the fact that it is, itself pleasant. Thus we talk, in terms of structure of marginal utilities, from various kinds of work, just like marginal utilities from various kinds of goods and services, in consumption. When work is challenging, the reinforcing effect of rising arousal, usually carries one, beyond the point of optimum comfort, often creating tension, and an inner compulsion, to continue, until the challenge is met. (Scitovsky, 1976 p. 93) Economics studies, the calculus of stimulus and response. Thus, human action is determined, by the responses and reactions of human mind, to external shocks and stimulants. Animal behavior, contrasted to human behavior, demonstrates no major differences, between what an animal may do for itself, and what it performs for instrumental reasons. Instrumental and intrinsic characteristics and considerations, involve a complicated process of reconstruction in human behavior. (Martindale, 1978) (18) Thus the measure of civilization, is determined by the extent, and the nature of separation of instrumental and intrinsic elements. On the other hand, human mind is indivisible. It does not possess water-tight compartments, specially designed to deal with specific aspects of human life i.e. religious, economic etc. Consequently, human mind acts as a unit, with individual actions demonstrating, profound relationships, and bearing common characteristics. Since individuals are the basic units, composing society, the attitudes and actions of society, are interrelated. (Mitroff & Kilmann) (19) Economics as the study of decision process, focuses and discovers, economic interrelations, arising out of individual motivational structure. Thinking and feeling, are two diametrically opposite routes, that bring an individual to a point of decision. Individuals tend to specialize, in one of the two. The process of thinking, generalizes from purely personal to purely impersonal. On the other hand, feeling individuates and personalizes:

The highest form of feelings are found in ethical systems, literature and art, which stress the uniqueness and individuality of all people—the fact that each person is treated as a unique end in himself or herself and not merely as one of an infinite number of similar means to be manipulated for society’s ends. (Kant) (20)

Compared to the views of psychologists, the economists’ outlook, has been summarized by Becker (1962). He observes, that the economic theory, has grown out of notions, about the behavior of a typical unit (e.g. a representative firm case of Marshall) in the market. In developing the market behavior, economists consider a general tendency, where rational unit responses would tend to outweigh irrational ones. (Becker, 1962) He also differentiates, between the impulsive and the inert behavior patterns, bounded by a range of opportunities, specified in the availability of income, for consumption and non-negative profits for production. According to him, opportunity sets apply , . . . . to all decision units with limited resources. (21) Consequently, we have a theory, that predicts behavior patterns of a typical actor. In such a paradigm, actual aberrations do occur, but only as exceptions proving the general rule, for the point of decision.

Economics and psychology, have however, traditionally considered, behavior of rational agents in the market place, from different angles. Psychologists have typically depended upon, experimental laboratory approaches, structured questionnaires, as well as naturalistic observation, as sources of statistical knowledge, while economists have tended to rely, to a greater extent, upon explanation, in terms of utility theory, and an objective notion of rationality, that has allowed forecasting, without grueling experience, of having to record, actual individual and personal responses of people. (Simon, 1969) (22) In the economics profession, following the leads of psychology, George Katona has tended to cast doubts, on the efficacy of traditional constructs, and has emphasized, the usefulness of elements, like consumer expectations, perceptions, motives and intentions surveyed by means of survey techniques. (23) Works of Herbert Simon, have also been, in a somewhat similar direction, with great deal of weight on cognitive processes. His seminal work entitled, Models of Man (1957), postulates a theory of bounded rationality, contending that the cognitive limitation, leads rational actors, to develop simplified models, in order to meet challenges of reality. Thus to be able to understand and forecast,

. . . we must understand the way in which this simplified model is constructed, and its construction will certainly be related to ‘man’s’ psychological properties, as a perceiving, thinking and learning animal. (24)

In his 1978 Richard T. Ely Lecture, Simon compares and contrasts, his earlier work on the notions of substantive rationality (classical model), with his more recent thinking on procedural rationality (as the learning in the form of reaction to perceived consequences). This second kind of concept, arises due to possibilities of imperfect competition, and uncertain environmental events—and other such expectational elements. His problems with rational expectations approach, consists in terms of relatively inadequate attention, paid to the problems of potential and attempted mutual outguessing behavior. According to him:

Complexity is deep in the nature of things, and discovering tolerable approximation procedures and heuristics, that permit huge spaces to be searched very selectively lies at the heart of intelligence whether human or artificial. A theory of rationality that does not give an account of problem-solving in the face of complexity is sadly incomplete. (Simon, 1978 p. 12)

Concerns such as these, are mutually shared, not only by the economists, and the cognitive psychologists, but also by the historians, and sociologists of arts and knowledge alike. Instrumental and intrinsic characteristics, involve a complicated process of reconstruction in human behavior, while there are no large enough gaps between the two in animal behavior. (Martindale, 1978) (26)

Historians of thought like Goodwin (1972, pp. 409-15) (27), have proposed a new paradigm, specifying processes in network of links, between theoretical formulations, professional enunciation of theoretical formulations, expression of non-professional opinions on economic policy, and mode of economic activity. Such a model of thought tends to highlight, like earlier illustration, the development of economic theory and its social context. Decades, since the publication of this paradigm, have witnessed a greater popularization, of rational expectations and adaptive expectations approaches, subsumed well within Goodwin paradigm. Indeed the very development of these approaches itself, was determined by the socio-political contexts of sixties and seventies. Economists had been indeed subjected to criticism by the other social scientists who urge(d) . . . . the revision of… . fundamental assumptions in the light of modern experimental psychology, sociology or even unprejudiced simple direct observation. (Leontief, 1948, pp. 388-411) (28) Such criticism has led many economists, in recent time, toward the development of more comprehensive and highly specialized models, though the transition to newer sets of ideas has been painfully slow, imposing its own toll, in terms of misplaced policies. Many of these works, have followed the kind of model, developed by Leon Walras (Leontief, 1948, p. 384) in terms of general equilibrium analysis, as well as, exploring the decision-making rules, that lie behind the sensitivity, of the crucial variables involving dual causality, feedbacks, and feasibility of adaptive behavior, in context of socio-economic theory. (Murphy, 1964) First half of twentieth century, observed an explosive growth of literature, in the general domain of macroeconomics, largely attributable to Keynesian departure, from the classical assumption of perfectly competitive markets. Indeed, the phenomenon of greater acceptability of an expectations approach, was due largely to a failure of Keynesian prescriptions, and the consequent challenge posed to the credibility of economic policy. The phenomenon of money illusion, and the associated Phillips Curve Analysis, furnished to the economic profession, since late fifties, is an important category of ideas, defining the correlation of unemployment, and the rate of inflation. Extending the earlier neo-classical analysis, more recently Robert Lucas and Neil Wallace of the University of Chicago, have contributed greatly towards the development of the Rational Expectations Approach, as an explanation of the phenomenon of Stagflation. This approach asserts, that expectations and perceptions are rationally developed, and treats them internal, to the pre-existing data, emphasizing that it is the perfect foresight that matters most. However, as George Katona of the University of Michigan points out, this approach does not attach any significance to an observation and measurement of actual expectations:

behavioral economists have measured people’s expectations of incomes prices and some other variables for the thirty years and have established that expectations are extrapolative only under certain circumstances, while under other circumstances they differ from past trends.(Katona, 1978, pp. 75-77) (29)

The Process Of Ideation

Obscurities, ambiguities, and errors, abound in social phenomenon, to a much greater extent, than in the domain of physical biological fields. Consequently, the comprehensibility of social phenomenon, in strict scientific sense, is substantially reduced. The process of ideation in this domain, follows the usual process of problem solving. An elucidation of a scientific discovery, consists in a narration of a series of procedures, that fully describe the magnitude and the course, that the scientific improvement, has followed. While such a course of events may be routine, and usual, in an industrial, and other physico-chemical processes, it is considered to be unusual in social sciences. Important social science discoveries are

. . . . typically counter-intuitive, shocking, and concerned with unintended and unexpected consequences of human action to vocation of the social sciences, can in good measure be attributed to this compulsion to produce shock and paradox.(Hirschman, 1980)

These remarks, hark back to the polemics of the philosophy of science, and the exchange between Kuhn and Popper, with the contributions of Alfred North Whitehead:

the work of scientist consists in putting forward theories… . . The question how it happens that a new idea occurs to a man—whether it is a musical theme, a dramatic conflict, or a scientific theory—may be of great interest to empirical psychology, but it is irrelevant to the logical analysis of scientific knowledge that there is such a thing as a logical method of having new ideas, or a logical reconstruction of this process that every discovery contains ‘an irrational element’, or ‘a creative intuition in Bergson sense. (Einstein 1962 p. 52), (30)

In a similar way Einstein speaks of the… .

search for those highly universal laws from which a picture of the world can be obtained by deduction. There no logical path leading to these laws. They can be reached by intuition, based upon something like an intellectual love (‘Einfuhlung’) of the objects of experience". (1962)

While Kuhn contrasts his approach, which despite his many points of agreement with Popper’s Logic of Discovery, as a gestalt switch that divides his readers into two or more groups, differs in a meaningful way, and surmises that popper’s duck may at last become his rabbit." He suggests, that normal work of a scientist, presupposes an organized structure of assumptions, a theory, or a research program, needed by the community of scientists in order to discuss his work rationally: (Popper, 1965, pp. 1-58).(31)

Normal science… is the activity of the non-revolutionary, or more precisely, the not-too-

critical professional: of the science student who accepts the ruling dogma of the day, who does not wish to challenge it, who accepts a new revolutionary only if almost everybody else is ready to accept it—if it becomes fashionable by a kind of bandwagon effect that each scientific domain, and that the history of science consists in a sequence of dominant theories, with intervening revolutionary periods of extraordinary’ science; periods which he describes as if communication between scientists had broken down, owing to the absence of a dominant theory.(Popper on Kuhn, pp. 1-58, 1965) (32)

Tracing the context of the polemics to the first quarter of this century, Alfred North Whitehead has been one of the most notable contributors. Well versed in mathematics and physics, he was:

. . . . to experience the shattering impact of new discoveries, of relativity and quantum physics upon the world view, that was implied by scientific materialism. ((Yankelovich & Barrett, 1970, p. 23) (33)

He espoused, a philosophy of organism based upon mathematics and natural science, with a firm view of a ‘calculable universe.’ He attacked the Cartesian tenet of reductive breakdown of complex states, into simplest elements, that are ‘clear and distinct’ objects, and are therefore, amenable to procedures, guaranteeing certainty of perception:

. . . . the absolute certainty without which knowledge would not be truly knowledge… a single ideal model of knowledge (which paradoxically, Descartes had generalized from his experience specifically within mathematics) that is to be imposed upon every field of research—a Platonic archetype of knowledge that must be approximated by any discipline to be truly scientific. (Yankenlovich & Barrett, 1970, p. 23)

Modern epoch in social and scientific thought, has often been characterized as the Cartesian-Newtonian age, exhibiting the overwhelming power of zeitgeist whereby, a climate of opinion has prevailed and persisted, for the last three hundred years. Cartesian paradigm, launched a program for mathematical science of nature, preparing the framework, for the domination of nature by machines, although the project was not to emerge clearly until much later. Elements of Cartesian paradigm, essentially emerge from analytical geometry, synthesized with Newtonian calculus, allowing dominance of technique, or technology. These abstractions were taken as ultimate concrete elements of reality in all realms of life, . . . psychological roots of what we called Cartesianism, relate to an instinctive readiness, to impose order on environments to control and master it, and systematize, classify, and objectify reality.(Yankelovich & Barrett, 1970, p. 177-79, 456-57) Thus a permanent paradigm of cause-and-effect, slowly evolved into existence, that was considered to be minimum sensible condition, for a generally acceptable scientific mode of analysis and argument. Hence, in social theory, an objective study of conditioned reflexes, was made possible in a world of stochastic processes, and probability distributions. Economics, like other fields of liberal arts, grew under the twists and turns, of these winds of scientific materialism, indeed the very publication of Wealth of Nations, was only thirty years after the death of Isaac Newton, and hundred years after Descartes:

Born and reared in the time honoured classical tradition of deductive reasoning the ‘child of Adam Smith’s mind’ has grown fond of powerful tools and techniques of logic, mathematics and statistics designed to give its conclusions an operational significance. The notion of an abstract universe of commodities is abandoned for good. The economists have at last come out of the apple-pie world." (Current scribe, 1962) (34)

In a purely economic domain, where claims are accounted for, and settled, in terms of legal tender of currency, these developments have been good deal easier, than in any other discipline of liberal arts in general, and the borderlands of economics in particular. Economists have traditionally depended upon the measuring rode of money, thereby narrowing down the universe of discourse. Nonetheless:

The Cartesian era which began with a theoretical bifurcation of man from nature has now developed to the point where that bifurcation is becoming a social and human fact… . On their own terrain, both psychology and philosophy in this century have been struggling to free themselves from the Cartesian straitjacket. (Yankelovich & Barrett, 1970, p. p. 187-88, 209) (35)

Indeed, economics fully shares these concerns of psychology and philosophy, in the domain of social exchange theory.

Inter-Disciplinary Orientation

Subsumed, under the category of non-economic factors, and beyond the explicit economic phenomenon, is the residue of socio-economic experience, that can be more preferably called and considered, a society’s socio-physical parameters.(Spengler, 1980, pp. xiii-xiv) Such an orientation, tends to reduce the element of scholastic eclecticism somewhat, making it easier to perceive, the socio-economic phenomenon. Capacity for non-trivial application of socio-economic theory has been varied over time as manifested in the process of challenge and response:

Economic thought consists in a variety of precepts and concepts made in response to sets of conditions and problems—response that after the passage of many centuries became transformed out of specific observations into organized sets of observations and finally a science… (Spengler, 1980, p.3)

Rostow (1961, 1962) has designed a scheme of stages on the basis of kind Of biological theory of process and pattern rather than a rigid Newtonian derivation from a few axiomatic assumptions. His differentiation in the initial enunciation of stages, from traditional stages to establishment of pre-conditions for take-off, is described as a set of social conditions, where structure is developed with limited production functions based upon pre-Newtonian science and technology, and pre-Newtonian attitudes towards physical world. (36) This essentially involves a belief that the external world is subject to a knowable laws. (Rostow, 1961) (Higgins, 1968, p. 181) (37) This is the domain of an inter-disciplinary approach and focus. It is indeed, the realm of historical controversy, that has pervaded the literature, art, philosophy and the economy, exhibited in the works of Kant, Hegel, and Marx in particular. Voltaire was the first exponent of social history or Kulturegeschichte contemporaneous with Isaac Newton. Remarkably, Rousseau was the first who coined the word moderniste, the very word that conveys the theme, pervading the works of major thinkers to this day. French and German criticism and thought, focused laying special stress, on matters of multiple interconnections of art and society. Writers like Montescieu and Taine, were particularly involved, with the questions of mechanisms of these interrelationships. German mind in particular contrast, was involved in abstract speculation e.g. philosophical significance of aesthetics. German philosophers added a new dimension, to the study of literature and society, and supplied the formal categories and more comprehensive, systematic orientation to these problems, a quality theretofore lacking. (Clark, 1978, pp. 238-38, 247) (38)

Immanuel Kant restricted knowledge to observable phenomenon that could give rise to empirical—scientific judgment. He considered taste to be very basically subject because it does not deal with the phenomena. Hegel on the other hand, considered this treatment of art to be overly restrictive since he considered: . . . . art as a crucial factor in the generation of knowledge, and secondly to defend aesthetics as a discipline capable of sustaining scientific analysis. (Clark, 1978, p. 249, Marx & Engels, 1962) (39) Marx went on still further and established sub-structural versus super-structural ramification about knowledge. He argued, that, it is not the consciousness of men that determines their being, but on the contrary, their social being that determines their consciousness. What perhaps got lost in the furor of ideological controversy, was the empirical fact, that such a dichotomy does indeed refer to an analytical domain, where variables do indeed determine each other simultaneously, as in the Walrasian system.

Early in this century, Max Weber explored self-defeating tendencies, arising out of the increasing complexity of bureaucracies, and large scale organizations, along with impact on areas as diverse as music, religion, economics, law and politics. He considered the modern age to be the age of rationalization with increasing systematization. By rationalization Weber implies, a modern factory system, whereby an officer in charge, or supervisor organizes, for example a line of products, with a view to maximize the quantity of output produced. This is a systematic endeavor, ensuring greatest pace, minimum effort, and least amount of the cost of production. This naturally involves, all the standardization, and the control, that such a production process may need. Such a rationalized society, is envisioned to have a standard of utilitarian proficiency," to adhere to. It amounts to greater formalization, and intellectualization, of the role of an individual in complex large scale organizations. He concludes that:

modern individual… . ends up being ignorant… . (and) complacent about conditions of life… . One of the most far-reaching consequences of rationalization is the secularizing of life… . Overdeveloped and over-institutionalized his need to order, systematize and master his world—and that, even though this trait is survival-related it risks being overdeveloped and defeating its original purpose. Yankelovich & Barrett, 1970, p. 458)

Herbert Simon argues, that in order to elucidate and enunciate, conditions of modern organizational and public life, economics as a discipline, will have to complement and construct, a theory, such, that adds a dimension of procedural rationality, to existing structure of substantive rationality, composed of elements, borrowed from neighboring disciplines of operation research, artificial intelligence and cognitive psychology… . (Simon, 1978, pp. 1-16) His earlier model of bounded rationality, was aimed at replacing, the traditional utility maximization approach. Such a model focuses upon, cognitive limitation. It is quite possible to incorporate, the sociological factors, such as social pressures, reference groups, acceptable roles and the inevitable course of family life cycle… ..(Morgan, 1978) (40)

Michael Ghiselin, and others have recently propounded, a realm of general economy, that is constituted, by the subdivisions of natural economy and political economy, referring to the Marshallian view, that economics is a subdivision of biology, but differing in an angle of vision. Political economy, in traditional scheme of things, emerged from natural economy, as a facet of social contract theory. Thus law and government, came to be considered, as third party, and need for such an intervention in exchange, was visualized to restore the natural order.

Language is quintessentially, the thing that makes us different from the animals… . infinitely creative… . a limited set of sounds… .—words—each of which has a distinct meaning… . according to rules that are known by both the speaker and the… . listener. (Bishop, 1993, pp. A1-A6) (41)

In this realm, where natural economy is not too sharply distinguished from political economy, economists’ terminology encounters, biological synonyms e.g. species/industries, mutation/innovation, mutualism/exchange, evolution/progress… . optimising/adapting… . (Hirschleifer, 1978, pp. 238-43) (42) George Homans (1961), Professor Kuhn of the University of Cincinnati, Charles I. Barnard, Herbert Simon and many others, have contributed substantially, toward the development and application, of what is known as, social exchange approach. It looks upon social activity, from the point of view of a gainful social transaction, whereby people get together, in order to generate and add value, to their social efforts and endeavors. This particular line of thinking, highlights a dimension of functional purposefulness, to social and psychological behavior patterns, making them more amenable to analytical scrutiny, particularly in complex organizational settings, fraught with all sorts of instrumental, as well as, intrinsic elements.

Epilogue

Story of economics, growing out of social thought context, is somewhat restricted to the history of past four hundred years, of modernist debate. This period of time, may be rather generally divided into three phases. The first originating, around year 1600, and characterized by a grope in the dark, in a futile attempt to correctly perceive modernity. The second phase, started towards the end of 1700, and followed even to this day, in spurts of revolutionary activity. In the third phase, strictly western experience starts spreading, and taking shape, in the form of a universal world culture, in which the idea of modernity… . loses much of its vividness, resonance and depth, and loses its capacity to organize and give meaning to people’s lives.(Berman, 1982, p. 17, 319-37) (43) Kulturegeschichte in this general context, can be said to have been characterized, by a universal search for, conclusions that can be drawn from the scrutiny of human events alone. Thus a move towards The particular, the distinctive, the unique manifested in events, institutions. persuasions and social customs characterizing the national spirit or genius, a concept conveniently vague enough to lend itself to a variety of interpretations. (Clark, 1978, pp. 237-38)

With the advent of 2000’s, it has become quite clear, that the modernist debate has been a source, greater for raising of questions, than providing answers. Nonetheless, the fact remains, that despite universal dislike of many groups, in the long run, modernization can’t be helped. It is a natural dictate of history. It can’t be helped against the increasing encroachment, and onslaught of world market, as well as expanding frontiers of human mind. This is a scene, of vast factories and rail yards, overshadowing industrial estates, and networks of communication, in backdrop of strong national states, along with large scale international corporations

". . . . of mass social movements fighting these modernizations above with their own modes of modernization from below; . . . . capable of most spectacular growth capable of appalling waste and devastation, capable of everything except solidity and stability (Berman, 1982, pp. 18-19)

Thus the maelstrom of modernity, is eroding the very basis of the superstructure, it aims at improving. The process has been particularly marked, and divisive in the less developed countries, where rates of change, have been tremendously greater than in mature societies, though the social impact has been similar. The modern phenomenon is one of anonymity (May, 1969) (44), in advanced countries, due to intensified density of population, concurrently with the industrialization and urbanization. Similarly in less developed countries, due to excessive growth of cities, population density has increased, causing similar impact. (Sjoborg, 1966, pp. 213-62) (45) At the outset of this century, the intellectual mood had been much grimmer and despair ridden with authors like Nietzche, Spengler as well as Weber. The later saw professionals of his times as:

Specialists without spirit, sensualists without heart; and this nullity is caught in the delusion that it has achieved a level of development never before attained by mankind. (Berman, 1982, p. 27)

He visualizes an iron cage, termed as mighty cosmos of the modern economic order, determining the lives of all individuals who are born into this mechanism, consisting of bureaucratic rules, denying human dignity and freedom. Weberian themes, continued to emerge and re-emerge through the entire century, as the basis of various alternative paradigms, but the mood by the close of the century seemed to be more triumphant, in the face of increasing realization of technological potential, and resource discovery, along with the crumbling walls, between what came to be known in modern times, the west and the east.(Vaclav Havel, 1990, pp. 9-20) (46) Nevertheless, the ceteris paribus of the social scientific models, has been too large. This has allowed, greater analytical possibilities, in terms of modeling of a series of separate components, thereby reducing vagueness, that a totality imposes, and inculcating lesser intellectual extravagance on the one hand, and increasing segmentation, and disintegration of thought, on the other hand, with greater emphasis, upon special interests, locked in an endless zero-sum struggle. (Thurow, 1980) (47)

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End of the Chapter Notes

¹.   For economics in the sense of conceptualized, systematized, generalization-yielding science did not come into being until seventeenth century. Scientific discussion of economic matter therefore lagged behind that of ethical matter, more so than discussion of political matter with greater emphasis upon public interest and less explicit emphasis upon self interest. Always, however, there was some overlap between ethics and economics, in substantive concern and in emerging analytical orientation. Ethics as A.J. Lotka pointed out, functions as regulator of conduct in close analogy to the manner in which logic functions as a regulator of thought." Joseph J. Spengler, Origins of Economic Thought and Justice, Political and Social Economy Series (Ed.) C. Addison Hickman and Arthur and Arthur H. Ford, Carbondale, Southern Illinois University Press, Carbondale, 1980, P. 115. Also see for references on Albert O. Hirschman, The Search For Paradigms As A Hindrance To Understanding, World Politics, (22) 1970, pp. 329-43. For Seidman Lecture, Morality and the Social Sciences: A Durable Tension, Reprinted in Essays in Trespassing Economics to Politics and Beyond, New York: Cambridge University Press, 1981, Chapter 8, Frank E. Seidman Award Lecture, September 1980.

².   In the history of social thought ethics and economics converged in the realm of law and jurisprudence. For even though ethics was treated as a science mainly of duties binding on the conscience, while laws referred to general rules of external human action enforced by a sovereign political authority, ethics could function as a source of criteria in the light of which to judge moral quality of these general rules. With the greater formalization of ethics and economics, it was recognized that metawelfare principles might