Economists Should Learn from Plural Rationality Theory


 Multiple or plural rationality theory, aka “cultural” theory, opens up the portfolio rationalities guiding economic theory and policy.  In traditional economies this space is filled by the market vs. state alternatives.  As organisational principles, cultural theory contends, this dichotomy leaves out important alternatives which should also be included when considering solutions to economic problems.  In a recent workshop seminar at the renowned London School of Economics book author, anthropologist, mountain climber, former professional soldier, and organisation theorist, Michael Thompson  presented his new book (Organising and Disorganising. A Dynamic and Non-Linear Theory of Institutional Emergence and its Implications. Triarchy Press, Axminster 2008) and his case for cultural theories applications.  As empirical examples he used a number of recent solutions to difficult decision problems, such as the Brent Spar fiasco, the new construction of the Emirates Stadium in London and how Nepalese tribes and Swiss Alpine villages deal with water use and forestry.  In this way, Thompson shows that the inclusion into the decision realm of unconventional actors and unconventional instruments enabled stable and sustainable solutions to heavily contested problems.

 

Cultural Theory adds two (or three) more typical world views or attitudes (“myths of nature”) to the market-state dichotomy.  Markets in this view are associated with “individualist” behaviour, characterized by everybody seeking his self interest.  State intervention is connected with “hierarchy”, where top-down solutions are proposed.  In addition, cultural theorists identify “egalitarianism” (caring and sharing) and “fatalism”, the latter as a passive way where suspicion and lack of trust induces persons to stay out of active solutions.  Sometimes, the model abstraction of the “hermit” is also introduced, to denote such persons and groups who have completely withdrawn from society.

 

Now, when the Arsenal Stadium needed to be rebuilt because it had become too small, the promoting actor in this decision process was the market-based group, the Arsenal Football Club, who wanted to build a new state-of-the-art stadium by obtaining permission to demolish two streets of adjacent terraced houses, thus destroying community life and making existing businesses obsolete.  The second, hierarchical actor, Islington City Council, was interested in keeping Arsenal in the borough, and was initially willing to go Arsenal’s way.  But then they got a massive problem at their hands when a third actor emerged, the Highbury Community Association, bitterly opposing these plans.  While this group wanted Arsenal to stay within the community (many were Arsenal fans), they were opposed to having the houses demolished and the social structure of the neighbourhood destroyed.  In this sense, they can be called the egalitarian actor.  As a massive political campaign arose, with thousands of signatures, demonstrations, television debates, etc. in its wake, it became clear that the original only solution proposed, to grant the planning permit Arsenal, did not fly.  The community council dug up two property surveyors who had found a new location, just half a mile away, large enough for Arsenal, which nobody had thought of before.  This turned out to be the optimal solution:  Arsenal got is beautiful new stadium;  the Islington Council kept the club and extracted large planning premium in place of the old stadium;  and the Highbury Association preserved the local community, by maintaining the streets and houses around the old stadium, got the businesses relocated and also kept the club close in the neighbourhood.  Without taking the egalitarian actor into account, a very controversial, community/damaging solution would have been enforced.

 

It needs to be remembered that cultural theory is not classifying persons as containing only one or the other world view, but their unit of analysis is the way to organise society.  Thus, as I pointed out at the above seminar, realistically every person contains more or less all of the traits (hierarchist, egalitarian, individualist, fatalist) within herself, everybody with different weights – which may also shift depending on the respective context.  Thus, people will decide differently in different situations.  The rational homo oeconomicus does not exist in reality.  While a parent may decide in the egalitarian way when organising a communal kindergarten, she may adopt a hierarchical attitude when dealing with dog owners on the playground, fatalistically when a road is being built next to her house, and as a hermit when disillusion with the political process keeps him away from involving himself in running the school of his children.

 

Now, on to economists.  Of course, economists have not all and only presumed the homo oeconomicus as their object of analysis.  But many have, and it can be stated without risk that mainstream economics is definitely too simplistic about human behavior assumptions.  But let me remind the reader of the introduction of expectations into economics (even though rational expectations theory exactly supposes the one-dimensional homo oeconomicus), of neo-institutional economics which recognises that persons act under (bounded) rationality and that the economy is made up of feeling persons and not super-rational, constantly interest-maximising individuals and firms, and, most importantly, to Ernst Fehr’s (Zurich) experimental economics with its empirical proof that altruistic behaviour exists and is rational.

 

In my take, the major innovation of cultural theory is (as theoretical,  abstract and simplifying its assumptions are) that the decision space for a large number of economic and social solutions must be opened up much wider than to the market-state dichotomy.  The 4/5 types of worldviews should all be systematically explored, groups representing them, or other types of opinions, need to be included into the relevant decision processes.  To just have market actors, i.e. businesses and state actors, civil servants and their chosen experts included, produces unstable solutions where those whose interests are violated will act to circumvent the solution.

 

I myself have used a similar model when proposing a new governance structure for global economic policy making (How to Run the World Economy.  BMF Working Papers 1, 2007, Vienna).  In the language of cultural theory, I propose a “clumsy” solution, not an elegant market or hierarchical one.  By some stretch, the criteria used there to design a viable and effective global governance structure (legitimacy, representation, participation, efficiency) can be mapped into the plural rationality scheme.  I propose a two tier structure:  a political steering group, e.g. a Global Economic Policy Council, to be made up by the heads of state of large countries (e.g. G-7), emerging countries and poor countries, such that all types of states are represented.  This Council mandates, depending on the individual problem to be dealt with, so-called thematic groups which are made up of government representatives, civil society representatives, business and academic representatives.  These groups work out global solutions, using all types of information and communication channels and propose them to the Council which adopts and promulgates them.  Implementation will only be on a voluntary basis, but “naming and shaming” might help. The innovation of this setup is both in the steering group, whose membership goes beyond the G-20 group that was convened on November 15 by President Bush to deal with the financial crisis and lacked the poor countries who had no part in causing the crisis, but are heavily affected; and in the thematic groups which also contain, importantly, civil society groups and academics.  I propose to have such groups dealing with macroeconomic stability, development questions, trade/competition/investment rules, labour/migration/social issues, global public goods (environment, security, illegal activities, etc.)  In addition, an overarching network should be created to deal with the links between the other themes.

 

The state of the world economy was problematic and unstable even before this crisis.  Global imbalances, large current account deficits persisting in some countries, structural surpluses in others, the massive increase in daily financial flows, especially cross-border, the stagnation of real incomes in fast growing countries, the obscene salaries and bonuses and concomitant incentives in the financial and real sectors, all these had been criticised as non-sustainable, but not acted upon.

 

While there is consensus that a market economy needs a well balanced appropriate regulatory framework in order to function properly, it is contested where this framework’s boundaries lie. They have recently been tightly squeezed.  While it was general knowledge that e.g. mortgage financing without proper deposit is precarious, this expansion and the refinancing of an artificially booming housing market fuelled US private consumption beyond sustainability and eventually formed the puzzle stone whose crumbling brought all of global finance to a standstill.  The interests of the few dominated reason, experience and prudence, as well as the wellbeing of the world’s citizens.

 

Cultural theory may not be the panacea to solve all our problems, but it is definitely a step forward into the right direction.  Economists could learn a lot from studying it and applying its thinking to policy advice they hand out.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertisements

4 Comments

Filed under Uncategorized

4 responses to “Economists Should Learn from Plural Rationality Theory

  1. Many thanks for the great posting. I am glad I have taken the time to see this.

  2. how are you I was luck to seek your Topics in wordpress
    your subject is quality
    I learn much in your theme really thanks very much
    btw the theme of you blog is really impressive
    where can find it

  3. Pingback: Popping the hedge funds bubble - Page 7

  4. riskviews

    I have been working on this with Michael Thompson. Gave a speech explaining how Cultural Theory can be used by Risk Managers, Spring 2009.
    http://www.soa.org/files/pdf/2009-chicago-erm-ingram-02.pdf
    Thompson & I are collaborating on a series of papers explaining how CT can be helpful to explain economic phenomenon. Let me know if you would be interested in discussing.
    daveingram@optonline.net

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s