Cognitivism and Innovation in Economics - Two Lectures

This issue of the Department W.P. reproduces two lectures by Professor Loasby organized by the CISEPS (Centre for Interdisciplinary Studies in Economics, Psychology and the Social Sciences at Bicocca) in collaboration with the IEP, the Istituto di Economia Politica of the Bocconi University in Milan. The first lecture was delivered at the University of Milano-Bicocca on 13 October 2003 and the second was staged the day after at the Bocconi University. The lectures are reproduced here together with a comment by dr. Stefano Brusoni of Bocconi and SPRU. Two further comments were presented at the time by Professor Richard Arena of the University of Nice and by Professor Pier Luigi Sacco of the University of Venice. Both of them deserve gratitude for active participation to the initiative. Unfortunately it has not been possible to include their comments in the printed form. In these lectures Brian Loasby opens under the title of Psychology of Wealth (a title echoing a famous essay by Carlo Cattaneo) and he develops an argument in cognitive economics which is based on Hayek’s theory of the human mind with significant complements and extensions, mainly from Smith and Marshall. The second lecture provides a discussion on organization and the human mind. It can be read independently although it is linked to the former. Indeed, in Professor Loasby’s words, “the psychology of wealth leads to a particular perspective on this problem of organization”. The gist of the argument lies in the need to appreciate the significance of an appropriate “balance between apparently conflicting principles: the coherence, and therefore the effectiveness, of this differentiated system requires some degree of compatibility between its elements, but the creation of differentiated knowledge and skills depends on the freedom to make idiosyncratic patterns by thinking and acting in ways which may be radically different from those of many other people”. This dilemma of compatibility vs. independence can find solution in a variety of contexts, as Loasby’s analysis shows. In his comments Richard Arena had focussed on the rationality issues, so prominent in Loasby’s text. For example, he had suggested that the cleavage between rational choice equilibrium and evolutionary order offers ground to new forms of self-organization. Pier Luigi Sacco had emphasized that Loasby’s approach breaks new ground on the economics of culture and paves the way to less simplistic conceptions of endogenous growth than is suggested by the conventional wisdom of current models. Unfortunately, as hinted above, is has proved impossible to include those comments in the present booklet along with Loasby’s lectures. A special obligation must be recorded to Dr. Stefano Brusoni, who has prepared a written version of his own comment which has been printed in this booklet and can be offered to the reader. Among other participants Roberto Scazzieri, of the University of Bologna, Tiziano Raffaelli, of the University of Pisa, Luigino Bruni of Bicocca, Riccardo Cappellin of Rome ‘Tor Vergata’ and others were able to offer significant comments during the two sessions of the initiative. The organizers are particularly grateful to Professor Brian Loasby for the active and generous support of the initiative. Together with our colleagues and students we have been able to admire his enthusiasm and intellectual creativity in treating some of the more fascinating topics of contemporary economics.

Industrial Dynamics Why Connections Matter

Transaction costs

Entrepreneurship, evolution and the human mind

Schumpeterian 'development from within' requires imagination, skill and motivation; so does Cattaneo's 'psychology of wealth'. Neither can be encompassed by models that rely on deductive rationality, but are twin products of Knightian uncertainty, where the absence of demonstrably correct procedures allows individuals to create domain-limited mental structures. The human mind (as studied by Smith, Marshall and Hayek), is a product of biological evolution which supports the evolution of knowledge and of economic systems. These are non-biological processes; both require (fallible) bounds to uncertainty, which are provided by (evolving) formal and informal organisation, including institutions

Uncovering the hidden costs of offshoring: The interplay of complexity, organizational design, and experience

This study investigates estimation errors due to hidden costs—the costs of implementation that are neglected in strategic decision-making processes—in the context of services offshoring. Based on data from the Offshoring Research Network, we find that decision makers are more likely to make cost-estimation errors given increasing configuration and task complexity in captive offshoring and offshore outsourcing, respectively. Moreover, we show that experience and a strong orientation toward organizational design in the offshoring strategy reduce the cost-estimation errors that follow from complexity. Our findings contribute to research on the effectiveness of sourcing and global strategies by stressing the importance of organizational design and experience in dealing with increasing complexity

Seismic event detection in urban Singapore using a nodal array and frequency domain array detector: earthquakes, blasts and thunderquakes

Detection of seismic events at or below the noise level is enabled by the use of dense arrays of receivers and corresponding advances in data analysis methods. It is not only important to detect tectonic events, but also events from man-made, non-earthquake sources and events that originate from coupling between the solid Earth and the atmosphere. In urban environments with high ambient noise levels the effectiveness of event detection methods is unclear, particularly when deployment restrictions result in an irregular receiver array geometry. Here we deploy a dense nodal array for 1 month in the highly populated city state of Singapore. We develop a new detection method based on image processing that we call spectrogram stacking, which detects anomalous, coherent spectral energy across the array. It simultaneously detects multiple classes of signal with differing spectral content and aids event classification, so it is particularly useful for signal exploration when signal characteristics are unknown. Our approach detects more local events compared to the traditional STA/LTA and waveform similarity methods, while all methods detect similar numbers of teleseismic and regional earthquakes. Local events are principally man-made non-earthquake sources, with several events from the same location exhibiting repeating waveforms. The closest earthquake occurs in peninsular Malaysia, in an area where no earthquakes have previously been detected. We also detect ground motion over a wide frequency range from discrete thunder events which show complex coupling between acoustic and elastic wavefield propagation. We suggest that care should be taken deciphering local high-frequency tectonic events in areas prone to thunder storms.Published versio

Decision Premises, Institutions and Organisation

In formal reasoning, premises are decisive; but most economists are reluctant to treat them as problematic, either for analysts or economic agents. After illustrating the significance of alternative premises for economic theory, we explore the implications of Knightian uncertainty and cognitive limitations for the formation and co-ordination of decision premises as well as the development of dispersed and asymmetric knowledge. Institutions help people to frame decision spaces while facilitating knowledge-sharing; and formal organisation promotes investment in decision-making systems and the development of organisation-specific institutions. A discussion of authority, trust and strategy concludes.Dans le raisonnement formel, les prémisses sont essentielles. Cependant, les économistes sont réticents à les traiter comme problématiques tant pour comprendre le comportement des analystes que celui des agents économiques. Après avoir illustré l’importance des prémisses alternatives pour la théorie économique, nous explorerons les implications de l’incertitude knightienne et des limites cognitives pour la formation et la coordination des prémisses décisionnelles, ainsi que pour le développement de la dispersion et de l’asymétrie des connaissances. Les institutions aident les gens à encadrer les espaces décisionnels tout en facilitant le partage des connaissances. Par ailleurs, l’organisation formelle promeut l’investissement dans les systèmes de prise de décisions, et elle développe les institutions qui sont spécifiques en organisation. Nous concluons par une discussion sur l’autorité, la confiance, et la stratégie

Prospects for the Progress of Heterodox Economics

While progress in orthodox economics is understood as an internal concept, progress in heterodox economics has both an internal and external dimension, where the latter refers to persuasive success. This broader understanding of progress reflects the fundamental, methodological level at which we distinguish between orthodox and heterodox economics. Regarding internal progress, orthodox economics retains cohesion at the level of formalism, but this cohesion is showing strains because of the inevitable limitations imposed by formalism. While more apparently disparate, heterodox economics can be seen to be more methodologically cohesive; this is explained in terms of a qualified form of pluralism at a range of levels. A discussion of progress of ideas in terms of persuasion (with sociological and institutional, as well as linguistic, dimensions) provides the basis for a considering a pluralist strategy for promoting the progress of heterodox economics