Universal versus contextual rationality: a case of Slovenia



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RATIONALITY IN TRANSITION: Using holistic approach to rationality to explain some developments in the Slovenian business system
Marko Jaklic

Hugo Zagorsek

University of Ljubljana

Faculty of Economics
INTRODUCTION
The assumption of rationality, as interpreted by the mainstream economics, is one of the cornerstones of economic science. It is believed that notion of rationality provides us with powerful tool for simplification of economic analysis. If agent behaves rationally, his decisions can be predicted by using logical and mathematical tools (Lange, 1945). Otherwise, it is believed, we are left in chaos of ad hoc hypothesis, which may cover many facts, but may lack overall cohesion and scientific refutability. The idea of means/ends rationality combined with assumptions of perfect knowledge, complete transitive preference ordering and deliberative choice has been implanted in minds of economists so strongly, that every attempt to question the standard concept of rationality was at risk of being described as non-economist. Only a few decades ago, have various models, inspired mainly by Simon’s work in this area (1961, 1972), started to emerge.
The aim of this paper is to present different notions of rationality and to develop a holistic approach to rationality taking into account boundedness and contextuality of rationality simultaneously. We believe that holistic approach to rationality best describes some peculiarities in the Slovenian business system and gives potentially better advice to decision-makers in the transition process. Slovenian economy has experienced four major transitions in the last two centuries. First began in 1848 when feudalism was abandoned and peasants have finally became owners of their land. Second occurred in 1918 when Slovenia ceased to be a part of Habsburg monarchy and became the westernmost state of Yugoslavia. Third happened after the Second World War, with establishment of socialism. Fourth, and final one began in the late 1980s when Slovenia, first within Yugoslavia and after 1991 as an independent state, abandoned self-management socialist system and started to move towards the open market economy. What is remarkable is the fact that despite such a strong changes in business environment, some basic, beneath the surface customs, rules of conduct and conventions have survived virtually unchanged. It is these ancient contextual factors that play important role in behaviour and decisions of today’s managers. It is our hypothesis that these institutions “worked relatively well” for centuries but many aspects of these institutions have become “backward” for Slovenian economic development in the last transition period. This is not to say that these institutions will disappear but a high level of evolution or change in them is needed if stronger economic development is to be achieved.

BOUNDED AND CONTEXTUAL RATIONALITY

Simon has argued that “satisficing” rather than maximizing behaviour better characterizes human behaviour and proposed that the concept of economic man be replaced by that of administrative man (Simon, 1961).1 Rationality of economic agents is bounded, because information is not readily available or free, and mind also does not have unlimited deliberating capabilities. Because deliberation and data collecting is costly, individuals are usually prepared to settle for satisfactory outcome, by using various rules of thumb and heuristics, rather than searching for an optimal one. However, both, unbounded and bounded rationality implicitly assume that rationality is universal, that is common to all individuals regardless of society and historical period that they belong, and independent of conceptual frameworks within which they operate. Economic thought in general is leaning towards universality. While business community has long ago acknowledged cultural, religious and social differences between nations or traditions and adapted its practices and polices to local customs, theoretical economists still believe that all people, e.g. Aborigines, Europeans, Chinese, Arabs, software developers, machine workers and religious fanatics, are subject to the same universal economic laws. They may differ in their preferences, but in mainstream economics preferences are given and are not subject of scientific enquiry. It is believed that they will all behave and decide equally rationally, regardless of whether by that notion we assume unbounded or some kind of bounded rationality.


This conviction has its foundations in Enlightenment philosophy, which advocates the principle of absolute or universal truth, justice and rationality. There has to be some source of truth and value outside human needs and cognition, which guides us throughout our existence on earth. And Reason is the ultimate instrument of man in search of this basic, universal truth. To rationally justify is to appeal to principles undeniable by rational people and thus rationality becomes independent of social particularity. This approach is problematic in that nobody could find such principles (Rempel, 1999). Various ideologies and competing systems of values and believes, either religious or non-religious, seek to monopolize truth and justice. Thus they believe that “there are things so sacred, that they must be protected by the arm of the state from irreverence and challenge – that absolutes of truth and virtue exist and that those who scoff are to be punished” (Schlesinger 1989).
In the last two decades totally opposite, relativistic philosophical view is gaining in influence (Westacott, 2000). Relativism asserts the relativity of truth, knowledge and rationality. Rationality is relative to a particular conceptual scheme (world view), which can be shared among members of entire society, culture or period, or unique for a more narrow social groups or individuals. Relativists do not simply assert that the different cultures or communities have different views about which beliefs are true and what behaviour is rational. Nor do they merely claim that different communities operate with different epistemic norms – i.e. criteria of truth and standards of rationality. That seems to be obvious at least to philosophers if not for economists. Their major claim is that no one set of epistemic norms is metaphysically privileged over any other. Our beliefs and values do not arise from something “higher” or “absolute”, they are product of our biology, culture, upbringing, education and “the idiosyncratic twists and turns of our career through life” (Clark, 2000).
One of the main characteristics of human beings is their ability to justify their actions and beliefs to others and to themselves. Most of us are trying to be self-consistent in a sense that we do not hold obviously contradictory beliefs and that we act according to our avowed values. Our actions can be justified if we can back them up with our believes. If we are rational, we can indicate how the particular act or belief in question fits into a larger network of higher values and cognitive commitments. This higher values and commitments are in accordance with our most basic beliefs and values about what is fundamentally right and how the world fundamentally is, which serve as a background criteria for all lower hierarchy commitments and actions. If we attempt to justify our basic beliefs, we could maybe show that they are mutually coherent, but will not be able to provide any logical justification for them, and prove that they are derived from something ultimate and absolute. Strawson (1987) claims that “we have an original non-rational commitment which sets the bounds within which, or the stage upon which, reason can effectively operate, and within which the question of the rationality or irrationality, justification or lack of justification of this or that particular judgment or belief can come up” (emphasis added). The rational is thus embedded and elaborated within a pre-rational context of preferences and cognitive assumptions (Clark, 2000). Similarly, MacIntyre (1988) asserts that rationality and justice are both tradition constituted and tradition constitutive2. Rationality can operate only within a certain tradition that is within an already given system of assumptions and motives.
Various examples demonstrate that rationality is strongly dependent of our pre-rational beliefs.3 As MacIntyre (1988) point’s out “there is no set of independent standards of rational justification by appeal to which the issues between contending traditions can be decided”. There is no neutral common ground form which to evaluate the conflicting traditions of science and religion. Although there are many common beliefs between traditions, reliance on rationality and the power of argument will not lead to unification of different worldviews. In other words, even if reasonable persons from all over the world decided to sit together and tried to unite their worldviews through rational debate, they would fail, because they originate from different traditions and thus view the world through different conceptual frameworks.
The notion of rationality as understood both by neoclassicist and their major critics is inadequate because it doesn’t take into the account the fact that rationality can operate only within a certain tradition. Rationality is contextual, that is, contingent upon tradition. With help of the concept of contextual rationality, we can study economic relations between distinct social groups more accurately. By considering institutional and other factors that affect a society, economics scientist can identify the conceptual framework within which that society operates, and thus identify the kind of rationality, which is common to it. In areas where it is fairly similar to her (western, scientific, materialistic, etc.) rationality, she can imply standard measures and solutions, known from the bulk of economic theory. But in areas where there exists discrepancy between these two rationalities, economist has to be aware that standard solutions will not be good enough, and has to adapt them to suit the distinct conceptual scheme of studied society or social group. Notion of contextual rationality can be useful methodological aid to identify, explain and eventually improve certain types of economic behaviour that could easily be labelled as irrational.
Let us examine what are the factors, which influence and define contextual rationality. They are certainly numerous and various but main factors are: institutions, conventions, customs, habits, beliefs, expectations and feelings. They will be dealt with in the following section, with emphasis on their contribution to contextual rationality.
Institutions: rules, conventions, procedures and customs. According to Simon, various rules of thumb, heuristics and other mental shortcuts are important tools, which help individuals to cope with their limited deliberating abilities. He implicitly presumes, that when a problem is simple and easy to solve and all the relevant information are provided (like in some laboratory tests), agents will optimise, that is, they will find the best solution (Hargreaves Heap, 1993, pg. 79). In other words, agents use rules of thumb and heuristics only when problems that they are facing are very complicated for them or when they do not have necessary information to make a decision – which is typical for many everyday economic situations – otherwise, they optimise. But vast empirical research clearly demonstrates (Conlisk, 1996; Stanovich & West, 1999) that agents use rules of thumb and heuristics even when problems that they are facing are simple and easily solved.4 Evidence suggests, that rules of thumb and heuristics are more important to human cognition than it is proposed by concept of bounded rationality.
Institutional economists point out that rules of thumb are shared among people, and are usually not personal affairs as one could understand from Simon’s work (Hargreaves Heap, 1993, 79). People use various rules of thumb, conventions and procedures on a daily basis. These institutions are same for all members of a certain tradition and help them in their everyday interactions. Why would a rational agent follow institutions? Answer might be, that it is a rational thing to do, because other agents ensue them too, which allows him to predict their behaviour. But question arises, why do others follow same institutions. Certain convention is in use only because it exists, not because it is more rational to follow one convention then others. From the neoclassical point of view it is not possible to explain why some and not the other conventions or customs are in use. Even if we assume bounded rationality in the sense of limited deliberating capabilities and limited and costly information, the origin of institutions is an elusive concept. One could seek the answer in ethics and its account of what is acceptable and what is not. Or one could turn to evolutional economics, according to which institutions are formed as more or less unintended consequences of economic action of agents. They can be portrayed as emerging through a process of the repeated play of certain kinds of games, such as the coordination game or the prisoner’s dilemma (Sugden 1986). Over time, agents will hit the strategies that are “evolutionary stable”; and these strategies, which are relatively simple bundles of rules, become institutionalised. Certain wide spread conventions can become internalised that is it can become a habit in a sense that agents do not deliberate about its usage but follow it automatically. They automatically expect that other agents will follow it also.5
Habits. Unboundedly rational agent or economic person, is capable of justifying her every action and belief, because they are an outcome of her conscious deliberation and thoughts. Boundedly rational agent or administrative person acts on a basis of conscious deliberation as well, even if he reaches his decision in some other, different way than former. But people often act unconsciously, out of habit, and do not even contemplate about it. 6
Hodgson (1993) drawing on the work of Koestler (1967) and Camic (1986) asserts that human mind could be considered as a hierarchical system. The highest level is constituted of conscious and deliberate decisions. On that level agents use optimisation, rules of thumb, heuristics, and institutions to form a belief or reach a decision and act upon it. Lower in the hierarchy of mind are habits, which are almost completely automated. Camic (1986, pg 1044) has defined them as “more or less … independent desires to act in a previously learned manner …”. They can occasionally be influenced by decisions from higher levels of mind. The lowest level in hierarchy of mind is represented by impulses, instincts and other more or less autonomous acts, like breathing or hunger. Although we are capable of partially controlling these impulses (i.e. we can hold our breath and not breathe for a while) it is unlikely that we do so.
We can distinguish between two types of habits: shared and personal. Shared habits are institutions (conventions, procedures, etc.) that have become internalised by an individual. Greeting a friend or acquaintance, driving on a right side of a road, … , are some examples, of habits, which are common to all the people of western tradition, and maybe even broader. Each tradition usually has some institutions that are used so frequently that they become habits for their members. For example, all Muslims remove their shoes before entering to a mosque. That is something that they do automatically, without deliberation, out of habit. Some believe that shared habits are same as customs. But there is a slight difference between these two expressions – custom is a broader notion, which encompasses both shared habits and other institutions, unique for a particular tradition. Personal habits, on the other hand, are characteristic for specific person. Although many persons can share the same habit, like getting up early, fast and dangerous driving or smoking, they are not common to all the members of society. 7 In short, habits are indispensable instrument of human mind, which enable us to perform routine acts almost unconsciously, thus freeing our limited deliberating resources to perform certain more demanding or creative activities.


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