Universal versus contextual rationality: a case of Slovenia

1THE RATIONALITY MATRIX

If we link together all ideas of rationality that were previously discussed, we could realize, that there are two dimensions of rationality. First dimension is concerned with a question of boundedness of rationality in a sense of limited deliberating capabilities as well as limited and costly information. It can be unbounded, if we presume that human deliberating capabilities are unlimited and that all necessary information is available and free. Otherwise rationality is bounded. Second dimension is involved with a question of universality of rationality. We can either assume that it is sufficiently universal (in general or in particular case) for our purposes or that it is contextual. If we take into a consideration impact that institutions, habits, and believes of a society or some smaller group of people have on agents’ rationality, we assume contextual rationality. Otherwise we assume that it is universal. For methodological purposes we can connect these two dimensions into the rationality matrix and consider differences between various approaches to rationality (Figure 1).

Figure 1: Two dimensions of rationality – the rationality matrix.

Rationality:	UNIVERSAL	CONTEXTUAL
Unbounded	1. Neoclassical (mainstream) approach to rationality	3. “Philosophical” approach to rationality
Bounded	2. Limited capabilities approach to rationality	4. Holistic approach to rationality

The rationality matrix introduces for major concepts or approaches to the notion of rationality, which are classified by the presumptions of its boundedness and contextuality.

(1) If we presume that rationality is identical enough among all individuals, that is universal, all necessary information is freely available and human mind has unlimited (or virtually unlimited) deliberating capabilities, than we operate within neoclassical, mainstream approach to rationality. Majority of economical theories and models explicitly or implicitly assumes this kind of rationality from its agents. It is simple and abstract concept. It allows intensive usage of mathematics and logic in the economics and is usually associated with optimisation. Of all concepts of rationality, it is the least realistic, that is farthest from actual human behaviour. Because of this, the real life validly and usefulness of conclusions and solutions based upon mainstream concept of unbounded rationality is questionable.
(2) Theories and models that take into a consideration boundedness of rationality, but still consider it universal (either implicitly or explicitly) belong to limited capabilities approach to rationality. This approach has significantly gained in influence in the last decades. Bounded rationality is much more realistic notion in comparison to unbounded, albeit more complicated and unclear. Its major weakness is in neglecting the influence of some aspects of human rationality (like institutions, habits, etc.). Because of this, it is for example very weak in explaining some cases of economic behaviour that deviate from standard Western/American conceptual framework.
(3) Some consider rationality to be unbounded, but at a same time take into account differences between different traditions, which are consequence of institutions, habits and values of a society and their influence on its members. This line of thinking is distinctive of some institutionalists, which have emphasized the importance of institutions on human economic behaviour. Otherwise, this concept is mainly in a domain of philosophers who argue mostly about universality of rationality, but do not engage into its deliberation or information limitations.
(4) Holistic approach to rationality acknowledges both, boundedness and contextuality of rationality. It recognizes the influence of contextual factors like institutions, habits, values, on rationality, while also acknowledging that information is scarce and costly and that human deliberating capabilities are limited. It is the most realistic concept and its power to accurately explain economic behaviour is probably the greatest, but it is also the most complex one, so it is probably hard to get exact and sometimes even useful solutions. Holistic approach to rationality allows us to become aware of complexity.⁸ At the same time it cautions against mindless copying of economic solutions or strategies that have been successful in one environment to another.

2HOLISTIC APPROACH - Rationalizing irrationalities of Slovenian Business System

In this section we will first identify four key contextual factors that have influenced Slovenian economy in an unusual and sometimes even unpredictable way.⁹ Next we will discuss the origins and evolution of these factors as Slovenian economy kept changing from feudalism to capitalism to socialism and finally back to capitalism. To illustrate the persistence and power that these factors have on all the actors of Slovenian economy, including politicians, managers, workers and consumers, we will provide some examples of peculiarities of Slovenian economy today and try to explain them using these factors.

Any inquiry into such a complex subject as a historical development of the country’s economy and society is bound to be incomplete and partial. However we assert that majority of specific developments and peculiarities of Slovenian Business System that exist today are the result of few basic socio–economic flows, which have gradually developed in the 19^th century and have survived all the changes of the business environment practically unaffected. We have identified four major socio-economic flows or as we will call them through the rest of this paper, four contextual factors:

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  Strong localism
  
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  Specificity and importance of informal networks (relationships)
  
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  High discretion and autonomy of managers
  
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  Inability of cooperation between companies
  

It is our intention to show that these “background institutions” have in many aspects become “backward institutions” in the socio-economic development of Slovenia in the last transition period, which started in the late 80s. During the last decade Slovenia has become a small open economy (population of 2 million people), which tries to become a full member of EU. The economic success in this new context has become the main criterion for all decision-makers (especially for managers and politicians).