The dominant developmental model in economics

1. The role of ideology in social and economic changeKarla Hoff and Joseph E. Stiglitzworld bank, march 22, 2010 • Talk based on “Karla Hoff and Joseph E. Stiglitz, Equilibrium Fictions: A Cognitive Approach to Societal Rigidity,” American Economic Review, Papers & Proceedings, May 2010.

2. The dominant developmental model in economics • Rational Expectations (RE): Individuals take into account all relevant information and use it in an unbiased way • Institutions are the “rules of the game” • Ideology has just a “walk-on role” • E.g., Acemoglu-Johnson-Robinson, in Handbook(2005)

3. Not all economists subscribe to that view • North 2005 • Argued that problems posed by the transition of one belief system to another “are at the core of the problems of economic development. There is nothing automatic about such a transition being successful.” • Loury 2002 • Argued that “biased social cognition” can lead to vicious circles, entrapping blacks. • Myrdal (1944) • Argued that South Asians were trapped by irrational values/beliefs

4. But where does ideology come from? And what sustains it?

5. Outline of presentation • Evidence of biases in cognition • Confirmatory bias in perception • “Pre-confirmatory bias” • Views in sociology and anthropology • Belief systems shape perceptions • Our view: • Belief systems & perception biases need to be understood together as part of an equilibrium. • Because of biased perceptions, societies can be rigid • Case study of racial ideology • Elements of a new theory of equilibrium ideology

6. Problems with the economists’ assumptions of Rational Expectations • 1. Confirmatory bias

7. Very blurry photo • Polly –please insert the most blurry picture. It should be so blurry that no one could recognize the object in the photo

8. Medium blur • Insert the 2nd most blurry picture. Again, it should be absolutely impossible to identify the objects in the photo.

9. Light blur • Now show a photo where it is just barely possible to identify the objects

10. Final photo • Finally show the picture that is somewhat clear—but still ambiguous

11. Confirmatory biasClassic experiment – Bruner-Potter (1964) • Participants were asked to identify blurred slides • The range of blur to which people were exposed varied across 3 groups I. Very blurred……………… very slight blur II. Medium blur…… very slight blur III. Light blur…….…. very slight blur

12. Correct identification was least likely if the starting slide was very blurred • Why? • Initial wrong hypotheses developed at the “very blurred” stage get in the way of correctly interpreting the data

13. A formal analysis can show that if confirmatory bias is sufficiently severe, or signals are sufficiently weak, then an individual may come to believe with near certainty that the incorrect hypothesis is true even after an infinite number of signals • Rabin and Schrag 1999 • This is interesting because many of our pre-suppositions come from the society we live in. We take them for granted; they are invisible. They have implications for societal rigidity and change.

14. Original

15. 2nd problem with economists’ view--“Pre-confirmatory” bias • The information that agents collect is structured • e.g. Bem 1981 • Category systems are collectively held –so there are supra-individual aspects of cognition • These category systems shape perceptions, interpretation, memory & behavior- • I’ll give an economic example later--

16. 2nd problem with economists’ view--“Pre-confirmatory” bias • The information that agents collect is structured. • Category systems are collectively held –so there are supra-individual aspects of cognition • These category systems shape perceptions, interpretation, memory & behavior- • I’ll give an economic example later--

17. A view of institutions from sociology & anthropology • Institutions exist at two levels—rules of the game and also symbolic systems • Paul DiMaggio 1991 • Institutions shape how we think…. • Mary Douglas 1986

18. Our view • The sociologists and anthropologists are right about the need to incorporate belief systems into our models of development— • Institutions are a source of hypotheses and schemas • The cognitive frames within which people view the world are both collectively held and malleable over time • But still we have no general theory: • E.g. How does biased cognition shape societal rigidity and change?

19. Elements in a theory of an equilibrium ideology • Individuals’ beliefs • Aggregation of those beliefs • Intrinsic values (“unquestioned truths”) • The process is idiosyncratic, so • We will focus on an example—race— • & a paradox in that example—the historical role of beliefs about the equality of men in the creation of racial ideology of innate inferiority

20. Political and economic factors + intrinsic values Categorization and assignment of meaning • 2 examples • Race in Virginia • Race in British India

21. Ex. 1 The construction of race to justify slavery • In Virginia, there was initially no coincidence between skin color and labor status, and no general perception of merit based on color. • In the 17th century, • “a substantial number of Virginia’s Negroes were free or became free. And all of them, whether servant, slave, or free, enjoyed most of the same rights and duties as other Virginians. … They could sue and be sued in court. They did penance in the parish church for having illegitimate children.” --Morgan,1972

22. Labor unrest in 17th c. Virgina • In Bacon’s Rebellion of 1676, Virginia’s “PooreEndebted Discontented and Armed” turned against the elite in a plundering expedition that spread across the entire state • The fear of unrest contributed to the decline in the reliance on indentured servants and to the abridgement of the liberties of Africans. • “To keep as slaves black men who arrived in that condition was possible and apparently regarded as plain common sense” --Morgan 1972

23. “It is impossible for us to suppose that these beings should be men; because if we suppose them to be men, one would begin to believe that we ourselves were not Christians” • --Montesquieu, Letters Persanes, 1721 • Two fictions emerged • The biological inequality of human beings with black and white skin. • Only two groups—a continuum was never recognized

24. Ex 2 British imperial narrative in India • In the 1700’s, the East India Company “had become a rogue state: waging war …and collecting revenue over Indian territory” that produced massive private fortunes and contributed to famine in Bengal • In the trial of the governor of India, Edmund Burke declared, “I impeach him in the name of the English Constitution, which he has violated and broken,--I impeach him in the name of Indian Millions, whom he has sacrificed to injustice.”

25. But over the nine years of the trial, the idea that British law applied to agents of Britain in India was salvaged not by finding Hastings guilty (he was acquitted) but instead by inventing a new interpretation of India • What emerged was a “race theory that cast Britons and Indians in a relationship of absolute difference” • Dirks, 2001

26. Slavery in Antiquity and in Russia • “Right, as the world goes, is only in question between equals in power” • Thucydides 431 BC • There was slavery, but no race theory; & • Slaves often occupied high status positions

27. Political and economic inequality + intrinsic valuesCategorization and signification Entrenchment of invented social identitiesmanc differences

28. Entrenchment of invented social identities Histories were “made up” or suppressed to give content to the “natural” differences between groups Psychological distancing by the suppressed population was impossible because deviations from the etiquette of inter-racial relations could lead to harsh punishment In Brazil, a former slave could lose his freedom for violations of etiquette Cultural expressions are regulated –dress, jewelry, parades… “’Our mothers began telling us about being black from the day we were born.” --Evers (cited in Ritterhouse 2006)

29. Caste is an example of an entrenched identity in village North India • No physical markings distinguish castes • With very limited mobility for men in North India, everyone in a village knows the caste of everyone else • Lowest castes were traditionally treated as “Untouchables” & denied opportunities for education or non-menial work

31. Game Board with Frame

32. March 2004: Same setting as in Maze Experiment

33. Cars for transporting the 6 participants in a session from 6 different villages

34. The power of a social construct: An experiment in India No caste gap when students are anonymous; Average number of mazes solved 7 6 5 4 High caste 3 Low caste 2 1 0 Anonymous Caste publicly Source: Hoff and Pandey (2006) revealed

35. The power of a social construct: an experiment in India Significant caste gap when individuals’ caste is revealed. Average number of mazes solved 7 6 5 4 High caste 3 Low caste 2 1 0 Anonymous Caste publicly Source: Hoff and Pandey (2006) revealed

36. Equilibrium fictions • Model of an equilibrium fiction that rests on empirical evidence that • Self-confidence boosts performance • Confirmatory bias in beliefs (individuals selectively remember) • “Pre-confirmatory” bias (categories shapes information that individuals collect)

37. Simple model of a fiction • Two “races”- reds and greens • Technology- Individuals can either fail or succeed at a task, & self-confidence enhances success probability

38. The technology probability of success 1 0 1 confidence

39. The rational expectations equilibrium probability of success 1 45° 0 1 proportion of events that are recorded as success

40. Animal spirits: any belief is possible for a while, but if perception is unbiased, incorrect views can’t be maintained probability of success 1 Spontaneous optimism Spontaneous pessimism 45° 60% 0 1 confidence

41. A human bias—rememberingone’s successes better than his failures • Most people “forget” or rationalize some of their failures • E.g. Far more than 50% of automobile drivers, magistrate judges, married couples, etc. rank themselves as above average • After taking a test, subjects who predict that their answers are 90% correct typically have only a 60% hit rate

42. We formalize the idea of race in a simple way: --the “reds” are less able than the “greens” to suppress memories of past failures

43. probability of success 1 High suppression of memories of failure Low suppression 45° 0 1 Proportion of events thatare recorded as success

44. An “equilibrium fiction” probability of success • Beliefs – • 90% success • Actual success rate is 75% • But beliefs are consistent with perceptions of actual outcomes (90%) 1 75% Proportion of events thatare recorded as success 0 90% 75% 60%

45. In a stable equilibrium, the belief generates a level of performance that is consistent with the perception of that performance probability of success • The result is that a social construct – race – by influencing perceptions is self-fulfilling 45° Proportion of events thatare recorded as success 0

46. Summarizing our example of race as a social construct • The idea of race to structure hierarchy repeatedly emerged historically in the post-Reformation West; & these beliefs became a state variable • Statistical discrimination models cannot explain the categories that people use • Rational Expectations cannot account for this: the reds would not rationally choose these beliefs • & beliefs are not just a matter of coercion

47. Summary, cont. • What is race? • An ideology that arose from oppressive formal institutions that violated beliefs about sovereignty and (constraints on) power that were coming to be taken for granted • Barbara Fields, 1982 • Why does ideology matter? • It affects perceptions, behavior, and policies • It is not determined only by current interests-- • so it has much more than a “walk-on role”

48. The dominant model in economics Political and economic rules Outcomes “rational expectations” Distribution of resources

49. Our view Political and economic rules Outcomes Distribution of resources “Equilibrium Ideologies”

50. Towards a theory of an equilibrium ideology • The infinite set of potentially observable data and the infinite ways in which that data could be processed are narrowed by the finite set of socially constructed categories • Individuals’ motivated beliefs are aggregated to produce those categories and an ideology, but the set of admissible ideologies is constrained by a set of “intrinsic values” (or higher order ideology) perhaps based on some unquestioned truth, to which an ideology must conform in order to be legitimate • e.g., the general belief after the Enlightenment that “all men are created equal”