Adaptation Within Constraints An Evolutionary Approach to Change in Individual and Social Constitutions A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy at George Mason University. By Sujai J. Shivakumar Master of Arts George Mason University, 1992 Director: Viktor J. Vanberg, Professor Instutut fur Allgemeine Wirtschaftsforschung Albert-Ludwigs-Universitat Freiburg Spring Semester 1996 George Mason University Fairfax, Virginia 11 Copyright 1996 Sujai J. Shivakumar All Rights Reserved Ill ACKNOWLEDGEMENTS Epiphany is a strong word but it aptly describes my sentiments on first being exposed to Constitutional Economics. An impressionistic recollection of the two week seminar on Economic Philosophy co-taught by Professors Vanberg and Buchanan in 1990 would include cold February mornings, the musty atmosphere of the Public Choice Center library and a sort of heady intellectual stimulation that I had not experienced before. Upon finishing my Master's thesis under Dr. Vanberg's tutelage, I joined the doctoral program in order to continue work in Constitutional Economics under his direction. But for his encouragement and help through the vicissitudes of the preliminary legs of this journey, this dissertation may never have been started. Dr. Vanberg's patience and gentle guidance from the initial process of defining this thesis through to its revisions and final refinements have eased this task. His intellect has been a steady source of inspiration. His encouragement and direction continued via the Internet after his transfer to Freiburg a year ago. The warmth and hospitality extended to me by Dr. Vanberg and his family on my two visits to Freiburg in pursuit of this thesis will long be remembered. in IV The debt of gratitude that I owe to my family can neither satisfactorily be articulated nor repaid. But for the love and support of my parents, I would never have navigated through the cliffs and shoals of my long and tortuous academic career with my wits mostly intact. I have always valued the concern and advice that my sister Sumati and her husband Krishnan have conveyed. My brother Dhananjai has been helpful in discussing and editing portions of this dissertation. Finally, I should not fail to mention my little nephews, Varun and Vikram, who, with their shining eyes and sweet innocence, have brightened many a day. IV TABLE OF CONTENTS Abstract x I. Introduction and Foundations 1 A. Adaptation Within Constraints 1 1. Proem 1 2. Knowledge and the Basis of Rationality 2 a. Dealing with Complexity 3 b. The Problem of Knowledge 4 3. Evolutionary Epistemology 6 a. The Darwinian Evolutionary Perspective 7 b. Problem-Solving and Evolutionary Learning 8 c. Classifications, Conjectures & Rules 9 4. Subjective Order and Conditioned Change 10 5. Evolutionary Adaptation in Individual & Social Constitutions 12 a. Individual Constitutions 12 b. Social Constitutions 16 6. Plan of Exposition 19 B. Constitutional Constraints 22 1. Methodological Starting Points 23 a. Methodological Individualism 23 b. Catallactics 24 c. Subjectivism 25 d. Normative Individualism 28 2. What is Constitutional Economics? 30 a. Strategic Precommitment 30 b. Constitutional Frameworks 33 c. Efficiency 37 v VI II. Order and Change in Individual Constitutions 42 A. Order and Change in Evolutionary Biology 43 1. The Relevance of Darwin's Origin 43 2. Key Notions in Evolutionary Biology 46 a. Natural Selection 46 b. Adaptation 47 c. Altruism; Group Selection & Kin Selection Explanations 48 d. Population Thinking :...52 3. Lessons from the Biological Account of Change 54 B. Order and Change in Individual Behavior. 56 1. Rule Following and Personal Constitutions 56 2. Psychological Models of Behavior. 60 a. Behavioral Theories of Learning 60 b. B.F. Skinner's Behaviorism 63 c. Cognitivism 67 3. Psychological Adaptation Within Constraints 74 C. Order and Change in Knowledge Structures 77 1. Epistemology and Psychology 77 2. Hayek's Psychology: Evolutionary Epistemology within Institutional Constraints 79 3. Extensions from Sensory to Social Order in Hayekian Theory 84 D. Economic Interpretations of Evolution, Behavior, and Knowledge 87 1. American "Old" Institutionalism 87 2. The Schumpeterian Tradition 90 a. Evolution 0 b. Entrepreneurship and Innovation 90 c. Neo-schumpeterian Approaches 91 d. Criticisms 93 3. Evolution, Behavior and Knowledge in Firm and Industry Theory : 94 a. A. A. Alchian 94 b. H.A. Simon 95 c. R.R. Nelson and S.G. Winter. 96 4. Errors in Evolutionary Economics 98 a. Mixing Equilibrium and Evolutionary Concepts 99 b. Using Unsound Biological Theories 100 VI Vll c. Lamarckism in Biological andPsychological Adaptation 103 vn III. Order and Change in Social Constitutions 106 A. Rules, Institutions and Orders 107 1. Institutions and Rules 107 2. Spontaneous and Pragmatic Origins 110 3. Coordinative Frameworks and Resultant Orders 115 B. The Nature of Change in Institutions. 118 1. Rules as Tools 118 2. Darwinian Evolution 120 3. Innovation and Competitive Selection Processes 122 4. Critiques of Hayekian Cultural Evolution 124 a. Group Selection and Vanberg's Critique 125 b. Evolutionary Optimism and Buchanan's Critique 126 5. Role of Constitutional Design in the Evolution of Institutions 128 C. Order and Change in Market Frameworks 133 1. Market Frameworks and the Process of Competition 133 2. Competition as a Creative Process 134 3. Markets within Institutional Constraints 137 D. Order and Change in Institutions of Organized Study. 140 1. Conceptions of Methodological Practice 141 a. Hume's Induction 141 b. Poppenan Falsification 143 c. Kuhn: Paradigm Shifts in Scientific Cultures 145 d. Lakato-s'MSRR 146 2. Methodological Approaches in Economics 147 3. Man as Scientist and Changes in Scientific Paradigms 152 . E. Experimentation, Adaptation and Constitutional Design 158 1. Levels of Consensus and Rule Experimentation 159 2. Constitutional Experimentation in Series 161 a. Constitutional Renegotiation under Crisis 161 b. Article V Type Procedures 162 c. Constitutional Revision Through Dialogue 163 d. Jeffersonian Overhaul 165 3. Constitutional Experimentation in Parallel 168 a. Citizen Sovereignty , 169 b. Prospects for Inter-jurisdictional Competition 170 c. Prospects for Competition Among Concurrent Jurisdictions 172 The upshot 174 IX IV. Order and Change in Neoclassical Economics 175 A. Neoclassical Rational Choice Theory 177 1. Roots of the Neoclassical Methodology 177 2. Chicago Tradition in Neoclassical Economics 178 a. Positive and Normative Economics 179 b. Prediction v. Realism 179 c. Characteristics of the Chicago Research Program 180 B. Critique of Chicago Methodology and Rational Choice Theory 184 1. Predictive Instrumental!sm 184 2. Teleology 185 3. Homo-oeconomicus Limited 186 4. The Role of Auxiliary Assumptions 188 C. Change and Adaptation in Equilibrium Economics 189 D. Knowledge and Institutions in the Neoclassical Framework 191 V. Conclusions 195 A. Frameworks and Linkages 195 1. Shared Inferences and Social Institutions 197 2. Moral Rules and Behavioral Conditioning 198 3. Legitimacy in Social Change 201 B. Relevance 203 References 205 LIST OF FIGURES Figure Page 1. Competition Conditioned at VanOILS Levels XI 2. Coordination Problem 112 3. Cooperation Problem 113 4. Institutional Experiments 123 xi ABSTRACT ADAPTATION WITHIN CONSTRAINTS; AN EVOLUTIONARY APPROACH TO CHANGE IN INDIVIDUAL AND SOCIAL CONSTITUTIONS Sujai J. Shivakumar, Ph.D. George Mason University, 1996 Dissertation Director: Dr. Viktor J. Vanberg The past three decades have witnessed a revival of interest in the study of institutions by economists outside the disciplinary mainstream. Approaches in, what has become identified as, New Institutional Economics promote an understanding of social institutions as a complex of rules which, because of their reliability, recognizability, and general applicability, serve to reduce uncertainty and promote coordination and cooperation among individuals. The more recent tradition in Constitutional Economics has complemented and broadened this perspective by focusing attention on the constraints circumscribing adaptive change within and among rule complexes of various kinds. This thesis focuses on how such an integration is part of a broad framework that includes a particular theory of knowledge and behavior within an evolutionary perspective. Xii Our aim then is to show how the Institutional-Constitutional view can rest on a robust understanding of the knowledge and behavior of individuals. In particular, this thesis demonstrates that the proffered approach - built upon while at the same time reflecting the structure of arguments in evolutionary, behavioral, and epistemological theories - provides a theoretically compact and integrated explanation that can form a more sound basis for the study of social and economic phenomena. I. Introduction and Foundations A. Adaptation Within Constraints 1. Proem The past three decades have witnessed a revival of interest in the study of institutions by economists outside the disciplinary mainstream. Approaches in, what has become identified as, New Institutional Economics promote an understanding of social institutions as a complex of rules which, because of their reliability, recognizability, and general applicability, serve to reduce uncertainty and promote coordination and cooperation among individuals. The more recent tradition in Constitutional Economics has complemented and broadened this perspective by focusing attention on the