Tuesday, May 6, 2008

Rationality, Progressivism and the Market

The market and progressivism pose two alternative approaches to rationality. Progressives argue that social deliberation can be purposeful and that incentives that might distort rationality in deliberative decision making, such as special interest group incentives to lobby for political benefits, do not distort deliberative processes sufficiently to outweigh the benefits from deliberation. Market theorists argue that rationality depends on information appropriate to a given time and place that cannot be communicated or discerned by a deliberative body, and less so by society at large. Economic actors have specialized knowledge such as price and technological knowledge that is difficult to communicate and far too complex to be known by outsiders. This knowledge is not the knowledge of general experts, economists or the like but rather of people who understand narrow production and market demand problems because the information required is very specific. For instance, do the people of Oshkosh like a different kind of Italian food from the people of Rochester or of Madison? Do bagel consumers in Manhattan have a different taste from those in Queens, Brooklyn or Wisconsin? This kind of information can be learned through trial and error.

The organizational life cycle and organizational learning would be critical to the second kind of information but not the first. In order to survive, organizations would need to obtain and utilize the second form of information, and the incentive to do so would be the threat of organizational death. In contrast, organizations need not learn if knowledge is deliberative. All that would be required were knowledge deliberative in nature would be the hiring of outside experts to maintain or improve institutions.

This has been the claim of Progressives and New Deal social democrats who have instituted an increasing degree of government intervention. Knowledge is general in nature and so requires the help of experts trained in general theory.

There should be empirical tests available as to which approach to rationality works better. Where there are more bankruptcies, over a 40 year period do economies do better or worse? If they do better, then there would be some support for the market-based model of rationality. If they do worse over the long term, then the social democratic-progressive model would be better supported. Likewise, the possibility of organizational birth would be associated with the market-based model of rationality. Where there are more organizational births, one would expect to see greater economic vitality according to the market-based model. Deliberative processes would tend to lead to stability, hence organizational learning, death and volatility would be associated with long run economic vitality under the market-based model. But more gradual change, which would be limited by economic and scientific theory, would be associated with success under the social democratic-progressive model. Volatility and risk associated with responsiveness to price and demand fluctuations would be associated with economic success under the market-based model but not under the social-democratic-progressive model.

Another importatn question is where do innovations occur most frequently under this continuum:

total state control--->social democracy---->limited state

Which of the three is associated with the most innovation? This can be viewed within the United States. Does innovation occur more in states with the least government intervention or the most? Did innovation occur more frequently in the nineteenth century or the twentieth century?

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