The dominant developmental model in economics

THE ROLE OF IDEOLOGY IN SOCIAL AND ECONOMIC CHANGEKARLA HOFF AND JOSEPH E. STIGLITZ

WORLD 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.

The dominant developmental model in economics Institutions are the “rules of the game”

Individuals take into account all relevant information and use it well

Generally, ideology has just a “walk-on role”

See Acemoglu-Johnson-Robinson (2005)

Not all economists subscribe to this extreme view … 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.”

North 2005, p. 44 See also Loury 2002

HOW does ideology matter?& WHERE does ideology come from?

Outline of presentation Biases in cognition

Confirmatory bias on perception Pre-confirmatory bias

Views in sociology and anthropology Belief systems shape perception

Our view: Belief systems shape perception but need

themselves to be explained A case study of racial ideology

Elements in a theory of “equilibrium ideology”

Problems with the economists’ assumptions

Beliefs shape perceptions

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

Medium blur Insert the 2nd most blurry picture.

Again, it should be absolutely impossible to identify the objects in the photo.

Light blur Now show a photo where it is just

barely possible to identify the objects

Final photo Finally show the picture that is

somewhat clear—but still ambiguous

Confirmatory bias Classic experiment – Bruner-Potter (1964) Participants were asked to identify blurred

slides The range of blur to which people were

exposed varied across 3 groups Very

blurred…………………………..final Medium blur…………….

….final Light

blur……….final

Very blurred Medium blur Light blurInitial condition at which the objects were seen

0

20

40

60Percentage of pictures

recognized

Correct identification 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

Economists have shown that if the confirmatory bias is sufficiently severe, or the 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 here because many of our pre-suppositions come from the society we live in. This has implications for societal rigidity and change.

Original

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, memory & behavior

I’ll give an economic example later--

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, memory & behavior

I’ll give an economic example later--

A view from sociology & anthropology

Institutions exist at two levels—rules of the game and also symbolic systems

DiMaggio 1991

Institutions shape how we think…. Douglas 1986

Our view The sociologists and anthropologists are

right on the need to incorporate belief systems into our models of development

But still we have no general theory of how ideologies change

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—the role of beliefs about equality of men in the creation of racial ideology

Political and economic factors + intrinsic values

Categorization and

assignment of meaning• 2 examples

• Race in Virginia• Race in British India

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

Labor unrest in 17th c. Virgina In Bacon’s Rebellion of 1676, Virginia’s

“Poore Endebted 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

“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

Two fictions emerged • The biological inequality of human

beings with black and white skin. • Only two groups—a continuum was

never recognized

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.”

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

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

Political and economic inequality

+ intrinsic values

Categorization and signification

Entrenchment of invented social

identitiesmanc differences

Entrenchment of invented social identities

Histories were “made up” or suppressed to give content to the “natural” differences between groups

Psychological distancing 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)

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

29

Game Board with Frame

30

March 2004: Same setting as in Maze Experiment

31

Jeeps for transporting participants in a session from 6 different villages

The power of a social construct: An experiment in IndiaNo caste gap when students are anonymous;

Average number of mazes solved

01234567

Anonymous Caste publicly revealed

High casteLow caste

Source: Hoff and Pandey (2006)

The power of a social construct: an experiment in IndiaSignificant caste gap when individuals’ caste is revealed.

Average number of mazes solved

01234567

Anonymous Caste publicly revealed

High casteLow caste

Source: Hoff and Pandey (2006)

Confirmatory biases can lead to persistence of racial differences after legal barriers are removed

Two “races”- reds and greens

Technology- Individuals can either fail or succeed at a task, & self-confidence enhances success probability

probability of success

confidence0 1

1

The technology

The rational expectations equilibrium


proportion of events thatare recorded as success

0 1

1

45°

Animal spirits: any belief is possible for a while, but if perception is unbiased, incorrect views can’t be maintained


confidence0 1

1

45°

Spontaneous optimismSpontaneous pessimism

60%

A human bias—forgetting some of one’s failures

Most people remember their successes better than their failures. They “forget” or rationalize some of the failures

E.g. Far more than 50% of automobile drivers,

magistrate judges, married couples, etc. rank themselves as above average

We formalize the idea of race as leading the “reds” to be LESS able than the “greens” to suppress experiences of failure

Proportion of events thatare recorded as success

0 1

1

High suppression of failure

Low suppression of failure

45°



An “equilibrium fiction”

• Beliefs – 90%

success• Actual

success rate is 75%

• But beliefs are consistent with perceptions of actual outcomes (90%) 0 90%

1

75%

75%60%


In a stable equilibrium, the belief generates a level of performance that is consistent with the perception of that performance

The result is that a social construct – race – by influencing perceptions is self-fulfilling

0

45°



Summary What is race?

--An ideology that arose from oppressive formal institutions that violated beliefs about sovereignty and power that were coming to be taken for granted

Fields, 1982

Why, in general, 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”

Political and economic rules

Outcomes “rational expectations”

Distribution of resources

The dominant model in economics

Political and economic rules

Outcomes

Distribution ofresources

“Equilibrium Ideologies”

Our view

Implications for development policy

The rules of the game are just the tip of the iceberg of a functioning institution. Functioning institutions also have associated with them a story, a belief system— Cognitive sources of resistance to

change

Access to information, changes in the distribution of wealth, & new economic opportunities matter not only directly but because they can

Undermine oppressive myths that are hurtful to individuals &

Change incentives over the “motivated beliefs” that individuals may choose to adopt—

e.g., racial, caste, & other ideologies

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The dominant developmental model in economics