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Customs and conventions
American Journal of Economics and Sociology, The, April, 2002 by Jack J. Vromen
JACK J. VROMEN *
Ekkehart Schlicht's On Custom in the Economy no doubt is very rich in scope and content. He not only emphasizes the importance of customs in understanding economics, he also argues that prevailing economic analyses of customs are at best incomplete. In particular game-theoretic analyses of conventions are said to be severely flawed, Schlicht argues, for they only pay attention to instrumental forces. Game theory neglects psychological forces that play a crucial role in the emergence, persistence and changes of customs. This explains why Schlicht in his book frequently engages in excursions into (social) psychology.
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There is much in this book that I agree with. I also believe that customs play an important role in economic processes. I share Schlicht's feeling that economic and game-theoretic analyses are deficient in coming to grips with customs. And I also think that (social) psychology may help in repairing some of the deficiencies. But I do not agree with the way in which Schlicht confronts game theory and (social) psychology. What I want to point out in particular in my comments is how Schlicht's juxtaposition of game theory and (social) psychology is misleading. (1) Game theory can easily accommodate much of what Schlicht says about psychological forces. What is more, apparently without recognizing it, Schlicht himself sometimes tacitly uses game-theoretic arguments in his discussion of his clarity view. I do not Herewith claim that game theory gives a complete account of customs; in a sense Schlicht is right that game-theoretic analyses are incomplete. But their incompleteness is due more to their emptiness than t o their one-sidedness.
I
Schlicht on Game Theory and Clarity
SCHLICHT'S VIEW ON GAME THEORY can be discerned from his discussion of game theory's shortcomings. Three kinds of shortcomings are identified. First, game theory is aid to be unable to account for the existence (and binding force) of non-enforceable contracts (p. 38) (2) second, game theory is said to have neglected Schelling's work on salience and focal points (p. 95). Third, game theory is said to be incompatible with reciprocity: "Reciprocity is, of course, incompatible with conventional concepts of rational behavior" (p. 115, footnote 3). The conventional concept of rational behavior underlying game theory, Schlicht argues, is that of instrumental reason. Game theory assumes rational players, in that players are assumed to attain their goals in the most sufficient way (see, e.g., p. 118).
What is neglected in game-theoretic analyses of conventions, Schlicht goes on to argue, is "the direct motivational impact of custom" (p. v). Whereas game theory assumes an instrumental, calculating attitude on the part of individuals, customs often exert their influence directly(without the intervention of instrumental deliberations). Customs pertain to how individuals categorize the situations they are in and to how to behave appropriately indifferent kinds of situations. Typically such perceptual and behavioral regularities are based on spontaneous clarity judgments. (p. 95, emphasis added. ) Clarity judgements rely on purely formal principles (such as symmetry) that can not be derived in any useful instrumentalist way (p. 159).
Like game theorists working on the evolution of conventions Schlicht holds that customs emerge out of interactions between agents. But unlike game theorists, Schlicht holds that instrumental reasons alone fall short of establishing customs. Psychological reasons, having to do with spontaneous clarity judgements, must be taken into account as well. As far as I can tell, Schlicht reckons with several different ways in which instrumental and psychological reasons can intermingle. But the dominant model here seems to be one in which psychological reasons take care of a first selection. Unclear rules and chaotic ways of classification and behavior are not even taken into consideration by agents. This reduces the set of possible ways of behavior to clear rules. Then instrumental reasons come in: among the set of clear rules, the rules are chosen that best satisfy the goals of the agents involved: "among competing clear rules, those should be selected that give the highest 'public utility'" (p. 158). (3) It is in th is sense that the instrumental is said to build on the psychological (p. 161).
II
Game Theory Need Not Presuppose Instrumental Reasoning
SCHLICHT'S VIEW THAT GAME THEORY IS COMMITTED TO the view that agents are engaged in instrumental (and strategic, it could be added) reasoning is mistaken. Individuals need not reason instrumentally in order for game theory to apply. Game theory is compatible with different behavioral assumptions. The dominant Savage (subjectivist) interpretation of Von Neumann--Morgenstern cardinal utility theory does not presuppose that individuals deliberately pursue goals (see, e.g., Binmore 1995). (4) A central solution concept such as the Nash equilibrium and associated typical theoretical results (such as that individuals converge on Nash equilibria) in game theory can be interpreted in quite different ways (see Aumann 1997). (5) Individuals settling on Nash equilibria need not be instrumental reasoners. Game theory can be (and actually is) invoked to point out how some population gropes toward some equilibrium (or stationary point) and stays there, not because the agents involved see (or have come to see) that this be st serves their ends, but because non-equilibrium ways of behaving have been eliminated. Agents need not be aware that the equilibrium best serves their interests. They may follow rules or play strategies for non-instrumental reasons. That is why functional may be a more appropriate (more neutral) term here than instrumental: Nash equilibria are functional in serving the interests of the individuals involved, but this does not necessarily involve awareness and conscious pursuit on the part of the individuals.
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