STOREP CONFERENCES, STOREP 2019 - The Social Rules! Norms, Interaction, Rationality

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When Institutions Kill: Between Evolution and Adverse Selection
LIUDMYLA VOZNA

Last modified: 2019-06-11

Abstract


It is noteworthy that Vernon Smith, by distinguishing constructivist and ecological types of rationality, considers that in the process of evolution the role of constructivism (which is associated with deliberate human designs and conscious use of knowledge and reason to make decisions) is to provide variation, while the ecological process (which is associated with intelligence embodied in the rules, norms and institutions of our cultural and biological heritage) carries out the role of selection. At the same time, he refers to Friedrich Hayek, according to whom only the rules can unify the extended order. It seems that variation and selection as two characteristics of evolution not only accompany and complement each other but must be in a harmonic interrelationship. For example, Ilya Prigogine and Gregoire Nicolis, in their book Exploring Complexity, wrote that order looks like a kind of compromise between two antagonistic factors: the first factor is a non-linear process, which continuously and uncoordinatedly sends innovative signals in the form of fluctuations; and another factor resembles the process of transportation because it catches, passes, and stabilizes these signals. The violation of the delicate balance between these two factors leads to the qualitative change of the state that occurs in a system. One of them is a chaotic state in which every element of a system acts independently, and another state is characterized by complete homogeneity and suppression of all fluctuations. So, in their opinion, complexity is constricted from both sides by two types of disorder. From this point of view, any institution, on the one hand, is intended to promote the process of structuring and lowering the chaos in a system, but on the other hand, the same institution on the stage of its excessive growth (in comparison with other institutions and resources) can provoke disorder in the system. This is the case when, e.g., ecological rationality transforms into a (negative) form of conformity, while an institution (principle or norm), even very good in itself, does not stabilizes “innovative signals”, but begins to freeze evolution, activates the distortion of information and causes the adverse selection in a relevant system. In the paper, it is proposed to analyse some examples of this process and to apply the law of diminishing returns to institutions, when social interactions take on the character of zero-sum (or negative sum) games, and the whole social organism acquires the features of the rent-seeking society.

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