The dominant developmental model in economics

1. The role of ideology in social and economic changeKarla Hoff and Joseph E. Stiglitzworld 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.

2. 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)

3. 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?

4. 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”

5. Problems with the economists’ assumptions • Beliefs shape perceptions

6. 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

7. Medium blur • Insert the 2nd most blurry picture. Again, it should be absolutely impossible to identify the objects in the photo.

8. Light blur • Now show a photo where it is just barely possible to identify the objects

9. Final photo • Finally show the picture that is somewhat clear—but still ambiguous

10. Confirmatory biasClassic 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

11. 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

12. 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.

13. Original

14. 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--

15. 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--

16. 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

17. 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

18. 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

19. Political and economic factors + intrinsic values Categorization and assignment of meaning • 2 examples • Race in Virginia • Race in British India

20. 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

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

22. “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

23. 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.”

24. 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

25. 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

26. Political and economic inequality + intrinsic valuesCategorization and signification Entrenchment of invented social identitiesmanc differences

27. 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)

28. 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

32. The power of a social construct: An experiment in India No caste gap when students are anonymous; Average number of mazes solved 7 6 5 4 High caste 3 Low caste 2 1 0 Anonymous Caste publicly Source: Hoff and Pandey (2006) revealed

33. The power of a social construct: an experiment in India Significant caste gap when individuals’ caste is revealed. Average number of mazes solved 7 6 5 4 High caste 3 Low caste 2 1 0 Anonymous Caste publicly Source: Hoff and Pandey (2006) revealed

34. 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

35. The technology probability of success 1 0 1 confidence

36. The rational expectations equilibrium probability of success 1 45° 0 1 proportion of events that are recorded as success

37. Animal spirits: any belief is possible for a while, but if perception is unbiased, incorrect views can’t be maintained probability of success 1 Spontaneous optimism Spontaneous pessimism 45° 60% 0 1 confidence

38. 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

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

40. probability of success 1 High suppression of failure Low suppression of failure 45° 0 1 Proportion of events thatare recorded as success

41. An “equilibrium fiction” probability of success • Beliefs – • 90% success • Actual success rate is 75% • But beliefs are consistent with perceptions of actual outcomes (90%) 1 75% Proportion of events thatare recorded as success 0 90% 75% 60%

42. In a stable equilibrium, the belief generates a level of performance that is consistent with the perception of that performance probability of success • The result is that a social construct – race – by influencing perceptions is self-fulfilling 45° Proportion of events thatare recorded as success 0

43. 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”

44. The dominant model in economics Political and economic rules Outcomes “rational expectations” Distribution of resources

45. Our view Political and economic rules Outcomes Distribution of resources “Equilibrium Ideologies”

46. 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