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 Rational Expectations (RE): Individuals

take into account all relevant information and use it in an unbiased way

Institutions are the “rules of the game”

Ideology has just a “walk-on role” E.g., Acemoglu-Johnson-Robinson, in Handbook

(2005)

Not all economists subscribe to that view North 2005

Argued that 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.”

Loury 2002 Argued that “biased social cognition” can

lead to vicious circles, entrapping blacks. Myrdal (1944)

Argued that South Asians were trapped by irrational values/beliefs

But where does ideology come from?And what sustains it?

Outline of presentation Evidence of biases in cognition

Confirmatory bias in perception “Pre-confirmatory bias”

Views in sociology and anthropology Belief systems shape perceptions

Our view: Belief systems & perception biases need to be

understood together as part of an equilibrium. Because of biased perceptions, societies can be

rigid Case study of racial ideology Elements of a new theory of equilibrium

ideology

Problems with the economists’ assumptions of Rational Expectations

1. Confirmatory bias

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 I. Very blurred……………… very

slight blur II. Medium blur……

very slight blur III. Light blur…….…. very

slight blur

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

0

20

40

60Percentage of pictures

recognized by Groups I, II, III

Correct identification was 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

A formal analysis can show that if confirmatory bias is sufficiently severe, or 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 because many of our pre-suppositions come from the society we live in. We take them for granted; they are invisible. They have implications for societal rigidity and change.

Original

2nd problem with economists’ view--“Pre-confirmatory” bias

The information that agents collect is structured

e.g. Bem 1981

Category systems are collectively held –so there are supra-individual aspects of cognition

These category systems shape perceptions, interpretation, 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, interpretation, memory & behavior-

I’ll give an economic example later--

A view of institutions from sociology & anthropology

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

Paul DiMaggio 1991

Institutions shape how we think…. Mary Douglas 1986

Our view The sociologists and anthropologists are

right about the need to incorporate belief systems into our models of development— Institutions are a source of hypotheses and

schemas The cognitive frames within which people

view the world are both collectively held and malleable over time

But still we have no general theory: E.g. How does biased cognition shape

societal rigidity and 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 in that example—the historical role of beliefs about the equality of men in the creation of racial ideology of innate inferiority

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, Letters Persanes, 1721

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 by the suppressed population 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

31

Game Board with Frame

32

March 2004: Same setting as in Maze Experiment

33

Cars for transporting the 6 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)

Equilibrium fictions Model of an equilibrium fiction that

rests on empirical evidence that Self-confidence boosts performance Confirmatory bias in beliefs (individuals

selectively remember) “Pre-confirmatory” bias (categories shapes

information that individuals collect)

Simple model of a fiction

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

probability of success

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

probability of success

confidence0 1

1

45°

Spontaneous optimismSpontaneous pessimism

60%

A human bias—rememberingone’s successes better than his failures

Most people “forget” or rationalize some of their failures

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

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

After taking a test, subjects who predict that their answers are 90% correct typically have only a 60% hit rate

We formalize the idea of race in a simple way:

--the “reds” are less able than the “greens” to suppress memories of past failures

Proportion of events thatare recorded as success

0 1

1

High suppression of memories of failure

Low suppression

45°

probability of success

Proportion of events thatare recorded as success

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%

probability of success

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°

probability of success

Proportion of events thatare recorded as success

Summarizing our example of race as a social construct

The idea of race to structure hierarchy repeatedly emerged historically in the post-Reformation West; & these beliefs became a state variable Statistical discrimination models cannot explain the categories that people use Rational Expectations cannot account for this: the reds would not rationally choose these beliefs & beliefs are not just a matter of coercion

Summary, cont. What is race?

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

Barbara Fields, 1982

Why 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

Towards a theory of an equilibrium ideology

The infinite set of potentially observable data and the infinite ways in which that data could be processed are narrowed by the finite set of socially constructed categories

Individuals’ motivated beliefs are aggregated to produce those categories and an ideology, but the set of admissible ideologies is constrained by a set of “intrinsic values” (or higher order ideology) perhaps based on some unquestioned truth, to which an ideology must conform in order to be legitimate

e.g., the general belief after the Enlightenment that “all men are created equal”

An equilibrium social construct… The beliefs that we model occur at two levels:

individuals indexed by i have beliefs Si about the nature of society, racial differences, etc., but

those beliefs are turned into social constructs S (“belief systems”) through the kinds of mechanisms illustrated above, e.g. legislation, rituals.

St+1 = f(S1,t , S2,t , S3,t ,…SN,t , Uberideolgyt , economic regimet , other variables).

Groupthink Hedonic or incentive problems can motivate

individuals To filter out certain signals, OR to obtain information in a way that leads to biases

but still these models preserve the idea of that individuals have rational expectations.

e.g. Benabou-Tirole 2002, Benabou 2008; Piketty 2005)

Other approaches to explain belief systems

A possible critique

In the approach of Benabou, individuals would rationally choose their probability of remembering certain things, and would remember that choice in assessing the reliability of their data But if individuals internalize societies’ categories and values, they would not know that they do not know how reliable their data are.

EXAMPLE: a founding member of the Black Panther party described the lower socio-economic American black male in the 1960s as

“a man of confusion. … All his life he has been taught (explicitly and implicitly) that he is an inferior approximation of humanity. … The parents pass it on to the child and the social system reinforces [it].”

Other work that abandons RE – “animal spirits” -- allows anything to happen

We argue that the RE approach is too limiting and too individualistic & the “animal spirits” approach is too loose

Towards a theory of societal rigidity & change

Social constructs provide lenses through which people may see and interpret reality (pre-confirmatory bias and confirmatory bias) We agree with the sociologists on the need to incorporate social constructs into our models of institutions But the sociologists have left out that social constructs need to be understood as an equilibrium (akin to economists who loosely talk of animal spirits) Ideology is a state variable in a theory of change and development-- Technology, contacts with the outside world, endogenous changes in power and wealth matter not only directly but through their effect on ideologies.

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